The view within the senior ranks of the NHS is that the Queen Elizabeth hospital in Woolwich, south-east London, is a well-managed outfit. Yet it is moving towards creating the biggest deficit of any NHS trust in England. How can this be?

Auditors from PricewaterhouseCoopers got to the root of the problem a year ago when they carried out an investigation for the Audit Commission. Their "public interest report" found the trust was locked into a deal under a private finance initiative that added about £9m to the costs that were met by an equivalent hospital built with money borrowed from the government.

The construction and fitting out of the QE's efficient but not extravagant premises cost about £93m. The Queen opened the buildings in 2001 and the Department of Health gave the trust responsibility for meeting the growing health needs of the London Gateway area.

The QE was one of the first PFI hospital schemes and the terms were particularly onerous, locking the trust into repayments at a fixed interest rate that now looks excessive.

Destructive

John Pelly, the chief executive, set about increasing efficiency to compensate for the extra £9m costs without compromising the safety and quality of patient care.

For two years the health authority gave financial support to cover the extra PFI costs and the trust managed to declare small surpluses. But that cosy arrangement stopped in 2004-05 when the QE began to suffer the bizarre financial consequences of the Treasury's RAB rules, or "resource and accounting budgeting".

Unsurprisingly, the trust ended 2004-05 with a deficit of £9m. Under RAB rules and after a few adjustments, it had approximately that amount deducted from its income in 2005-06. The money was not carted away in cash, but the amount was entered as a minus on the balance sheet.

The extra cost of the PFI payments remained the same and so the trust was set to lose £18m in 2005-06 unless it could find efficiency savings. It did make savings, but other financial pressures pushed the deficit up to £19m.

It was then that the full destructive power of the RAB rules came into play.

As well as taking £9m away from the QE's income, the rules required the hospital to make a £9m surplus in 2005-06 to bring the public sector accounts back into balance. This amounted to punishing the hospital twice for the same offence.

To return immediately to solvency, it would have needed to have made savings of £27m in 2005-06 - £9m to eliminate the PFI costs, £9m to cover the amount deducted from its income, and £9m to meet its statutory duty to achieve a surplus.

But that was only part of the nightmare. The RAB rules required the trust to add the £19m deficit it declared in 2005-06 to the £9m deficit from 2004-05. So it began 2006-07 with a cumulative deficit of £28m. It expects to "overspend" by £37m this year - raising the deficit to £65m.

Mr Pelly told the Guardian a year ago: "In traditional commercial terms we are insolvent - and we are not alone."

Yet the Department of Health did not send in a "turnaround team" of consultants; officials recognised that the PFI costs and RAB rules were to blame. And while in other hospitals the services might have been decimated to avoid technical insolvency, at Woolwich the big problem was managing cash flow.

Mr Pelly hopes Patricia Hewitt, the health secretary, will scrap the RAB rules today when she announces a new operating framework for the NHS in 2007-08. But it will be hard for her to undo the damage already wreaked on NHS balance sheets.

Mr Pelly fears his trust will have to repay the deficit it declares at the end of this financial year. He said last week that even over five years it would be extremely difficult to repay it. "But we can get to a position where we can bear the excess costs of the PFI, break even and start to generate surpluses."

If the NHS can escape the RAB nightmare, it can recover, he believes.

Trusts in trouble - the largest deficits

Analysis of data provided to the Guardian under the Freedom of Information Act showed that 23 NHS hospital trusts were forecasting deficits worth more than 5% of their turnover. By overspending on that scale, they are at severe risk of being caught in the RAB trap that ensnared the Queen Elizabeth. However, trusts that achieved surpluses in previous years and those that made drastic spending cuts earlier this year might still break free.

To identify trusts that can be assumed to have passed the RAB's point of no return, the Guardian applied three tests. In the half-year return to the Department of Health, did they forecast a deficit of more than 5% of turnover for 2006-07? Did they forecast a cumulative deficit of more than 10%? And did they fail to pass a DoH test called the "run rate" - an indication of whether the money coming in from treating patients exceeds the money going out to staff, suppliers and financial institutions?

This showed 13 trusts in the gravest difficulty under the RAB rules. They have hit trouble for different reasons, not necessarily connected to the quality of management.

FAQ: NHS finances

How big is the NHS deficit?

Last year 179 NHS trusts in England overspent by £1.3bn and this year 172 trusts are forecasting deficits totalling £1.2bn. Health authorities have set aside a big contingency fund. With some trusts making surpluses, the government says the books for the NHS as a whole should balance by March.

So there's not much of a problem?

The overspends are a tiny proportion of an NHS budget of more than £80bn. But they destabilise individual hospitals. If they were businesses, some would have to declare themselves insolvent.

Is the accounting system to blame?

Not entirely, but it does blow existing problems out of all proportion. It is also incompatible with health secretary Patricia Hewitt's plans to make hospitals compete for patients.

Is she to blame for this mess?

No. Gordon Brown was at the Treasury and Alan Milburn was health secretary when the so-called RAB accounting rules were applied in 2001.

Could the rules help underspending hospitals build up huge surpluses?

Theoretically yes. But trusts that gained from the system spent the money as soon as possible before anyone could claim it back.