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CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1204-ii House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE HEALTH COMMITTEE
Thursday 20 July 2006 MR KEN CUNNINGHAM SIR IAN CARRUTHERS OBE, MR RICHARD DOUGLAS and DR BILL MOYES Evidence heard in Public Questions 237 - 387
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Health Committee on Thursday 20 July 2006 Members present Mr Kevin Barron, in the Chair Mr David Amess Charlotte Atkins Mr Ronnie Campbell Sandra Gidley Anne Milton Dr Doug Naysmith Dr Howard Stoate Dr Richard Taylor
In the absence of the Chairman, Dr Naysmith took the Chair. ________________ Witnesses: Mr Ken Cunningham, Former Chief Executive, Surrey and Sussex Hospital Trust, gave evidence. Q237 Dr Naysmith: Good morning, Mr Cunningham. Can we welcome you to the Committee? We have a few questions to ask but first can you identify yourself? Mr Cunningham: I am a retired NHS Chief Executive. I retired after 37 years' service in February 2005. Q238 Dr Naysmith: Thank you very much for coming. Can we start with the fact that all the minority trusts have large deficits currently. Does this not mean that the deficits are the fault of local management and, if not, can you tell us what the problem is? Mr Cunningham: It is a complex problem, as the Audit Commission and the National Audit Office identified. Local management have a responsibility but it is important to remember that no Trust or organisation operates as an island. You operate as part of a health economy and certainly these deficits should not come as a surprise to a local manager and, indeed, in my situation that was not the case. We were aware of the scale of the deficit which could only be addressed through a health economy approach. Q239 Dr Naysmith: You are very familiar with the deficit at Surrey and Sussex. Can you describe to us perhaps why you think that arose? Mr Cunningham: When I went to Surrey and Sussex I was seconded there in June 2000 and it had an underlying deficit at that time. I was seconded there to try and see if there was a strategic way forward and, indeed, one was agreed. We agreed a strategic plan which involved interim funding and complete service changes. I think that most of these larger deficits need to be addressed through a reconfiguration of the services, a change in the way that services are delivered and, indeed, the location of the delivery of service and, in relation to Surrey and Sussex, we agreed a plan. That plan was put in place. Unfortunately the plan was delayed at an integral part which cost the Trust in opportunity costs substantial amounts of money, and the health economy itself did not recover from that in the short to medium term. Q240 Dr Naysmith: I was not quite sure just to what extent you thought that local management could have done something about it before you were seconded? Mr Cunningham: Well, before my secondment we had health authorities, not primary care trusts, and I would suggest that it is the supplier/manufacturer relationship, if you like. The health authorities and, indeed, the PCTs have an integral intimate relationship with the provider trust, and if they do not see that as a financial relationship then it will not work and I think that was the difficulty that we had - organisations competing to protect their own financial base at the expense of each other, and what you need from local management is a joined-up approach to the financial issues rather than just the operational issues. Q241 Dr Naysmith: And at that time when the deficit was being incurred, were the local management getting any assistance from, say, the Strategic Health Authority (SHA)? Mr Cunningham: There was not a SHA at that time; it was a regional health authority. They were getting some assistance but it was a bigger organisation in the region, that just one local health economy, and I would say it was not working. It was described to me as a very difficult position when I went there. Q242 Dr Naysmith: So do you think the changes that have been implemented are enough to turn Surrey and Sussex around now? Mr Cunningham: Personally I do not because I have always seen that health economy as needing a complete restructuring because I think it is simply overheating. We were not doing anything wrong; we were not treating people who did not need treating. It is a question of getting the modality of treatment and the location of care right, and of course there are difficulties about how and where the services are provided in that area, when you have a number of providers over a relatively small geographic area. The solution we came up with was to focus services in one single area, (hospital) and that was not popular with local population or, indeed, politicians, as I am sure you are aware. Q243 Sandra Gidley: I wanted to ask what you meant by "health economy" approach. I think you have explained to a certain degree, but are you referring to the financial buck-passing that happens in lots of trusts and somebody needing to get a grip on that, or were you referring more to the reconfiguration of services which, as you appreciate, everybody thinks of as a reduction? I am not quite sure what you meant. Mr Cunningham: It is both actually. The financial buck-passing, as you describe it, is a fact of life, and where you have primary care trusts that are providers and are in competition with the acute trust there is a natural tendency to make sure their services are protected at the expense of the other acute services in order to develop their services. I am not blaming them for that, it is a natural reaction, but you end up with competing services and developing services in primary care that do not necessarily substitute for the services and the acute services. Q244 Sandra Gidley: But should not the SHA have an overview of that? Mr Cunningham: Yes, I would agree. Q245 Sandra Gidley: So why did they not? What went wrong? Mr Cunningham: I do not know. We set up under my chairmanship a local health economy board to oversee these changes and, indeed, the SHA were present at that board and all the constituent trusts were part of that, and it is a matter of record that we did that, so everyone was signed up to what we were doing, but in the event not everyone delivered what they said they were going to deliver. Q246 Sandra Gidley: Are you able to give an example of that? Mr Cunningham: Well, an example would be that part of the arrangement was that there was substantial investment in community-based services to reduce the number of acute emergencies presenting at the hospital front door. In the event that did not happen; indeed we got the reverse effect, but the money had still been invested in primary care. Q247 Sandra Gidley: It would be interesting to know a bit more about why that did not happen because we are being told all around the country that this is the way of the future, so anything you could say now might help. Mr Cunningham: No one has told the patients or the GPs, because there are undoubtedly new services being developed in primary care and very good ones and they seem to be filling an unmet need, because there is still an increase in the number of people presenting at A&E. I do not think the acuity of disease has increased, people are not sicker than they were, but the threshold for entry seems to have dropped and there are more people presenting, and the statistics show that, at the A&E front door, so all these schemes that were put in place, certainly locally, where I was, did not have the effect they planned to have to allow me to take the resources out of the front line so I did not have to spend that money, and that was part of the problem. Q248 Anne Milton: Good morning, Mr Cunningham. I should probably declare an interest because my husband used to work for you. Mr Cunningham: Yes. Q249 Anne Milton: Just for the tape, if you like, reconfiguration services, ie closing services on some sites - yes? Mr Cunningham: Yes. Moving services from one site to the other. Q250 Anne Milton: So what effect do you think government policies such as PCT reconfiguration, payment by results, et cetera, is going to have on provision of services at Surrey and Sussex? Mr Cunningham: I can only speak of when I was in post when there was a multiple number of PCTs, we had four, sometimes five PCTs, negotiating with us for the services we provided, and naturally they wanted to protect their local boundaries, as it were, so it was very difficult for us to achieve the strategic changes that we wanted to achieve because of local influence and local factors. I think the amalgamation of primary care trusts into larger commissioning bodies will be a better, good thing in that it will stop this competition of providing services, and it will mean we can take a much more strategic view of how services should be provided, but where we had the four PCTs and one trust I did have to change and modify my approach several times depending on which particular primary care trust we were talking to, so it did cause a lot of issues and problems. Q251 Anne Milton: The SHA has produced a document, and there will be effects on Surrey and Sussex creating an NHS fit for the future, which is clear and explicit, that in order to save money they will reduce services delivered at certain sites. I should think they would like to close a hospital down. You obviously had a bad experience of that and you talked about your plan being delayed. How do you think the NHS should manage what amounts to closure of hospitals in the face of huge public opposition? Mr Cunningham: Well, it can only be done by facing the public and educating them, I am afraid to say, and I spent months with my medical staff going to public meetings and talking to members of the public, and I felt when I came out of those meetings that I had had a fair hearing. They did not always agree with me but I asked them to trust the doctors that treated them, and the doctors stood up in front of these people and said: "We think this is the right thing to do", and the more times I did that the more I convinced people that it was the right thing to move the services, to change the services, so I think you have to do it with the clinicians facing the public, and you need the media on your side as well. I could only influence the secondary care clinicians, the consultant staff. We needed the primary care, the general practitioners to stand up and be counted in the same vein at the same time to persuade the public it was the right thing to do. That is the only way you will get the public and media to accept some of the changes that are put in place. People will not be convinced it is in their interests to shift an A&E department ten miles north. Q252 Anne Milton: And, because it is going on in my constituency, across that SHA area, when the clinicians stand up publicly and do not support the service changes, what would be your view of the likely outcome? Mr Cunningham: I think you will get an awful lot of opposition. I know what I got in some cases! Even with the clinicians on board I still got quite a lot of problems. Q253 Anne Milton: So in order for the Government policies to work, what you are saying is you need the management team, if you like, to first get on board clinicians and GPs, and then present to the public and re-educate the public as to what is needed to look after their health? Mr Cunningham: I would say so. That was the approach I tried to take and it was muddied, as I am sure you are aware. Q254 Anne Milton: One more question: do you think you had enough flexibility in your accounting processes to make the investments needed to cut costs in the long term? Mr Cunningham: No. We would like to have taken other steps to reduce expenditure in the years before I retired. Some of that was publicly unacceptable, if you like, in the sense that we wanted to move services to where they were more efficient and more economic, but there was a commitment to providing services in far-flung locations - when I say "far-flung", eight or nine miles away from the base - which caused us a problem, and that meant we were spending money on duplicating services and maintaining facilities that were uneconomic around the patch, and I was not in a position to be able to change that. Q255 Dr Naysmith: Can I clarify something that you were saying earlier about payment by results? You are on record as saying that payment by results is a good thing but it is going to cause real problems for some bits of the National Health Service. Mr Cunningham: In my opinion, yes, and the reason I say that is because the accounting systems within trusts are not so sophisticated as to be able to identify the cost base of every procedure, so although the costs are being standardised by payment by results there is a fair degree of flexibility within the way these costs are aggregated at trust level. On top of that, there is the opportunity for what I would call coding gain, because all procedures that go through a hospital are coded by an international classification of disease, and it is a standard classification that is used. Now, the PBR payment is based on that coding. Coding is a forgotten and ignored specialty in hospitals - or at least it was for many years - and it has suddenly become extremely important because it is on that basis trusts will be paid, but if the primary coding can be adjusted or inflated in any way then it will change radically the costs that that particular procedure attracts, and because there is medical terminology around these codes they have to be accurately interpreted, and I know that having examined some coding in some trusts recently there is the opportunity for misinterpretation, if I can call it that, and I think that could be an area that needs some clarification