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Mr. Phil Willis (Harrogate and Knaresborough) (LD): The hon. Member for South Cambridgeshire (Mr. Lansley), speaking from the Conservative Benches, raised a very important point. Does the Chairman of the Select Committee agree that there is an inherent contradiction between a primary care trust, which has a finite budget to manage, and foundation trusts within that PCT, which have a “payment by results”, more open-ended agenda? There are two
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conflicting arrangements there, which are certainly not conducive to balancing the books.

Mr. Barron: At this stage, I would say to the hon. Gentleman that we looked at the issue of payment by results, but whether or not it is a distorting factor has not yet been finalised. If the hon. Gentleman reads the report in detail, he will find that the Government put their hands up in some respects and brought in some elements of payment by results and some tariffs that were clearly off the mark. Some changes were made earlier in this financial year to try to get them back to a more sensible balance.

This has been and remains very much a moving picture. Once we start to make national health service expenditure transparent, as the Government have tried to do, all sorts of things are brought into play. That is not historical, but quite new in respect of payment by results. Other aspects, which I shall come on to in a few minutes if I can make some progress, have been more historical.

Mike Penning (Hemel Hempstead) (Con) rose—

Mr. Barron: I shall have to give way to the hon. Gentleman, who is a member of the Committee.

Mike Penning: Yes, I have the honour of being a member of the Committee of which the right hon. Gentleman is the Chairman. Before he moves on, I agree that everyone should stick within the allotted budgets, but the problem is that the formula in many areas is so bad for trusts that they cannot both stay within budget and produce the care that our constituents deserve.

Mr. Barron: The hon. Gentleman uses the phrase “so bad”, which I am not sure I would use, but we tried to establish what it was in the formula that led to the problem. Indeed, that is what the Government’s own analytical department has been trying to do. I will refer both to what we found—or, in that particular case, what was not found—and how the Government responded to it in their own report of 20 February.

Mr. Nicholas Soames (Mid-Sussex) (Con): We all greatly respect how the right hon. Gentleman chairs the Select Committee. I have raised with him the serious problem of historic deficits where the Government order one trust to merge with another trust, which can often lead to a very substantial deficit that the newly created trust then finds it almost impossible to get out from under. The trust has no alternative but to deal with that. Does the right hon. Gentleman agree that the Government really need to find a more sympathetic understanding and a more coherent way to deal with those inherited deficits that does not cause such terrible difficulties later on in the trust’s life?

Mr. Barron: The hon. Gentleman will see exactly what we tried to do in the report. We dealt with how to manage the situation where deficits, historical or otherwise, are a very high percentage of the turnover of one organisation while at the same time being fair to other organisations in the NHS and to the taxpayer. Basically, deficits are about overspending. Whether
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historical or not, they are overspend against the budgets allotted to each individual constituent part of the NHS.

My own view—I have said it for many months now—is that that problem has to be addressed in the interest of the taxpayer and in the interest of the NHS. We cannot have all this extra money being invested only to find out that there is still overspending. Often we do not know exactly where the money has gone or whether it is improving productivity and so forth. Under those circumstances, these are big issues. I would not want to argue—neither did the Committee, to its good sense—that where there are massive overspends or deficits, we should not find some mechanism for dealing with them. It is up to the Government, who run the organisation, to find out how they can make people more responsible than they have been in health communities in the past where overspend has taken place.

One of the biggest issues for me—I speak from a personal level—was how the Government decided this current financial year to take on the matter of the overspend or deficits by seeking to balance the books nationally by the end of the financial year. They sought to do so on the basis of top-slicing. It certainly hurt my health community when more than £7 million was withheld from the Rotherham primary care trust, but I am pleased to say that that came out of growth money rather than current services. If it were not for that, I would have been even stronger in my criticism of top-slicing, which was done to bring back some discipline.

I have a question for my hon. Friend the Minister. Paragraph 26 of the Government’s response to the Select Committee report states:

the Committee agreed with that—

According to the quarter three returns of the NHS finances that were published on 20 February, there is a suggestion that £300 million could be paid back from the top-slicing within the year in which the top-slicing has taken place. That is my understanding of the situation; if that is correct, will my hon. Friend tell me how that money will be paid back, and to which primary care trusts or NHS organisations?

