Mr. Seamus McCarthy:

The appropriation account for Vote 39 indicates that the Health Service Executive's gross expenditure for 2014 amounted to €13.54 billion. This was approximately €585 million more than provided for in the original Estimate for the Vote approved by Dáil Éireann. Approximately 10% of the total spend in the year was funded through a range of appropriations-in-aid of the Vote, which amounted to €1.34 billion in 2014. This was €68 million below the amount of receipts forecast in the original Estimate. The net result was a requirement for Exchequer funding of €12.2 billion for 2014, around €653 million, or 5.6%, more than originally budgeted for. This budget overrun was met by a Supplementary Estimate in December 2014 which allocated an additional €680 million for the HSE. The €27 million that remained unspent at the end of the year was liable for surrender back to the Exchequer. The budget overrun in 2014, with its consequent Supplementary Estimate, continued a pattern that has extended over many years. Notes 3 and 4 of the appropriation account provide explanations of significant variances in spending and receipts. The variance relative to the budget was more significant in some spending and receipts areas than in others. Members will recall that for 2015, the Vote for health includes Exchequer funding for the Health Service Executive. Consequently, this is the last appropriation account that will be prepared by the HSE. It will continue to produce accrual-based annual financial statements.

The Accounting Officer has included in the appropriation account a comprehensive statement on the system of internal financial control in place in the HSE. This reflects the complexity of the HSE as an organisation and the range of services and facilities it provides. I draw the committee's attention to certain matters dealt with by the Accounting Officer in that statement. These relate to the extent to which the HSE does not comply with the relevant procurement procedures which are set out in detail in the HSE's national financial regulations. I have reported previously on this matter in my 2013 annual report. The committee considered that report on 23 April 2015. I also draw attention to a comprehensive review by the HSE examining its compliance with tax rules, which was completed in 2014. The HSE made an unprompted voluntary disclosure to Revenue, including interest and penalties, amounting to €21.6 million in 2014 and €800,000 in 2015. We have also prepared three reports that deal with areas of HSE activity, which are before the committee today.

Chapter 19 deals with compliance with prompt payment legislation in the HSE in Beaumont Hospital and in St. James's Hospital. The two hospitals are section 38 bodies funded by the HSE whose financial statements are subject to audit by me.

There are a substantial number of other section 38 bodies that I do not audit.

Legislation providing for automatic penalties for late payment of invoices was first enacted in 1997, in response to concerns about the impact on suppliers, particularly small and medium enterprises, of onerous payment terms and conditions. The initial provision was for automatic payment of interest by public sector bodies where suppliers had not been paid within 45 days of receipt of an undisputed invoice. In 2002, late payments were redefined as those not paid within 30 days. At that time, the legislation was also extended to private companies, as well as public bodies. Specific contract terms can be agreed with suppliers, allowing longer or shorter credit periods. The prompt payment legislation was further amended with effect from March 2013, requiring the automatic payment of flat-rate compensation payments of €40, €70 or €100, depending on the value of the invoice, in addition to late payment interest.

In the 2014 audits of the financial statements of the HSE and the two hospitals, we examined compliance with the revised legislation. In all three cases, we found there was a failure to pay the statutory compensation, even where late payment interest had been paid. The HSE subsequently recognised in its financial statements a liability to pay compensation to suppliers. It estimated that this amounted to €9 million in respect of the period from March 2013 to the end of 2014. As of September 2015, these compensation amounts had not been paid. Additional liabilities in St. James’s and Beaumont relating to non-payment of late payment interest and compensation are estimated at €389,000 and €200,000, respectively.

We also found a variation in credit terms in operation within the HSE. Some HSE areas use a standard credit period of 30 days, while others operate a standard 45-day credit period with suppliers. Separate payment terms are in place under contracts for payments to nursing homes and drug suppliers, and we noted that the HSE was not late in making payments to nursing home or drug suppliers. As a result, suppliers to the HSE may not be treated equally.

Chapter 20 looks at another routine business function in the health sector, this time dealing with the collection of income - specifically, the collection by major hospitals of private patient income due from health insurers. We examined the situation in five hospitals, three of which are HSE managed, namely, Cork University Hospital, University Hospital Galway and Midland Regional Hospital, Tullamore. The others were the two major section 38 hospitals within my remit, namely, St. James's Hospital and Beaumont Hospital. Patient income accounted for €410 million of the HSE's total current income in 2014. Almost three-quarters of this related to charges in respect of private patients, and the bulk of this was recoverable from private health insurers. Patient income in section 38 hospitals does not form part of the HSE's current income but is taken into account in the funding of these hospitals by the HSE.