and some scrutiny. Q256 Dr Stoate: Are you seriously suggesting that some trusts might artificially inflate the codes in order to get more money? Mr Cunningham: No, I am not suggesting that people will artificially inflate them; I am saying that the way the codes are interpreted by coders can be -- Q257 Dr Stoate: What is the difference? If you are going to interpret the code in a way that favours the trust, is that not the same thing as artificially inflating the code? Mr Cunningham: I think there is as much as opportunity for downcoding them as upcoding them, actually. Q258 Dr Stoate: Which do you think is most likely to happen? Downgrading or upgrading? Mr Cunningham: In my experience, which is a relatively short experience, of looking at it, it happens both ways. If I was fighting on behalf of the Commissioner I could downcode things, and if I was fighting on behalf of a trust I could probably upcode some, because I think there is an opportunity for going away from the coding. It is not that precise - not in every piece of coding but in a fair number of times that is what we found. Q259 Dr Stoate: So you are not suggesting, then, that people are using codes as an opportunity to make money? Mr Cunningham: No, I am not suggesting that. Obviously it could be done but that is not my experience. What I have seen suggests that coding is a relatively inaccurate science and there is an opportunity for undercoding as well as overcoding. Q260 Mr Amess: Mr Cunningham, the Committee has got you as a witness this morning because we think you will be an interesting witness and a truthful witness, because we do from time to time have people come and give evidence who are spinning a yarn. Now, you have not got any advisers with you this morning, have you? Mr Cunningham: No. Q261 Mr Amess: And you are a picture of sartorial elegance. I want you to think for a moment that it is just you and I having a conversation together. Now, before I get to the cut of it all, you said you had worked for the service for 37 years, is that right? Mr Cunningham: Yes. Q262 Mr Amess: Now, did you want to retire? Were you, in effect, sacked? Were you pushed? What are the circumstances of your departure? Because you certainly do not look that old. Mr Cunningham: Thank you! I felt my time at that particular trust was at an end and I needed to move on and let someone else take on that role. It was a very challenging role and, had another opportunity been available within the service, I might have been interested in looking at that. Q263 Mr Amess: I knew you were a truthful witness. Thank you very much indeed for that answer. Now, what do you think the consequences of the deficits themselves would be and of the trust's attempts to eradicate those deficits? Mr Cunningham: Are you talking specifically about Surrey and Sussex, or generally? Q264 Mr Amess: You can talk specifically about your own circumstances, or generalise? Mr Cunningham: If I can generalise, then, where a trust has a deficit of, let's say, more than 8% or 9%, getting up to 10%, which some of these trusts now have, which is partly a consequence of the new financial regimes in themselves, which I know you are aware of, then I would suggest that it is practically impossible to maintain the range of services that these trusts need to maintain and to deliver that sort of reduction in expenditure. I have no evidence, certainly not in my case, of there being extravagant expenditure within hospital trusts, certainly to that degree, and given the extent of fixed costs or semi-fixed cost that are very difficult to move within a hospital trust I cannot see that you could eliminate 8%, 10%, 12% of cost in one or two years; it is just not deliverable. You can deliver 1% or 2% cost improvement and that is a very good discipline and one we have maintained for many years in the NHS and it does help drive efficiencies, but once you get above 3% or 4% it becomes a very tough regime, and I would suggest it is not deliverable, if you continue to deliver the same range and scale of services. Q265 Mr Amess: Well, the Secretary of State has been very firm on this particular matter thus far so, given that you do not believe that these financial changes can be met, do you think there will be hospital closures? And are you aware of any hospitals in particular which you can see closing? Mr Cunningham: I think the term "hospital closures" is probably right in the sense that most large trusts are a combination of a number of hospitals and, indeed, in my experience, I have been Chief Executive of two trusts and both had multiple sites, and the only way to provide a viable economic future for these trusts was to consolidate your fixed assets, to get yourself on to a single site, reduce your overheads and provide the service in the most economic way, and I would suggest that some of these multiple site trusts will have to look very hard at their capital base, and that is what I intended to do at Surrey and Sussex. Q266 Mr Amess: Can you think of any particular hospitals that you feel may be under threat? Mr Cunningham: I would not like to go into detail because it is such an emotive issue. I closed a small cottage hospital of 20 odd beds in Surrey in 2001 and I had seven hundred people at a public meeting in opposition to that closure and the hospital was overrun with vermin and it was not fit for purpose, to use a common term, and I had a difficult time closing a hospital that really was a disgrace and it was only 20 beds. Q267 Mr Amess: You know, Mr Cunningham, that most members of Parliament do not leave unless they retire on a voluntary basis, and no member of Parliament who has any sense would support their hospital closing, and their constituents are very keen on the local hospital. Now, given that you feel that there are, and quite rightly you are not prepared to name them, a number of hospitals under threat, what would be your advice as to how these endangered hospitals may be protected? Mr Cunningham: It depends what you mean by "protected". I think you will have to decide what you need to provide at some of these sites, and I would suggest that the term "hospital" is a very loose term and conjures up an A&E department and surgery and various other things, and we need to re-educate the public about what should be provided locally and what is safe to be provided locally, and I think a great deal needs to be done in education of the public through the media of what is right. Let's say you had a child who was very ill. I suggest you would be happy to take him to the best hospital available. If it was Great Ormond Street or whatever you would travel whatever distance to get the correct treatment. Why should it not be the same for an adult who has a very serious illness? We should take people to the best location where they can get the best and most specialist service and not expect it on every local hospital site, and we need to get that message across to the public about what can reasonably be provided locally and what "locally" means. Q268 Mr Amess: But you and I know, Mr Cunningham, that no education through the media is likely to take place in the particular way you wish it to, so in reality how can these hospitals, which are under threat, be protected? Mr Cunningham: They can only be protected by providing basic outpatient-type services and explaining that to the public and having the courage to do that. That is what I had. I had the courage to close a hospital when it needed closing and to remove services when they needed changing, and I think one of the key factors of management is having the courage to make these changes and see them through, and have the clinicians behind them and to face the media over these things and explain your actions. As public servants you have a duty to do that, and I would be happy to do it if I believed in what I was doing, and that is what we need to do. Q269 Mr Amess: So your final message is that others should be as brave as you have been, and to hell with the consequences? Mr Cunningham: It is not a question of "to hell with the consequences". You should be proud of what you achieve. You need to make changes and improve healthcare, that is what we are there to do, and I made a number of changes, some of which were not popular, but I believe they were right and they had the backing of clinical staff to improve healthcare. Q270 Charlotte Atkins: Given that the model of healthcare is changing from the acute sector to the primary care sector, is it not the case that in some circumstances it would make sense to either close beds or, on occasions, hospitals because we are trying to take healthcare nearer the patient? Mr Cunningham: Yes. Q271 Charlotte Atkins: So would you say that when you are talking about possible hospital closures, some of those could be due to the need to get care nearer the patient, and because we are going away from the overbedding of the acute sector into delivery at a local level? Mr Cunningham: Absolutely. I am proud of the fact that I have closed probably hundreds of beds as a chief executive but in doing that we have increased care because we have increased day care and local care, and the public have a perception that beds equals hospitals, that beds are the currency of hospitals, and they are not. It is the outcomes that are important, as you know. That is what we have to educate people about, what can be delivered locally? Day care can be delivered locally, diagnostic procedures can be delivered locally, and that is the range of services we need to get locally, and take the beds out of the system, which is where the high cost is. Dr Naysmith: Thank you very much, Mr Cunningham. You have been very helpful to the Committee. Witnesses: Sir Ian Carruthers OBE, Acting Chief Executive of the NHS, Mr Richard Douglas, Director of Finance and Investment, Department of Health; Dr Bill Moyes, Executive Chairman, Monitor, gave evidence. The Chairman resumed the Chair Q272 Chairman: Good morning, gentlemen. Could I ask you to introduce yourselves? Dr Moyes: I am Chairman of Monitor, which is the independent regulator of foundation trusts. Sir Ian Carruthers: I am acting NHS Chief Executive. Mr Douglas: I am Director of Finance Investment at the Department of Health. Q273 Charlotte Atkins: Is it the case that the Government blames local deficits on local management? Sir Ian Carruthers: It is not a question of who blames whom, and the real point is to ask the question why has the position arisen, because I do not see the Government blaming anyone and I do not feel that from my position. Why did it occur? The fact is that the Audit Commission produced their report and we would agree with their analysis because it corresponds very much with the Chief Executive's report which Richard Douglas put an appendix in. Firstly, there is not any single cause as to why deficits have arisen; there is a multiplicity of reasons; there is not necessarily a relationship between deficits, their size and the resources allocated; there are issues that need to be addressed because they are concentrated in one in ten organisations and, if you look at them over time they are the same organisations that cannot escape from their histories, quite often, and there are a lot of issues to learn about governance at board level, leadership, how we cost national policies, how transparent the accounting system has become, and I think that there is a cultural set of problems behind this which is about how we engage clinical staff and how we engage our decision-making processes, so the notion to say that there is one part to blame I think is too simplistic. Q274 Charlotte Atkins: That may be fine for you to say that sitting where you are, but in a situation where a hospital is in major deficit, and the chief executive and the chair person are up for sacking because of the management, then, of course, it is an issue and inevitably people point fingers, do they not? Sir Ian Carruthers: I have only happened to be sitting here for the last four months. My real life is being out there, where I have sat in what we would call a high-performing system, which incidentally was high-performing when it had the lowest degree of growth and was in the bottom 2% or 3% growers, and I have also had the challenge in the last year for seven months of sitting in a so-called challenge system with a deficit of £120 million, and all I can say from both experiences is that sacking people is not necessarily the answer because what we need to do is lead more, and what we need to do is put in solutions that will deliver the business. But I can understand how people feel very vulnerable in those situations, and I know from the experience I had in Hampshire that was an overwhelming feeling for many of the people when I went there. Needless to say they got to a position where they reduced that £120 million to £24 million in eight months, and no one was sacked. Q275 Charlotte Atkins: I know that everyone is delighted to see you out there, particularly you visiting North Staffordshire, my patch, but would you say that issues like poorly costed targets, bad accounting practice, things like Agenda for Change and so on, have really made a big difference to deficits? Sir Ian Carruthers: I will answer the question in this way, and Richard may want to comment. It is a fact that Agenda for Change has cost more. It is a fact that the consultant contract has cost more. It is a fact also -- Q276 Charlotte Atkins: Cost more than you estimated? Sir Ian Carruthers: Yes. It is a fact that the general practitioner contract cost more than we estimated. It is also a fact there have been record levels of growth and people have been receiving 9% or more, and Richard can give us the detailed figures, and it is also a fact to say that none of these individual things when