The National Audit Office has warned that more transparent and consistent plans for dealing with NHS trusts in trouble will be needed as the financial squeeze on the health service tightens.

In a report issued overnight, the financial watchdog says that the NHS as a whole finished the last financial year with a surplus of £2.1 billion – but this figure hides “financial distress” in the system.

The NAO says 34 NHS bodies finished the year in deficit, 21 of them foundation trusts. It also says that “a small group” of ten NHS trusts are in “long-term financial difficulty” and running a combined deficit of £177m.

Two trusts in London account for £115m of this; South London Healthcare, which recently became the first NHS trust to be taken over by a special administrator, and Barking, Havering and Redbridge, which is one of five trusts the NAO has identified as being unlikely to have a viable financial future.

Below this visible pain, the NAO says there may be another 15 trusts that are hurting to the point where they would have run a deficit without help from their commissioners.

The NAO is worried that more NHS bodies will get into trouble as the latest round of NHS reforms takes hold and the health service faces up to the productivity gains that will be demanded from it over the next seven years.

Its report says that while the Department of Health is determined to eliminate PCT deficits before clinical commissioning groups start work next year, CCGs will still need to make efficiencies that will “reduce their ability to manage the local health economy and support providers.”

Meanwhile, it says the 4% cut in the NHS tariff is already squeezing trust margins, and many trusts will have to find “higher levels of efficiencies than they have previously managed” to stay in balance.

In response to the report, Margaret Hodge, the chair of the Public Accounts Committee, said it was “shocking” that so much money was going on “bailing out trusts in financial difficulty” and the Department of Health needed to “do more to help struggling organisations make efficiencies.”

She said that “if trusts are allowed to go bust” the DH must have plans in place to prevent “poorer communities suffering poorer health services as a result.” She said the PAC would quiz officials on how this could be done.

Yesterday, the Institute for Fiscal Studies warned that the NHS would face a difficult financial future, even after it has completed the ‘Nicholson challenge’ to find £20 billion of efficiency savings by 2015-16, to cope with the gap between flat funding and growing demand.

In a report for the Nuffield Trust, the IFS said low economic growth, the burgeoning welfare and debt reduction bill, and other public spending demands were likely to depress NHS funding until 2021-22.

But it warned that even in the most optimistic scenarios, the NHS would need to make unprecedented productivity gains to avoid services deteriorating or demands for rationing and charges being made.

At this year’s NHS Confederation conference, NHS chief executive David Nicholson warned that the NHS was only in surplus because of national wage freezes, management cost reductions, the cut in the tariff and local cost improvement programmes.

He said it urgently needed to get to grips with the ‘innovation’ part of the quality, innovation, productivity and prevention agenda, and start reconfiguring services or finding new ways of doing things, some of which will depend on technology.

Today’s report from the NAO agrees, but says this will be difficult. It says that some trusts have stayed out of financial trouble to date by “growing income rather than focusing on cost reduction” but their scope to continue doing this will be “limited” by contracts that stop them increasing activity.

Instead, it says trusts will have to find “higher levels of efficiencies than they have previously managed.”

Since some will not manage, the NAO says there is an urgent need for a “transparent” framework for providing support to suffering trusts, including a central capital fund.

It also says a financial failure regime is needed for CCGs and for “NHS trusts in the pipeline that cannot achieve foundation status” and are too weak to be attractive merger partners for stronger trusts.