Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 180-199)


16 OCTOBER 2006

  Q180  Mr Dunne: Can I move on to the double deficit issue that has been talked about, particularly in relation to payments to the NHS bank, in addition to the resource accounting deficit make-up? Those trusts that are in deficit are having to make substantial contributions to the NHS bank, and that is particularly true of the west midlands health authority area, which is where I am. However, there seems to be little provision for repaying that funding out of subsequent years' annual resources. How will it be paid off?

  Mr Nicholson: You are referring to the money that PCTs have given up for the reserve across the west midlands and across a number of strategic health authorities. That money is being used to support the deficits in a whole set of organisations in the west midlands. The issue of payback is yet to be finalised, and I am sure that it is subject to significant negotiation, but the real driver is the delivery of financial balance in those organisations that are in deficit. Once they are in financial balance, they will no longer need the resource, so it can be paid back. That is the delicate issue that needs to be negotiated, but we obviously hope that the PCTs get the resources back as fast as we can arrange it.

  Q181  Mr Dunne: But the tariff makes no provision at all for helping to recover historic deficits. How do you intend to square that circle?

  Mr Douglas: The tariff does not make specific provision for any organisation for any individual thing; it is based on the average cost across the NHS and is then uplifted by pay and prices. For organisations to generate surpluses and recover past deficits, they will have to operate at less than the tariff price—they will have to be more efficient than the average organisation.

  Q182  Mr Dunne: And if they cannot be? They are left with a debt, are they not? Should you not be arguing to the Government that you should be looking for a longer repayment of historic debt? Is that not a way out of the problem?

  Mr Douglas: I think that there are two issues. One is the cash issue for organisations. Where organisations have got into a cash problem as a result of running a deficit—it is the cash thing that people usually call the debt—we are creating a system under which we are potentially looking at giving people longer-term loans to repay that cash.

  Q183  Mr Dunne: Sorry, but can I be clear about that? You are looking potentially at longer repayment terms? Over what period?

  Mr Douglas: For the cash payment. At the moment, if someone borrows cash from elsewhere in the system, it is flipped over to the following year and paid back. What we have done is to look at the demands for cash from each NHS organisation, based on their past financial problems, and at those organisations that will potentially have a surplus of cash. We are matching the two and, in most cases, that will lead to short-term loans. However, for some organisations—those with the most intractable problems—those loans may stretch over longer periods.

  Q184  Mr Dunne: Could you envisage those periods stretching over three years or beyond five years? How do you see that?

  Mr Douglas: We have got to look at the final figures for this. I would find it difficult to see any stretching beyond five years.

  Q185  Mr Dunne: Thank you. My final question relates to paragraph 3.37 on page 37, which states:  "Recovery plans may need to include non-recurrent measures such as asset disposals to tackle cumulative deficits", so asset disposals clearly could be one means of paying off historic deficits. The problem for many of the trusts with assets on their books that have not been properly depreciated through the NHS accounting rules is that there is a substantial impairment charge. Under your accounting rules, it has to be written off against revenue in the year in which it is incurred, thereby effectively stymieing any opportunity to use asset sales as a means of solving the problem. Would you like to comment on that?

  Mr Douglas: We follow normal accounting practice on the impairment of assets, so organisations have to recognise an impairment in their revenue account.

  Q186  Mr Dunne: Yet you do not follow normal depreciation rules for fixed assets such as buildings, do you?

  Mr Douglas: The system overall is broadly in line with normal accounting practice, and the NAO and the Audit Commission confirm our compliance with UK general accounting procedures. The issue of using land sales to deal with deficits is quite complicated because if you get a capital receipt from a land sale, you have to apply that for capital purposes; you cannot apply it to pay off a historic revenue deficit. The only element of a land sale that allows you to deal with a deficit is the profit on disposal, so this is not an easy way for people, just to dispose of assets.

  Chairman: Thank you very much. Your last questioner is Mr Williams.

  Q187  Mr Williams: Is not the ultimate problem that there is an ambivalence right at the heart of the health service as to who is in control? You, for example—we have had a succession of yous, as you will understand—sit there and issue your Caesar's edict, which is carried out to the provinces, but by the time the chariots get back you have already lost control. The information system is not adequate to begin with to enable you at the centre to exercise more hands-on, contemporaneous control. Is that a fact?

