Examination of Witnesses (Questions 20-39)
NATIONAL HEALTH
SERVICE AND
DEPARTMENT OF
HEALTH
16 OCTOBER 2006
Q20 Dr Pugh: Would you accept that
some hospitals have a greater problem than others and that that
is reflected in the outline figures? For example, some hospitals
are on a number of sites; some hospitals are in rural areas; and
some hospitals have intermediate treatment centres near them.
All those factors will compound those hospitals' ability to deliver
a good service. Would you accept that those are factors that should
come into an assessment of their financial performance?
Mr Nicholson: But I could point
to hospitals that quite adequately manage their affairs, even
though they have all those issues. We try to be flexible and supportive
to organisations that have major problems. That is why we have
not insisted that every organisation balances its books this year
and that not every organisation will be in run-rate balance this
year. Some special organisations have particular problems, and
we will allow them a bit more time to get their position right.
Q21 Dr Pugh: So no extra allowance
will be given for rurality or for hospitals that are on a number
of sites for good clinical reasons?
Mr Nicholson: No; there are good
examples of organisations that have for many years managed their
books adequately in rural areas and on split sites.
Q22 Dr Pugh: With regard to co-operation
between health service institutions, if everyone has to reach
a black line every year and there is no brokerage and no acceptance
that the system as a whole has to be treated as a system and that
each institution needs to be treated as a separate cost centre,
will that not discourage the development of desirable clinical
networks between various elements of the health service? People
will be careful to get what business they can, perhaps regardless
of the interests of the patient.
Mr Nicholson: There is a balance
to be struck. This year, we have allowed the development of strategic
reserves, where PCTs have put money into a pool, which we have
been able to use flexibly across the patch to help and support
organisations that are going through significant change. Most,
if not all, of that money this year has been used to deal with
deficits, but as we develop in the future, we should be able to
develop strategic reserves to enable us to do the sorts of things
that you describe. There are issues around clinical networks that
need further development. One of the jobs of the new strategic
health authorities is to help and support the development of clinical
networks, and I am sure that they will start to do that in a significant
way. The unbundling of the PBR tariff—I am sure that we
will come on to this and that you have discussed it before—will,
to an extent, help us to look more flexibly at the way in which
networks are moved. To be frank, clinical networks are the way
in which major services will be delivered in the NHS over the
next 10 years or so.
Q23 Dr Pugh: One last and very quick
question: should turnaround teams' reports be public documents?
Mr Nicholson: I thought they were.[1]
Q24 Annette Brooke: I would just
like to return to John's point about the knock-on effect of this
year's deficit on the subsequent year. These large deficits across
the NHS have escalated as we have moved from predicting them to
reporting them and then to the actual out-turn. The report identifies
perverse incentives, which is where it ties in with my point,
because there has been a tendency to underestimate the size of
the deficit in the unaudited accounts. What progress has been
made to address that particular perverse incentive? What further
perverse incentives have you identified in terms of transparent
and efficient financial accounting?
Mr Douglas: The issue there is
that the resource reduction that we make is based on the unaudited
accounts, so if things deteriorate between the unaudited and the
audited accounts, someone could, in effect, get a one-year benefit.
People have not responded to that, as far as I can see, as an
incentive, so I do not think that we have had a situation in which
people have deliberately manipulated their month 12 forecast numbers
to get a one-year gain. It is a potential disincentive, and, for
next year, we are looking at whether we should base the resource
reduction on the final audited accounts, not the month 12 figure,
so, if something moved adversely after month 12, we could make
a further resource reduction to compensate for that. The year
2004-05 was the first year in which we had a big adverse movement
in the accounts between month 12 and the audited figures. We had
not seen anything on that scale before, despite the fact that
we had operated the same system for a number of years.
Q25 Annette Brooke: If you do not
put it down to that particular perverse incentive—the predictions
of the size of the deficit this financial year have, of course,
been going up and up—why do you think that there is such
a big gap between the early prediction and the actual out-turn?