you look at all of them can explain the actual positions very often in local organisations. Yes, there are pressures but there are also leadership, cultural and other sorts of issues that are entangled in them, so the notion it was the fault of that is not borne to be true: the Audit Commission says it is not either, but there is no doubt that they have added pressures. Q277 Charlotte Atkins: The King's Fund seems to think that something a bit more Machiavellian is going on here, and they suggest that the problem may appear to be localised but, in fact, somehow the Strategic Health Authorities are shifting deficits on to individual trusts so that it appears that everyone, or every trust, every PCT, has a deficit so therefore the fault can be attributed to poor local management. How do you respond to that? Sir Ian Carruthers: I cannot speak for everyone, only from my own experience, but that would seem to be an entirely bizarre thing to do from where I am sitting because what you want is as many organisations to be in at least balance or better, but I will ask Richard to talk about that because what is behind it is the transparency of the accounting frameworks. Mr Douglas: I think Ian is right, first of all, it would be bizarre to spread poor organisations' deficits across and to blame local management; I could not see why anyone would do that. What we have more of in the past is people moving money round the system to cover underlying financial problems, and this is something we have discussed before at this Committee. We have increasingly year on year tried to tighten up the regime to prevent that happening. Now, I am not saying that money is never moved about the system now to disguise deficits; it is in some cases. Q278 Charlotte Atkins: It is done at the moment and interest is paid on it. There is top slicing and so on, is there not? Mr Douglas: The interest paid and the top slice of local reserves is slightly different than moving the money about, because in that case you are not disguising a deficit. The key thing to us in trying to stop the money moving about was to focus on where the financial problems are. If you took money off one place and gave it to another place without acknowledging that and without anyone seeing that movement then you would not address the problem, and that is what we have tried to clamp down on. The system of SHA reserves is designed to allow a SHA as a whole to deliver a balanced financial position but not by moving the money about. So it is not intended from that for money to be moved from a well performing financial organisation to a poorly performing one. Q279 Mr Campbell: Dr Moyes, I have read your evidence which you gave to the Committee, and I am a bit struck by this and that and I would like you to explain it to the Committee. "National Health foundation trusts are delivering rapidly a strong financial performance". Now, how does it happen that the trusts can produce these strong performances? These were all hospitals before they became foundations so they must have been all in the black, I suppose, so how does that square with what you said there? Is there something special about these? Are they getting more money off the Government? Dr Moyes: No, they are not getting more money off the Government. I think there is a number of explanations for why foundation trusts overall are doing slightly better than the NHS generally. One is they have been through an assessment process, and that is quite a thorough process, and it really does force the trusts to understand the type of problems they have, and to a large extent to try and sort them before they become foundation trusts, so we would take a little bit of comfort from that; we think that is a good process. We think that the monitoring system we run and the compliance system we run flags up problems faster than in the generality of the NHS in a way which boards cannot ignore; boards cannot pretend they do not have problems. So I think those are two reasons why foundation trusts overall are doing better, but I would not want to conceal the fact that some foundation trusts have had serious problems and we have had to intervene. Q280 Mr Campbell: So we could not apply that criteria to all the hospitals? We could not put what you have put in place for each foundation hospital trust in place for the other ones where they are in debt? That would not work? Dr Moyes: I think financially over time the intention is all hospitals will become foundation trusts so gradually this system will apply to them all. Q281 Mr Campbell: Would it have anything to do with the fact, as you said earlier on in your conclusions, that a foundation hospital can borrow on the commercial market, therefore they would have to be performing strongly, because if they are not they would not be able to borrow the money? Nobody would trust them? Dr Moyes: There is some truth in that. There is an incentive to perform strongly in that if they were weak and rated by us as performing weakly then they certainly cannot borrow. Their borrowing limits are tied to their performance. I think another aspect of it is that we do allow an element of deficit in foundation trusts as long as they have a plan, and we also challenge foundation trusts with problems very rigorously and very robustly, so I would not, like Ian, put my finger on any one factor; there is a huge number of factors that have generated this rather different performance. Q282 Mr Campbell: So the organisations that are in debt are not applying at this moment for foundation trusts, as far as you are aware? Dr Moyes: Generally that is true. There will be some organisations, I am sure, that will apply to the Secretary of State -- Q283 Mr Campbell: So is there something in there that we are not seeing? Because they are not applying for it maybe they do not care, maybe they are letting their debt roll because they are not bothered. It looks to me like these forty foundations and the rest of them seem to be saying: "We want to be foundation trusts, we are getting our house in order before we become foundation trusts", and yet the ones in debt might be saying: "Well, I could not care less. I do not want to be a foundation trust"? Dr Moyes: Well, the ones who are not foundation trusts I cannot speak for very much. Our experience is that most hospitals are quite keen to become foundation trusts and to get themselves into a position where they can be, but I defer to Ian. Sir Ian Carruthers: The foundation trusts have a high bar to pass through the assessment process, and it is not surprising that they are in an order that others are not. I think one of the big things I see about the foundation trust movement that is very positive about it is that it does improve the standard of leadership and management in those organisations and their focus, and that is why it is good that it should be pursued as a national programme. It is important to recognise that every acute hospital in the NHS has gone through a diagnostic where we have analysed their strengths and weaknesses, and they are now all establishing plans to move to become foundation trusts in due course, so in essence the problems are being addressed through that mechanism. We are getting people, if you like, fit so they can jump the assessment bar, but for some it will take longer than others. Q284 Anne Milton: Gentlemen, I wanted to pick up on something you said. I think I was surprised to see your surprise that it was being suggested that deficits and poor financial management go together. Lots of people have suggested that and I have had lots of letters from the Department and from ministers suggesting that financial deficits and weak financial management go together. What I would challenge you on, Sir Ian, is your statement that the consultant contract, Agenda for Change and the GP contract cost more than the Department estimated? Why did they not get it right? It was not difficult. Sir Ian Carruthers: We can ask why we did not get it right but I need to clarify what you heard me say. What I was saying was there was no single reason for the deficits, and neither was there blame. If you want my personal view on this, and I have written articles on it, I believe that the financial problems are a symptom of the managerial actions. Money does not just incur itself without people deciding it should be incurred. None of you goes to Marks & Spencers and buys a jumper without making a number of decisions - (a) to buy one, (b) to give the money to the person at the till and (c) to walk out with the jumper. If you do not do that normally someone tries to stop you at the door. So what I am actually saying is behind every deficit are a whole set of decisions and they are down to broadly priorities, the scale of the agenda, how people implement them, and how good their control systems are. I want to make that absolutely clear because if you read articles I have written I am very unpopular because it is a popular thing in public service to say: "Well, it is the money that is always the problem", and the money just does not happen in isolation. It is a retrospective figure for what people have decided to do, so I think we should deal with that very clearly. Q285 Anne Milton: If you are going to bring in a Marks & Spencers analogy I have to come in and say that that jumper is needed so you cannot walk out of the shop, ie the hip replacement is necessary so you do not have a choice about getting it. You have to follow that through. Sir Ian Carruthers: Yes, but I go back to my earlier point, and the Audit Commission report we would agree with and it is in Richard's report, that there is no relationship between deficit size and resources allocated, because I can take you to some areas where they have more percentage growth and more deficits than in others where they have less percentage growth and they go about their job differently. I am not arguing the case of need because I do not believe people spend things on things they do not genuinely feel are appropriate, but there are always different ways of doing it. Q286 Anne Milton: So how could managers and you underestimate the cost of something that I think would have been quite straightforward? Sir Ian Carruthers: Well, I did not underestimate them because I was not there at the time. In my present role I accept I have to accept accountability, but Mr Douglas will deal with it! Mr Douglas: As someone who was there, the first thing about the pay contracts is we acknowledged in front of this Committee before that we did not get the numbers precisely right on the three major contracts. Q287 Anne Milton: So do you need a turnaround team in with you, do you think? Mr Douglas: I do not think a turnaround team is needed for the Department of Health because we got the numbers not quite right for the pay contracts. What you have to recognise on the pay contracts is these are complex negotiations of staff contracts for about a million people across the NHS. They are going to be implemented in different ways across different parts of the country. Although we will always aim to get the figures precisely right we will not, they are too complicated for that. They are subject to negotiation all the way through. We took advice; we drew on help from within the NHS; we used internal people for it; we checked the numbers out; at the end of the day they were not quite right on those three contracts. At the same time there are other areas where you have had offsetting savings, so on prescribing we saved significant amounts of money for re-negotiating the PPRS contract. That saving was not initially built into my assumptions at the last Spending Review. Again, as we have had some discussions with this Committee before, delivery of elected waiting time targets has taken less activity than we would have expected, saving some money on that, so that is offsetting savings as well. We do have to keep working on getting policy costing right and we have acknowledged ourselves, and I acknowledged in my last report, that we need to improve the process of the department and make it probably more transparent than before, because the easiest way of testing whether we have the policy costing right is to open it up to challenge from people, so the key change in how we approach policy costing will be opening up that policy costing to a lot more people allowing it to be challenged. Q288 Sandra Gidley: I want to turn now to the accounts for 2004/2005. There was a big variation between the mid-year forecast position and the actual end of year results, and the NAO Audit Commission's report stated that they were concerned about the level of audit adjustments required during the 2004/5 audit. What was the problem with forecasting correctly? Mr Douglas: In some senses this was worse than the problem with forecasting because the big change was from the month 12 figures, which should be the final draft accounts, so the movement was between the draft accounts that were produced at month 12 from us and then those accounts once they had been through the audit process. There were a number of things, as we have said in our written evidence to the Committee, that led to that change last year, two or three particularly big things. One was Agenda for Change and how people accounted for Agenda for Change; how much money essentially they provided for the cost of Agenda for Change. There was a specific technical issue around how people calculated prescribing creditors. Now, it sounds very arcane, and it is actually, but a process that had been used in one part of the country for a number of years, other parts of the country tried to replicate and at that point the auditors said: "No, that is not acceptable accounting practice", so there were those couple of big things. Q289 Sandra Gidley: Can you just clarify the