  Mr Nicholson: We are not running a Ukrainian tractor factory—that is true.

  Mr Williams: This is not the allusion that I am trying to get at.

  Mr Nicholson: No, and I would not want to give the impression in any way that I was, but there are two or three things that we can do. First, we can ensure that we have proper business processes in the system; and secondly, we need to ensure that the organisations have the capacity to respond. Those are quite important things for us to do, but we should not get carried away with the idea that there are certain levers—there is certainly no lever in my office connected to some hapless nurse on ward.

  Q188  Mr Williams: You are not a Ukrainian factory controller—you are sitting in Moscow pulling levers and expecting things to happen, but the lever is not connected to anything. Let us take this ambivalence to a different level. Is it not also a fact, administratively and operationally, that there is ambivalence in the key units within the health service? Some years ago, we were asking Sir Alan Langlands—who was a very good witness and for whom we had great admiration—about controlling this vast empire and he told us, "Well, I have about 600 accountable officers". I am told by the NAO that the precise figure is now 567 accountable officers, but they are an illusion, are they not? How does their power, as accountable officers, compare with your power as an accounting officer? They have the responsibility, but do they have the power to go with it?

  Mr Nicholson: They certainly have the power to manage their own organisations. They are all part of statutory boards that have the kind of statutory responsibilities that we have. They all manage incredibly complex organisations, many of the costs of which are driven by clinicians treating patients.

  Q189  Mr Williams: But that is a value judgment. I hope that Sir John does not mind my quoting his reply to a note that I passed to him. I asked about the accountable officers and he said, "Well, they don't cut the ice in the way the accounting officer in other departments does." That is the reality, is it not?

  Mr Nicholson: I do not think that I quite understand that point.

  Q190  Mr Williams: When I probed the issue a bit further, the Comptroller and Auditor General made the point in a second note that the accountable officers do not have the same authority as the permanent secretary and that they lack that status when compared with the clinicians. Is it not a fact that there is a struggle down at the operational level? Those who want the resources actually have more status than the people are trying to control those resources.

  Mr Nicholson: What is true is that you get the best results where clinicians and managers work closely together. That is absolutely true and I have seen from my own experience, when I was responsible for Doncaster royal infirmary for 10 years, that that is exactly what happens. That was exactly the position that we were in, working very closely with clinicians. If you are set in opposition to clinicians, things become very difficult and a trial of strength. It was true up to about four or five years ago that the mean reason chief executives were fired was because they fell out with their doctors. That is not the case now, but it was.

  Q191  Mr Williams: I know of an example of precisely that. The administrator was in the right, as it happened in this particular instance, as I recollect. We have had reference to creative accounting at a local level, but is that not a way of covering up this tension and incompatibility with the wishes of service suppliers and the need for control by the man or woman in charge of the finances?

  Mr Nicholson: I cannot accept that there is lots of creative accounting going on in the system. Perhaps I can give you an example of the sort of thing that I think that you are talking about. It could be that a particular hospital has a deficit and that, historically, a deficit was dealt with by the region or the strategic health authority, or whoever it was in those days, shifting resources to it to enable it to cover that up so it could say that it was in balance. That was often done on the basis that it had a year to sort its problems out. Typically, those problems did not get sorted out, because the really tough decisions about the way in which clinical practice is developed, including the number of day cases, the number of beds that a particular clinician would require for his or her work, and the perioperative length of stay—all those things—are difficult to deliver. One thing about the transparency that we have now is that it is impossible to avoid making those big decisions. That is the crux of the matter at the moment. We need to be absolutely resolute to ensure that we make those difficult decisions and deliver them.

  Q192  Mr Williams: We are told in the report that 70% to 80% of the bodies with a deficit, knowing that they are in deficit, are not implementing their recovery programmes; they are definitely implementing the programme that exists. Are you saying that this is entirely down to the accounting officer, who will therefore be held accountable for failure at the end of the financial year?

  Mr Nicholson: They are accountable for delivering their savings programmes. That is their job; that is what they are paid to do.

  Q193  Mr Williams: But how is it, since their job is on the line, that they cannot ensure that, in 70% to 80% of the cases where a recovery programme has had to be introduced—they must know that their job might be on the line—they get the response that they need from the body that they are working within?