Mr Douglas: The movement this
year between month 12 and the final audited numbers was about
£35 million, which is still too big a number for me, but
it is not an enormous movement on the scale of numbers that we
are talking about across the system. If you looked at the draft
unaudited accounts and the final audited accounts of lots of organisations,
you would find movements of that fraction of a per cent. In the
year to which the report referred, there were three big issues
that caused that movement: one was how people calculated creditors'
prescribing costs; one was how we introduced and then scored the
cost of the "Agenda for Change" pay contracts; and one
was the capitalisation of assets. Those were the main things.
We went through each of those with the finance directors of the
strategic health authorities and made changes to our manual of
accounts and our guidance to the NHS, where we needed to, and,
as a result, we have not seen a recurrence of that sort of movement.
I think that there were just three very particular issues in that
year.
Q26 Annette Brooke: We shall see.
Can I just ask you to reflect on figure 20 on page 36 of the Report?
It shows that a very high proportion of primary care trusts and
NHS trusts do not have a comprehensive plan in place that will
be delivered in practice, if I interpret it from a negative point
of view—according to the charts, it is rather a negative
fact. So what are you doing about that situation?
Mr Nicholson: This became a significant
issue for us in the NHS about 18 months ago, when we started to
work with organisations that were approaching foundation status.
One of the things that we found at that time was that, on average,
organisations were delivering about 50% or 60% of their cash-releasing
cost-improvement programmes, and that they were balancing the
rest off by non-recurring means. We saw that develop over the
period, and we started to take action, particularly on getting
people to organise their plans better, sharing them and giving
us oversight over them to ensure that they were in place. One
big change that has occurred over the past year has been the development
of turnaround support to organisations that are in particular
financial trouble, which has been particularly effective at getting
those plans in place. So, for example, for the first part of this
year, NHS organisations in turnaround were, in overall terms,
producing 95% of their cash-releasing cost-improvement programmes
on time and in the way that they had planned. That is the kind
of action that will bring things into balance much better.
Q27 Annette Brooke: Finally, although
I appreciate that things are being brought into balance, the costs
of getting back into balance must be quite considerable. An example
came my way recently, when I met the professor of health studies
at the local university, who is very concerned at the cutbacks
in the commissioning of places at the university for the future
training of doctors, nurses and everybody else, right across the
board. I am concerned that we have a boom-and-bust situation,
which will have a worrying knock-on effect in the education system
in three years' time, in terms of having our own trained professionals.
Is that fully taken on board in your strong financial approach?
Mr Nicholson: I would be absolutely
straightforward that we need to deliver balance. We will have
to take some difficult decisions in the short term to enable us
to do that. If we had taken the same action last year, we would
have had less pain this year—that is absolutely true, and
I am determined to achieve it. In terms of training places, I
have no evidence on that. In fact, the situation is the opposite—training
places have increased over the past few years. As you are aware,
we are now training more doctors and nurses than ever before.
Q28 Annette Brooke: May I just interrupt?
My point is that right now we have graduate physiotherapists,
midwives, nurses—you name them—who cannot get jobs,
but the next fear is that in three years we shall have a surplus.
Have we got proper planning for health staff running alongside
the financial planning?
Mr Nicholson: Clearly the NHS
cannot guarantee a job to all the people coming out of the schools
and colleges now. That is not what we do—we are there to
deliver health care. However, we can do quite a lot to help and
support people who find themselves in difficulty at the moment,
and we are doing that. There are lots of examples from different
parts of the country of how we are taking people on part-time
or supporting them through training, retraining or whatever, to
enable them to take employment at the end of that process. However,
there is no doubt that we now have to take a long, hard look at
the numbers and our work force planning arrangements in the NHS
to ensure that we do not get ourselves into a boom-and-bust position.
Q29 Helen Goodman: Chart 1 and chart
2 at the front of the Report show that the deficits have been
increasing over the past five years. This gives the impression
that the financial situation and the financial management are
worsening. Do you think that they are getting worse and, if so,
why?
Mr Nicholson: No; I do not think
that financial management is getting worse, but the pressure on
the system to improve its performance, on the one hand, and the
transparent way in which we are dealing with finance, on the other,
make such things much clearer than they were in the past.