prescribing problem, because I do not understand quite what you are getting at? Surely if there was something that was not good accounting practice it should have been picked up by the Department earlier, not allowed to extend to others? Mr Douglas: You do not always know what the practice is. We have accounting guidance and when the accounts come back, if they have not been challenged by the auditors, our underlying assumption is that the way in which they had accounted for things was in line with our accounting policies. The prescribing creditors one was essentially people making a standard assumption about how many weeks creditors they would have to pay for prescribing, and it was something that it appears had gone back probably to the old health authority accounts days, even before PCTs. A number of other places had just picked up on this practice and tried to introduce it and, quite rightly, it was overturned. What we have done as a result of what happened last year is, first of all, on the back of the changes in the summer, I was in touch immediately with all the health authority finance directors asking for explanations from every organisation in the country; we have gone out and put out through the NHS SHA finance directors the lessons learned last year, what went wrong and why this happened; I meet with the Audit Commission about once every two months just to keep track with them about whether there are any practices they are not happy with, and if there are any we then send out correcting guidance to the NHS. Last year was exceptional; there will always be some movements between the draft accounts and the final accounts, but last year's was an exceptional difference. Q290 Sandra Gidley: But they moved in all directions which was the worrying thing. It was not just a case of the deficits were worse in every trust when you had the final outturn, which seems to me to indicate that there is a lack of financial scrutiny, for want of a better word throughout the whole process. What is happening to improve that? Mr Douglas: Well, you will always get, where you have 500 odd organisations, some movements between the draft accounts and the audited accounts. In a previous life I was director of the National Audit Office and used to audit the accounts of lots of bodies, and I regularly made changes between draft and final accounts because there are matters of accounting judgment where your auditor will take a different view than your board will have taken, and that type of thing will happen. I just would not have expected the scale of last year. In terms of the overall improvements in financial management, there are clearly issues for us on that. We have worked with Monitor putting together a new training scheme, effectively, for all finance directors that we will be introducing shortly. The diagnostic process that we put all the trusts through that Ian referred to is helping us to educate boards more in financial management, so there is a continuing process of training, development and education to improve financial management. Q291 Sandra Gidley: So there will not be such a large amount of change this year then? Mr Douglas: I do not expect it. I have spoken to the Audit Commission probably three or four times since the accounts closed this year, and they have not identified any systemic issues that would lead to this degree of change. I have asked all the health authority finance directors to contact me personally if they become aware of any. There are one or two organisations that I am aware of where there will be movements but not on this scale and not across the whole country in this way. Q292 Sandra Gidley: How confident are you that the more opaque kinds of brokerage, for example, through adjustments to service level agreements, have been eliminated? Mr Douglas: I think it is difficult to say that we have eliminated every element of financial fudge in the system. Everyone is aware of how they should account and how they should operate. The auditors are on to this as well as ourselves more than ever before. The introduction of PBR is making things like the SOAs far more transparent, and the options for moving money about in that way are reduced, but I could not say every element has been taken out of this. What is changing now, I believe, is there is more of an appetite for transparency within the NHS itself, so organisations themselves, I believe, want to be clear about their financial position as a way of identifying the problems they have to address. Q293 Sandra Gidley: You mentioned transparency and appetite for greater transparency, and that is I think very much to be welcomed, but are there cultural issues within certain trusts that stand in the way of progress in that direction? Mr Douglas: I think there have been cultural issues across the system in the past that stood in the way of that, and that is not blaming the NHS issue, it is across the system including the Department of Health, including the whole way the system operates. I think we have overcome those. There will be some organisations I am sure still amongst the large numbers that we have where they will not want to fully disclose their position. It is our job, then, through the performance management system we operate in the strategic health service to identify where those are and then to correct those problems, and it happens in both directions. Some people will disguise financial problems; others will disguise financial surpluses because the culture of the system has been if you have a surplus someone else will take it off you, so we are trying to work with both sides to get the problems brought out but also be clear where the surpluses are as well. Q294 Dr Taylor: Because I have only just found the figures with your permission I want to go back and make a comment. When you were talking about the estimates of the cost of the contract, Mr Douglas, I think you said you had not got them precisely right. I have just found the figures we were given and the four contracts we were talking about, in fact, you got wrong by £2 billion. We sent these figures after a previous meeting many months ago to the Department for their comment and as far as I am aware we never got comment, so if we sent them again can we get your comment? Mr Douglas: You can have my personal comment. The consultant contracts I would estimate were out by £90 million.[1] Q295 Dr Taylor: Ninety is the figure we got. Agenda for Change, £950? Mr Douglas: No. Q296 Dr Taylor: You would argue with that? Mr Douglas: Agenda for Change round about £220 million, I would say. Q297 Dr Taylor: GMS contract £600 million? Mr Douglas: No. The figure for that would be in the region of £250 million; about £100 million on out of hours and about £150 million on over achievement against the QOF. Q298 Dr Taylor: And the pharmacy contract we got £400 million? Mr Douglas: I would have to look at that. As far as I know we had no overrun at all on the pharmacy contract, so I do not know where that comes from. Q299 Dr Taylor: Moving on, it is simple arithmetic, and I just do not understand the figures. We were given a gross deficit by the Secretary of State of £1.27 billion. If you add up the PCTs and the acute trusts' end-of-year deficits, that only adds up to £1.036 billion, so we are missing £230 million. What is that £230 million? Could it, by any chance, be the figure that, again, I do not understand which are the cumulative deficits which do not seem to have been included in the £1.036 billion? Mr Douglas: It would be nothing to do with accumulated deficits at all, but I am just trying to identify the figures. The gross deficit figure in month 12 was £1,277 -- Q300 Dr Taylor: £1.277 billion, yes. I have no argument with that. But if you add PCTs and acute trusts you only get £1.036 billion, so we are missing £230 million. Mr Douglas: I would have to look at those figures because if I add the figures I would not get that at the moment. Q301 Dr Taylor: Can I at the same time complain to Sir Ian, because I put in a Parliamentary Question to get at this as long ago as 7 June and the answer I got was not about deficits at all; it said: "The gross surplus of the aggregate surpluses reported", so it was a non starter. I have written to try to get that straight and I still have not, so we are missing £230 million which we need to know about, where it comes from. That is the first point. Secondly, you have reduced the gross deficit to £512 by finding £765 million. Where did you find that? Mr Douglas: We have not reduced it and we have not found it in the department; it is surpluses within the NHS. If you add up all the deficits across the system, you will get the 1,277, and then, if you add up the surplus across the system, you would get the gross surplus number and take one from the other to get the net deficit. The money has come from a number of sources. Some have been the surpluses in individual primary care trusts and NHS trusts, some have been the surpluses within the strategic heath authorities, and in my report there is a table that breaks down where the surpluses and deficits came from. Q302 Dr Taylor: What I am trying to get at is that the total SHA budget is 4.3 billion and of that something like 3.5 is a training budget. There is only 800 million that is not training, so you cannot have got 765 million from there, and so the straight question is: have you taken that 765 million from the training budgets, because, as far I can see, there is nowhere else you can have found it because there were not overall surpluses in PCTs and acute trusts? Mr Douglas: Within the SHA numbers you will have a mix of two things, some will be underspends on the central budgets they manage such as the training budget. The underspend generally on that budget has been running at anywhere between 80 and £120 million over the last three years, so there will be some underspend on that. There is some underspend that they hold from the NHS bank monies that the SHAs manage on our behalf. On top of that, in some cases individual PCTs will lodge their surpluses with the strategic heath authority. So, sometimes a PCT will ask the SHA to hold their surpluses, one of the issues I mentioned earlier about trying to get a cultural transparency not just in declaring financial problems but also in declaring surpluses. So, they will come from a mixed central programme of underspends managed by the SHAs and local PCTs lodging monies with them. Q303 Dr Taylor: But if the total amount of money the SHAs had was 4.36 billion, I still do not understand. Mr Douglas: If a PCT was lodging it with the SHA, it would not be part of the SHA's budget number. Q304 Dr Taylor: I am sorry; if a PCT was lodging its surplus? Mr Douglas: It would not be there within the turnover of the SHA; so they would be effectively giving their surplus up to be held by the SHA. Q305 Dr Taylor: But are you not counting the surpluses twice? Mr Douglas: No. Q306 Dr Taylor: Because you are using them to minimise the total PCT deficit? Mr Douglas: No, because they would not be there. What would be happening then is the PCTs would not be accounting for that surplus within their figures; it would be accounted for within the SHA figures; so it definitely would not be counted twice. Q307 Dr Taylor: So, why have we seen letters from Strategic Health Authorities to their separate units saying there is no money in their training budgets for training, for example, healthcare assistants to become nurses? Mr Douglas: I would not know the individual letters that you are referring to. Undoubtedly, there have been underspends on the training budget. As I say, those have been running for the last three years at between about 80 and 120 million each year. Q308 Dr Taylor: So the answer to the parliamentary question I got about where the 765 million came from was the same sort of fudge that you have given us? Mr Douglas: I do not think it was a fudge. What I have given you was not a fudge; it was explaining where the numbers actually were. Q309 Dr Stoate: Mr Douglas, my background is as a humble GP and, therefore, I am used to running a health related business. In my business we get income, we get expenditure and we get profit. I used to think that accounting was a pretty straightforward business until I discovered Smirnoff, and that led me straight on to resource accounting and budgeting, which does appear to be a bit of a black art. To quote from your recent report, you have said that the impact of RAB is to exaggerate the overspend by £117 million. Do you agree that is right and how do you explain it? Mr Douglas: It is like the Government equivalent of the Schleswig Holstein question, I think. It is very difficult. I will start at the very beginning with resource accounting and budgeting. The 117 million you refer to is, effectively, the impact of the overspend in 2004/2005 on the allocations we then made for 2005/2006, so we reduced the allocations for the year by the amount of the overspend. You will not get to an exact match because of the way foundations trusts work. The basic principles of how resource accounting and budgeting work that people refer to as creating a problem in the NHS is that the department is given a spending limit by Treasury split into two parts, a revenue spending limit and a capital spending limit. They both control the amount of money we spend, not the cash that actually goes out of the door, it is the actual expenditure that has been incurred, and we then get the cash that supports those two spending limits. If the department overspends on its revenue spending limit in one year, then that money is basically taken off us the following year, if we underspend it is given back to us, and we apply the same system to the NHS. The NHS last year (2005/2006) had we overspent net by £500 million, we