Examination of Witnesses (Questions 1-19)|
16 OCTOBER 2006
Q1 Chairman: Good afternoon and welcome
to the Public Accounts Committee. Today we are considering the
C & AG's Report on Financial Management in the NHS. We
welcome Mr David Nicholson, who is the Chief Executive of the
NHS, and Mr Richard Douglas, who is the Director General for Finance
and Investment at the Department of Health. So, Mr Nicholson,
as the politicians have ensured that NHS spending has been at
record levels in recent years in real terms, why are we still
seeing deficits, redundancies and service cuts across the country?
Is it down to weak management on your part or on the part of the
Mr Nicholson: The first thing
that I would say is that we have had significant growth but we
have done a significant amount with that. I know that you will
have heard from a number of witnesses in the past about the benefits
in terms of waiting times, coronary heart disease, cancer and
the rest of it, as well as the increase in the number of staff
by a third over the past few years.
Chairman: We can take it as read for
the purposes of the Committee that we congratulate you most warmly
on the progress that you have been making. However, I was not
asking you about waiting times and such indices, which are all
very welcome. I was asking why, with spending at such record levels,
we are still seeing deficits, redundancies and service cuts in
Mr Nicholson: I obviously wanted
to say that to begin with. The second issue that I would identify,
in line with the National Audit Office Report, is that there is
no single cause of deficits in the NHS. There are a multiplicity
of causes, which we will no doubt talk about. One thing I can
say about NHS finances over the past period is that our performance
has become increasingly transparent. One of the problems with
the financial regime under which we have operated over the past
few years is that the implications of management and clinical
decisions in the financial sphere have not always been clear,
and now they are. We have also considerably tightened the regime.
It was not long ago that we had the opportunity in the National
Health Service to transfer capital to revenue. Indeed, some £250
million was transferred during the last year of that happening.
Almost all such issues have now disappeared, so it is clear which
organisations are responsible for the deficits. Thirdly, there
is no doubt that we could be better at costing some of our policies.
There are examples of some policies, when we have costed them,
that have in practice for various reasons cost more, the obvious
one being the reforms to the pay system. Finally, undoubtedly
there have been some examples of poor management and financial
Q2 Chairman: That is a full and honest
answer. Let us consider local NHS management of deficits. You
mentioned it in your penultimate point. Paragraph 3.30 states
that: "auditors reported that the issues which caused financial
pressures and left some NHS bodies unable to manage within their
current resources included . . . implementation of workforce contracts"
and "additional activity". People are saying locally
that you are underfunding your own initiatives. It seems from
the answer that you gave a moment ago that you were accepting
that criticism. Perhaps you could do better in future. Some initiatives
have been underfunded by hundreds of millions of pounds, have
Mr Nicholson: Yeah, but on the
other side of course
Chairman: So "yeah" is yes,
is it? The answer is yes to that point.
Mr Nicholson: I said that some
of the policies that we have implemented had not been properly
costed. That is absolutely true. But others have operated in the
other direction. For example, the pharmaceutical price regulation
scheme changes in the costing of drugs enabled us to reduce the
costs by 7% throughout the NHS. It has cost both ways.
Q3 Chairman: But you accept the
criticism under paragraph 3.30 to which I have just referred.
Mr Nicholson: Yeah.
Q4 Chairman: Thank you very much.
We have heard a lot of criticism about local management and deficiencies.
You will see stated at paragraph 5.36 on page 71 of the Report
that the auditors had "concerns about the financial management
capabilities of general management at 30% of organisations, and
about non-executive directors at 25% of organisations." Is
that a real problem and do you believe that there are sufficient
financial management skills within the trust to cope with the
reforms and the extra work that you have had to undertake in recent
Mr Nicholson: It is worth pointing
out that most organisations balance their books and that most
organisations manage their financial affairs adequately, but undoubtedly
some areas need improvement. There is a whole series of things
that we and the NHS
Q5 Chairman: What is going wrong
at local level?
Mr Nicholson: In terms of?
Chairman: Financial management.
