Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 160-179)


16 OCTOBER 2006

  Q160  Mr Mitchell: Why would southern trusts get into more holes than northern trusts?

  Mr Douglas: There is not really anything that correlates with deficits in certain parts of the country. As I said before, people have raised all sorts of issues about allocations and so on, but none of them work. I do not know whether there are different management issues in the south, whether it is more difficult to get and keep people at the appropriate level in management and finance jobs, but there is nothing that jumps out automatically.

  Q161  Mr Mitchell: Once you are in a hole, it is difficult to get out of it. Why are you now proposing to reduce the income the following year for those in deficit? Paragraph 3.10 of the Report states that "a number of Trusts have expressed concerns to us that once financial balance has been lost, the resultant cut in income under the RAB regime makes recovery doubly difficult." That seems barmy.

  Mr Douglas: The only way in which that you can allow additional income and repayment for those who have underspent is for it to come off those who have overspent or you create a central buffer—a central reserve—to handle it. It is the only way in which it can be done.

  Q162  Mr Mitchell: So if they are down, you will hit them? That is the system.

  Mr Douglas: If people have got into deficit, they have to recover that deficit. The double deficit issue, as the Audit Commission report makes clear, is an important timing issue so that, in the end, people are not hit twice. We allow strategic health authorities to operate the RAB adjustment differentially at a local level to give them a cushion.

  Q163  Mr Mitchell: It seems an odd way in which to carry on. You are trying to impose a framework of financial discipline in nice boxes, but at the same time the trusts are being deluged with policy initiatives and changes that make it difficult to predict the situation and make it really difficult to do it. A number of key policy changes are being implemented, such as payment by results, practice-based commissioning, NHS foundation trusts and whether they will happen or not, and the rationalisation of primary care trusts and strategic health authorities. You cannot have one thing or the other, can you? You cannot have balance in the system and an endless series of initiatives thrown down from the top.

  Mr Nicholson: There is no doubt at the moment that we are in a period of maximum risk for NHS financial management in the sense that a major set of re-organisations is going on in PCTs and SHAs. It is our job to manage that, but most of the things that you have described should in the medium term help the position, not hinder it. As someone who has spent 15 years of his career running hospitals, the most obvious is being paid for what you do. It is something that people who have run hospitals have said that they have wanted for a long time. That is essentially what payment by result is. It is being paid for what you do, and it seems a helpful way of being able to plan and develop services in the future. Practice-based commissioning gives GPs control over resources and the ability to move patients through the system and to organise services around them.

  Q164  Mr Mitchell: But it takes us back to 1997—

  Mr Nicholson: No. Practice-based commissioning should help that, because it will enable clinicians to be engaged directly in managerial, financial and service decisions at that level. Those sort of things will help the position, not hinder it.

  Q165  Mr Mitchell: Let us hope that that is true. However, in the medium term many of the patients are dead.

  Mr Nicholson: I do not accept that the implementation of what I have just described will result in patients dying.

  Mr Mitchell: But in the medium term, you are embarked on what amounts to a huge game of bluff. You said, "We have to push them as far as we can."

  Mr Nicholson: Yes.

  Q166  Mr Mitchell: You are bluffing them that there will be a sanction at the end, and they are bluffing you by fiddling the figures—or by creative accounting—that they are actually achieving the targets. It is a huge national game of bluff. It sounds barmy at this particular time.

  Mr Nicholson: I do not accept that it is a game. Anyone who has worked in the NHS will know that it is not a game. It is far too serious for that. It has real consequences.

  Q167  Mr Mitchell: If it were not a game, surely they would have you by the stethoscope because you would not put anyone in a situation in which they fire large numbers of staff, close wards and in which there is a deteriorating service. Members of Parliament would be clamouring around you all the time. It is impossible politically to put a trust into that situation, so it is a game of bluff.

  Mr Nicholson: We are trying to transform a system completely both in terms of the way in which we deliver care and in the structure of care. For example, we will increasingly be looking at treating people in the community—in primary care—and at how certain elements of care need to be centralised in regional centres. That will not happen by accident or without significant difficult decisions having to be made. We need to ensure that the financial regime is designed in such a way as to reinforce that to make it happen. That is why payment issues are so important.

  Q168  Mr Mitchell: These are two separate issues.

  Mr Nicholson: No, they are not.

  Mr Mitchell: It seems daft to combine one set of pressures with another. The restructuring of the service is causing all sorts of alarms about the closure of cottage hospitals—particularly in Conservative constituencies, I see from this morning's The Times—and emergency services. You cannot push that through at the same time as you are trying to push through this financial discipline because the two are separate issues, are they not?

    Mr Nicholson: No, they are not. They are exactly the same.

  Q169  Mr Mitchell: Are you saying that those trusts that are in deficit and in the worst financial situation will have such structural changes pushed on them first?

  Mr Nicholson: No. I am saying that finance and good management are two sides of the same coin. We need to do both of those things at the same time, and we need to take services forward. The financial regime that we are talking about exposes those issues very clearly, so that if a PCT decides to avoid lots of medical admissions and to treat far more patients in the community, it needs to have the financial discipline to be able to do that. The reforms enable it to make that happen.

  Q170  Mr Mitchell: That may be so, but my point is different: what confidence will the public have in structural changes, which are causing lots of fears locally about the closure of cottage hospitals and various services, if they are thought to be part of an economy measure—you may say that they are producing greater efficiency—and if they are concentrated on those trusts that are in most financial difficulty?

