THE FINANCES OF NHS WALES Report by the National Audit Office on behalf of the Auditor General for Wales

Transcription

1 THE FINANCES OF NHS WALES 2002 Report by the National Audit Office on behalf of the Auditor General for Wales

2 THE FINANCES OF NHS WALES 2002 Report by the Auditor General for Wales, presented to the National Assembly for Wales on 20 March 2002

3 CONTENTS Executive Summary 1 Part 1: Introduction 5 Scope 5 Basis of Audit 5 The Audit Commission and the role of its appointed auditors 5 The work of the appointed auditors 6 Reports and referrals 6 Part 2: Financial performance of the NHS in Wales: 7 Annual results and trends Introduction 7 Overview of the financial performance of NHS Wales, Overall forecast for Financial performance of the health authorities, Financial performance of the NHS trusts, Financial standing and management of NHS Wales 10 Review of actions being taken to address deficits 10 Public sector payment policy and performance 10 Forecast of the financial performance of NHS Wales, The Charitable Funds held on Trust by NHS Wales 13 Part 3: Challenges facing NHS Wales 15 Introduction 15 Restructuring of NHS Wales 15 Tackling NHS fraud 18 Corporate Governance 21 Contingent liabilities 22 The Welsh Risk Pool 22 Prescription pricing 22 Whole of Government of Wales accounts 23 The Private Finance Initiative in NHS Wales 24 THE FINANCES OF NHS WALES 2002

4 Appendix 26 A: Analysis of financial performance by health economy area 26 A1 Bro Taf health economy area 26 A2 Dyfed Powys health economy area 27 A3 Gwent health economy area 28 A4 Iechyd Morgannwg health economy area 29 A5 North Wales health economy area 30 A6 Welsh Ambulance Services NHS Trust 31 A7 Dental Practice Board: General Dental Services in Wales 31 Index of figures and tables used in this report Figures Figure 1 Total reported net surplus/deficit of NHS Wales for , and Figure 2 Health Authorities in Wales: Comparison of accumulated deficits at 9 31 March for the years 1997 to 2001 Figure 3 Appointed auditors' concerns over NHS trusts' financial standing in and Figure 4 Comparative supplier payment performance of Health Authorities in 12 Wales for the years and Figure 5 Comparative supplier payment performance of NHS Trusts in Wales 12 for the years and Figure 6 Funds held on trust: value of funds at 31 March for the years to 2001 Figure 7 Funds held on trust: analysis of income received from charitable funds, Figure 8 Case study 1: Locum doctors' fraud 18 Figure 9 Case study 2: Optician's fraud 18 Figure 10 Examples of cases under investigation by Counter Fraud 20 Operational Service (Wales) THE FINANCES OF NHS WALES 2002

5 Tables Table 1 Accumulated net income and expenditure deficit of NHS Wales 8 for 2000 and 2001 Table 2 Main factors contributing to changes in the financial forecast 8 for Table 3 NHS Wales estimate of potential restructuring costs and savings 17 Table 4 Comparison of forecast and actual cumulative restructuring costs 17 and savings at 31 March 2001 Table 5 Contingent liabilities of NHS Wales at 31 March Table 6 Bro Taf health economy area financial results, and the 26 forecast for Table 7 Dyfed Powys health economy area financial results, and 27 the forecast for Table 8 Gwent health economy area financial results, and the 28 forecast for Table 9 Iechyd Morgannwg health economy area financial results, 29 and the forecast for Table 10 North Wales health economy area financial results, and 30 the forecast for Table 11 Welsh Ambulance Services NHS Trust financial results, 31 and the forecast for Table 12 Dental Practice Board: General Dental Services in Wales financial results, and the forecast for THE FINANCES OF NHS WALES 2002

6 EXECUTIVE SUMMARY Introduction 1 This is my first annual report on the financial health of NHS Wales. In previous years my reports on the NHS Wales Summarised Accounts have included a commentary on financial performance but the challenges now faced by the NHS in Wales merit consideration of wider issues. 2 The Audit Commission appoints the auditors of the five health authorities and 15 NHS trusts in Wales. I am responsible for the audit of the three summarised accounts prepared by the National Assembly's NHS Directorate. This report includes material provided by the Commission, its appointed auditors, and the Counter Fraud Operational Services (Wales). I am grateful to these organisations and to the NHS Directorate for their assistance in producing this report. Issues covered in this report 3 Part 1 of this report sets out the basis of my audit and the work of the Audit Commission and its appointed auditors. In Part 2, I comment on the financial performance of NHS Wales in and note the latest financial forecasts for In Part 3, I consider the challenges now facing NHS Wales including restructuring, measures to tackle fraud, corporate governance, and other financial management and internal control issues. 4 I laid the Summarised Accounts of NHS Wales before the Assembly on 28 February 2002, together with a report explaining the limitation of the scope of my audit opinion on the Summarised Account of the Health Authorities. This limitation mirrored that given by the appointed auditors of all five health authorities in Wales in respect of a potential shortfall in revenue from prescription charges. My opinions on the summarised accounts of NHS trusts and funds held on trust by NHS bodies were unqualified. Main findings and conclusions Financial performance: annual results and trends results: The overall result for was a surplus of 24.3 million comprising a surplus of 7.6 million from the NHS trusts, a surplus of 16.8 million from the health authorities and a deficit of 0.1 million from the Dental Practice Board's services in Wales. The comparative result for was a deficit of 1.6 million comprising a deficit of 0.7 million from the NHS trusts, a deficit of 0.5 million from the health authorities and a deficit of 0.4 million from the Dental Practice Board. The comparative figures differ from those previously reported (an overall deficit of 5.3 million) as they have been restated to incorporate the results of the Dental Practice Board's activities in Wales for the first time and a change in accounting policy to allow for the recognition of deferred income (paragraphs 2.2 to 2.3). 6 Strategic assistance funding: During , the NHS trusts received strategic assistance funding of 19.2 million. Without such assistance, the reported surplus of 7.6 million would have been a deficit of 11.6 million. The NHS Directorate expects to provide further strategic assistance funding of 9.15 million in (paragraph 2.4). THE FINANCES OF NHS WALES