Mr Nicholson: One of the things
that we have been doing over the past six months or so is going
through a whole series of diagnostic work with NHS trusts and
primary care trusts to look at issues in respect of the financial
management of organisations. For each one, we have identified
the issues within the individual organisation, whether it be putting
in turnaround people for help and support, strengthening financial
management on the board, working with the Appointments Commission
to enable the chairs of audit committees to get up to speed and
house training and supervision for finance staff. We are putting
into place all those sorts of things.
Q6 Chairman: We have read a lot recently
about deficits causing redundancies and ward closures throughout
the country. How will you ensure that essential services in the
NHS are maintained, if not improved?
Mr Nicholson: That essentially
is a local matter. All those issues play slightly differently
in each local circumstance. We are dependent on local PCTs and
NHS trusts reaching arrangements that suit them overall. Obviously
each organisation has put its plans to the strategic health authorities,
and we have looked at them overall. We are satisfied that the
development in health services in the NHS over the next 12 months
will deliver the things that we want to deliver in respect of
the six priorities identified by the Department. Each organisation
goes through its planning process. They have to identify that
they must deliver their waiting times and so on, and we are satisfied
that that is what they are currently doing.
Q7 Chairman: Let us be clear about
this. Despite the deficits and the publicity that we are reading
about redundancies and ward closures, are you giving an assurance
to the Committee that you can from the centre ensure that vital
services are maintained, or are you saying that that is not within
your power or gift because of local management?
Mr Nicholson: No, I think we are
satisfied that vital services are being protected and indeed developed
Chairman: If not improved?
Mr Nicholson: If not improved,
because do not forget that even the smallest amount of growth
in any health community this year is, I think, about 8.2%. We
would expect in those circumstances both to protect and to enhance
Q8 Chairman: My last question relates
to annex two of the Report on page 74, headed "Financial
Duties of NHS Organisations". Would it be a fair criticism
of you to say that you have perhaps not taken financial targets
in the past as seriously as other, hotter issues, such as waiting
times and performance measures? Would that be a valid criticism,
reading this annex?
Mr Nicholson: I do not think it
is a valid criticism of the NHS as a whole. As I said, most NHS
organisations manage to deliver financial balance and the improvements
that I have identified, but there are small number, for a variety
of reasons, that have had difficulty doing so. The strategic health
authorities and the Department are there to help and support these
organisations to improve their financial management, but also
to deliver improved services.
Q9 Chairman: Because there are statutory
duties and the regulatory duties, are there not? Under "Departmental/Regulatory"
it says: "Achieve financial balance without the need for
unplanned financial support." At first sight it may seem
that that does not have the top priority that it should. Perhaps
not everything can have top priority. If that is the case, just
Mr Nicholson: I think it is equal
to all the other priorities. We are seeing the consequences of
not getting financial balance in those organisations and areas
of the country.
Q10 Dr Pugh: In the old days, the
national health service more or less balanced, but individual
cost centres did not. There was a lot of brokerage around in the
system. Now a lot of hospitals with newer buildings affected by
resource-based accountancy and so on are suffering rather more
than some older hospitals. Do you not see that as an anomaly and
a problem that needs addressing?
Mr Nicholson: I do not think there
is any evidence to suggest that those organisations that have
major capital expenditure are having undue financial problems
compared with those that are not, so I do not actually see the
Q11 Dr Pugh: Well, they are certainly
saying that, are they not? A number of hospital have complained
precisely along these lines, suggesting that they are being penalised
for having PFI buildings, for having new buildings or for having
major capital investment and making it more costly for them to
deliver the same service than an older hospital down the road.
Mr Nicholson: Well, they may say
Dr Pugh: You do not recognise their problem?
Mr Nicholson: I do not recognise
Dr Pugh: Even though Ministers have been
sympathetic to that problem hitherto, or have made appropriate
noises, if I may put it like that?
Mr Nicholson: We have got to help
organisations to deal with the problems as they see them, but
a blanket "it is because they have got new buildings"
seems to me not supportable.
