House of Commons - Health - Written Evidence

Select Committee on Health Written Evidence

Evidence submitted by Andrew Lansley MP, Shadow Secretary of State for Health (Def 48)

1. I welcome the Committee's Inquiry. The worsening NHS financial position at a time of unprecedented resource increases is a matter of great public concern. The reasons for the deficits, their consequences, and the means of resolving them are all insufficiently clear. I hope the Committee's Inquiry and subsequent report will assist in clarifying these issues.

2. As the Shadow Secretary of State for Health, I have sought to identify the scale of, and resources for, the deficits over the course of the last 15 months.[121] This stands in contrast to the Government's complacent line, exemplified by the assertion towards the end of the 2004-05 financial year, by the then Minister of State at the Department of Health, John Hutton, who said that:

122

3. In fact, 2004-05 saw a deficit in NHS Trusts, NHS Foundation Trusts, and Primary Care Trusts (excluding Strategic Health Authorities (SHAs) of just over £624 million. Only when the surplus of just over £373 million generated by SHAs in 2004-05 is taken into account was the system-wide NHS deficit reduced to £251 million.[123]

This was the first NHS-wide deficit since the £129 million deficit recorded in 1999-2000[124]—even though funding for the NHS in 2004-05 was, in real terms, 56% higher than the level in 1999-2000.[125]

4. The scale of the deficits has clearly been persistently underestimated by the Department of Health. In July 2005, the Secretary of State used unaudited figures to estimate a net year-end deficit in 2004-05 of £140 million, excluding NHS Foundation Trusts.[126] In September 2005, however, the Department of Health's audited figures showed it was 56% higher, at £218 million[127]—a figure since revised by the National Audit Office to £214 million.[128] When the £36.9 million deficit run up by NHS Foundation Trusts is also included, the overall deficit in 2004-05 rises to £251 million—some £111 million higher than that previously admitted by the Government.[129]

5. It is not clear to what extent the Department of Health has known the size of, or whether it has been wilfully ignorant of the scale of, the deficits. In November 2005 the motion for our Opposition Day Debate on NHS Finance highlighted my estimate, derived from the Board Papers of Strategic Health Authorities, that the NHS was facing a year-end gross deficit in 2005-06 approaching £1 billion.[130]

During the Debate, Ministers failed to confirm or deny my estimate. However, just over two weeks later, the Department of Health published its estimate of the year-end deficit showing that the NHS was forecasting a collective year-end gross deficit of £948 million.[131] These figures were those provided to the Department of Health by Strategic Health Authorities at month six of the 2005-06 financial year (ie end-September 2005), and would have been available for the Government to inform our Opposition Day Debate in November. It chose not to make this information available to Parliament at the time when it would have been most useful.

6. The Committee will recall that, in December 2005, the Secretary of State believed that the deficits for 2005-06 could be managed down to a net total of £200 million—ie lower than 2004-05.[132] The Department of Health's figures, based on unaudited figures, published on 7 June 2006, reveal a net deficit of £512 million,[133] suggesting that the overall impact of the measures introduced to control deficits in the latter part of 2005-06 failed to offset an even larger deficit than that incurred in 2004-05, and failed to restrict the net deficit to that aimed for by ministers.

7. It is clear to me that the Department of Health was aware—at least by early 2005—of the risk of significant deficits, because it was around this time that it chose to make use of "control totals" as an internal and new mechanism to secure a specific financial outcome. The control totals set for 2004-05 should have secured a system-wide deficit of £70 million (Appendix 1), and those set for 2005-06 should have secured a system-wide deficit of £200 million.[134] However, despite the use of this additional method of financial control, a year-end deficit in 2005-06 of £200 million has not been achieved, because the Department has lost control of NHS finances.

8. It is sometimes argued that the deficits which are occurring in the NHS today are the same deficits which occurred in the past, but which were then obscured by brokerage (eg, through the NHS Bank), and which are now exposed by a more transparent accounting system. However, brokerage can only offset deficits in individual organisations; a system-wide deficit would still have been disclosed in the past—whether or not accounting for individual organisations within the NHS was transparent.[135]

It is apparent that the system-wide problem of deficits began in 2002-03 and has consistently increased since then. For example, the National Audit Office (NAO) reported last June that six SHA areas were in net deficit in 2002-03, and seven SHA areas were in net deficit in 2003-04.[136] In 2004-05, 16 SHA areas were in a net deficit, and in 2005-06, 17 SHA areas were in net deficit.[137]

It is also clear that, while some areas of England, regarded as "healthier, and wealthier" ran into deficit earlier—as a result of a failure of allocation methodology to reflect accurately the disease burden—the deficits have become more widespread. Some years ago, serious deficits did occur in a number of Trusts (eg in North Bristol, Royal United Hospital Bath, and in the Mid-Yorkshire Hospitals), but these were the exception. However, this situation has since worsened. The Government confirmed on 7 June 2006 that 31% of NHS organisations ran a deficit in 2005-06.[138]

9. If system-wide deficits have occurred when resources have been rising rapidly, what are the causes? Four principal causes have been cited to me, in the course of my discussions during visits to over one in four NHS Trusts over the past two and a half years:

Centrally controlled cost pressures.