7 7 Forecast for : Three months before the end of , the NHS Directorate predicted a 13.4 million overall surplus for the health authorities and NHS trusts. The final accounts record an overall surplus of 24.3 million. The difference is relatively small in the context of the overall NHS Wales budget that exceeds 3 billion and was mainly due to the difficulties in forecasting expenditure on primary care drugs. The Director of NHS Wales has put in place a range of measures to improve the quality of management information and forecasting for and subsequent years (paragraphs 2.6 to 2.10). 8 Financial standing and management of NHS Wales: For , the appointed auditors expressed concern over the financial standing of nine of the 15 NHS Trusts (12 out of 16 for ). There were four trusts where the appointed auditors had doubts about the achievement of their recovery plans. The NHS Directorate is closely monitoring the financial performance of Cardiff and the Vale NHS Trust and Carmarthenshire NHS Trust where recovery plan targets are unlikely to be met in (paragraphs 2.14 to 2.18). 9 Public sector payment policy and performance: All NHS bodies are required to pay undisputed invoices within 30 days unless other terms are agreed with suppliers. NHS bodies in Wales paid around one million bills in with a total value of 2.8 billion. Only 81.0 per cent were paid within 30 days but these represented 94.7 per cent by value. This compares to 76.8 per cent (93.2 per cent by value) for and 75.1 per cent (90.4 per cent by value) for As in previous years, there was a wide variation in payment performance across NHS bodies ranging from just under 67 per cent for Gwent Healthcare NHS Trust to just over 95 per cent for North West Wales NHS Trust. 10 The NHS Directorate continues to regard compliance with the CBI Supplier Payment Code of Practice as a key performance indicator for NHS bodies in Wales and is monitoring performance on a monthly basis with emphasis on the number of bills paid rather than the value. The Director of NHS Wales has also tasked health bodies with producing action plans for achieving at least a 95 per cent compliance rate for She proposes to make performance against the CBI Code a formal administrative target for all NHS bodies by and has established a working group consisting of NHS Trust Directors of Finance with the aim of producing a guide that will disseminate and share good practice (paragraphs 2.19 to 2.27). 11 Forecasts for : The year-end forecast for is still fluid due to the paucity of information on primary care drugs expenditure. The latest forecast indicates that NHS Wales expects to generate an overall in-year net deficit of between 16.8 million and 8.6 million (paragraph 2.28). Challenges facing NHS Wales 12 Restructuring: In November 2001, the Minister for Health and Social Services announced the results of her consultation on the reorganisation of NHS Wales. Subject to the passing of the necessary legislation, the five health authorities will be abolished in 2003, and the 22 Local Health Groups will be reconstituted as statutory Local Health Boards. These Boards will commission health care in close co-operation with local government. The Specialist Health Services Commission for Wales will become an all-wales commissioning body for tertiary services and will have enhanced capacity to advise, guide and facilitate the commissioning of secondary care. 2 THE FINANCES OF NHS WALES 2002