Dr Pugh: So that is not an issue?
Mr Nicholson: Not as far as I
Q12 Dr Pugh: Foundation trusts do
not have the same regime as other hospitals and other trusts at
the moment; in fact, they need to budget and reach a balance over
a cycle rather than an individual year. Do you not think that
that makes it a lot worse for hospitals that perhaps are trying
to come to terms with their financial problems but which are not
yet ready for foundation trust status?
Mr Nicholson: It is a freedom
that NHS trusts get when they have shown that they can manage
their affairs appropriately. It seems to me a good incentive for
an organisation to get its finances in order.
Q13 Dr Pugh: But if the weaker hospitals
are subjected to a stiffer regime that means they are on a vortex
of decline, does it not?
Mr Nicholson: It does not necessarilylots
of them are notand if you look at the number of organisations
that are coming forward for foundation trust status, that would
not be supported by those numbers.
Q14 Dr Pugh: Right. What is the case
for treating foundation hospitals and foundation trusts differently
from the others, in terms of where and how they must balance and
how they must treat their revenue?
Mr Douglas: The whole issue with
foundation trusts is that the entire regime is different. It is
not just breaking even one year with another that is different;
they have a stricter regime around cash borrowing
Q15 Dr Pugh: But whether they are
judged to have balanced their accounts is judged differently,
is it not? I want the rationale for that, please.
Mr Douglas: How they judge whether
they have balanced their accounts is the same. The accounting
regime is broadly the same; there is one minor difference, but
it is broadly the same. They do not have a statutory duty to break
even taking one year with another, like trusts do, and they do
not have an administrative duty to break even each and every year,
like trusts do. Now, those differences in the foundation trust
regime were given to organisations that had demonstrated that
they were financially strong and could manage within that new
environment. We want to start moving other NHS trusts on to a
very similar regime, even in advance of becoming foundation trusts.
We want to take people through the trust regime they have now,
through a quasi-foundation trust regime into the full one.
Q16 Dr Pugh: I understand that. You
want to put it on the record that those trusts are basically treated
in the same way with regard to adjudicating whether they are in
Mr Douglas: Not in terms of the
break-even duty. The break-even duty is different. Those trusts
do not have the annual duty that normal trusts have, but they
have also not had access to the support that other trusts have
had. The Chairman raised issues about planned supportthey
have not had access to that support which other trusts have had.
Q17 Dr Pugh: If a hospital is overdrawn,
it receives brokerage in one particular year, which is currently
taken up as revenue for the following year, is it not? To an ordinary
person, that would seem to be deliberately making life more difficult
for that hospital to pull out of a decline. How would you respond
Mr Douglas: The issue we have
with the way we resource account the budget is that in relation
to the fixed pot of resource, if an organisation underspends,
we give it the benefit of that underspend in the following year.
To fund that, where organisations overspend, they must have the
resource taken off them in the following year. You cannot have
one side of the system without the other. The system is not universally
applied, as the NAO Report says, to each and every trust in the
country. Strategic health authorities have a capacity locally
to determine whether individual hospitals can manage that resource
Q18 Dr Pugh: But it compounds their
problem, does it not?
Mr Douglas: In the same way that
if I overspend on my bank account and I get an overdraft, I do
not have that overdraft
Dr Pugh: Yes, but when you overspend
on your bank account, your boss does not take money off your salary,
Mr Douglas: But I cannot use that
money, which is the same principle entirely.
Q19 Dr Pugh: In the figures that
you have given, there are elements of brokerage in some of the
cost centres, are there not? Why are some hospitals getting brokerage
and are perceived to be in credit and to be balanced, and some
Mr Douglas: This is the planned
support that we have had under the system. We distinguish between
unplanned support, which is money given to people late on in the
year to balance their books, and planned support, which is money
that was agreed at the start of the year or early in the year
with the health authority as part of the recovery plan for the
organisation. Up until last year, we did not allow unplanned support,
but we allowed planned support. From this year, we have stopped
both forms of support, so organisations have to break even on
the basis of their normal income.