Ministers are looking to big savings in the cost of generic medicines to rescue a bleak financial outlook for the NHS this year.

The Department of Health’s financial report for the second quarter of 2006/07 reveals that the NHS across England slipped into deficit again during the summer. After six months NHS organisations had overspent by £94m – compared to an underspend of £18m at the end of the first quarter.

Well over one-third of primary care trusts, 175, are forecasting year-end deficits – compared to 120 at the end of quarter one. If the forecasts are borne out the system will repeat last year’s £1b deficit.

But the report claims that some factors which have not yet been built into the forecasts “are likely to have a beneficial impact on outturn”.

The report says that most important amongst these is the reduced margin on some generic drugs allowed under the pharmacy contractual framework.

This will improve PCTs’ financial position by £150m this year, the report estimates.

However it admits that some extra cost pressures have also to be factored into predictions and it voices concern that the number of organisations forecasting deficits soared during the summer – and is now approaching the number that overspent last year.

The East of England is forecasting the highest overspend, some £150m.

The deterioration over the summer was particularly marked in PCTs – the organisations which effectively control the medicines purse-strings. They are forecasting cominted year-end deficits of nearly £600m, 20% higher than their combined overspending last year.

Ministers claim that despite the financial pressures most organisations are continuing to meet key targets around waiting times and choice.

Dr Gill Morgan, chief executive of the NHS Confederation, complained that the task of restoring financial balance is being made much harder by government accounting rules.

“For many NHS organisations, the way that deficits are accounted for by the centre makes the challenge of financial balance very difficult. The NHS Confederation has called for some time for changes to the accounting rules – in particular the removal of the Resource Accounting and Budgeting (RAB) principle which means that trusts in financial difficulty are penalised twice.

“The Confederation is keen to see the early implementation of the Audit Commission’s Lyon’s review that called for the removal of RAB from the deficits’ calculation to give a fairer picture of trusts’ financial circumstances.”