8 13 The Directorate and NHS bodies have made considerable progress and the Implementation Team is now turning to managing the transitional process and the organisational and development work needed to ensure that the new structures are in place by 2003 (paragraphs 3.2 to 3.10). 14 Redundancy and early retirement issues: NHS bodies reported costs of 130,000 in their accounts for compensation for loss of office. They also reported nearly 300 early retirements due to ill health that will cost nearly 11 million (to be borne by the NHS Pension Scheme). Termination of staff contracts will continue to be an issue during the period of restructuring. Some appointed auditors have reported problems regarding the interpretation and application of Assembly guidelines. In particular business cases are not always as robust as they should be. They have again had to emphasise the need for proper legal advice and to ensure that all cases are properly approved. 15 Redundancy packages should always be cost-effective and should ensure that they do not result in the betterment of one individual at the expense of the NHS as a whole. Given the structural changes facing NHS Wales, more formal and explicit guidance from the NHS Directorate on the interpretation of existing contracts would be helpful (paragraphs 3.11 to 3.14). 16 Health authority accumulated deficits: In January 2002, the Minister for Health and Social Services announced that loans to health authorities outstanding at 31 March 2001 amounting to million will be cancelled on their abolition (paragraph 3.15). 17 Tackling fraud: There is an urgent need to obtain a better assessment of the current level of fraud within NHS Wales. Through its partnership with the NHS Counter Fraud Service a series of measurement exercises on fraud connected with prescriptions, optical services and dental services is being carried out. The results of the first exercise covering patient prescription fraud will be known by the summer of The Counter Fraud Operational Service (Wales) was established in May 2001, and the team of six investigators is currently investigating 20 cases of suspected fraud. 18 NHS Directorate directions issued in July 2001 required all NHS bodies to nominate a Local Counter Fraud Specialist and to set up revised reporting arrangements on fraud. The number of cases under investigation by the Counter Fraud Operational Service (Wales) is expected to increase significantly once these specialists have completed their training and start referring cases to them. 19 The Audit Commission's appointed auditors have maintained a strong focus on anti-fraud work in As well as examining the overall arrangements for detecting and countering fraud, they have carried out a number of specific exercises and have been working to establish co-operative arrangements with the Counter Fraud Operational Service (Wales) (paragraphs 3.16 to 3.36). 20 Corporate governance: For , three health authorities and four NHS trusts reported non-compliance with the minimum internal financial control standards prescribed by the Assembly. However, appointed auditors found that NHS bodies are having difficulty in complying with the wider risk standards that are designed to protect patients, staff, the public and other stakeholders. For , NHS trusts were required to confirm progress against these standards in their annual reports. Five trusts reported non-compliance with the standards set by the Assembly - two because they did not meet the March 2001 deadline and three because they had not achieved the targets (paragraphs 3.37 to 3.42). THE FINANCES OF NHS WALES

9 21 Contingent liabilities: Contingent liabilities represent possible rather than probable obligations and, as such, no provision is made in the balance sheet. Contingent liabilities reported by health authorities and NHS trusts in Wales as at 31 March 2001 amounted to million of which million was in respect of the condition of the NHS estate. The remainder ( million) was primarily due to legal claims (paragraphs 3.43 to 3.44). 22 The Welsh Risk Pool: The Risk Pool was established to assist NHS bodies with risk management and settlement of claims. It is funded by contributions from member bodies. In the period to mid-february 2002, the Pool has paid out some 18.6 million more than expected in the current financial year. This was due to difficulties in forecasting the dates of settlement of claims and the amounts to be paid. This unplanned expenditure has been met from underspends elsewhere within the Health and Social Services budget and by deliberate slippage into of some noncapital programmes. The Welsh Risk Pool also expects that members' contributions will need to increase by 29 million over the original level to fund the Pool in (paragraphs 3.45 to 3.48). 23 Prescription Pricing: During delays in pricing prescriptions arose from shortages in the supply of generic drugs resulting in dispensing contractors having to buy from alternative sources. Health Solutions Wales took significantly longer to process prescriptions, as each item had to be considered and priced individually. Pharmacists received advance monthly payments from the health authorities based on previous workload estimates uplifted by one per cent to cover increased drug costs. In March 2000, I reported that the NHS Directorate had estimated that these advances had resulted in overpayments to pharmacists of between 5 million and 6 million that would be recovered in In January 2001, the Assembly offered pharmacists the option of being paid on the basis of a sampling exercise for the backlog period (October 1999 to March 2000) rather than full pricing of all prescriptions. 24 In its report published on 17 January 2002, the Assembly's Audit Committee expressed concern that recovery of overpayments would be likely to slip to The NHS Directorate told me that, where payment was based on the sampling exercise, all overpayments have now been recovered. Where pharmacists have chosen the full pricing option, pricing of the backlog will not begin until August 2002, with recovery of overpayments commencing in early 2003 (paragraphs 3.49 to 3.55). 4 THE FINANCES OF NHS WALES 2002

