Select Committee on Public Accounts Minutes of Evidence

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 trusts?

  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 some areas.

  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 practice.

  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 they not?

  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 years?

  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 those services.

  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 say so.

  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 issue.

  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 it—

  Dr Pugh: You do not recognise their problem?

  Mr Nicholson: I do not recognise that problem.

  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 am concerned.

  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 necessarily—lots of them are not—and 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 balance.

  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 support—they 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 to that?

  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 reduction.

  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, does he?

  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 are not?

    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.

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