will have to take £500 million off NHS organisations' allocations for this year. Q310 Dr Stoate: You are, therefore, saying that this is the correct figure. In that case, do you accept that the RAB favoured the NHS by allowing overspends in previous years, because I have got some figures here from public finance which show some very interesting positions? For example, in 2001/2002 the reported position was a £71 million surplus, and yet, without the RAB, it would have been a £41 million deficit. If we look, for example, in 2003/2004 the recorded surplus was £73 million and yet, if you took the RAB out of it, it would have been a deficit of £23 million. So, my contention is that you have been using RAB to prop up the system and mask the real situation over the last four or five years so that it ends up making it look much worse than it really is now. Mr Douglas: It has not been using RAB to do that. The public finance figures---. Let me use correct numbers. Q311 Dr Stoate: These have been verified by the department, I am told. Mr Douglas: I know they are the correct numbers, I think they got them from me originally, but it is not masking a deficit at all. If I underspend on my budget by ten pounds and I get that ten pounds back, I am entitled to spend it the following year. What is happening is people have been spending the money they had underspent the previous year. What it does show, though, in this sense the public finance accounts are absolutely correct, is that the position has not dramatically suddenly deteriorated; the position has been a lot flatter. Q312 Dr Stoate: The point I am making is that the real position has been masked in the public eye for the last five years and the what's name has hit the fan now because of a sudden change of RAB from plus 77 last year to minus 117 this year, which actually has caused huge difficulties and problems for trusts around the country, whereas the reality is that there has been an underlying difficulty over five years which, convenient or otherwise, has been masked by the RAB. Mr Douglas: I think, in terms of an underlying financial difficulty, I could probably go back 15 years within the NHS. The accounts do not identify underlying financial problems, and they never have identified underlying financial problems. What the RAB system has done and what other things like restricting capital to revenue transfers have done is start to open up those underlying problems to the things that have always been there and have been there probably quite constantly for a number of years. Just as public finance has done with the RAB figure, it could do the same thing with capital to revenue transfers. Three years ago we transferred probably £200 million capital to revenue. Q313 Dr Stoate: Two hundred and fifty million pounds, but the point is that rather than accepting five years ago that you have a difficulty, which I believe should have been tackled on a year on year basis over the last five years, what has happened, in fact, is that this year it looks like a real crisis and the trusts up and down the country are now having to lay off thousands of staff and are having to make extremely unpalatable decisions, will probably make decisions in the short-term to meet needs which in the long-term they will deeply regret, simply because of your accounting system over the last five years, which has, very conveniently, looked as though things were going quite smoothly when the estimated underlying deficit in 2001/2002 was 291 million, in 2002/2003 was 225 million, in 2003/2004 was 341 million. These are underlying deficits. In fact, the underlying deficit now is almost exactly the same as it has been for the last five years. Only now, because of this, has it caused chaos and melt down to a number of organisations which are going to face problems in the future which, I believe, could have been avoided by a different application of this system. Mr Douglas: If what you are saying is these problems should have been tackled earlier, I would absolutely agree with you. Q314 Dr Stoate: Why were they not? Mr Douglas: What has happened is that, because people have been targeted, because the whole system has been targeted on delivering a zero position every year, everyone works to zero under the system that operated. If they get the benefit from a previous year's underspend, they will spend that because they want to show people that they are using the money they have got, and that is some of culture change that we talk about, accepting that over those years perhaps we should have had a surplus in the system in RAB terms. Taking exactly what you said, we should have had a surplus in each of those years. That was not in the culture of the NHS and I do not think it was the way that any of us in the public or even in Parliament thought about it. We were criticised a few years ago for having 90 to £100 million surplus and being told that we were not using the money that had been given to the NHS, but this is a big cultural change for us. You have got to recognise that you need to build up surpluses to keep a buffer there. Q315 Dr Stoate: Why do we not be a bit charitable then and just call it mere confusion and lack of transparency, because that is the way it has come out? Richard Taylor has made some very interesting points that we have not had answers to, the Committee has been looking at this for some time and we have not had answers to any of these points, and they are crucial, because if you are genuinely saying, "The situation now is only what it has been for the last five years, so what is the problem?" The problem is that we have now got trusts facing meltdown that could have avoided that meltdown had we taken a much more strategic approach many years ago. Mr Douglas: I am not saying that. I said that there have been underlying problems in the system that have not been dealt with. You get to a point where, if you do not deal with the underlying problems, then they start manifesting themselves in your bottom line position and you have to deal with them. Q316 Dr Stoate: That is my point. You have had this for five years and you have not dealt with them, and now we are facing a crisis which, I believe, was probably avoidable. Sir Ian Carruthers: Can I comment, we are sort of trading figures and losing the message. I think there is a real point behind what Dr Stoate is raising. If you look at the 1.2 billion that Dr Taylor mentioned and if you look at the Douglas Report, you will find that the greater share of deficit deterioration was not the present year, which supports your argument. I think we have to be clear, but if you look at the table in that report, I think it was 2004/2005 (Richard will correct me if I am wrong) where actually it changed dramatically. So, whilst we have all got in a lather in the last year, actually the deficit growth has only been about 270 million, if you look at it. Q317 Dr Stoate: That is my point. Sir Ian Carruthers: I agree with your point. I am going to agree with your point, because we need to be clear. The point is that, if you look at it, there have been years where deficits have been increasing and it is partly a cultural problem, we would accept that, but we should not make excuses for this because overall the lesson to be drawn, and it is brought out in the Douglas Report, is (1) why is it that organisations that are in difficulty, unless they address problems early never get out of it? (2) that means that we need to address problems early, and (3) if I was looking back, there has been a lack of willingness to intervene and intervene strongly at the earliest point. Q318 Dr Stoate: I entirely agree with all of that. Sir Ian Carruthers: If that is what is behind your point, we are in complete agreement. What we are now saying is that we have changed those strategies quite dramatically, because we are now intervening on turn-round, we have actually changed in a number SHA areas before we moved the leadership from 28 to ten, and in some that had a big impact. I think those are lessons to be learned, but there is no denying the fact that the deficit, when you look at the Douglas Report, has increased in years and some of it should have been addressed at local level earlier. In fact, the very successful systems did just that. Q319 Dr Stoate: My point is simpler than that. My point is that it is very depressing indeed to be facing a crisis now which could and should have been predicted before and it has undone most of the good work done by your department where we have seen some genuine growth in the Health Service which has now been damaged, I believe, by a lack of taking this seriously before? Sir Ian Carruthers: Let us get the crisis in perspective as well, because that is the other side of this. The fact is that all of the NHS is not in crisis. Q320 Dr Stoate: I agree. Sir Ian Carruthers: The fact is that everywhere is having a tight position. I have been in the NHS for 37 years, which seems a popular number this morning, but the plain fact is that every year I have been in the NHS people have told me it is the worst possible and it is tight and it is difficult, and this is regardless of which administration is in. This is very different, and I want to say it is very different for two reasons. First of all, we are not in total crisis - let us get some perspective in it - but there are four areas of the country that have very difficult things to face, and they are Avon, Gloucester and Wiltshire, they are London, the East of England and Surrey and Sussex, and there we are talking about gaps, for whatever reason, in the biggest one a 3% problem. I can say nationally, as a business we are not in crisis, but if I just give you some figures, this last year we have put in 5.4 billion growth. The deficit is only 512 million, it is .8% of the revenue, it is the equivalent of each of us earning £20,000 and being £160 overspent on the credit card. All of us would love to have that position; we would not feel ourselves in crisis. However, the point is it is differential, and in some places it is really difficult, and I do not deny that. Q321 Dr Stoate: But the politics is slightly different, and that is that the perception out there that it is facing real difficulty, I believe, was completely avoidable. As you quite rightly say, there is no real crisis but the perception out there is that there is a crisis and an awful lot of people have become extremely agitated and worried over a situation which, I believe, could have been avoided. That is my point. Sir Ian Carruthers: If I may respond, I am not going to speculate, but it is quite clear that if there is early intervention and problems are addressed, the stitch in time rule applies, and that is one of the big learning lessons. Chairman: I do not think we are going to sort this immediate problem out now, but hopefully later in the year we will be clarifying that a little bit further in terms of the figures that we have heard this morning. Can I move on to Ron now. Q322 Mr Campbell: How fair is the funding formula? Does it need an independent assessor or should it be left in the parameters of the Government? Sir Ian Carruthers: There are two things: the formula and the tariff. The formula itself is based on age, sex distribution, deprivation where you live and Richard will comment on that more, and the other is the tariff, which is the amount, in effect, PCTs have to pay hospitals for each of the procedures, and they are two different things. I will ask Richard if he will comment on both and pick up the point about an independent assessor. Q323 Mr Campbell: What about an independent assessor? Would that be better? Sir Ian Carruthers: The independent assessor really relates to the point of the tariff and Richard will pick that up as well. Mr Douglas: On the resource allocation formula, we have got an external advisory group that advises the Secretary of State on the allocation formula; so we do open the formula up to independent testing, support and challenge through that process. I would find it difficult to envisage a situation where the Government would actually put the distribution of resources across the whole NHS into an entirely independent body. I feel that that would be a step I could not see any government taking. Opening all of these things up to more independent scrutiny examination I think is a very sensible idea. The tariff, as opposed to the resource allocation formula, there was a report produced for us that came out last week on some of the issues we had about setting the tariff this year that, amongst other things, points the way to greater independent scrutiny and challenge to the way the tariff itself is calculated, and Bill may have some views on that as well. Dr Moyes: Certainly from the perspective of foundation trusts, getting the tariff right is quite important and increasingly it will require a detailed knowledge of hospital costing. We have been suggesting to the department that perhaps in the longer run, once the tariff is better established, some of the technical work of structuring it might best be located with us because we do know about individual hospital costings, but we also accept that the department has to ultimately set the prices in the tariff because that determines public expenditure, and I do not think you can transfer public expenditure decisions of this scale outside the Government department. Q324 Mr Campbell: In regard to fair funding can I put something to bed. Is there a difference between funding in the south and the north, because all the debts are in the south and all the surplus is in the north. It has been argued that we are getting more money in the north. Mr Douglas: Different parts of the country, different PCTs, get different amounts of money per head of population. That reflects the assessed need of