10 PART 1 INTRODUCTION Scope 1.1 This is my first annual report on the financial health of NHS Wales. My previous reports have recorded the results of my audit examination of the NHS (Wales) summarised accounts and provided a commentary on the financial performance of the NHS in Wales. I shall continue to include such topics but the changes now facing NHS Wales are such that this and future reports merit consideration of wider issues. 1.2 In Part 2 of this report, I comment on the financial performance of NHS Wales in , and note the latest forecasts of the financial results for In Part 3, I consider the challenges facing the NHS in Wales including restructuring, and financial, management and internal control issues, including PFI, developments in corporate and clinical governance, and measures to tackle fraud. The Appendix provides more detail about the financial performance of each of the five health economy areas within Wales. 1.3 In addition to this report, I recently reported to the Assembly on the results of my value for money study "Managing the Estate of the National Health Service in Wales" (28 November 2001), and I am undertaking a further study on Renewal and Disposal of Property in the NHS Estate. 1.4 The NHS (Wales) Summarised Accounts for were laid before the Assembly on 28 February I have reported separately on the summarised account of the health authorities to explain the limitation on the scope of my opinion given to that account. This limitation mirrored that given to the accounts of all five health authorities by their appointed auditors. Basis of Audit 1.5 Under Section 98(4) of the National Health Service Act 1977, I am required to examine, certify and report to the Assembly on the NHS summarised accounts prepared by the National Assembly for Wales (the Assembly) from the underlying accounts submitted by the five health authorities, the Dental Practice Board (General Dental Services in Wales), and the 15 NHS trusts. My examination of the NHS (Wales) summarised accounts included an assessment of the reliability of the underlying information contained in the audited accounts of the individual NHS bodies. As in previous years, National Audit Office staff in Wales undertook this task by reviewing the work of the auditors appointed by the Audit Commission, scrutinising their reports and discussing their findings with them. My staff also examined the summarisation of the individual underlying accounts by the Assembly's NHS Directorate. The Audit Commission and the role of its appointed auditors 1.6 For , the Audit Commission appointed PricewaterhouseCoopers to undertake the audits of Bro Taf Health Authority, Pembrokeshire and Derwen NHS Trust and Pontypridd and Rhondda NHS Trust. The Commission appointed its armslength agency, District Audit, to undertake the audits of the other four health authorities and 13 NHS trusts. Each of the appointed auditors completed their work on the accounts of individual health bodies in accordance with the Commission's new Code of Audit Practice to the timetable prescribed by the Assembly's NHS Directorate. 1.7 The appointed auditors provide an opinion as to whether or not the annual accounts show a true and fair view and, for the health authorities and NHS trusts, provide an opinion on each body's Statement of Internal Financial Control. They also prepare an annual audit letter summarising the key issues for the attention of the body's board of directors and detailed reports and presentations on specific matters and projects undertaken as part of the audit. 1.8 The Audit Commission promotes the best use of public money by ensuring the proper stewardship of public finances and by helping those responsible for public services to achieve economy, efficiency and effectiveness. Auditors appointed by the Commission ('appointed auditors') are required to assess expenditure not just for probity but also for value for money. The Audit Commission produces regular reports summarising work on stewardship and governance and performance management issues. During the last year the Commission has published 'Your Risk: Update on IT Abuse (September 2001) and Picture of Health?: A summary of findings from local value for money studies during 1999 and 2000 in the NHS in Wales (February 2001).' THE FINANCES OF NHS WALES

11 The work of the appointed auditors 1.9 Each NHS body is required to publish an annual report and statement of accounts, along with an annual report and statement of accounts for the charitable funds held on trust, which must be prepared in accordance with the Assembly's Manuals for Accounts. The objective of appointed auditors' work in respect of the annual accounts is to form an independent view of the financial statements and to issue an audit opinion The appointed auditors of all five health authorities limited the scope of the regularity element of their audit opinions on the accounts in respect of a potential shortfall in revenue from prescription charges due to the NHS that had not been statistically quantified. This form of limitation of audit scope is used where a matter is material but not pervasive to the accounts The appointed auditors gave unqualified opinions on the accounts of all NHS trusts and the accounts of funds held on trust by health authorities and NHS trusts in Wales. Reports and referrals 1.12 As part of their work, appointed auditors consider the legality of actions taken by NHS bodies. In the majority of cases issues are resolved by discussion, in some instances resulting in action by the body to ensure that it acts within available powers. In certain circumstances, appointed auditors may decide that it is in the public interest to make a referral to the Assembly or to issue a report in the public interest. No such reports were made in The Dental Practice Board is a special health authority whose remit covers England and Wales. The Board's auditors (appointed by the Audit Commission) issued a referral to the Department of Health drawing attention to their qualification of the regularity opinion of the financial statements on the basis that they contain a material amount of inappropriate expenditure, including administrative error, misunderstanding of regulations, inappropriate or poor quality work and deliberate theft. This expenditure is estimated by the Dental Practice Board to be approximately 70 million across England and Wales. In the context of the summarised accounts of health authorities in Wales, in which the General Dental Services in Wales's expenditure is consolidated, this inappropriate expenditure is likely to be less than 0.2 per cent of expenditure in THE FINANCES OF NHS WALES 2002

12 PART 2 FINANCIAL PERFORMANCE OF THE NHS IN WALES: ANNUAL RESULTS AND TRENDS Introduction 2.1 This part of my report presents a snapshot of the financial health of NHS Wales summarising: the financial performance of NHS Wales for (paragraphs 2.2 to 2.5); the overall forecast for (paragraphs 2.6 to 2.10); the financial performance of the health authorities for (paragraph 2.11); the financial performance of the NHS trusts for (paragraphs 2.12 to 2.13); the financial standing and management of NHS Wales (paragraphs 2.14 to 2.17); 2.3 The comparative figures for have been restated to allow for two changes in accounting treatment made by the NHS Directorate in that impact on the result for the year. In previous years, funds received by the health authorities from the Assembly were treated as income when they were received. Recognition of such income is now deferred where there is a clear indication that the funds are provided for a specific purpose and that a future obligation exists. Also, the summarised account of the health authorities now includes a full consolidation of the Dental Practice Board's accounts for its activities in Wales. If these changes had been introduced in , the total reported net deficit for NHS Wales of 5.3 million would have been reduced to a net deficit of 1.6 million. the actions being taken to address deficits (paragraph 2.18); the public sector payment policy and performance of NHS Wales (paragraphs 2.19 to 2.27); Figure 1 Total reported net surplus/deficit of NHS Wales for , and the latest forecast of the financial performance of NHS Wales, (paragraph 2.28); and the charitable funds held on trust by NHS Wales (paragraphs 2.29 to 2.31). The Appendix contains more detailed analyses of the financial performance within each health economy area of Wales. Overview of the financial performance of NHS Wales, The total net surplus for was 24.3 million, as shown in Figure 1. This comprised a 7.6 million net surplus amongst the NHS trusts, a 16.8 million surplus generated by the health authorities, and a deficit of 0.1 million from the Dental Practice Board's General Dental Health Services in Wales. The comparative result for was a net deficit of 1.6 million, comprising a net deficit of 0.7 million for NHS trusts, a net deficit of 0.5 million for health authorities, and a deficit of 0.4 million from the Dental Practice Board. million Year Source: NHS (Wales) Summarised Accounts for , and THE FINANCES OF NHS WALES