Ministers have already told us that, in many instances, top-slicing has taken place in areas where there are high levels of health inequality. Those are the last places in which we should be holding back national health service expenditure, not the first. The top-slicing took place as a percentage across the board in SHA communities. If that money is to be repaid within the year, how will that be brought about? In Yorkshire and the Humber, for example, will a percentage be given back to all the NHS trusts? I will not bore the House with the details, but if we look at the health inequalities in that area, we see that there is great diversity there, although there was no diversity involved in the top-slicing. Perhaps my hon. Friend can respond to that point at some stage.

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I should like to move on to the contingency plans. The Government had planned to set up what we called a buffer in relation to the present in-year problems. They said that it was not a buffer, but it related to the top-slicing. In paragraph 31 of their response to the Select Committee report, they state:

that is, for the purposes of dealing with the current overspend. Given that nowhere near all the deficits will be cleared by the end of this financial year, what action can we expect to be taken next year by SHAs? Will we see the repayment of the £300 million—if my analysis is correct—in this financial year, only for further top-slicing to take place in 2007-08? I would like my hon. Friend to answer that question as well.

The lack of a failure strategy to deal with in-year problems was not acted on quickly, but the Government are now talking about the implementation of a formal failure strategy in response to our criticisms. Will my hon. Friend tell the House what the situation is, in that regard?

The hon. Member for Hemel Hempstead (Mike Penning) mentioned the funding formula. The Committee took evidence from three professors for our report, and I think that we heard four different interpretations of the funding formula on that occasion. We were trying to determine whether the formula disadvantaged rural areas, and it would only be fair to say that that was denied by our witnesses. I note, however, that page 6 of the report that I mentioned earlier—which was placed on the website by the Department on 20 December—stated:

In the report, the Government say that the formula is being considered by the relevant committee. How long is it likely to be before we get an explanation or interpretation of whether the funding formula impacts negatively on rural areas?

Mike Penning: The individuals who gave evidence to the Select Committee were joined by the chief economist for the NHS, who said that the formula did have a detrimental effect on areas such as mine in Hemel Hempstead. In evidence on page 103 of the report, however, the Secretary of State said that the correlation was “very, very small”, which is contradicted by her own Department’s report.

Mr. Barron: The Department mentioned six areas in its executive summary in relation to the current deficits, and that is certainly one of them.

My hon. Friend the Minister will be familiar with the cuts in education and training budgets. Given the overspend in certain areas, those seemed to be easy targets. Effectively, budgets are held by SHAs and are consequently easy to hold back in order to balance national budgets. The Government said, in paragraph 65 of their response:

for which we had asked, because of the raids, so to speak, in the current financial year—

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The Health Committee will, I hope, agree a report on work force planning later this week, and no doubt the House will debate the matter again. I would be interested, however, to know exactly what the Government mean by the phrase, “robust service level agreement”.

Cuts to vulnerable services were also criticised. Numerous witnesses suggested that mental health and public health expenditure were the easier targets in health care. Several organisations wrote to us to make that point. The Government effectively denied that in their response. They said:

I accept that entirely as it is written, but none of the three services that I have mentioned has national targets set. When services do have national targets, the NHS believes that those must be met. Under those circumstances, it is right and proper to say that matters should be equitable, but do we have equity when there are national targets and when some areas of the national health service have had such problems recently?

On the delay in recognising deficits, the analytical body said in its report that the NHS’s inability to recognise the implications of changes in resource accounting and budgeting and therefore what was likely to happen in the particular year was one of the major problems.

The Government responded, and I am pleased that they did. We had said:

The Government’s response was:

That represents a big change in the culture of the national health service:

I remember, many years ago when I was an Opposition health spokesman, reading Audit Commission reports showing that the priority of hospitals at this time of year was to spend their budgets immediately. If they did not do so, regardless of whether they needed the relevant equipment, the budget would be withheld from them in the following financial year. Has that changed? Rather than spending all its annual budget, can a part of the NHS—while not making a profit—keep some money that can be rolled over into the next financial year? That could help the NHS to plan for different departments.

