Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 20-39)


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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