13 2.4 During , the Assembly and the health authorities provided 19.2 million strategic assistance funding to NHS trusts in Wales to assist the recovery process. Without this strategic assistance in , the net financial position of the NHS trusts would have been a net deficit 11.6 million rather than the reported surplus of 7.6 million. The NHS Directorate told me that they expect to provide further strategic assistance funding amounting to 9.15 million in The accumulated net income and expenditure deficit of NHS Wales at 31 March 2001 was 52.4 million (31 March 2000: 80.7 million). These figures are analysed further in Table 1. The contributory factors to this reduction in the accumulated deficit include surpluses generated by Swansea and North East Wales NHS trusts resulting from additional non-recurrent income that allowed loans to be repaid, the dissolution of Cardiff and the Vale's predecessor trusts, health authority underspends together with surpluses generated by a few trusts. Table 2 Main factors contributing to changes in the financial forecast for million December 2000: NHS forecast of surplus for Deferred income adjustments (1.6) Prescribing budget underspends 0.7 Health authority underspends on General Medical Services 9.7 and other budgets Additional strategic assistance funding for the 1.0 Welsh Ambulance Services NHS Trust NHS trust underspends 1.2 Dental Practice Board: General Dental Health Services (0.1) in Wales Recorded surplus for Source: NHS Directorate, National Assembly for Wales Table 1 Accumulated net income and expenditure deficit of NHS Wales for 2000 and March March 2001 million million Health authorities NHS trusts Dental Practice Board Accumulated net deficit In June 2001, the Accounting Officer told the Assembly's Audit Committee that there had been a number of unquantifiable factors which had meant that NHS Wales was unable to produce reliable forecasts for the financial year; and that whilst corrective action was in hand, these factors would also cause the forecasts for to be less accurate than the NHS Directorate would wish. NHS officials also told the Audit Committee that it had been difficult to engage some general practitioners to utilise the full extent of available general medical services budget. 8 Source: NHS Directorate, National Assembly for Wales Overall forecast for Three months before the end of financial year , the Assembly's NHS Directorate predicted a 13.4 million overall net surplus for health authorities and NHS trusts in Wales. However, the audited summarised accounts of NHS Wales record a net surplus of 24.3 million. The difference of 10.9 million is relatively small in the context of the overall NHS Wales budget that exceeds 3 billion. The main factors that contributed to the changes in the financial forecast, and the late improvement in the financial position of NHS Wales, are set out in Table 2. THE FINANCES OF NHS WALES In its report published 17 January 2002, the Audit Committee recommended that the NHS Directorate and NHS Wales should work together closely to ensure that improved forecasting measures are fully tested and in place by 31 March 2002, to enable accurate financial forecasts to be made for the financial year and subsequent years. 2.9 The NHS Directorate told me that, subsequent to the Audit Committee proceedings, the Director of NHS Wales has conveyed her serious concerns about the historic inaccuracy of forecasting to the NHS Wales Chief Executives Group, and that the following action has been taken during to improve forecasting:

14 the Director of NHS Finance has emphasised the importance of improving forecasting to all health authority and NHS trust Directors of Finance; the NHS Directorate has taken action to ensure that centrally held budgets are distributed as early as possible in the year - so that health authorities are not faced with late changes to funding allocations; the NHS Directorate has liaised with the Department of Health in respect of forecasting models for primary care prescribing. However, the Department's model adopted for proved unreliable with significant variations occurring at year end; the health authority Directors of Finance have established a group to produce a best practice guide for accounting and forecasting primary care drugs spend. The first stage of the project reported in December 2001, recommending a more standardised approach to accounting and reconciling expenditure. This first step is an essential component for reliable forecasting. The second part of the project will extend beyond the finance function and will report back in early 2002; the NHS Directorate has introduced revised monitoring arrangements of 'earmarked' monies for , an area of high risk for end of year variances in forecasts. Financial performance of the health authorities, All of the five health authorities recorded in-year surpluses. However, all except Iechyd Morgannwg Health Authority and North Wales Health Authority reported year on year accumulated deficits at 31 March The total accumulated net deficit of health authorities in Wales at 31 March 2001 was 38.7 million (31 March 2000: 55.5 million), as shown in Figure 2. Figure 2 Health Authorities in Wales: Comparison of accumulated deficits at 31 March for the years 1997 to 2001 million Year In addition, Director, NHS Wales now holds quarterly accountability reviews with health authorities and their local trusts, which could also be a vehicle for raising concerns on the quality of forecasting in the future Although the forecasting of primary care drugs expenditure remains difficult during because of the lateness of pricing (see paragraphs 3.49 to 3.55), the measures being taken should help to improve the quality of management information and forecasting for and subsequent years when more timely pricing information should be available. They should also help NHS Wales to take advantage of all available resources and use them to maximum effect for the provision of health care in Wales Source: NHS (Wales) Summarised Accounts and underlying Health Authority accounts for , , , and THE FINANCES OF NHS WALES