that population. There is nothing that demonstrates any significant link between the amount of funding per head of population and the deficit in an organisation. You can look across the whole range of PCTs, look at their deficits, look at the funding per head, look at the amount of growth they had and you cannot come to a significant link between those two things. Q325 Mr Campbell: Looking at South Yorkshire, Norfolk, Warwickshire and Wiltshire, are there any factors, other than funding formula, causing unusually high levels of demand and cost in these particular areas? Sir Ian Carruthers: What do you perceive to be happening in South Yorkshire and Wiltshire? They do not have higher demands per se then anywhere else, but there are problems. I can talk about Wiltshire, because I know Wiltshire, quite reasonably. Q326 Dr Naysmith: It was one of the four areas you mentioned. Sir Ian Carruthers: Yes. If you look back at it, Wiltshire has always had a very tight financial position. The difficulty in Wiltshire is that they have incurred debt over a period of time and they are in this cycle, which we discussed earlier, where they actually cannot get out of it. The strategy therefore is to look, and it is a pity Sandra has gone, because it applied exactly to the New Forest as well. So, what do we do? We start looking at where we can save money and we then open a consultation on the nine community hospitals or six community hospitals in Wiltshire. We then start tackling things that will save money, which goes back to the point, which is where do they fit with the longer term view of healthcare. A consultation is taking place there, it is closed, but I think that it would be hard, without analysis, to say the demands are any greater in Wiltshire than anywhere else. There is an issue going on about the closure of community hospitals there, a consultation is taking place and now I am quite sure that will be reassessed as to whether it is the right way forward. I am not quite sure what you perceive the problem to be in Norfolk and Warwickshire. Perhaps you could outline that, because we do not have a real problem about Norfolk. Q327 Mr Campbell: They are basically going into debt. What we are trying to find out is what is the common factor. Is there a common factor between them all? Mr Douglas: I do not think you would find a common factor between those organisations. I think across the country there are different reasons for people going into financial problems. The South Yorkshire one is primarily around the PCTs where we have had a relatively successful hospital. The PCTs to some extent have got by on a degree of financial support from the SHA over a number of years, and what they are having to do now as part of the turn-around process is address how they manage effectively the need for that continuing support. Q328 Mr Campbell: We are trying to see if the formula is the problem. Mr Douglas: If you look at every deficit in the country against the formula allocation for every PCT in the country and run statistical tests against it, look at the links between deficits and resources allocated, there is nothing that comes out and says there is a link with resource allocation. Q329 Chairman: Mr Douglas, could I just ask you about the formula and disentangle it from the tariff for the moment. We have taken evidence in this Committee that formulas are difficult where you have got multiple sites. Our evidence was that the formula largely assumes an average asset mix in terms of sites. If you have got multiple sites, that has major implications for expenditure in that area. Surely that would be recognised in a funding formula, would it not? Mr Douglas: I would have to check on that point and give you note on how the average asset mix is dealt with in terms of the capital flow.[2] Q330 Chairman: Let me try this one with you. I am a South Yorkshire Member of Parliament but I have kept an avid interest in the funding of my Health Authority for over two decades now, since I have been a member of this place. If I go back to about 15 years ago, one of the neighbouring health authorities had got a bigger budget than us for the care of people with special needs, you would call it now, and historically they had always had more money. When I found out why they had more money in this area, it is because years ago they had had big institutions in there that had gone years ago but they still had weighted in their budgets historical weights for these things and they have changed them back again. Has that changed in the last decade in terms of these historical weights that we are having in formulas up and down the country? Mr Douglas: I am just checking on the technical point. Q331 Chairman: This is a conversation I had a long time ago. I asked the question about why these budgets seemed to be so different, because we work on comparing like with like in terms of socio-economic populations. Mr Douglas: What I would have to do is give you a note on how this old long-stay adjustments works in the formula.[3] I want to be clear on that before I answer. It is a very specific technical part of the formula that dealt with the closure of long-stay institutions, and I will just have to make sure I have got that absolutely right. Q332 Chairman: We have also had major question marks about: it may give insufficient weight to the needs of elderly populations, it may give insufficient weight to the needs of rural populations. Could you give us a note on how the formula, not the tariff, is actually based?[4] I think that might be useful. I think my colleague Anne has a question. Q333 Anne Milton: Moving on from that, and I do not want to keep the Committee any longer than I need to, just to ask for your comments may be along with the note you send us. There is considerable evidence around from people like Professor Stone, Professor Asthana and a number of other people that there is a strong link between deprived and under-targeted PCTs in deficits and, in fact, that PCTs in both affluent and rural areas are significantly under-funded. I suppose the question I would like to ask is whether the department's mind is closed to the possibility of any review of resource allocation formula given the evidence that is around, which you have not mentioned, Mr Douglas, and I would draw your attention to. Mr Douglas: I will give you a note overall on the resource allocation formula. I do not believe the Government's mind is closed about the formula. We are in the process currently, through the advisory committee on the formula, of commissioning three major pieces of work about elements of the formula before we go into the next allocation round that will look again that how we deal with needs. We will look again at the market forces factor and how that works. Perhaps if I was to provide the Committee with an explanation of how the formula works and the forward work programme for elements of the formula that are being reviewed and with specific reference to the old long-stay adjustments as well so that I could clear that point as well.[5] Chairman: Maybe we could just drop you a note in these areas and ask you to comment on them. Q334 Anne Milton: For the record, I would challenge what you said to my colleague about links between deficits across the country. Sir Ian Carruthers: What I would like to say, Chairman, is that of course all the south argues the formula is wrong in favour of elderly people. They do. It is fairly common. Q335 Anne Milton: There is good robust evidence---- Sir Ian Carruthers: The point I am going to make is that the formula does not suit anybody when you get down to it, no formula ever does. The truth is that you have got to get the best fix. We will come back to that because, equally, some parts of the country would argue that the funding for deprivation is too great and others would argue that the weighting for the elderly, where most people, in fact, spend in their later years more on hospital treatment, is wrong, and that is basically a different argument. The point is that the formula is the formula, and I think Richard should come back on that, but there is a lot of debate about the formula because there will always be. If I was looking in the Isle of Wight, we will even get down to the ferry costs and its effect, so everyone has an angle on the formula is the point I am trying to make. Q336 Dr Naysmith: I know you do not get involved in the politics, any of you, but there is a lot of debate about the formula and one of the things that is being said and one of the political parties is considering adopting is a straight abolition of the formula, where you take your money per head of population. What effect would you think that might have, in broad terms, if it was possible to say, "Well, maybe you would like to give us a little bit more detail next time"? Mr Douglas: If what you are talking about is rather than allocating for weighted heads of population, just pure unweighted. Q337 Dr Naysmith: Yes; and the same amount of money involved presumably. Mr Douglas: That would make a significant difference to those areas with a population that, for example, was older than the average. As Ian says, the elderly consume health resources more than anywhere else. If you were to strip out and purely go to a formula based on unweighted heads of population, that would have a major impact on those areas that have a high elderly population or a highly deprived population. It would also have an impact on London, because you would not have an adjustment to the additional costs of London. So, you would come out with some very significant changes in the amount of money for each PCT. Chairman: We will pass some of these things on to you, Mr Douglas, and you can comment on them in your own time. Q338 Dr Stoate: Ken Cunningham, our first witness, pointed out some difficulties over the Payment by Results tariffs in that he said that some of them are difficult to code and there was significant room for interpretation of the code, which is actually quite an exact science. Do you believe that there should have been more piloting of the PBR system before it was rolled out nationally? Sir Ian Carruthers: It is a retrospective question. The fact is that that view (i.e. the need to have pilots) was not felt to be appropriate at the time. I would support that view. Where I think we could do more is to do more local testing, as we have done actually with the tariff in the last few months. On the question of coding, I think it is a good thing that people get to know their businesses better, because that is part of one of the good processes of moving to foundation trust status. They understand their businesses much better and they are able to handle these things. I do not think we should blame the NHS difficulties on the fact that we are learning more about how to deal with this. Neither do I think that it people need to be manipulated, but if you are either side, as Mr Cunningham said, you view things in that way. I think it is a good thing, because the more information we have, the more we will understand and the better we will be able to manage our resources. Q339 Dr Stoate: Are you not concerned with the fact that there could be significant room for interpretation and that could lead to distortions, whether intentionally or unintentionally, in certain trusts? Sir Ian Carruthers: I think that there could be distortions, but I am not overly concerned on that particular issue. Q340 Dr Stoate: Practice-based commissioning is obviously going to be rolled out in the near future, and I think most people agree it will be a very quick move forward. My worry is that there does not seem to be any IT specifically allocated to the project. Certainly on the information we have got, there is no IT budget specifically for practice-based commissioning, and I am wondering how PCTs are going to be able to support it? Sir Ian Carruthers: I think the setting of the practice budget is a matter for obviously the PCT with the local practice. I am not sure that any allocations have been particularly made for IT itself, but in the wider connect to the health programme, I can clarify this and get back to you. I know that there are things to do with Payment by Results, etcetera, and they are being picked up in the wider question, but on the specific question we will come back to you. Q341 Dr Stoate: Have you made an assessment of the risk associated with the reconfiguration of PCTs and SHAs and how this might affect the local home economies? Sir Ian Carruthers: What we are trying to do at the present time, obviously we are in a period of major change, but we need to get that in perspective. I think it is 79 out of 152 organisations are not changing, so there is only 50% that are or are creating a further set of organisations - I think 82 is the figure - but that, of course, means change for something like 220. It is that sort of order. What we are trying to do is make sure that there are business continuity plans in place to manage those risks and SHAs have been doing that, but we should say it will be a difficult thing to achieve. Q342 Dr Stoate: Would you at all say that some of these changes may have been partly responsible for deficits and, in fact, to some extent, the department, therefore, bears some responsibility for the difficulties that areas are facing? Sir Ian Carruthers: Regardless of the structural change, there is a responsibility at all parts of the system to manage this. I do not actually think the changes are the cause of the deficits, but, obviously, it is an additional thing to cope with at a time when we are tackling a difficult agenda. Q343 Charlotte Atkins: Dr Moyes, obviously your organisation monitors foundation trusts very carefully. Is there anything that we can learn - the department, other health organisations - from that sort of monitoring so that we can try to avoid these sorts of deficits? Dr Moyes: I think the lessons that we have to offer are, first of all, making sure that there is a financial accounting system that makes deficits very transparent to the boards, and our accounting system does that. I think Ian and Richard have already indicated that they are interested in developing that accounting system across the whole patch. The second thing to say is that we force boards, in Monitor, by the way we work, not to ignore deficits. If they know about them, we require them, we have different ways of pressing them to make sure that they take effective action, and we know if they have are taking effective action. If, by any chance, they decide that they are not going to act, that they are going to let the deficit run, as we showed in Bradford, we are perfectly capable of intervening robustly to force change. So, if you take the three foundation trusts that in 2004/2005 had significant deficits - Bradford, Peterborough, Devon, Exeter - in the course of 12 months they turned those three deficits from a total of around 23 million to a total deficit of round about two million, from memory.