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Dr. John Pugh (Southport) (LD): I apologise for the fact that my hon. Friend the Member for Northavon (Steve Webb) is not present. He would like to be here, but he is elsewhere working tirelessly for the public good on parliamentary business.

As I am new to the health portfolio, I am sure that hon. Members will excuse or perhaps even welcome the relative brevity of my contribution. I could be tempted into launching a Castro-like tirade in which, having acknowledged the additional funds that the Government have put in, I damn them for disproportionate increases in administration, public relations and publicity, failure to recognise the impact of wage settlements, gold-plating the European Union working time directive, vexing hospitals with politically driven targets, and generally fomenting a culture of change and instability that makes Mao Tse Tung's permanent revolution seem a little tentative. However, that would only provoke Labour Back Benchers to point to the largesse of the Chancellor, falls in the waiting lists and the fact that the net deficit is only about 1 per cent. Instead, let us cut to the quick and have the sensible debate that the right hon. Member for Rother Valley (Mr. Barron) requires us, and prompted us, to have.

The basic problem with the NHS is how to run a non-profit-making, demand-led service and stick to expenditure limits. That is analogous to the problems
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that councils will be familiar with when dealing with social services departments—they always overrun, and it is very difficult to manage a demand-led service effectively.

The Government's first idea was to set targets, but reaching targets requires adequate resources. When resources are not adequate, targets are often achieved by adopting perverse methods, or displacing equally worthwhile goals. The second Government idea, which was embodied in the Healthcare Commission, is the perfectly legitimate idea of pursuing a strategy of assessing clinical outputs in relation to resource allocation. By itself that is not a bad idea, but the key question is how it is pursued. Global figures on the whole NHS are no good. They are relatively uninformative; they tell us something and they are very useful in Prime Minister's questions and so on, but they do not provide a fine-grained picture. Even at strategic health authority and regional level, they are relatively unilluminating, as there will be a lot of funds sloshing around between one cost centre and another.

The Government appear to have pursued a policy that concentrates on individual cost centres: primary care trusts, hospitals and so on. In some senses this is a new departure, and they have done it in a way that has revealed substantial and worrying variations, and considerable deficits. The moot question for all of us is whether the issue is new and recently discovered, or whether it has previously existed in one form or another, perhaps disguised in the past by sloppy accountancy or the ability to move finance from year to year. It has certainly been disguised by extensive use of brokerage, whereby the SHA would find money for those in deficit and bail them out at the end of the year, and sometimes by plain misdescription of activity, whereby a shortage of secondary care might be dealt with by using some money allocated to primary care, which is then called secondary care.

Mr. Graham Stuart: I know that the hon. Gentleman is new to his post, but may I ask whether he is aware of the work carried out by Professor Sheena Asthana and Dr. Alex Gibson at the University of Plymouth, which has uncovered systematic underfunding in rural and relatively affluent areas, which is where the deficits are predominantly occurring? The Government's effort to blame managers is wrong. There is in fact a systemic underfunding of certain areas by the Government.

Dr. Pugh: The hon. Gentleman takes the words out of my mouth, because the crude Government hypothesis that the problem is due to a failure of management is significantly wide of the mark. If that were the case, resignations would have to follow and heads roll, and the public would have been substantially let down. In North Staffordshire we have seen the whole trust staff resign, more or less, but we have not seen such acknowledgement anywhere else. By and large, people who fail in managing trusts seem to be recycled elsewhere in other parts of the health service, where they are often equally well paid.

Michael Jabez Foster: The hon. Gentleman seemed to suggest that a 6 per cent. minimum was somehow underfunding. How would he compare that with 3 per cent. or less, as it was under a previous Administration?

Dr. Pugh: To be honest, I have not mentioned underfunding at any stage. I have not accused the
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Government of underfunding the NHS; that is not the problem. [Interruption.] Whatever the hon. Member for Beverley and Holderness (Mr. Stuart) has said, he has said. I will stick with what I wish to say.

It seems to me that the deficits can reflect a range of factors. They can certainly reflect a lack of previous transparency. We must all acknowledge that. Some trusts have also been slow to adjust to the fact that there is a new ball game, with new rules. Things have happened, brokerage has been abolished and there has been a switch to resource-based accounting and so on. Furthermore, the system lacks transparency at present. The world is not as it seems, and the debts of some trusts are currently disguised by brokerage simply because the SHA accepts that some trusts have a Baldrick-like cunning plan to get out of their current situation. It is an odd fact that in certain areas where there are foundation trusts, it is the PCTs that seem substantially to carry the deficit.

There is a lack of financial predictability across the piece. There is no three-year plan, as there was for local government. There is top-slicing, as various hon. Members have mentioned. Even now, the tariff for payment by results is not finalised. There is also a constant stream of initiatives. The initiative to move heart and asthma care is good in many respects, but it will have a substantial impact on acute trusts' prospects and budgets.

There are also some bizarre rules, such as the requirement that certain amounts of work be allocated to the private sector, even where that is not financially advisable. There is a failure to recognise the true cost of new build and private finance initiative in the capital factor. There is a double whammy whereby once a trust runs up a deficit in one year, it starts with a lower budget the following year. That must be the most insane way of dealing with debt since the debtors prison was abolished. In some cases, a deficit will not be due to anything other than poor configuration, but it can also be due to additional costs that are imposed by the correct configuration, but are simply not recognised.

What all those issues require is something I think most hon. Members would consent to—a responsible causal analysis. What we have had in part is a knee-jerk blame reaction, whereby the problem is said to be poor management. It is arguable whether we can leave that causal analysis entirely to the consultants and turnaround teams. It is such people who have argued others into PFIs in the first place, and who churn around the same data as are already available. I am certainly not impressed by what turnaround teams have done in my neck of the woods, where they have, by and large, looked at the figures that the hospital already has and told it what it already knew.

There is clearly a difference between a deficit that is accompanied by high output and more and better services—what might be called a virtuous deficit, as more work is being done—and a deficit with no additional level of service, which is clearly unacceptable. The reality is, however, that in order to reduce the deficits, very few alternatives are open to people. One can reduce activity, lose staff or increase efficiency; one of those three things must be done. The requirement that each cost centre should work within its own budget
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embodies a relatively crude principle of rationing. That is bearable only if we know what entitlements individuals and communities have under existing provision. At the end of the day, our entitlements determine our choices.

My great fear is that the drive for financial balance across all cost centres will ride roughshod over patient entitlements and lead to damaging reconfigurations, longer patient journeys, trusts crippled by historic debts and a whole lot of political trouble for the Labour party. A better approach, which we should favour and which is true to the NHS ethos, is not necessarily to begin with the question of how we can get existing cost centres into balance so that they can trade solvently with each other, which seems to be the question preoccupying the health service at the moment. Given the money available, we should be asking what citizens are entitled to and how we can best deliver it. We should start with the people, and local people at that, rather than with institutions. We do not have a false choice between an NHS that satisfies the auditors and an NHS that satisfies the citizen—but in the real world it does not follow that the former guarantees the latter. I urge the Secretary of State to proceed with caution, to avoid simple solutions and to recognise that even with reform, one must learn how to reform.

I shall close by quoting the King's Fund, which has made a pertinent, relevant and on-the-ball comment:

The key word is "flexibly".

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