  Mr Nicholson: What I am saying, obviously not very well, is that the need to restructure care is being driven by a whole set of issues—demography, technology and so on.

  Mr Mitchell: But it is a separate issue from these deficits.

  Mr Nicholson: That is what is driving things. We need to ensure that we have a solid financial basis in order to do all this. That is what we are trying to do.

  Q171  Mr Mitchell: Why do them both at the same time? Why not get a solid financial basis and then go in for the structural changes, which in the long term may or may not be necessary? If the two get muddied, it will produce an impossible situation and an incredible public reaction.

  Mr Nicholson: It is obviously necessary to do both at the same time.

  Q172  Mr Mitchell: Why?

  Mr Nicholson: Because the expectations of our patients, the expectations in relation to the introduction of new drugs and new evidence about the safety of services all mean that things need to be done as soon as we possibly can do them.

  Q173  Mr Mitchell: You can have every guarantee that the doctors against closure party will be the largest single party at the next election. In a year in which the financial provision for the health service is better than ever, it seems bad management to produce this atmosphere of crisis, cuts, restructuring and chaos.

  Mr Bacon: Say what you really think, Austin.

  Mr Nicholson: I do not accept that.

  Chairman: Mr Dunne will attempt to follow that.

  Q174  Mr Dunne: We have heard a lot of talk of your confidence in the improvement in the current year, Mr Nicholson. A number of Members have touched on that issue. Can you explain how it is that you have such confidence? Let us consider the context of Government initiatives and NICE decisions that are emerging all the time, which impose additional cost obligations on the trusts.

  Mr Nicholson: I am sorry, I did not mean to sound overconfident about balancing the position at the moment. We are confident that we have the plans in place to enable us to do that. We cannot exactly foresee the future and the events that might be around the corner, but based on the best evidence that we have, our series of plans and the evidence from the quarter one results indicate that we should be able to live within the total financial envelope available to us.

  Q175  Mr Dunne: How good is the financial forecasting?

  Mr Nicholson: It is getting better.

  Q176  Mr Dunne: It is clear from page 51, paragraph 4.28, that, until this last year, trust managers had a perverse incentive to understate their deficits because the star-rating system clearly rewarded them on the basis of unaudited accounts, and that system is now behind you. What has been done to improve the financial capacity of trusts and the skills of the finance directors to undertake forecasting, because in the past they have clearly been motivated to do so in a particular way that no longer applies?

  Mr Douglas: One of the issues that you rightly raise is not just that of competence but the question of the incentives in the system. Historically, for a number of organisations, bidding up the deficit early in the year was part of a negotiating strategy. Particularly as a trust, they might forecast a large deficit in the hope that the trust would get some support from the health authority and the PCT to cover that deficit. That would be done to get additional income and was part of the negotiating position in the NHS. The first thing that we are trying to do is to change that culture. By removing the support in the system of the movement of money, we are no longer incentivising people to bid up problems. That is the first thing. The payment-by-results system has the same effect, because people are paid on the basis of what they do. In terms of skills and capabilities, a range of training programmes are run through our strategic health authority finance directives. Along with the foundation trust regulator, we are introducing a new development programme for finance directors to help us to up their game. The most important skills aim, as the report makes clear, is that we get financial skills right across the boards. We are working with the NHS Appointments Commission on the training that we give to whole boards, not just to the finance directors.

  Q177  Mr Dunne: In the current year, budgets were set based on a tariff that finance directors were told about only after they had submitted their original budget. That is not a particularly good example of best practice coming from the centre. How can you be confident that the current budgets will be remotely in line with what you expect?

  Mr Douglas: First, I agree entirely that it was not an example of best practice and it was not our finest hour in the Department. In terms of whether the budgets will be what people actually deliver, from the moment the tariff was issued, we have worked through the strategic health authorities with individual trusts and PCTs to try to verify their plans. We have a continual dialogue with the SHAs, their performance directors and their finance directors to ensure that the plans stack up. Whether each and every organisation will deliver the specific plans that we have agreed remains to be seen as we progress through the year, but the information that we are receiving says that the system as a whole will meet the overall targets that we have set.

  Mr Nicholson: The key issues in terms of financial discipline for this year and whether plans are taken out are twofold. First, there is the issue of whether NHS trusts will manage to deliver the cash-releasing savings problems that they have identified. The second issue is whether the numbers of patients referred into secondary care by PCTs are of the kind of numbers that were identified in the plans. Those are the two issues that will make the big difference.

  Q178  Mr Dunne: Both are very difficult to predict in a period of transition.

  Mr Nicholson: Very difficult. The second is easier to predict, and we are monitoring closely the delivery of the cash-releasing cost improvement programmes in trusts. The first issue is more difficult to predict.

  Q179  Mr Dunne: Mr Touhig touched on the role of the NHS Appointments Commission. Given the change that is going on—the reduction in the number of PCTs and SHAs—what is being done to ensure that the chief executives and the finance directors involved in the 18 failing trusts are assessed for competence and what is the price of failure for those particular trust managements?

  Mr Nicholson: As far as the organisations that are in the most difficult category are concerned, you will find that a number of the chairs, and/or chief executives and financial directors have changed. There has been a whole set of management movements in that area already. We are now in the position of supporting the new organisations to deliver those changes through the sorts of things that Richard has been talking about.

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