Mark Pritchard (The Wrekin) (Con): Recommendation 29 of the Select Committee report expresses concern about short-term answers to some of the financial problems
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faced by acute trusts in particular. Does the right hon. Gentleman feel that the transfer of access to brokerage on deficits from acute trusts to strategic health authorities was a positive or a detrimental step?

Mr. Barron: I think it was a positive step. The hon. Gentleman will find “Explaining NHS Deficits, 2003/04 — 2005/06” on a Department of Health website. I do not think it has been published yet, but it appeared on 20 February. As it explains, the main reason for the deficits is the fact that in 2003-04, strategic health authorities were told that they could no longer move capital into revenue accounts, as the NHS had done for decades. Capital expenditure budgets were easy targets, because they were not as obvious as revenue budgets. When the practice stopped, the whole issue of deficits was brought to light.

I hope the House accepts that I am not being partisan when I say that that was a brave decision for any Government to make. Sir Humphrey would say “That was very brave, Minister.” It brought the House, as well as the Government, into the debate on whether enough money was going into the system. In the past, SHAs had covered up overspend by ensuring that other parts of the NHS effectively underspent. It is possible that there was underspending in areas where there was more need—no doubt examples will be produced—but that was not the intention. The intention was to ensure that an NHS organisation’s budget was the property of that organisation, to serve its health community. Until two years ago, that was not the case because of the brokerage that was taking place. I am very pleased that it has ended.

Mr. Bernard Jenkin (North Essex) (Con): I am listening to the right hon. Gentleman’s speech with interest, because he is describing many of the factors that have disrupted local health services in my constituency. Earlier, he suggested that primary care trusts should be able to run up their own reserves to cushion the impact of changes and new targets issued by the Government. Is that recommendation in the Select Committee report? I cannot find it. If it is not, would the right hon. Gentleman consider making such a recommendation to the Government? That really would be about financial independence for PCTs and others.

Mr. Barron: Let me read out the Government’s response again:

That is very plain, and very specific. It is in paragraph 80 of the Government’s response. I think I know what the Government mean by it; all I want to know is whether organisations would lose any money that they did not spend in any one year. I do not think that that is necessarily wrong, but it is a major issue.

Will the trust that has not been overspending—it might be spending up to the mark because it feels that it has to do so as the end of March is coming up—be able to save however many millions of pounds are involved and then take that into the next year with no consequences for the following year’s expenditure? That is important.

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The Health Committee was very critical of what we call the failure of financial management inside the national health service. I am pleased that the Government have accepted that

Many of us agree with that.

We also criticised the role of finance directors. Indeed, some NHS organisations—some with budgets of more than £200 million or £300 million per annum—did not have what would be called a finance director who is responsible to the board for the income and expenditure of the organisation. I am pleased that the Government have now said:

However, the end of that statement is a little thin, so I ask how far we have got now in setting that up. If we are to avoid the situation that has arisen in the last few years—and probably decades—in the national health service of there being overspending which is hidden by this type of brokerage, it is important that people have confidence that their finance directors know exactly what is happening and what should be happening and that they are looking after the interests of both the taxpayer and the people who use the national health service.

I shall not carry on much longer as I know that other Members wish to contribute. The whole issue of national health service deficits arose early last year, and question marks still hang over some aspects of it. I have posed a few questions this afternoon, to which I hope my hon. Friend the Minister will respond and I am sure that other Members will have other questions to ask. It is crucial that the taxpayer—and everybody else—knows exactly how their money is being spent inside the national health service.

When the Health Committee comes to report later this year, we will have further thoughts on how we have ended up in our current situation in respect of at least one other area that we shall look at. I hope that Members agree that some progress has been made in the past few weeks in explaining the history of national health service deficits and in finding a mechanism for tackling the problems that some trusts face. Some parts of the national health service still face deep problems because of their amounts of overspend, regardless of whether that overspend is historical—they have inherited it—or they have created it themselves. The Government need to address these issues soon.

4.58 pm

Sandra Gidley (Romsey) (LD): I welcome the opportunity to discuss health service deficits. It is fair to put on record that nobody can deny the unprecedented levels of funding. [Interruption.] No, my next word is not a “but” exactly: many people are asking some legitimate and serious questions. They want to know where all the money has gone; has some of it been wasted and, if there is so much money in the system, why do things not seem better?

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