15 Financial performance of the NHS trusts, The summarised accounts of the NHS trusts reports a surplus for the year of 7.6 million (around 0.4 per cent of the total operating expenses), with an accumulated deficit at 31 March 2001 of 2.6 million (31 March 2000: 14.3 million) Within the overall net surplus reported by the NHS trusts in Wales for , 14 reported a surplus ( : six) and one, Welsh Ambulance Services NHS Trust, reported a deficit ( : ten). Financial standing and management of NHS Wales 2.14 Appointed auditors are required to form a view as to whether the financial standing of NHS bodies is soundly based. In forming a view, they have regard to: the financial performance in the year; the ability to meet statutory and other financial obligations, actual and contingent; known developments, whether current or in the foreseeable future, which might have an impact on financial standing The Audit Commission told me that, for , financial standing was again a major issue for its appointed auditors. Although they raised concerns about the financial position of NHS bodies in all five health economy areas of Wales, there were a smaller number of trusts this year than last where: appointed auditors reported concerns about financial standing; there was no agreed recovery plan in place In their view, there were four trusts where the appointed auditors had doubts about the achievement of their recovery plans. These were Cardiff and Vale NHS Trust, Carmarthenshire NHS Trust, Powys Healthcare NHS Trust and Pembrokeshire and Derwen NHS Trust. Figure 3 summarises the requirement for and progress on the development of recovery plans. The NHS Directorate is closely monitoring the financial performance of both Cardiff and the Vale and Carmarthenshire NHS Trusts, where approved recovery plan targets are unlikely to be met in In both cases, the Director NHS Wales has met senior trust and health authority officers, and the trusts have been required to produce action plans to demonstrate how financial balance will be restored within the break-even timetable. Latest indications are that the Powys Healthcare NHS Trust and Pembrokeshire and Derwen NHS Trust will achieve their recovery plan targets in The NHS Directorate and the Audit Commission consider that there are a range of cost pressures and issues that impact on the ability to deliver recovery plans. For example, the Audit Commission considers that the increasing use and cost of bank and agency nurses poses both financial as well as clinical risks, and that the extra resources made available for new beds that have often been staffed entirely with temporary staff have compounded the problems. Review of actions being taken to address deficits 2.18 The appointed auditors expressed concern over the financial standing of nine of the fifteen NHS trusts in ( : 12 of 16). Of these nine, two NHS trusts had not been placed in formal recovery in The NHS Directorate told me that the delay in approving the recovery plan for the Gwent health economy area, including Gwent Healthcare NHS Trust, arose from Assembly and the appointed auditor's concerns about the robustness of the initial plan. Gwent Health Authority submitted a revised recovery plan to the Assembly in January 2002, which was subject to independent review by District Audit. The NHS Directorate expects to approve the Gwent health economy recovery plan in the early part of Public sector payment policy and performance 2.19 All NHS bodies are required to comply with the CBI prompt payments code and the Government accounting rules that require that all suppliers should be paid within 30 days of the later of receipt of a valid invoice or goods/service received, unless other terms are agreed with suppliers. The payment performance of each health authority and NHS trust in is disclosed at Annex 4 of the Foreword to the Summarised Accounts. 10 THE FINANCES OF NHS WALES 2002

16 Figure 3 Appointed auditors' concerns over NHS trusts' financial standing in and Appointed auditor expressed concerns over Trusts' financial standing? Yes 9 (12) No 6 (4) Agreed recovery plan in place covering the health economy area? Yes 7 (7) No 2 (5) Appointed auditor considers the recovery plan to be robust and achievable Acceptable reasons for absence of agreed recover plan? Yes 3 (3) No 4 (4) Yes 1 (3) No 1 (2) Source: Audit Commission THE FINANCES OF NHS WALES