Q30 Helen Goodman: You have chosen
0.5% of income as the cut-off point for starting to measure your
deficit, which seems quite small, really. Why did you choose such
a small percentage?
Mr Douglas: Well, we have classed
deficits of more than 0.5% as significant; but we count all deficits.
The numbers here would count as a deficit if the figure was £100,000.
The process will count everything. We did that quite deliberately
because, within the fixed resource pot that we have, one person's
deficit has to be someone else's surplus and it is important that
we always keep that perspective in the system. Every deficit is
important to us.
Q31 Helen Goodman: In answering the
earlier questions you made it clear that the majority of the trusts—three
quarters, I think—are in surplus and hitting their targets
and only 25% are problematic. Chart 14 on page 23 and chart 15
on page 25 show deficits of more than £5 million. It looks
as if two thirds of the deficits are accounted for by about 30
trusts, so the major part of the problem is concentrated in a
small number of trusts. Is my understanding of the situation correct?
Mr Nicholson: Yes.
Mr Douglas: Yes.
Q32 Helen Goodman: Why do you think
that more problems seem to be emerging in the south of England
than in the north of England? The maps in figure 4 on page 5 show
that South-West Peninsula, Avon, Gloucester and Wiltshire, Hampshire
and the Isle of Wight, Surrey and Sussex and Kent and Medway have
been persistent offenders over the last three years. Why should
there be a geographical difference in the performance of the trusts
in the NHS?
Mr Douglas: We have tried
to look at a whole range of reasons for what causes the variations
in deficits. We have looked at the allocation formula, the level
of activity, the level of general practitioners. You can look
at almost any of these indicators. We cannot get anything that
correlates dramatically to the variation in deficits. The one
thing that comes through strongly and links back to other Members'
comments earlier is that the biggest indicator of deficit in a
year is a deficit in the previous year. In some parts of the country
there have been financial difficulties and they have, to some
extent, been helped through a period with support either from
the NHS bank or from other parts of the NHS system. Problems have
not been resolved and they have built up in the system. That seems
to me to be the only explanation. I do not know whether David
has other views.
Mr Nicholson: No.
Q33 Helen Goodman: May I ask you
some questions about the duties and accountabilities, following
from some of the questions asked by Dr Pugh? Looking at annex
2, which sets out all the duties, you can see that different duties
are placed on the different bits of the organisation. Given that
that is so, is it possible for all parts of the organisation to
be breaking even, or are their objectives competing to such an
extent that you are bound to have problems somewhere, just because
of the way in which the system works?
Mr Nicholson: Twenty years ago,
when I was working in the NHS, it was all relatively straightforward,
in the sense that the money was allocated from the centre to various
organisations that spent it and you got a little bit more the
year after. In those circumstances it is relatively straightforward
to be able to do the sorts of things that you describe. However,
what we are running now is not an organisation but a system that
has some 600 organisations in it—all with different objectives,
and working together. The resources move between them as a part
of clinical activity contracts, and all the rest of it. It would
be surprising for every organisation to be completely in balance
all at the same time; it would show a lack of dynamism in the
system that would, frankly, be unbelievable. This is one of the
issues that we—as an NHS—have to face in future. If
you try consistently to deliver a nought in the bottom right-hand
corner of all the clinical activity and all the activity of the
NHS, the chances are, more often that not, you will get it wrong—sometimes
a little bit more, sometimes a little bit less. What we need to
do in the NHS—this is quite a difficult cultural thing for
the NHS to deal with—is look towards delivering surpluses
in the future. It seems to me that that is the only way in which
we will get the financial flexibility to be able to let the system
work in an appropriate way. That, I think, will be quite difficult,
because most organisations, as you know, are on the one hand full
of clinical staff who are desperately keen and ambitious to take
their services forward and to do more, and on the other hand you
have the boards who feel, often, that it is their moral responsibility
to spend every single penny that they have on delivering health
care.
Q34 Helen Goodman: Well, that is
interesting, and it relates to the next thing I was going to ask
you about, which is the complication that we have now in the system.