[6] So, we think it is perfectly possible in most organisations to achieve rapid change, provided the board understands what is happening, providing it acts and provided there is some external pressure to get on with it. Q344 Charlotte Atkins: Could you roll that out to the whole of the NHS organisations? Dr Moyes: As they become foundation trusts, it will roll out anyway, but I think there are quite a number of lessons to be drawn from what we do and we obviously talk to the department a lot and share experience with them, and we can learn from them too. Q345 Chairman: We have got a couple more questions on foundation trusts, then we want to move swiftly on to the consequences of deficits and your perception for the future. Foundation trusts have reported lower deficits than other trusts. Is this down to a good finance director, a good chief executive or board, an inherited position with no problems, or over funding? Dr Moyes: It is certainly not over funding, I do not think. We have had a careful look at the impact of Payments by Results and although foundation trusts, because they were early implementers, have gained from Payments by Results, from being early implementers, the total impact is not so significant to make a huge difference. We think it is a number of factors, Chairman. We think it is partly, as I said earlier on, the assessment process that forces boards to understand their problems; we think it is the compliance framework; we do think that boards are probably much more prepared to tackle deficits within the foundation trust system because they know they are responsible, they are accountable and there is no where else to go; they cannot lobby for more money or anything like that, and so we think the system does produce the right kind of pressures and the right kind of information. Q346 Chairman: University College London Hospital, of course, shows a bit of contradiction here. Why is that? Dr Moyes: There were two main factors in UCLH, we think. We know quite a lot about UCLH, as you can imagine. One is that as they moved from a number of hospitals to the new PFI hospitals they recognised, and we recognised, that activity would be interrupted, but the interruption on activity was much longer in duration than they were expecting and when activity came back to the hospital their experience to date has been that it has tended to be activity on which they could makes less money out of the tariff. The other thing in UCLH that emerged was that they had an underlying problem with costing of their facilities management, which only emerged once they were in the new hospital. So, there were two issues there with UCLH, but they have been tackled effectively, we believe. Q347 Mr Amess: I just want to say to Mr Douglas, you do look marvellous and I think we can all benefit from this Yorkshire air, but I did listen to my colleagues, Dr Taylor and Dr Stoate, very, very carefully, and neither of them are accountants, but I did find the simple way that they put these matters of great interest to me personally, and I would just gently say to your good self that, rushing through it all, I thought the response was less than robust, it would be cruel to call it a lot of waffle, and I just think it was a very interesting exchange. Before I get to question 14, Chairman, I just think this tortuous session could have been speeded up if perhaps at the start we had been honest with our witnesses and said this was all the fault of Sir Nigel, now Lord, Crisp, and I simply admire your loyalty. Sir Ian Carruthers: We also dispute that as well, just for the record. Q348 Mr Amess: I am not saying, Sir Ian, that it was his fault; I simply throw it in to stir it up. Are there really 125 to 175 hospitals that will meet the selection criteria which you have in place to become foundation trusts, Dr Moyes, or will the requirement of all hospitals to achieve foundations status just mean that in two to three years' time more foundation trusts will be in financial trouble? Dr Moyes: No, we think in principle that all hospitals, ultimately, can become foundation trusts, but we think that things need to be done in some cases by the trust themselves, in some cases by the SHA and in some cases by the department. The diagnostic project that you and colleagues referred to earlier on has given the trusts, the SHAs, the department and ourselves a lot of information about what action needs to be taken by whom in what timescale, and if that action is taken - in some cases it is simply improving the quality of the board or tackling cost overruns, in some cases it is service rationalisations, in some cases there are national policy issues like specialist tariffs to be sorted out - then we believe that all trusts can become foundation trusts and, ultimately, we believe that they will not be in financial incompetence. Mr Amess: As Sir Ian said, everyone is very keen to become a foundation trust and, as my colleague, Mr Campbell, perhaps was hinting earlier, we are greatly reassured that there is no massaging and fiddling of the situation to give unfair advantage, but I think that is it, Chairman. Q349 Anne Milton: On the basis that the Secretary of State is promising to return the NHS to balance this year, given the £1.2 billion problem, and we can argue about odd million here or there, the problem with the provider/PCT accounts, what is going to go? How many people are going to lose their jobs? What patient services will suffer? Something has to go to save that money. Sir Ian Carruthers: Did you want me to comment on that? First of all, let us remember that the indication given is to achieve net NHS financial balance, so that actually is around 512 million as an audited figure, not the 1.2 billion. We clearly do want to reduce deficits to as low as possible, and the action that is in place is things like turn-round teams, and so on. On the manpower front, I think it is important to recognise two facts. One is that in the last year we increased, as has been published, our workforce by 34,000 people. That increased at a rate greater than we could afford, and if you look at the projections made from the spending plans, in most cases we have exceeded the number of people. Q350 Anne Milton: I want to know what is going to happen. Sir Ian Carruthers: I have not got a crystal ball, but I will come on to that. Q351 Anne Milton: Time is short Sir Ian Carruthers: I shall say, because the point is that those are very local decisions. We are agreeing local delivery plans. It would be wrong to say there will be no change, because clearly to recover this position there has to be change. It is actually difficult at a national level to draw conclusions on the manpower reductions because, in some cases, they are notices of consultation, in others they are reductions in posts, they are not necessarily reductions in people; they are about reducing agency costs, introducing vacancy freezes and, in very few cases, are about compulsory redundancies. The only two examples I can give are the experience of last year, and this is how it is, where South Tees indicated that they were going to reduce their workforce by 300. That came out as 300 redundancies. They ended up making, I think, three people redundant. What I am saying is that the announcement on manpower figures is quite difficult because they all mean different things, so it is not as simple as adding them all up, but reductions there will be. Q352 Anne Milton: A job that was being done is no longer being done puts people out of a job. Sir Ian Carruthers: Not necessarily. We may be employing people at a lesser rate because we are not doing agency work and improving the continuity of care by doing so. Q353 Anne Milton: The issue of nurses and doctors coming out of training and not having jobs this year, the issue of patient services and, I think, the issue of job losses is still running out there. Sir Ian Carruthers: I think we would dispute the point about--- Q354 Anne Milton: Mr Cunningham talked about four million jobs going in Surrey and Sussex, so jobs are being lost. Sir Ian Carruthers: They will be lost, yes, that is absolutely the case, but not on the magnitude and scale. I can cite one hospital that I know where when they were having a deficit they continued to recruit a further 280 people. You would not do that in your own lives and neither should we expect public bodies to act in that way. On the training problem, there is obviously going to be a greater correlation, because we have said previously that the workforce is reaching a plateau, is stable and is not going to grow, but I think it remains to be seen whether the claim that you have made that people coming out of training will not have jobs is true. Q355 Anne Milton: It was a question. Sir Ian Carruthers: We do not expect that in big numbers. Q356 Dr Taylor: Can I clarify that? The immediate aim is to save the 512 net deficit. Is that what you are aiming for? Sir Ian Carruthers: The aim is to achieve NHS net financial balance. Q357 Dr Taylor: So it is the 512 that we have to achieve by the end of this financial year? Sir Ian Carruthers: Yes. For a net financial balance, we need to have changed that round. Q358 Dr Taylor: As we have already discovered, the total deficit from PCTs and trusts is over a billion; so that means you are going to allow half of that to carry on? Sir Ian Carruthers: No. What we are describing here is----. The question was what the Secretary of State had said, and I am just confirming that that is what has been said. Our aim is to reduce the deficit in every way we can. Dr Moyes has just mentioned the point about where we are on NHS trusts. We want them to become foundation trusts. They are not going to do that unless we tackle these issues. I think I just am being realistic, because what has built up over five years is hard to eradicate in one. Q359 Dr Taylor: That is what I am trying to get at, because it is completely unrealistic to expect every trust to get into complete balance in one year by April 2007? Sir Ian Carruthers: Yes, but we would want as many as possible to be in that position. I think we need to be clear. We are not saying every organisation will not have a deficit, because, I think, regardless of which government is in power, organisations in the public sector will always perform to a variable level because no-one can be at the top per cent. Q360 Dr Taylor: What are you going to do in the longer term about the absolutely huge cumulative deficits that some trusts have got? Sir Ian Carruthers: They need to be dealt with and managed through the system that we have got at the present time. Q361 Dr Taylor: Going back to the difficulty with finding jobs, many of you may know there was a lobby by recently qualified physiotherapists either yesterday or the day before. One of my constituents told me that out of 90 trainees that have qualified from Brunel University this year only four have so far got jobs, because with knee-jerk economies that trusts make it is particularly things like physio, occupational therapy, that are hit. Is this a figure that you accept? This girl who saw me has put in 60 job applications so far and has been unsuccessful and is getting rapidly demoralised. Sir Ian Carruthers: I think there are two things. It is important that we do not invest training in a lot of professional people and not arrange for them to work for the benefit of the community. In that particular instance, I do not have the figures, but I did talk to one of the Chairs on Tuesday night at something I was at and the real problem there is that there are not enough basic grade jobs. There are a lot of senior jobs in the physiotherapy world that can be filled and, indeed, are vacant, but it is the basic grade jobs, and that reflects some of the past practice perhaps with recruitment and retention arrangements, where it was quite common for people to inflate their grades because at one time we did not have the skill base to actually recruit to the basic grade, and I am quite certain that is a good point to raise and it needs to be addressed in organisations. Q362 Dr Taylor: It is very distressing for these girls and chaps who three years ago were told in physio that there were lots of jobs and they were going to get a job. It is very sad. Can you take note? Sir Ian Carruthers: We will take note because, obviously, if we have spent, as we have, a lot in investing in skills, we would want them to be used. The difficulty is that we are talking this up into a crisis. No-one is denying there are not problem, but the more the press talk it up into a crisis the more people take