139

The European Working Time Directive (EWTD).

Hansard,

Rising emergency admissions.

140

141

An ageing population means demographic and cost pressures which require increased real resources. A combination of rising costs, increased unplanned demand, and extra staffing relative to output has pushed costs beyond even the recent real terms increases in resources of several percentage points above inflation.

The impact of targets.

A number of these factors, in particular the cost of Agenda for Change and (for PCTs) the GP contract, have become even more significant in 2005-06.

The net system-wide deficit in 2005-06 masks a much larger gross deficit: £1.277 billion.[142] This continues the trend set in 2004-05, when a gross deficit of £759 million was largely offset by a total underspend by SHAs of £373 million.[143] The Department of Health has since revealed the scale of the total underspend by SHAs in 2005-06: £524 million.[144]

These underspends by SHAs reflect cut-backs in training budgets, and postgraduate deaneries in 2006-07 are already expecting a further 10% reduction in their training budgets, implying 4,000 fewer training posts. Such cuts in training contribute to short-term financial reconciliation, but at a long-term cost to the service.

10. The Department of Health has met a potential £620 million deficit in 2005-06 by means of:[145]

(i) £200 million use of year-end flexibility for 2004-05;

(ii) £200 million underspending on Connecting for Health (an incidental effect of delayed delivery on NPfIT contracts);

(iii) £112 million access to the contingency reserve; and

(iv) £116 million reduction in central budgets.

In 2004-05, accounting changes made by the NHS Litigation Authority achieved a reduction in its provisions of £1,497 million, and thus gave the Department of Health a substantial underspend in its central budget. These accounting changes, however, stand to increase liabilities in subsequent years.[146]

11. The turn-around teams appointed in December have not significantly reduced the overall deficit below the levels predicted in September 2005 (ie a net deficit of £623 million; a gross deficit of £948 million).[147] Their identification of the deficiencies in financial management, of the lack of control over cost factors, of the lack of effective procurement, and of the unconstructive relationships between SHAs, PCTs and Trusts are, however, all useful insights. Many of the responses they advocate are, of course, not new: excessive agency staff costs, for example, have potentially been significant in contributing to Trust deficits in the past. However, since expenditure on agency staff has been decreasing since 2002-03, it can be discounted as a factor in explaining the worsening financial position since then (Appendix 2).

12. Other factors which improve efficiency (such as reducing the average length of stay in hospital, increasing day surgery, and scrutinising follow-up appointments after treatment) were among the high-impact changes already recommended in 2004 by the NHS Modernisation Agency.[148]

The issue for the NHS is less the question of what needs to be done, but more the question of why incentives have not been aligned at early stage with best practice. The lack of competitive pressures which drive efficient processes must be addressed in order to deliver the enhanced productivity within existing budgets which is sorely needed. If, as expected, spending increases for the NHS after 2008 are less generous than now, the need for such action will become even more pressing.

13. While, for resource accounting purposes, PCTs recording a defict are required to repay it as a first charge on their subsequent year's allocation, NHS Trusts can carry forward deficits (with the one caveat that their overspending represents a charge against the Department of Health's Departmental Expenditure Limit (DEL) which must be offset within the three-year DEL period).

Therefore, it is NHS Trusts which are carrying forward a large deficit of approximately £1.1 billion as at the end of the 2005-06 financial year. This has accumulated over just three financial years.[149]

14. The increasing accumulated deficit specifically amongst NHS Trusts in part explains the actions they have taken over the last three months order to cut costs. In addition, however, two key failures in the management of the NHS tariff have also precipitated the cuts:

— (1) Final details of the tariff were not available until 17 March; and

— (2) Against recognised cost pressures of 6.5%, NHS Trusts have received an average increase in the tariff in 2006-07 of only 1.5% above the levels they received in 2005-06.

