Select Committee on Health Minutes of Evidence

Examination of Witnesses (Questions 380 - 399)



John Austin

  380. Can I raise a question with you on this very international financial direction in which we are going. In the past those services which have been provided essentially within the private sector have been outside the remit of the World Trade Organisation. As we move increasingly to a mixture of public and private provision in public services such as health, is there a danger that the whole provision of health care becomes subject to rules and regulations of the World Trade Organisation, opening up our health service to bids from competition from maybe the major American health care group organisations?
  (Professor Pollock) There is definitely a danger. The WTO is an organisation whose sole remit is trade, opening up markets to trade. They operate through a number of trade treaties. The most serious with respect to health and education and welfare is the General Agreement of Trade and Services (GATS). That trade treaty is currently being negotiated. Countries have the ability to opt in. The problem is that when they have actually already opened up their health services to the market place, to corporations, they will now become very vulnerable and will actually become subject to the rule of the GATS. This is a highly contentious and topical issue. I have just returned from Taiwan, where the Ministry of Health is most concerned about the effect of joining the WTO and the GATS, and similarly in Canada, where opening up both the funding and the delivery system to the private sector means that they will now be exposed to the rules of trade which come before public health.

  381. Why do you think there has been so little attention drawn to that?
  (Professor Pollock) We have published two articles in the Lancet to which I draw your attention. Partly because these are very technical trade treaties. I think there is also an issue that the Department of Health and the Department of Education have not been sufficiently involved in their negotiations. It is led by the Department of Trade, whose sole remit is opening up trade and markets in services and there is also a very large business lobby. There is very good evidence from the US, for example, that the business lobby and the government see the opening of health care systems as "absolutely essential to their profits". In their quote, not mine, they see Europe as a "great unopened oyster" in terms of education and health. If you think, this is big money at stake—most countries are spending anything between 12 and 20 per cent of their gross domestic product on health and education. These services have hitherto been protected from the market place. These services are now being opened up at local level with new structures being put in place and they are exactly what the corporations and some of their governments are actually targeting, because economic success will rest on being able to open them up

  382. Are you essentially saying that whatever the protestations of any government, we are on the path of privatisation of our health service as a result of those changes?
  (Professor Pollock) No, there are two processes taking place. One is at the level of the World Trade Organisation, where policies are being written, new constitutions are being written for countries which will override domestic sovereignty in these issues. At the other level, countries themselves are pursuing an agenda which is liberalising and opening up public services to trade. These are two parallel agendas that are taking place but both will have the same disastrous and devastating consequences for public health. I will draw your attention to the TRIPS Agreement, which is on trade related aspects of intellectual property, and access to essential medicines in the developing world. TRIPS is a trade treaty which had disastrous consequences on the developing world and yet when the US Government finally stepped in and threatened to actually break the patents during the Anthrax scares this led to the WTO softening that trade agreement. But that is what we are going to be up against if we allow further privatisation and our participation in GATS to override public health concerns.

Dr Taylor

  383. We as a committee are trying to ask what I think should be a very simple question, with a very simple answer, and that is entirely the question of best value. We are told absolutely clearly by Mr Milburn and his advisors that PFI is best value full stop; we have KPMG here who are saying, "Acute hospital PFI schemes overall have represented good value for money for the public sector"—although they water it down a little bit later on by saying it is marginal; and we have Professor Pollock saying exactly the opposite. How do we as a Committee find out which is correct?
  (Professor Pollock) I think there is a lot of confusion being sown over value for money.

  384. Absolutely. We want somebody to cut through it.
  (Professor Pollock) I will try and help you.

  385. In all fairness, I want both sides. I want to hear KPMG as well—as I am sure our Chairman does.
  (Professor Pollock) If you think of it as a political exercise which comprises political judgments, be it dressed up as objective economic criteria. VFM is actually a political exercise with political value judgments which are required to provide the right answers—which in this case is privatisation. Value for money is an economic analysis. It is not a cash analysis, so it does not tell local trusts what the affordability is, ie whether they can actually afford the new scheme. I put it to you: a Porsche or a Ferrari might be value for money for you, or an Armani suit, but you may not find that is affordable, so therefore it is not affordable. That is the real issue. VFM is not a science but a black art, as we have shown. But it is often presented very misleadingly because the value for money figures tend to be the ones that civil servants, sometimes chief executives, sometimes even directors of finance present to their boards and to the public in terms of efficiency savings and affordability. As the Government's own guidance says, "these two issues of affordability and VFM must be considered separately. Value for money is an economic analysis with two elements, discounting and risk transfer." I can go into the two parts but that would only serve to confuse you. I think it is very important that you consider the issues of affordability and risk transfer separately. You are absolutely right that value for money analysis shows very little difference between the PSC and the PFI—for instance, in the public expenditure memorandum the effect of using a too-high discount rate of 6 per cent, which was agreed to be generally too high, did not actually change the value for money case, it still left it in favour of the public sector comparator. It was only by adding in risk transfer assumptions that the value for money case came out in favour of PFI. When you look at the actual NPVs, as they are called, there is almost no difference. It is less than one per cent. In the case of Swindon, for example, the NP figures were £1,311.3 million for the public sector comparator compared with £1,310.6 million for the PFI. So this is very arbitrary. I put it to you; if you were deciding as a contractor you would not make decisions on the basis of a less than one per cent swing in the total value of the project.