short-term actions. The real point is if we all have a more measured view of it and grit-determination, we will avoid the sort of short-term actions that would lead to that sort of situation. Q363 Dr Taylor: So, we agree as near as we can after this one year. Is there a cut-off time where you will say that, if a trust still has a lot of its cumulative deficit in three years, five years, "I am sorry, you have had it, you have got to go", what is going to happen at that point? Sir Ian Carruthers: I think the only answer we could give is to say that cumulative deficits we need to manage until people are back into solvent positions, because if we want them to aspire to being foundation trusts, which we do, which is about improving institutional management, those things need to be taken care of or they will not be enabled to get through the assessment process. What I would be keen to point out is that that is already happening in every hospital through the diagnostic programme, but there is a long way to go and it will take some time for some. Mr Douglas: Could I add briefly to that? We aim to eliminate the 500 million so we get to zero for the system as a whole. In all the organisations who have had financial problems we expect to see improvement by the end of this year and we aim to be in a position where almost all of those organisations are in monthly balance. Once they have got to a monthly balance position, they can then start eating in for the problems that they have carried over from previous years. It is that sort of stage that they go through. Q364 Dr Taylor: Can you give us any idea of the number of trusts that do hold cumulative deficits? Is it a very small number or very large number? Mr Douglas: Cumulative deficit in their balance sheet, it would be a very large number, but not all of them will have to eliminate all of that deficit. The key number is what number they have finished with last year. Q365 Dr Taylor: Why will not some have to eliminate all of it? Mr Douglas: Some of the accumulated deficit goes back historically to when the organisations were set up or when they were merged with other organisations. That will not have to be recovered, effectively, in the future. That is a balance sheet issue, effectively, that they will not have to recover. The key number for all organisations is what was in that bottom line figure at the end of last year, and that is the real figure that matters. That will include the extent to which they had overspent the previous years, so we have taken the money back off them again, and these terms people use in quite different ways. Accumulated deficit, historic deficit are different things. Q366 Dr Taylor: How do trusts know their particular cumulative deficit is going to be written off? Mr Douglas: It will not be written off, it will be there in the balance sheet, but they do not have to do anything with it. Q367 Dr Stoate: "This overdraft I have got, could you forget about it. Is that okay?" Mr Douglas: What I should do for the Committee is write you a note that explains the terms. What is an in-year deficit, what is an accumulated deficit, what is an historic deficit and what is the impact of them?[7] They are all different things, I am afraid. Q368 Chairman: Could I ask you a question? Whether PCTs had deficits or not in the last financial year, all PCTs this year have been top-sliced because of that and a national balance, we understand, is being held. Quite clearly, from what you said, Sir Ian, they are not going to be in balance, as you would want them to be, by the end of this financial year as well. What are the implications for all PCTs faced with that situation in nine months' time? Sir Ian Carruthers: I think, first of all, we should be clear about what we have asked people to do. What we have asked people to do is to discuss and agree with their PCTs how they can create a reserve, because across all the ten NSHA areas now, there is not one SHA area that has nobody in deficit and it is about how to create the deficit. The top-slice varies from .5% to 3%, so that in some parts of the country this just is not having a big effect at all; in others it is having a very big effect. The point is that the top-slice is not going to be taken away from them; it will still be credited to their financial position. Q369 Chairman: They cannot spend it. Sir Ian Carruthers: No, they cannot spend in. Q370 Chairman: "It is not being taken away from them", is a bit of a lose phrase in that respect, is it not? Sir Ian Carruthers: Your question was: what will their end of year position be? The point I am saying is, yes, it will mean that they need to reorder priorities, it will mean they will have to readjust plans, it will mean that some parts are not having to go as fast because others - the four that I have mentioned - are in difficulty to achieve that; but, in terms of the question, which was, "How will they be credited in their books?", they will have that credit in their books, so they may not end up in a deficit position for that reason of itself. Q371 Chairman: My PCT has been top-sliced this year from being in balance. It has been top-sliced and it has taken some of its growth money away. It is not having to cut services, I accept that entirely, it would like to expand services, but it cannot because it has been top-sliced. Are we likely to see that happening in the following financial year as well? Sir Ian Carruthers: The question is that we would hope not, but clearly what we have to do is recover the overall financial position of the NHS. I think the point is that at the present time it is our intention that we deliver a net NHS deficit this year and those rules can be reviewed, but, equally, what we are suggesting, to support organisations, is that where there is local agreement (and this is recommended good practice by the Audit Commission) SHAs do create reserves because we will always have across these areas some organisations that will have surplus and some will be in balance. Q372 Chairman: Is that not just brokerage that has been going on, we now understand, for years and years and has got some people in this mess? Sir Ian Carruthers: No. The difference is that the money will not actually be moved from one organisation to another; so it is different in that sense. Q373 Chairman: Where does my top-slicing money go? They will be able to get it back, with interest, we have been told. When? Sir Ian Carruthers: The assumption is that this is for a financial year only; so from 1 April next. That is the intention. Q374 Chairman: That will be held until such time as it is released presumably? Sir Ian Carruthers: They are holding it themselves with the SHAs. Q375 Chairman: They cannot spend it. Sir Ian Carruthers: They cannot spend it, that is absolutely right, but what we have got are lots of local agreements which SHAs have done with PCTs. As I say, some have got a .5% variation, others have got 3%, depending on their local circumstances. Q376 Chairman: Providing that a PCT has been in surplus last year, it will be top-sliced this year and obviously will not be overspent, but it will not have spent as much as it wanted to. Would you expect that there will be any further top-slicing in the following financial year? That is what I am trying to get to. Sir Ian Carruthers: I would expect that, firstly, they would receive their money back, but, secondly, I would expect that SHAs would have a discussion with all their organisations to make sure that they achieve net financial balance next year. It is like saying, if this year had not happened, but the fact is it has, and we have to get through the present year that we have to recover it. I think all I would say is it is not the intention that that should occur, but clearly that depends on how people deliver this year. Q377 Chairman: I am a little confused, because between this year and next year there is going to be no added increase as far as any public expenditure rounds are concerned to the NHS expenditure. So, basically, my PCT will get the money back if other people save it. Sir Ian Carruthers: No, your PCT will not lose the money, it will be ‑--‑ Q378 Chairman: They will be able to spend it if other people save money? Sir Ian Carruthers: No, they will not be able to spend it this year because they have agreed that they are going to hold whatever the percentage is in a bank. Q379 Chairman: Next year they can then? This time next year they should be able to spend it? Sir Ian Carruthers: If the planned health net financial balance is gone. Q380 Chairman: Did you say "yes" to that? Sir Ian Carruthers: I did, yes. That is the intention, but you cannot be certain. It depends on how people do it. Chairman: I accept that, I realise that. By and large, most people on this Committee would want to know what the NHS costs as well, but it is just a difficult road that we have to travel to find out how it impacts on us and our constituents. Doug has got one last question you will be pleased to know. Q381 Dr Naysmith: It is to Dr Moyes. In the interesting evidence that you submitted to us, Dr Moyes, you list seven criteria for successful turnaround for trusts in difficulties. It does not say much about management capacity or changes in management. Do you think that management is important, and in some of the turnarounds that you reported, did they involve changing management at the top? Dr Moyes: Management is undoubtedly important. Our experience in the foundation trusts that have got into problems is that mostly they have lost control of cost. They do not have the information to marry up activity and cost, to understand where to cut cost, where to try and increase income and so on. Having good management capacity in foundation trusts to tackle these issues effectively undoubtedly is important, but as well as that they need leadership from the board, they need good external advice and they do need good management systems. Q382 Dr Naysmith: Also in the evidence you talked about a "focus on clinical efficiency" and suggested some of the foundation trusts were more able to do this than other trusts. I was not quite clear what you meant by that, and why other trusts cannot do what you are saying now. Dr Moyes: I was not seeking to make that point. If that is what has come through then that was not the intention. The point I do make to foundation trusts, particularly the ones which are facing some problems, is there is no point in salami slicing 10% of the budget. Mostly, if you are going to achieve a lasting result, you do have to tackle how clinical services are delivered, and that means you have to understand where you make money and where you lose money. In places like the UCLH, in Bradford, the work they have done is down to the HRG level, they try and understand where we make money, where we lose money and what we have to do to make money. That is where they get the clinicians involved and that is where they impact how clinical services are delivered. That is key to a lasting turnaround. Q383 Dr Naysmith: That must be true in other trusts as well? Dr Moyes: Absolutely. Q384 Dr Naysmith: What is it about foundation trusts that makes it more likely? Do foundation trusts work more as a team with clinicians? Does something like that happen? Dr Moyes: In the case of foundation trusts, the key thing, as far as I am concerned, is that the boards realise that they are responsible, they are publicly accountable to the governors and members, they are accountable to Parliament through Monitor and they have nowhere else to go. There is no point in asking us for money because we have not got any and there is no point in lobbying ministers because there is nothing much ministers can really do to help the foundation trusts' problem. It concentrates the mind of the board very quickly and that in itself usually saves quite a few months. Also, we have been trying very hard with foundation trusts to get them to take really serious external advice from experts in this field, and they have done that, by and large, and it has been effective. Q385 Dr Naysmith: It must also focus the minds of some clinicians if they know there is no point in spending time lobbying their chief executives to go and ask for more money, they have got to do something about it themselves? Dr Moyes: That is correct. The anecdotal evidence that we have from the hospitals where we have been heavily involved, such as UCLH and Bradford, is that quite often the clinicians are surprised to see the pattern of expenditure and activity when it is put together. They are often very surprised indeed to discover what makes money and what loses money, and once they understand that, they are usually extremely able to suggest to managers how things can be changed to change the position and to get the trust back into balance. That is a key part of it. Q386 Dr Naysmith: The new consultants' contract applies to you as well, does it not? Dr Moyes: Yes, indeed. Q387 Dr Naysmith: Has that been helpful? Dr Moyes: I really cannot comment on that. I have no evidence from foundation trusts that it has been a problem or that it has been particularly helpful, so I really have nothing to say on that, I am afraid. Chairman: Gentlemen, could I thank you all very much indeed for coming along - I was going to say for "answering questions" - and taking part in the debate this morning. I found that enormously useful. Whether we will see you in the autumn or not, I am not sure. Thank you very much.
[1] Ev [2] Ev [3] Ev [4] Ev [5] Ev [6] Note by witness: The correct figure for the deficit after "turnaround" is £3 million. This is stated in the written evidence. We do not consider it is necessary to amend the evidence as the difference is not material to the point being made, but we wanted the Committee to be aware of the actual figure. [7] Ev |