News / News analysis: Shock waves

The NHS provided an oasis of sanity last month as the private sector spiralled into financial madness. The banking community is still coming to terms with a rescue package that is measured in the hundreds of billions. And turmoil is not a strong enough term to describe the state of the share market. Contrast this with an NHS scoring highly in national use of resources assessments, continuing to project a prudent surplus and employing a treasury management policy that has almost completely protected its funds from the Icelandic banking collapse. The NHS could be guilty of feeling smug.

However, the financial turmoil does have implications for the NHS, some of which have already started to be felt. Perhaps of greatest concern have been reports that the government may be targeting a claw-back of foundation trust surpluses. Cash balances in foundation trusts stood at £2.3bn at the end of 2007/08 and had risen to £2.5bn by the end of June. Some commentators have suggested that, although the prime minister has pledged not to cut spending review commitments to health, taking back unspent money might not be seen as a cut.

NHS finance leaders poured cold water on the idea. Although there is, in theory, a mechanism for clawing back cash balances – through the required repayment of public dividend capital – the move would undermine the basis of the foundation trust regime. HFMA chairman Chris Calkin said the regime was about transparency and planning, with NHS trusts encouraged by the financial framework to make surpluses to invest in the planned development of local services. A knee jerk claw-back would be at odds with this planned approach to using resources.

Professor John Appleby, chief economist at the King’s Fund, said the cash balances were conspicuous but agreed that the claw-back was, in practice, unlikely to happen. ‘It would simply look bad,’ he told Healthcare Finance. But he added that the existence of the cash surpluses in the current climate, coupled with the public’s poor understanding of the need for foundation trusts to hold these reserves, would increase pressure on foundations to spell out their investment plans.

A spokesman for Monitor said that any attempt to claw back surpluses would be seen as ‘penalising efficiency’, which would send a negative signal to the system as a whole. Financial reserves have been built up over time by NHS foundation trusts as a result of greater operating efficiencies and to undertake planned investment in the future over a period of the next 10 years. To claw these back would significantly diminish the opportunity for FTs to invest in new services and innovation and to respond to the Darzi review, to patient needs and to the strategic plans of commissioners.’

However, there could be other ways of taking advantage of the FT surplus cash, without such draconian measures. Keith Palmer, chairman of Barts and the London NHS Trust, gave the Commons Health Committee, during its summer review of foundation trusts, one option. ‘It is actually relatively straightforward to devise an internal banking system where you re-use those surpluses but you do not take them away from the providers so that when they have good plans for them then they can use them,’ he said.

There have been discussions at the Department of Health about such a system. But it is understood that foundation trusts’ desire to see a competitive return on their lending has been a sticking point. (There are also concerns over the resource accounting implications, with the Department potentially still needing resource in-year to be able to spend the cash it has ‘borrowed’ back.) No further progress has been made, although it is understood the idea is still being considered as having potential.

The need for such an arrangement may be diminishing. An HFMA survey of foundation trusts at the end of October found that, as a reaction to the recent banking debacle, many are bringing their surplus cash back into Paymaster General accounts or the National Loans Fund (see box above). Some suggested this was not just natural risk aversion but an active attempt to ‘support the government’.

A more direct consequence of the credit crunch and financial problems in the commercial sector has been an encouragement to pay bills more quickly. Both the Department of Health and Monitor have urged NHS bodies to move to 10-day payment terms, following a commitment from the prime minister that central government would seek to pay suppliers in this timescale.

Foundation trusts gave a mixed response. Most backed the aim of the move. Some highlighted reductions in interest receivable from introducing the change – £150,000 according to an early estimate in one trust. Others were interpreting the letter as meaning paying local suppliers, rather than all suppliers – although Monitor has subsequently clarified that its encouragement applied to all suppliers, local and national.

Paying on time

Some foundation trusts told Healthcare Finance that there would be logistical and behavioural changes needed to speed up the process. And others questioned whether the change would have a material impact. One trust claimed it was already achieving a 10 day target in nearly 70% of cases and that similar rates probably existed in other organisations, as a necessary contribution to hitting the current public sector payment policy target of 30 days.

A spokesman for NHS Shared Business Services, which handles transaction processing for more than 100 NHS organisations,  said that across its client base some 55% of non-NHS trade invoices were already available for payment within 10 days. He added that faster payment was about more than simply adjusting payment terms, with changes needed across the payment process. But he said that the Department’s letter ‘should serve to further strengthen our ability to introduce these processes more widely’.

There are likely to be other fringe impacts. For instance working capital facility costs could rise for foundation trusts (see survey above). This could well increase the attractiveness of a central loan scheme to recycle foundation trust surpluses, if the deal could be linked with a central working capital facility arrangement that met Monitor’s requirements for a committed facility.

Even if a claw-back of surpluses is unlikely, there will be growing pressure on foundation trusts to spend the surpluses or at least articulate far better why the surpluses are necessary. In an environment of a struggling economy, rising inflation and union demands to reopen pay negotiations, cash surpluses sit uncomfortably in the eyes of the general public. If surpluses remain unspent – or at least their intended purposes remain unexplained – some will interpret the situation as a general indication that foundation trusts are currently overfunded. And this could lead to an increased efficiency requirement built into a future tariff.

Add in the government’s interest in fast tracking public sector capital projects, bringing forward foundation trust spending plans, where possible, looks a good move. As Monitor’s Bill Moyes told the recent HFMA conference on service line management: ‘There are strong arguments for spending [the cash surplus], if you have good projects on which to spend it. I would be encouraging foundations to sit down with commissioners and work out areas where expenditure could be brought forward.’ However business cases still need to stack up. ‘I would not encourage spending for its own sake. That would be terribly foolish,’ he added.