17 2.20 At an all-wales level one million bills with a total value of 2.8 billion were paid in Although only 81.0 per cent of bills were paid within the 30-day period, these represented 94.7 per cent by value. This payment performance compares to 76.8 per cent of bills paid within 30 days in (93.2 per cent by value) and 75.1 per cent (90.4 per cent by value) in Health authorities 2.21 Figure 4 shows the comparative supplier payment performance of health authorities for and , analysed between payments to NHS bodies and payments to non-nhs bodies. NHS trusts 2.22 Figure 5 shows the comparative supplier payment performance of NHS trusts for and , analysed between payments to NHS bodies and payments to non-nhs bodies Again this year, appointed auditors found a wide variation in payment performance across NHS trusts during , ranging from just under 67 per cent for Gwent Healthcare NHS Trust to just over 95 per cent for North West Wales NHS Trust. In , 13 of the 15 NHS trusts paid more than 75 per cent of bills within 30 days ( : 11 of 16 trusts). Corrective action to address prompt payment performance 2.24 The NHS Directorate told me that they regard compliance with the CBI Supplier Payment Code of Practice as a key performance indicator for the NHS in Wales and continue to monitor performance on a monthly basis. The Audit Committee has expressed its concerns over the impact of poor payment performance on the smaller business. Officials told me that this would be addressed by emphasis on monitoring performance in terms of number rather than value of bills paid. Figure 4 Figure 5 Comparative supplier payment performance of Health Authorities in Wales for the years and Comparative supplier payment performance of NHS Trusts in Wales for the years and Percentage of payments made within 30 days Percentage of payments made within 30 days All payments Payments to NHS bodies Payments to Non-NHS bodies All payments Payments to NHS bodies Payments to Non-NHS bodies Source: NHS (Wales) Summarised Accounts and underlying Health Authority accounts for and Source: NHS (Wales) Summarised Accounts and NHS Trust accounts for and THE FINANCES OF NHS WALES 2002

18 2.25 The NHS Directorate also told me that, subsequent to the Audit Committee proceedings of 28 June 2001, when the marginal improvement in prompt payment performance achieved in was noted, the Director of NHS Wales has initiated the following action: health authorities and NHS trusts in Wales have been tasked with producing action plans detailing how to achieve at least a 95 per cent compliance rate; Forecast of the financial performance of NHS Wales, The NHS Directorate told me that the year-end forecast for the financial year is still fluid mainly because of the paucity of primary care drugs expenditure information. The latest forecast indicates that NHS Wales expects to generate an overall in-year net deficit of between 16.8 million and 8.6 million. it is proposed that performance against the CBI prompt payments code becomes a shadow administrative target for Health Authorities and NHS trusts from , and for this to be introduced as a formal administrative target for NHS trusts and Local Health Boards from The proposed target will be 100 per cent but will be deemed to be achieved within a tolerance of 95 to100 per cent; and The charitable funds held on trust by NHS Wales 2.29 The funds held on trust are charitable funds administered by trustee bodies. The trustees are responsible for the administration of the individual charities and for ensuring that assets are properly managed, controlled and safeguarded in accordance with trust and charity law. a working group has been established by the Assembly with the aim of producing a guide that will disseminate and share good payment practice. From initial discussions about current performance and how full compliance can be achieved, it has become evident that there is no consistency in the measurement of prompt payment performance across NHS Wales and this will need to be rectified from 1 April The measures being taken by the NHS Directorate should help to improve performance against CBI Supplier Payment Code of Practice, and I will monitor progress closely The majority of assets are held as investments, including properties and investments listed on the United Kingdom stock exchange. Fund income during totalled some 13.1 million ( : 12.6 million) and the charities expended some 13.6 million ( : 14.8 million) on a wide range of projects to support NHS Wales. Figure 6 shows the value of funds held on trust over the past five years Figure 7 shows that in donations comprised 69 per cent of the 13.1 million income of the funds held on trust (70 per cent in ) Following enactment of the Late Payment of Commercial Debts (Interest) Act 1998, certain creditors now have the right to claim interest against the late payment of debt. Other than 6 paid by one NHS trust, no such interest payable was recorded in the accounts of the underlying NHS bodies in ( : nil). THE FINANCES OF NHS WALES

19 Figure 6 Figure 7 Funds held on trust: value of funds at 31 March for the years 1997 to 2001 Funds held on trust: analysis of income received from charitable funds, Investment income 11% Other income 4% million Legacies 16% 30 Donations 69% Year Source: NHS (Wales) Summarised Accounts for Source: NHS (Wales) Summarised Accounts for , , , and THE FINANCES OF NHS WALES 2002

