Examination of Witnesses (Questions 120-139)
MR DAVID NICHOLSON CBE AND MR DAVID FLORY
21 JANUARY 2008
Q120 Mr Williams: As I have made clear, we can congratulate you on getting to where you are now as compared to where you were, but I am a little puzzled at the fact that you planned for a surplus of £916 million. How many shillings and pence? £900 million I can understand, a billion I can understand, £800 million I can understand. That suggests you have a very precise way of anticipating what the figures should be. How did you arrive at £916 million?
Mr Nicholson: What happened is that we would send out the operating framework to the NHS where we would set out what our expectations are for the NHS as a whole. We would have said that we want to reverse the effects of RAB and we want every organisation to carry a half per cent. All the organisations then go away, do their detailed financial planning and then they send the results to us. There is a discussion between strategic health authorities and PCTs and trusts about the nature of those plans and out of that process comes a final figure for us that we then hold the NHS to account. That particular figure will have come up through the NHS to us. The detail of that will not be set by us. It is a reflection of their plan.
Q121 Mr Williams: It seemed to me to be a false precision—hostage to fortune in a way—but you are planning year in, year out, for 3% efficiency savings. How did you determine that 3% would be an achievable and a desirable figure?
Mr Nicholson: First of all, we were given the 3% through the CSR. As part of the settlement for the NHS all public organisations had to deliver 3% cash releasing cost improvement. We were given that as part of that process. My job is then to work out how we are going to deliver it. It seems to me in a 100 billion system like ours perfectly reasonable in terms of the potential for efficiency gain for productivity improvements that we could get that out and that is the plan that we have asked people to work on. That is what we are getting back later on in March from the NHS which sets out how they will deliver that 3%. That is something that was given to us.
Q122 Mr Williams: Since a mark of achievement seems to be elevation to foundation status, the more foundation hospitals you create, the greater the problems you are creating for the rest of the service, is it not, in terms of meeting the balance?
Mr Nicholson: Not really. The thing about foundation trusts of course is that they are our most successful NHS providing organisations. To become a foundation trust you have to pass a whole series of tests about how you manage your organisation, how you manage the resources that you have, annually forecast and manage your money. It is in all our interests to get all of our organisations up to that place and that is what we have been attempting to do over the last two or three years, reasonably successfully with the 83 foundation trusts that we have, but it is true that those organisations not yet foundation trusts are often those that have had the most difficulties in the past because they would be managed by now and have all sorts of issues around service reconfiguration and management that we are trying to put right. That is why our ambition to get all organisations into a place where they can become foundation trusts seems to be the right thing to do. The critical thing for us in terms of whether we can manage the totality of our cash limit in those circumstances is, first of all, the strength of the commissioning in how powerful PCTs are in those circumstances. What the balance is between their power and the power of foundation trusts is particularly important and one of the things that we have been doing as part of the operating framework is to give PCTs more leverage to make sure we do have more control in those circumstances. The second thing is the way we manage the system through the strategic health authorities. It does make it more difficult but I think foundation trusts have proved that they can deliver high quality services at reduced cost.
Q123 Mr Williams: How misleading is the table which shows us the surpluses and deficits? You have this fantastic figure right across the page in the line bar diagram on surpluses and deficits showing Guy's with a surplus of £23 million which is three times the second in the table and four times the third in the table. Would it look significantly different if it were done in percentages and would it be fairer if it were done in percentages?
Mr Nicholson: Yes, it would certainly look different if it were done in percentages; that is true. It would be a fairer reflection of performance.
Q124 Mr Williams: Is it even meaningful in its present form? It could be grossly misleading. Guy's could still be a small percentage of a vast expenditure. How different could it look if it were expressed in percentage terms?
Mr Nicholson: I have not done it but it would look different.
Mr Flory: My assumption is that there would be less variation. This particular appendix is taken from the publication of the accounts by Monitor, the regulator for foundation trusts.
Q125 Mr Williams: I had missed that. That is worrying. Why are they using these figures instead of using percentage figures? That is more relevant to them, is it not? If they are monitoring, as their name suggests, you want figures that are meaningful. These figures, as you have indicated, are meaningless.
Mr Flory: My own view is that percentages on there would be more meaningful in terms of looking at the relative performance. I do not think it needs to be one or the other if you have the absolute amount and the percentage of turnover.
Q126 Mr Williams: I think it does need to be one or the other. I think it is much clearer in percentages. You have no indication here of how the so-called efficiency of Guy's, for whom I have an enormous amount of admiration, but how it relates to the sums they have available. If you were monitoring, as you are to some extent, but now you have this body operating, which figure would you sooner have to guide you in making an assessment of hospital performance—the percentage figure or the gross monetary figure? I would also ask C&AG if possible subsequently we can have a graph showing us that because it might influence some minor points in our report.
