Will politicians allow providers to fail?

The progress made by the NHS in England in converting a net deficit of £547m (€812m; $1121m) in 2005-6 into a net surplus of £510m in 2006-7 has given the government a breathing space. Yet behind the headline figures lies a picture that is more complex and promises to become more troubling as the programme of health reform gathers pace.

The net surplus in 2006-7 resulted from a gross deficit of £911m and a gross surplus of £1421m.1 Moreover, the gross deficit was concentrated in a small number of organisations, some of which face financial difficulties that cannot be easily resolved. To address these difficulties the Department of Health is working with strategic health authorities to identify long term solutions, focusing on 17 NHS trusts with the greatest challenges.

The experience of converting deficits into surpluses has shown that there are three main approaches to dealing with NHS providers in difficulty.2 The first is to develop recovery plans tailored to the circumstances of providers, often linked to the provision of loans.

In many cases, these recovery plans focus on reducing pay …