Nor can NHS Trust managers compensate for this by increasing the volume of their activity: first, many PCTs in financial difficulties are attempting to maintain financial control by restricting referrals to the acute sector; and second, if emergency admissions rise above a certain threshold, NHS Trusts will only be paid at half the tariff value. Therefore, many NHS Trust Chief Executives have no option but to cut costs quickly. The consequence has been that around 60 trusts have announced some 17,500 job losses in recent months (Appendix 3). The lack of primary care capacity to compensate for this reduction in secondary capacity shows that these are financially driven cuts, and not the result of a planned shift of resources into primary care settings into which any prior investment has been made.

15. There is no financial equivalent of the seventh cavalry about to ride over the horizon. It is necessary for NHS organisations to live within their means and for their carried-forward deficits to be recovered. It is also important not to bail out financial incompetence, which would send out the wrong signals for the future.

16. The Department of Health's intention, as set out in its Operating Framework for 2006-07, is for the NHS to achieve an overall surplus in 2006-07. To achieve this, all organisations have been required to plan for a balanced budget and to recover any deficit from previous years. According to the Framework, only exceptional cases are permitted to carry a deficit forward to 2007-08.[150]

However, in a letter of 12 April 2006 to me, the Secretary of State significantly amended this aim. Her new intention is for:

"All organisations that are overspending to show improvement during 2006-07, and by the end of the year everyone should have monthly income covering monthly expenditure" (Appendix 4).

This is, of course, a wholly different financial discipline and is consistent with the possibility of a substantial deficit continuing into 2007-08. The Secretary of State's account on 7 June did little to clarify how the latter requirement applying to individual organisations can be consistent with a return to overall balance without significant surpluses being generated by many PCTs.

17. In order to achieve financial stability, several steps are required:

(i) The Government must ensure that resource allocation more closely matches disease prevalence. Data from the Quality and Outcomes Framework, in addition to other sources, show that many "healthy and wealthy" areas have levels of morbidity higher than that implied by the aggregate data based on deprivation indices which are currently used for resource allocation. The current review must be accelerated for the introduction in 2007-08 of a revised method of resource allocation.

(ii) The Government must impose no new central cost pressures and, wherever possible, give greater control to NHS Trusts of their costs, in the context of an environment in which freedoms for providers facilitate competition.

(iii) The Government must align financial incentives with decision-taking responsibility by making GP budget-holding a reality. This necessitates GPs being able to hold real (rather than indicative) budgets, able to reinvest any savings they build through the commissioning of more cost-effective patient care, and able to negotiate and hold contracts with providers. This will ensure that GPs taking clinical decisions are fully aware to the need for financial discipline, making demand management both real and practicable.

(iv) The tariff-setting process must be independent, so that NHS Trusts and other providers have to respond to the benchmarked costs of efficient providers, in a more predictable framework.

(v) The Government should allow opportunities within agreed protocols (eg in the fourth quarter of the financial year) for marginal pricing of extra capacity, so that capacity utilisation can be optimised and demand met, rather than left unused with the treatment of patients delayed until the next financial year.

(vi) The Government should require PCTs to return to recurrent balance in 2006-07 and, where they have a past deficit, pay it back through having their budget top-sliced over a period of up to three years.

The indiscriminate top-slicing of all PCT budgets is inherently undesirable since it masks deficits and leads to short-term financial pressures in Trusts and PCTs which are otherwise working within their budgets; it clearly distorts the whole structure of resource allocation.

(vii) The Government should require NHS Trusts to achieve recurrent financial balance by 2007-08 and, if they achieve Foundation Trust status with the requisite degree of financial control, the Government should be prepared to convert this past debt to equity (ie public dividend capital). The performance of Foundation Trusts has been exemplary: at the end of the 2004-05 financial year Foundation Trusts had a collective deficit of £37 million; and a year later the collective deficit has been managed down to £24 million.[151] The financial control regime for Foundation Trusts clearly has out-performed that of the rest of the NHS.

(viii) NHS Trusts and PCTs which do not meet these financial criteria must expect the Board and Management to be removed. It is essential that, as the NHS moves to a more open, competitive environment, the role of regulation needs not only to set out the requirements for the licensing of providers and the arrangements for meeting the universal obligations, but also to set out a failure regime, the penalties to be received by and the framework for turnaround for failing organisations.

As it stands at present, when an NHS Trust breaches its statutory break-even duty (as St. Peter's and Ashford NHS Trust has done) no-one knows what happens. Explicit statutory failure requirements need to be put in place. The Department of Health's "Wider Review of Regulation" (due Spring 2006) needs to make provisions for this in forthcoming legislation.

18. I look forward to reading the Committee's conclusions on the way forward. I would be glad to give oral evidence if the Committee would find this helpful.

Andrew Lansley MP

June 2006