20 PART 3 CHALLENGES FACING NHS WALES Introduction 3.1 In its report on the NHS Wales Summarised Accounts, published on 17 January 2002, the Audit Committee stated that a key challenge facing NHS Wales is to be able to take advantage of all available resources and use them to maximum effect for the provision of a high quality health service for the people of Wales. Within this context, my report examines some of the challenges now faced by NHS Wales: the restructuring of NHS Wales (paragraphs 3.2 to 3.15); 3.3 In its report on the NHS (Wales) Summarised Accounts, the Audit Committee strongly recommended that: the framework of management, oversight and accountability should be clear and straightforward, with a clear focus on delivering improvements in the operational effectiveness of NHS Wales; there should be strong and effective corporate governance, using the collective skills of NHS Wales to provide oversight and control; tackling NHS fraud (paragraphs 3.16 to 3.36); corporate governance (paragraphs 3.37 to 3.42); contingent liabilities (paragraphs 3.43 to 3.44); the Welsh Risk Pool (paragraphs 3.45 to 3.48); the restructuring should proceed on the basis of a full understanding of all costs, and that forecasts of restructuring costs and savings should be revised as the changes highlighted in 'Improving Health in Wales' are worked through; the NHS Directorate should develop contingency plans and also set aside tightlycontrolled financial provisions to deal with unforeseen events; prescription pricing (paragraphs 3.49 to 3.55); Whole of Government of Wales accounts (paragraphs 3.56 to 3.63); and the Private Finance Initiative in NHS Wales (paragraphs 3.64 to 3.70). Restructuring of NHS Wales 3.2 In November 2001, the Assembly Minister for Health and Social Services announced the results of her consultation on the reorganisation of the NHS in Wales. Subject to the enactment of primary and secondary legislation, the five health authorities will be abolished in 2003 and the 22 Local Health Groups covering each local authority area will be strengthened to become statutory Local Health Boards. The Specialist Health Services Commission for Wales will become an all-wales commissioning body, commissioning tertiary services and having enhanced capacity to advise, guide and facilitate the commissioning of secondary care. In addition, regional Assembly Government offices will be created in north, mid-west and south Wales, with the Assembly's NHS Directorate providing strategic leadership. Progress all expenditure commitments made during the restructuring process should be tracked and recorded centrally, in order that the Assembly can identify fully and quickly the total level of commitments and liabilities incurred; and the financial costs of restructuring NHS Wales should be reported to the Assembly clearly, accurately and on a timely basis. 3.4 Considerable progress has been made in implementing 'Improving Health in Wales: A Plan for the NHS with its partners'. The NHS Directorate told me that the focus of the Implementation Team is turning to managing the transitional process between now and 2003 and in undertaking the organisational and development work needed to ensure that the new structures are in place for THE FINANCES OF NHS WALES

21 Financial consequences of restructuring 3.5 The Audit Committee's report on the NHS (Wales) summarised accounts stated that sound forecasting of the financial consequences of reconfiguration and restructuring is essential to an informed decision-taking process and to the NHS Directorate's ability to monitor implementation. The Audit Committee looked to the NHS Directorate to identify the likely order of costs and to track these changes against the forecasts. 3.6 The NHS Directorate told me that NHS Wales had forecast that restructuring costs totalling some 10.6 million over seven years would be incurred as a result of the reduction in NHS trusts from 26 to 16 by 1 April The bulk of these would be incurred in the initial years following reorganisation. 3.7 NHS Wales identified potential recurrent annual savings of 6.9 million arising from the restructuring process, although the Assembly recognised from the outset that these would only be achieved in full from onwards. Table 3 sets out the pattern of forecast costs incurred and savings generated by the restructuring process. These figures are unaudited. 3.8 These forecasts of expected costs and savings were not revised to take account of the impact of the further reduction in NHS trusts from 16 to 15 on 1 April 2000, since the creation of Cardiff and Vale NHS Trust was not expected to generate additional costs or savings although some savings had since been expected as part of the Trust's Financial Recovery Plan. Also, no estimate has yet been prepared of any potential costs and savings that may derive from the further restructuring that was announced in January 2001 by the Assembly Minister for Health and Social Services. 3.9 In the three years to 31 March 2001, NHS Wales had expected to have incurred restructuring costs of some 9.9 million and to have generated savings of 8.1 million, giving an expected cumulative net cost to date of some 1.8 million. However, Table 4 shows that the total actual costs and savings reported by NHS Wales at 31 March 2001 were 5.6 million and 10.5 million respectively, giving a cumulative net saving to date of 4.9 million The NHS Directorate told me that the better than expected position was because the original plans used prudent assumptions particularly in relation to redundancy costs where more staff were able to be redeployed in the wider NHS Wales Community than originally estimated. Redundancy and early retirement issues 3.11 In December 1999, the Assembly issued guidance to NHS Wales covering redundancy and associated costs and reminded Chairs of health bodies of their responsibilities regarding termination settlements for chief executives and other senior managers. In my report on the summarised accounts, I stated that Assembly officials told me that a further letter was to be issued to health bodies reinforcing the guidance on reasonable periods of notice. It was also to emphasise that no action is to be taken which would increase the costs to the public purse of the structural changes announced in 'Improving Health in Wales'. This guidance has not yet been issued This year, the NHS trusts have reported compensation for loss of office costs of 130,000 in the accounts (health authorities: nil). The NHS trusts also reported 298 early retirements due to ill health. The cost of these ill-health retirements (calculated on an average basis and borne by the NHS Pension Scheme) will be 10.7 million (health authorities: 2 early retirements at a cost of 141,000). The Audit Commission has told me that termination of staff contracts is still an issue in as services are restructured. Some appointed auditors have reported problems regarding the interpretation and application of Assembly Government guidelines. In particular, business cases for redundancy and early retirement are not always as robust as they should be. The appointed auditors have again had to emphasise the need to obtain legal advice in such cases and to ensure that any agreements made are properly approved by the bodies concerned. They also consider that further more prescriptive and explicit guidance is required from the Assembly. 16 THE FINANCES OF NHS WALES 2002