New legislation enacted in July 2013 revised the charge rates for private inpatient services that came into effect in January 2014. There was uncertainty in hospitals about the application of the charges following the commencement of the new legislation, despite the provision of a six-month lead-in period. The process of clarifying the details, involving the hospitals, the insurers, the HSE and the Department of Health, continued until August 2014. As a result of the clarifications, additional private patient charges totalling circa €25.7 million had to be levied by hospitals in respect of 2014.

Delays in collecting income due from private health insurers means that the Exchequer is effectively meeting the funding gap at hospitals until payment is made. At the end of 2014, the total private patient debt outstanding from insurance companies was €290 million. The age of the private patient income debt - calculated in debtor days - was 186 days. This measure reflects the equivalent number of days' average income the hospitals would have to generate from private treatment of private patients, to accumulate the current outstanding debt level.

At the end of 2014, claims on hand had been with consultants awaiting sign-off for an average of 58 days, up from an average of 43 days at the end of 2013. Delays in sign-off were longer in HSE hospitals, at an average 68 days, than in the section 38 and voluntary hospitals, where the average was 47 days, a difference of almost one third. In both sectors, the averages are well above the target of 20 days agreed with consultants as part of a Labour Relations Commission agreement in September 2012. The HSE noted that the changes in charges implemented in January 2014 had resulted in an increase in the number of claims requiring consultant review, contributing to increasing delays at the consultant sign-off stage during 2014. The HSE does not currently analyse the value and age of debt awaiting sign off for each individual consultant.

The value of claims queried by insurance companies also increased significantly, by approximately 69%, over the course of 2014. The sharp increase in queried claims appears to be the result of the changes in the charging regime introduced at the beginning of 2014 and additional information being requested from consultants to justify the length of stay of patients.

Chapter 21 deals with the HSE's control over the supply of high-tech drugs and medicines. Expenditure by the HSE on the provision of high-tech drugs and medicines was €485 million in 2014, representing an almost 50% increase when compared with 2009. While the associated patient care fees paid to pharmacists have remained relatively stable at around €17 million a year, payments to the suppliers of drugs and medicines increased from €315 million in 2009 to €468 million in 2014. The HSE needs to have good controls in place to ensure that all drugs invoiced and paid for have in fact been delivered to pharmacies. We found that the controls in this regard were not adequate. Even though the majority of the expenditure on the scheme relates to the purchase of drugs, the checks conducted by the HSE are focused on checking pharmacist’s claims rather than supplier invoices.

Excess expenditure can occur where high-tech drugs and medicines delivered to a pharmacy, and paid for by the HSE, are not subsequently used. This situation can arise, for example, where a patient’s prescription changes or where the patient decides to use an alternative pharmacy and the first pharmacy does not have another patient requiring the drug, within the available product life. In general, pharmacies cannot return unused stock to suppliers or transfer stock to other pharmacies. At 31 December 2014, the value of stock of high value drugs and medicines held in community pharmacies was just under €45 million. Returns from individual pharmacies indicated that stock on hands, valued at €2.7 million, had gone out of date. This, however, is a measure of loss at a point in time, and probably understates the actual level of wastage of high-tech drugs occurring over the course of a year.

The HSE does not require pharmacies to complete declarations of stock disposals or destruction of out-of-date stock. It also lacks information on the level, cause and cost of wastage due to excess stocks or in respect of the incidence of losses due to patients opting to use a different pharmacy. Even though the HSE operates an annual programme of pharmacy inspections, it does not conduct independent checks of stock levels in individual pharmacies. This could be done on a sample rather than a comprehensive basis, for example, checking stocks of specific kinds or brands of drugs. Instead, the HSE relies for stock information on annual returns by pharmacies, providing details of stock on hand.

In the context of ordering stock, it is important to acknowledge that an appropriate balance must be struck between ensuring that drugs are available to satisfy patient needs in a timely way, while minimising wastage due to excess stock. In 2011, and again in 2013, the HSE requested pharmacies to co-operate in maximising a just in time facility designed to reduce stock to a level compatible with immediate patient needs. The examination noted that the stock level in pharmacies at end 2014 was equivalent in value terms to just over a month's supply of stock, which seems high by reference to the frequency of delivery of drugs and the lead time for orders. On the other hand, the HSE has pointed to complaints that some patients had to wait over a weekend for essential stock to be delivered to their pharmacies.

In all the chapters, we have made recommendations for improvement. I am glad to note that the HSE has agreed to implement most of these, subject in some cases to practical challenges being overcome.