Mr Flory: My own preference would be that percentages on these figures would give us a much clearer indication of the relative performance between trusts with hugely varying turnover, the point that you have illustrated. I also think it is important to understand the total surplus in cash terms that is generated in the foundation sector. I would actually report them both side by side to answer those two very different questions.
Q127 Mr Williams: What occurs to me is that we should have Monitor sitting here to explain why they are using what I would call, and I think the Committee would probably call, an incompetent way of judging comparative performances. It is not exactly encouraging to the PAC to have a body monitoring and giving reports when it seems to you statistically meaningless figures.
Mr Nicholson: I think this is done for illustration. I do not believe that Monitor uses this as part of their compliance.
Q128 Mr Williams: But to illustrate what? Remember that you are illustrating allocation of resources, competence and so on, and this does not illustrate anything of the sort. It is not your responsibility.
Mr Nicholson: No, but I think you need both. Having sat here I have tried to use percentages on a number of occasions that have been knocked back because the numbers are so large. I think you probably need both.
Q129 Mr Williams: I have run out of questions now but I would like the table from the NAO, if possible?
Sir John Bourn: Yes, certainly.[3]
Q130 Chairman: Mr Williams mentioned Monitor which regulates 100 NHS foundation trusts for £14 million, is that right? That is quite good value, I would have thought, but then we read the strategic health authorities spend £4 billion performance managing primary care trusts and NHS trusts.
Mr Nicholson: How much?
Q131 Chairman: That is the figure I have been given.
Mr Nicholson: The running costs of an SHA is just over £10 million and there are ten of them, so that is just over £100 million running costs of SHAs as compared with Monitor's running cost of just over £13 million, but they do completely different things. Monitor is an economic regulator and is currently regulating the best performing 83 organisations in the NHS. SHAs have a wide-ranging responsibility from strategic planning right the way through to workforce development and management and have been managing this big financial change, so it is quite different. You cannot compare one with the other.
Q132 Mr Dunne: Mr Nicholson, I think you were appointed to your present role about 15 months or so ago now, is that right?
Mr Nicholson: Yes, that is right.
Q133 Mr Dunne: That was well into the turnaround programme that had been instituted by your predecessors.
Mr Nicholson: Yes. I started in the September.
Q134 Mr Dunne: To what extent were you responsible or involved in the decision which led to introducing the turnaround measures and the introduction of resource accounting and budgeting?
Mr Nicholson: I was part of the senior management team of the NHS because I was both at one time the Strategic Health Authority Chief Executive for the West Midlands and for a short time Strategic Health Authority Chief Executive for London and as part of that I was responsible as part of the corporate discussions around top-slicing and about the strategy that we use, so I was party to all of those decisions and part of that before I came into post. When I got into post we had to set the turnaround teams up and make them do their work and we had to see the financial strategy through.
Q135 Mr Dunne: You were one of the architects but not the prime mover behind it.
Mr Nicholson: I was part of all of that.
Q136 Mr Dunne: Mr Flory, you came in after all of this.
Mr Flory: I joined the Department of Health team in June. At the same time as David was a member of the management team when he had responsibility for, firstly West Midlands, then London, I was on that same team with equivalent responsibilities for the North East.
Q137 Mr Dunne: You described earlier that the NHS has been growing significantly during this period of financial distress. One of the things that happened was a number of organisations involved in delivering health services in this country increased substantially with one of the multiple restructurings that took place in about 2003/2004, in particular when the primary care trusts were established, since when they have been dramatically cut back. To what extent do you think that that reorganisation process contributed to the financial deficit that subsequently occurred in both the primary care trusts and the acute trusts?
Mr Nicholson: The process of reorganisation?
Q138 Mr Dunne: Yes, and the management change that that introduced, because ultimately this is a management failing, is it not?
Mr Nicholson: The deficits pre-dated the management changes that you have just described, the commissioning a patient-led NHS. If you look at the financial positions of organisations they had been deteriorating for two or three years before that. I think the commissioning a patient-led NHS was part of the solution to all of that. What was clear is if you had 300 PCTs trying to manage the NHS finances during that period we simply did not have enough really good people to deliver that kind of change. One of the benefits of going to 150 is we will be able to concentrate our management teams into 150 organisations who can deliver.
Q139 Mr Dunne: That has become increasingly clear as a result of this report and from our own experience of working with the new management I think it is essential to introduce some management discipline. In my own area in fact there were some individuals held responsible who were fined for the deficits which arose in the acute trust and also in your area, I think.
Mr Nicholson: I remember it well.
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