Mike Farrar, Chief Executive of the NHS Confederation, has said the growing crisis in hospital funding demands major investment in community-based healthcare.

His statement follows an Audit Commission report showing that the number of hospital trusts in deficit increased from 13 in 2010/11 to 31 in 2011/12.

While the report called for tight control of trust finances, Farrar argued that the underlying problem is the over-dependence of the NHS on acute care.

The Audit Commission’s annual report on NHS finances said that while PCT finance was mostly healthy, there had been a dramatic increase in the number of foundation trusts and NHS trusts in debt.

There was “no room for complacency” over hospital trust finances and the need for tight spending controls, the Commission said.

Andy McKeon, its Managing Director of Health, commented: “The Department of Health and other relevant national authorities need to focus their attention on the minority of organisations whose financial position is deteriorating and on their geographical distribution and service standards.”

Farrar, who has long argued for a shift in funding from acute to preventative and long-term care, said: “This is the time for the NHS Commissioning Board to help providers, not with bailouts, but by releasing money to new CCGs so they can work with providers to help put them on a sustainable footing by changing the type and range of services they provide.

“Now is the time for big investment in community and primary care. It is worrying that the number of trusts in deficit has more than doubled in the past year. This situation is likely get worse unless we take radical action.”

The NHS has billions of pounds which is being unused, according to a new report by the Audit Commission.

Research into the NHS’ financial year 2011/12 discovered there was nearly £4bn in ‘uncommitted finances” after PCTs, SHAs and NHS trusts restricted spending.

The NHS Confederation said the money should be given to CCGs across England to help transform local health services.

The report revealed NHS organisations had a combined under-spend and surplus of £1.6bn. However, the number of NHS trusts and foundation trusts in deficit increased from 13 in 2010/11 to 31 in 2011/12. A small number of trusts did report improved finances during the same period.

It also highlighted the financial difficulties NHS trusts have in different parts of the country. The majority of NHS trusts in deficit were either in London or around the south east.

Andy McKeon, Managing Director of Health at the Audit Commission, said the findings show there is “financial room for manoeuvre in the future.”

“The NHS has also delivered the first tranche of its £20bn savings required by 2014/15,” he said. “While nationally the NHS appears to be managing well financially, and preparing itself for the changes and challenges ahead, a number of PCTs and trusts are facing severe financial problems.

“The Department of Health and other relevant national authorities need to focus their attention on the minority of organisations whose financial position is deteriorating, and on their geographical distribution and service standards.”

Mike Farrar, NHS Confederation Chief Executive, said the funds should be used for “big investment in community and primary care” to ensure services can meet demand in the future.

“Fundamental changes to the way we provide care are necessary if the NHS is to maintain financial balance and become more responsive to patients’ needs,” he said. “Doing this will require some difficult decisions and in some cases will require changing or closing down some services, but this can only happen if we build up the capacity in the community and in primary care to enable people to be treated at home.”

The NHS Confederation has called for greater levels of transparency in order to stop patients taking cash-strapped trusts to court over prescribing decisions.

David Stout, NHS Confed Chief Executive, said trusts need to be honest about the financial challenges they are facing to help patients understand why certain treatments approved by NICE are not prescribed.

He was responding to comments made by NICE chair Sir Michael Rawlins who claimed that patients should take trusts to court if they were being denied recommended medicines.

Mr Stout agreed that trusts should be providing treatments to patients they are “legally entitled to”. But he added that “every NHS organisation has a finite amount of money available” and that funding for new treatments means “fewer resources for other treatments”.

“NHS organisations are faced with the difficult challenge of achieving the best outcomes and highest quality care for patients while balancing their budgets,” he said.

“The issue raised by Sir Michael Rawlins leads us on to the wider debate that we need to have about the fact that the NHS is facing an unprecedented financial challenge. All NHS organisations are facing budgetary pressures while striving to maintain high quality care.

“We need to be open and honest with the public about what the consequences of this financial challenge are, and the fact that trade-offs will be required if we are to improve standards of care while keeping the NHS affordable.”

Sir David Nicholson, NHS Chief Executive, has admitted taking control of NHS finances whilst the Government’s reforms to the health service take shape.

Speaking at the Local Government Association, Sir David said he had a greater hold of NHS finances than ever before to oversee and control budgets.

He told delegates that despite talk about “localism” he has “more control nationally” and he refused to apologise for that.

Despite taking control of finances nationally, Sir David stressed the importance of “joined-up, integrated services” when the NHS reforms were fully functional.

The Chief Executive admitted that patients in the past had been failed by a “lot of services on the cusp of health and social care” and said there was a “strong case for bringing in innovation from the wider sector” to address previous errors.

He also admitted that the health service had “raided the public health budget” to “bail out” other parts of the system. The admission is likely to affect future public health budgets after the Government said it would base council funding on historical NHS spending.

South London Healthcare may become the first NHS hospital trust to be declared bankrupt after accumulating debts of £69m.

Health Secretary Andrew Lansley has warned the trust that an administrator may be brought in to sort out its finances. The trust could also be dissolved and certain services closed as a result.

Mr Lansley said in a letter that he realises not all of the debts are the trust’s fault. However, he added that problems must be “tackled” and that “we are almost at this point”.

The trust merged three London hospitals in 2009: Princess Royal University Hospital in Orpington, Queen Mary’s Hospital in Sidcup, and the Queen Elizabeth Hospital in Woolwich.

When the three joined to form one organisation, the trust inherited a large debt through a private finance initiative (PFI) that had been used for the buildings at Orpington and Woolwich.

If the Health Secretary decides to disband the trust, it would not necessarily mean that all services would close as another NHS organisation or a private provider could take over responsibilities.

Government ministers are thought to be considering a deal which would see taxpayers taking over responsibility for the £2.5bn PFI contract.

But the option of emergency funding to reduce the deficit is not being considered in a move which ministers believe would allow other trusts to assume similar bailouts.

Mike Farrar, Chief Executive at the NHS Confederation, welcomed the move by the Health Secretary. “The NHS can’t go on with short-term fixes to financial problems,” he said. “That might mean some tough decisions, but hopefully will deliver financial sustainability in the long term.”

Chris Streather, Chief Executive of South London Healthcare, said talks were now ongoing with the Department of Health and NHS London to decide the “best future” for the trust.

“The most important thing is that the health needs of the local population are sorted out,” he said. “Over the last three and a half years since we have merged we have made an enormous amount of progress on quality of care.

“There is a huge gap in our financial plan in order for us to become viable in the long term and this intervention if it solves that problem which it is designed to do is absolutely welcome and will be helpful.”

A decision is expected on the future of South London Healthcare in the middle of July.