  Chairman: We might be looking in practical terms at some of the schemes in a moment or two.

Dr Taylor

  386. Perhaps we could hear from the other side.
  (Mr Stone) I actually agree wholeheartedly with one of the things which Allyson said which is the need for the separation of value for money and affordability. They are two separate fundamental differences. Let us start with the background to the process. I actually dispute fundamentally that it is a political exercise because much of the lessons that are being applied here I know are being applied very carefully in the private sector as well. Is not just a political issue, it is about standing back and saying, as a matter of principle: you the Government set health policy, you decide what it is that you want to be delivered to the tax payers and to the voters. Then the question is: "How best can we deliver that?" If the problem were of a size to be capable to be held in one person's brain, it would be wonderful. It is not. We do not manage any part of our economy en bloc; we manage it in manageable bits. The PFI processing, so far in acute health schemes anyway, has looked at the infrastructure, the serviced infrastructure. What it has looked at there is: given what the health service says it wants to be delivered, what is the lowest use of resources in the long run for the nation as a whole to deliver to that standard of service? The whole process is working back from a definition of level of services to how best can we deliver it. It is not a dogmatic process that says: Thou shalt do it precisely this way. The process has been engineered over time to take in improvements. It is fundamentally about saying: the minute you take a decision to build a hospital, you have just taken on 30, 40, 50 in some cases hundreds of years of liabilities. Like it or not. We have no accountability in the public sector for the consequences of those decisions historically. We have a public sector which is in general not trained, measured or rewarded to manage risk, but yet put in a position where they have to do over time. All that the process is saying is: be cognisant of the long-term consequences of your decisions; force as much as you can the process to be focused on delivery of outputs; and get your hands off the details. Let those who are best able to produce the solutions, whomever they may be, public or private, come up with the right answer. The value for money case which is generally visible is in our experience and our view a very pessimistic case, for all sorts of reasons. Firstly, the availability of data, of honest data in terms of what it actually costs to deliver health care in any of the areas in the traditional mode, is just not there. The data is very difficult to get hold of. That data which you can get hold of points to a broad conclusion that all the analyses to date are significantly pessimistic, so when we talk about three or four or five per cent it is probably—and again I can only go on the data that we have seen—probably more like 10 or 15. It is a completely different measure altogether, but nonetheless the process has been very careful to be prudent, to be careful, and to try and develop a process where we learn from our experiences all the way through and we bring as much best practice in as we can. So far there have been 24 schemes signed to date. It will be a number of years before absolute copper-bottom proof is available that this method works rather than another. However, what I can say is that, with few exceptions, those people who have actually seen the inside of the schemes in gory detail - and I really do mean the inside of the schemes (and you might like to talk to people like Mike in a second about that)—there is a much more open and honest approach to these mechanism and a much greater visibility of the true costs. Everything that we have seen leads me to state quite confidently to you that the process does actually work and it is getting better. But what we need is honesty. We need honesty in debate, in what it actually costs now. The fact that, for example, there are hospitals in this country which we have worked on where patients were moved from A&E across to wards on the back of electric milk floats over a car park. The great British public has a stiff upper lip and deals with it but we never look at the long-run costs of these sorts of things. We never look at the long-run cost in one year because of budgetary issues—and we will come on to affordability in a second. Because of budgetary issues, an estates chap may decide not to mend the roof this year but to put it off for three years. It does not cost inflation extra; it costs all the dilapidation and the damage to the health care process inside as well. That stuff gets lost. It is first and foremost about getting the honest analysis, and then, when it comes on to affordability, what you are talking about there is micro-managing budgets. It is not about taking the revenue budget and paying for this, that or the other. That is fundamentally economically irrelevant. It is about allocation of resources. It is about: do we produce a process which delivers the required services to the lowest long-run use of resources? Or do we fudge it? And we have fudged it in the pat because we have not had visibility of the process or the data.