On pages 14 and 15 we have two charts, about the structure of
the NHS in England and the audit arrangements, which are not absolutely
straightforward. I think that even a fan of the reforms would
say that. In particular, I want to ask you about the accountability
of NHS foundation trusts. One of their accountability lines is
to Parliament. How are they accountable to Parliament?
Mr Douglas: They present their
accounts directly through the NAO to Parliament. The NAO audits
their accounts. They are not absorbed with our accounts. The regulator
for foundation trusts, Monitor, can be called before any of the
House Committees, to answer about the foundation trust system.[2]
Q35 Helen Goodman: But, for example,
there is a chart somewhere that shows that some of the foundation
trusts that were supposed to be very well performing—four
of them, it says on page 25—are in deficit. What can we
as parliamentarians do about the trust in Bradford, for example?
What powers do we have? What I am asking you is this: is this
accountability meaningful or does it just operate on paper?
Mr Nicholson: My assumption is
that it is meaningful and that you can call foundation trusts
or the foundation trust regulator to account in the way that you
would me or Richard.
Q36 Helen Goodman: But we would not
have any powers to sack the chief executive, would we?
Mr Nicholson: Of a foundation
trust?
Helen Goodman: Yes.
Mr Nicholson: Monitor can do that—the
regulatory body.[3]
Q37 Helen Goodman: I see; but if
you look at the chart you can see that they get money from one
place and their accountability is to other places, so the accountability
pressures are not the same as the budget pressures, and, indeed,
the local elections will be from communities of people who will
want to maintain their local hospital services, and that will
be their priority, rather than financial responsibility, will
it not?
Mr Nicholson: No, they have a
statutory responsibility, like any other organisation, to deliver
their financial duties, but they are slightly different; that
is true.
Q38 Chairman: Sir John, can you explain?
Are NHS trusts accountable to the Audit Commission and therefore
not to Parliament, or to you, and therefore to us?
Sir John Bourn: No. The foundation
trusts may choose their own auditor. They could choose the Audit
Commission; they could choose a private sector auditor. We are
the auditors of the consolidated accounts of foundation trusts.
Their finances are covered in the Report that the Committee has
before it, but when the Committee comes to discuss the Report
that we shall produce on the 2005-06 accounts, you may wish to
have the head of Monitor, who is the man responsible for the finance
for the foundation trusts, before you, so that you can put questions
to him as well.
Chairman: Thank you.
Q39 Mr Khan: The Chairman, in his
introduction, commented on the generous moneys invested in the
NHS and gave credit to all politicians—I think he meant
the Labour Government, but that is by the bye; I am not sure whether
it was an insult or a compliment. The question that I have is
this: you will know from the figures the huge increase in funding,
but the deficits in percentage terms, when you compare the amount
of money invested, are for last year 0.74%, and for the year before
0.38%. I am sure that to trusts like my own that suffer the deficits
they are huge in micro terms, but in macro terms they are not
huge deficits when compared with the amount of money that you
spend. My question is—I assume that you will say "0%",
but forget that answer for a second, and let me ask the question—what
percentage of overall deficit is acceptable to you? We will not
accept zero as an answer, as I said.
Mr Nicholson: I am struggling
now.
Mr Khan: My point is this: bearing in
mind your answer to Helen about the bottom right-hand corner,
is it not inevitable that there will be some variation?
Mr Nicholson: For the NHS as a
whole, there should be a surplus, not a deficit. That is the only
way that we will be able to manage all the organisations operating
in the system.
1 Note by witness: These are publicly available
and are also often to be found on the websites of the organisations
concerned. Back
2
Note by witness: An NHS foundation trust presents its
accounts directly to Parliament. An NHS foundation trust appoints
its own auditor. The regulator for NHS foundation trusts, Monitor,
is required to produce consolidated accounts which provide an
overall summary of the accounts of NHS foundation trusts. The
NAO audits the consolidated accounts. Back
3
Note by witness: Where the regulator (Monitor) determines
a NHS Foundation trust is failing he may remove any or all of
the directors including the chief executive or members of the
board of govenors and appoint interim directors or members of
the board. Back
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