  Mr Nicholson: Well, I think they are getting better at it. I have identified that, some years ago, it was 50% for the turnaround organisations and now those are delivering 95%. One of the major lessons from the turnaround teams is clinical engagement. That is what you need in order to deliver.

  Q194  Mr Williams: That was my next question—and exactly where I was going. Because of the less formal attempts being made to reconcile finance with need in the past, when the turnaround teams go in and draw up their proposals, how binding are they? Are they laid down as commands that shall be obeyed or are they guidelines around which the old ambivalence can recur?

  Mr Nicholson: We do not accept a turnaround plan unless the local organisation owns it. So we start from a basis that that is what it needs to do. If it does not think that it can deliver it or it does not own it or, particularly, if its clinical staff do not believe that it is deliverable, we would not accept it. That is why we are taking so much time to get these plans in place.

  Q195  Mr Williams: I am running out of time. I apologise. Jumping to your aspirations for the future, I am slightly confused. I can see that it is a real problem for you, intellectually. If you aim for break-even, you either make it or you do not; you may be just above or just below. I understood you to say that you are aiming for small surpluses everywhere. When small surpluses occur—if they do—will the hospitals or other organisations be told, "You have been good children. You can carry this forward to next year in addition" or will they be told, "That nasty Treasury is breathing down our necks and since you had a surplus last year, you are having less this year"? Is not that a temptation at the centre: to try to claw to some of it back to put to other uses?

  Mr Nicholson: It is certainly not a temptation for me, because I have to put exactly the right incentives in place. If I said to people, "Whatever surplus you get, we are going to whip it off you," I should get the surpluses that I deserve, should I not? My ability to deliver those surpluses to people is dependent on our ability to deliver balance in those places that have deficits. If they are organisations that continue to rack up deficits, I shall never be able to give them back their surpluses.

  Q196  Mr Williams: This is my final question. What structural changes have been necessary to ensure that you get that collective view, so that instead of there being a struggle between the head of finance and the clinicians, you now have a consensual approach to the solution?

  Mr Nicholson: I do not think there is a structural solution to it; it is about the way in which organisations function. One thing that potential foundation trusts must demonstrate in terms of their ability to manage their finances is that clinicians are brought into the general strategy and direction of that organisation. Those are the processes that are most likely to deliver. The other thing I would say is that we need to improve the quality and leadership of management in the NHS in general. One thing that I need to do is to start to encourage and bring more clinicians into senior chief executive and management positions in the NHS. We are quite unusual in the developed world for having relatively few—particularly doctors—in those positions. One of my jobs is to make that happen over the next period.

  Mr Williams: I look forward to seeing you in a year's time when you can boast about your 567 surpluses. Thank you.

  Chairman: Thank you, Mr Williams. Mr Bacon has a final supplementary question based on the evidence.

  Q197  Mr Bacon: Actually, it is based on Mr Nicholson's CV. Would you clarify whether you were the chief executive of West Midlands South and of Shropshire and Staffordshire strategic health authorities consecutively, or was it one joint appointment? It looks like you have had four jobs since last year.

  Mr Nicholson: I have had five jobs since last year actually, including this one. I was the chief executive of Birmingham and the Black Country strategic health authority. In the August or September, I was given the job of running both the Birmingham and the Black Country and the Shropshire and Staffordshire strategic health authorities. About one month later, I took over responsibility for West Midlands South SHA. I was the chief executive of three organisations by October last year.

  Q198  Mr Bacon: When you stopped being chief executive, you did not get any severance payments from those SHAs, did you?

  Mr Nicholson: No. I applied for one of the 10 strategic health authority chief executive jobs, and I got the London strategic health authority job. I was there for two months before I came here.

  Q199  Chairman: To clear up a problem that is still confusing me, under this Government—the Labour Government—you accept that there is a dramatic increase in spending and the output has also improved, but confirm to me whether productivity has increased. What is the ratio between inputs and outputs? Has it improved?

  Mr Nicholson: The evidence produced by the Office for National Statistics over the last five years shows that on average we have increased our productivity, which includes quality, and all the stuff around coronary heart disease and cancer is improved by 1.6% on average per year.

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