  387. One of the areas of concern of Professor Pollock is the entire direction that PFI is taking us in—and as someone who personally has reservations about the Government's increased use of the private sector—and what that means for our concept of the collective health care system. I was interested in your evidence where you are arguing for pilot projects involving clinical and near clinical services. The fears that Professor Pollock has about where this will lead to, your evidence in a sense undermines those fears. You are arguing that we should go much further than the current boundaries.
  (Mr Stone) I would like to see evidence. At the moment, the boundaries to which the system works are politically inspired (politically with a small "p"). There is a boundary that says: this is how far the process can be referred. I would actually like to see some experimentation and some real investigation as to whether value for money could be improved by knocking down the artificial boundaries. From the bits and pieces we have looked at—and, again, there are very few schemes that have gone very far in this direction so far, but I think you will be seeing next week West Middlesex and Quest, so you will get some evidence there to have a look at—my only plea is actually not one of saying ,"I want it to go in this direction." I would actually like people to take an honest, data driven, evidence-based approach to it and not to be dogmatic and simply to look at how best we can facilitate the delivery of health care in the long run. If the answer is: "Keep as it is," that is fine. But at the moment we do not have an open and honest debate; we have a very frustrating debate which is essentially much more emotion and dogma and very little fact in many cases. Such factors are visible. For example, the VFM numbers. You need to look very carefully at what those numbers mean and where they come from. It is the old: lies, damn lies and statistics. With much of the numbers that are floating around in this, unless you actually understand where the money has come from, it is very difficult to interpret them. And that is a big issue.

Julia Drown

  388. You said in your evidence that the PFIs led to a higher standard of hospital accommodation than under the conventional route. Why?
  (Mr Stone) So far it is entirely anecdotally. If you talk, as we do to our clients, they are saying that the hospitals they are seeing produced—and Greenwich is an example—are at a standard and quality that they have never seen before in the public sector. It has to be at this stage anecdotal evidence—but actually I do not think that is necessarily in any way weaker—that the few that are so far opened—and remember these are still early schemes, so you have not seen anything like the benefits that will come through over time—the early schemes, such as Greenwich, are clearly, in the minds of the practitioners in this—

  389. You cannot tell us why that might be?
  (Mr Stone) I think it is quite clear, it is that as a matter of basic mathematics the more constraints you put on any process the worse it will be. You cannot make a process better by constraining it. What has happened in the early PFI deals is that many of the constraints have been taken off, in that we have not simply said—

  390. If I am comparing to a conventionally funded route, would I find more constraints on a conventionally funded route? You could argue that there are less constraints.
  (Mr Stone) It is constraints in terms of saying: there are an army of skills out there which the public sector has traditionally used (the construction companies, the service companies and so on, the architects). What traditionally has happened, again from our experience, is that there has been a very tight control of, "I want slate roofs, I want 6ba bolts holding the doors on," and not saying: "I want a hospital that delivers these services, I want a hospital that works, that allows these different clinical units to inter-operate." For example, these days the whole PFI process involves, for example, putting out plots of clinical adjacencies (who works close to each other), and we let the architect or the designer stand back and say: "Here is my best guess." Historically what has happened is there have been much tighter constraints. They have been constrained in terms of saying, "I want my corridors exactly so many feet wide," but they have not said, "How best can we do it?" Part of what has helped has been the relaxing of those constraints. In general, I think, provided that we remember that the starting point is: we are trying to deliver health care—or whatever it is - we are trying to deliver something—because assets on their own are valueless, we are trying to deliver a service, what are the necessary and sufficient constraints that we have to impose? And then: let us produce the best solution. That is fundamentally what we are trying to get to.

  391. Now we have learned that, do you agree that that could then be transferred to the future public sector funded projects, that that same relationship could be developed?
  (Mr Stone) There is undoubtedly a great deal of scope for the improvement of skills in the public sector.

  392. But it is not the public sector, though, is it? It is the private sector which builds hospitals whatever.
  (Mr Stone) No, but skills can be transferred. In the long run, the real issue here is getting the right skills for the right job and the right experience. We have a system at the moment which actually damages the skills. For example, there are lots of chief executives of hospitals and finance directors and clinicians who have been through 24 schemes so far. Very, very few of them take the experience they have learned on that and reapply it. There are two examples I can think of that have: the project director from Greenwich is now working at Roehampton and there is a scheme up in the north-east of England where the finance director has done two schemes back to back. The re-use of that expertise is spectacular. It is bliss for us because we then have a lot less grief to go through but it is real value for the public sector. It is important that as the apprenticeship process happens within the public sector, when people learn how to do these different types of roles, that it is captured and not frittered away by moving people around artificially.

  393. I think you said that it was probably in 1991 that the charges came in, so that for the first time there was a charge for the capital for trusts. Then you said that because of the PFI there was a charge for the capital for the first time for NHS trusts. Is the problem the capital charges or is it PFI?
  (Professor Pollock) I think there are two problems. I think it is the problem of the switch to debt financing. As I have said, before 1991 for 40 years NHS capital was funded by block contract grant. The evidence shows—and we have published a table in the BMJ more recently that you probably have not seen yet—that the effect of capital charging was absolutely catastrophic at local level because, although the net effect was supposed to be no leakage from the system, and cash neutral, at local level trusts treated this as a real cost. In fact, for six years between 1992 and 1998 they could not break even, they could not meet that six per cent that was required. The trusts responded by perceiving this as a real cost pressure. They had very few alternatives if they were not going to cut the staff budgets immediately. What they could do was to increase prices, but that was then at the risk of not being competitive; secondly, they could get into debt, but then chief executives would not get their performance related pay, etcetera; and, thirdly, they could cut services by disposing of asset and estates—and we know that there was a major disposal of estate. Trust Mergers were one way of disposing of NHS estate, but also between 1997 and 2001 13,000 NHS beds have closed. So capital charges on their own had a major effect because the effect was to take capital investment as a national responsibility and devolve that to trust level. Now the problem was that when PFI came along it compounded that because of the affordability issue. On average trusts were spending about 8 or 9 per cent of their income on servicing the capital charge. What we can see from the public expenditure memorandum is that is rising dramatically to nearer 20 per cent, so that is a major cost pressure. For Dartford and Gravesham, for instance, it was 7.5 per cent of income, rising to 27 per cent of income. So PFI really compounds affordability.

  394. I know that is one of your concerns, that because schemes are spending more capital, it therefore has to be saved, particularly on clinical staff. Is it not true that throughout the NHS there is capital scheme after capital scheme which indeed does impose capital charges and in one sense is paid for by savings on clinical staff? That is things like the ward re-configurations, MRI scanners (which mean that patients can be seen more quickly, you need less radiographers, you need less clinical staff and it is a better service for patients—and given the shortage we have had of staff it is actually good). We save some money on staff and, yes, we spend it on capital but if it is a better service it is a good thing.
  (Professor Pollock) I am not quite sure I understand. You were saying, first of all, there is a historical dearth of capital and, you are absolutely right. Secondly, trusts have often tried to sell land or use their revenue to fund capital for example equipment. That is absolutely true and that has introduced real distortions into the system where the revenue budgets have been diverted to capital schemes at the expense of services and staff. However, we are talking about something completely different.

  395. You do not think trusts should dispose of assets they are not using in order to improve the service?
  (Professor Pollock) Absolutely. You want proper asset disposal, but one of the rationales behind launching capital charges was that trusts were inefficient. There is absolutely no evidence they were inefficient in their trust disposal. That is the first thing. The second thing is that the effect of capital charges was that trusts underspent on their capital budgets because they were frightened to increase their capital charge. I think they underspent by an average over £200,000 per year. Thirdly, there was a rise in the backlog in maintenance and repairs. These were all indirect consequences of capital charges.

  396. Do you accept the point that sometimes in the NHS it is good to spend more on capital and less on medical staff because it gets a better service?
  (Professor Pollock) I accept the point but not from the revenue budget. When you do it from a cash restrained, under-resourced revenue budget, you should not be using that for your capital. You should have proper capital flows and a proper system of capital funding.

  397. So, basically, even if this committee recommended complete abandonment of PFI, you would still have all the same concerns from the public health perspective.
  (Professor Pollock) I would. I think debt financing is not the way forward; you need to go back to making this a national responsibility and it needs to go back to government grant.

  398. You mentioned about the internal market, suggesting that the increased costs—which were substantial on transactions there—were in some sense linked to money going out of the system in privatisation, but the internal market was not; that was all internal on NHS funds.
  (Professor Pollock) First of all, capital charges were non-transparent, because money goes to purchasers and then providers have to load their prices with what they think the cost of capital is, but there has never been any evaluation of capital charges in terms of the winners and the losers nor the formula. When I was talking about money leaving the system I was talking about the effect of privatisation. We know that is again another unevaluated piece of work. There is one paper on fund holding which shows that one of the things that fund holders did was to subcontract services either into the independent acute sector or for example chiropody or physio services. Once you start to subcontract for services to the private sector from your revenue budgets, you are including de facto a cost for the administration costs and the cost of capital. So leakage occurs but the problem is we do not know how much because there has been no monitoring.

  399. You spoke about money leaking out of the system. Do you accept with a PFI project that, yes, the money leaks out, but you get a huge leakage in at the beginning when the building is built on a PFI and not through a public sector scheme.
  (Professor Pollock) No, I do not think so at all. This is the point that the IPPR have made. PFI is not net new investment. It is not a source of new money. The £14 billion that have been used in PFI could have been funded entirely from the Treasury surplus which was running at £2 billion. PFI has to be paid for and it is being paid for every year over the next 30 years.

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