Public Expenditure on Health and Personal Social Services 2009 - Health Committee Contents

Examination of Witnesses (Questions 1-168)

SIR HUGH TAYLOR KCB, SIR DAVID NICHOLSON KCB CBE, MR RICHARD DOUGLAS CB AND MR DAVID FLORY

21 JANUARY 2010

  Q1 Chairman: Good morning, gentlemen. Can I welcome you to our first and only evidence session we have on our public expenditure questionnaire. I wonder if I could ask you, for the record, to give us your names and the current positions that you hold.

Mr Douglas: Richard Douglas, Director General for Finance and Chief Operating Officer, Department of Health.

  Sir Hugh Taylor: Hugh Taylor, Permanent Secretary at the Department of Health.

  Sir David Nicholson: David Nicholson, Chief Executive, NHS.

  Mr Flory: David Flory, Director General, Finance, Performance and Operations.

  Q2  Chairman: Well, once again, welcome. I think it is congratulations as well to two of you; you have got a prefix that you did not have the last time you visited this Committee. That is the easiest one this morning! Sir David, you have emphasised the need for the National Health Service to make £15-20 billion in efficiency savings over the three years 2011-12 through to 2013-14. What analysis and assumptions were used to generate these figures?

  Sir David Nicholson: I think it is worth pointing out that my thinking behind all of this is that in April/May-time of last year, when it became pretty clear to everybody that the public finances were going to be under some pressure in the future and we knew that the NHS over this year and next year would be getting over 5% growth, but after that period it would be significantly less, what I was very keen to do was to signal to the NHS that more difficult times were coming and that people should start to plan now how they would deal with it, so we had quite a lot of discussion nationally about all of that. We could have just said, "More difficult times are coming; get ready", but we thought it would be helpful to the NHS to give them some kind of indication of the scale of what we thought at that time. Remember, this was before the PBR, it was before indeed there has been any Comprehensive Spending Review for those three years just to give the NHS some indication as to what it would be. Essentially, what we did is we looked at what would happen if, essentially, spending in the NHS stood still and, when you consider what `standing still' means, it was still a remarkable position to be in. When you think about the way in which the NHS has grown over the last ten years, we are in a much better position. Financially, we are in a much better position, the finances are much better managed than they have been at certainly any time in the history of the NHS, and we have this issue of having 5% growth this year and 5% next. What would happen if expenditure stood still? Well, what we know is that, even if expenditure stands still, the NHS does not and the expectations of our patients and the nature of disease goes on, so what we did is we made some broad assumptions, and they are broad assumptions, hence the £15-20 billion which is a pretty broad assumption to make, about the impact of demography, the impact of an historic increase in demand of services in the NHS, we made some assumptions about NICE and about the issues that would be raised in the future around NICE guidance and the rest of it, we made some assumptions about workforce and pay, pay in particular, and we have made some assumptions about policies which had been announced, but have not yet been implemented. If you took all of that together, in order to deliver all of that with a position of expenditure standing still, we calculated that we need between £15-20 billion worth of efficiency and productivity gains in the NHS over those three years to deliver that position, so that is the way we did it. It is pretty broad-brush. It was not meant to be scientific, but it was meant to give the NHS a signal that we had better use the next 18 months/two years or so to plan ourselves so that, when we get into that period, we have put all the things in place which will enable us both to improve the service for our patients, but also to stay within the means that we were given.

  Q3  Chairman: We published the PEQ this week and, looking at question 87 of course, this broad assumption you talk about is a very broad assumption because the savings identified there are quite small in terms of any target of £15-20 billion, but it is mentioned there in three or four areas of savings. What are the other areas beyond that, or do you not know them yet?

  Sir David Nicholson: The reason we made the statement as early as we did, and I think we were probably one of the first parts of the public sector to set out what we thought the impact of the financial squeeze would be, was to give the NHS the opportunity to plan and, in effect, that is what the NHS is currently doing. The NHS is currently working through what the implications are on an average of between 5% and 6% efficiency gain every year for the three years the CSR will have, and they are working through that at the moment. We have got the Operating Framework which has come out which has set out a load of parameters for people to work to and they are currently working through that, but, in any circumstances, you can see the big areas which we will be able to make gains on, and they are obviously back office and all the kind of overheads for the system and, as you know, we have announced in the Operating Framework a 30% reduction in the costs of the management and administration of the PCTs and SHAs, there are the savings around the Department of Health and the arm's-length bodies, so it is all of that, but we have not finally kind of costed in relation to all of that, so that is one issue. The second is getting the NHS to a place where it is as efficient as the best bits of the NHS can be, Better Value, Better Care, all of that kind stuff about how we can improve efficiency there, and then there are the kind of big changes in relation to the way in which we deliver services, long-term conditions and all the rest of it, and they are the kinds of areas, we think, that people should be looking at and, essentially, that is what people are doing at the moment as they work through these issues.

  Q4  Chairman: Any estimated job losses in all of this?

  Sir David Nicholson: Well, we are working through the planning at the moment and PCTs and the trusts are doing all of that work at the moment, so I would not like to say what the implication of that is, but the issue for us really is a very clear one, which is that there is, essentially, a trade-off between pay and numbers of jobs. In a cash-limited system, that is the big unknown for us and that, in a sense, is what we need to talk through with the trade unions and the staff organisations at the moment about what that trade-off actually is, and we will be starting those discussions relatively soon to get us into position because that is going to be, I think, the big issue to face us over the next few months.

  Q5  Chairman: We can see that trade-off, but, since you made this announcement, the Chancellor has announced a 1% public sector pay cap. Does this mean that you will be able to save even more money now or not, or do you think you are going to have to work within this?

  Sir David Nicholson: Well, all I would say is that that is a pay cap and it is not meant to be what the settlement is. Clearly, for us, we will be negotiating and discussing hard with the trade unions to see what we can get for the NHS as a whole. We see that as a pay cap, not as a right for everybody.

  Q6  Chairman: You talk about efficiency savings, and there has always been the `e' factor inside National Health Service expenditure, well, for decades actually. Our advice is that it has probably been able to do, at best, about 50% of what you are predicting you want it to do, if £15-20 billion over three years is the right thing. How confident are you, and I know that it was a broad assumption, but a broad assumption that is twice as much as any targets that you have ever met before is a broad assumption, is it not, so how broad is it?

  Sir David Nicholson: Well, it is undoubtedly, in the jargon, `extraordinarily challenging'. We have never done anything like this before in the NHS, but then again we have never been in the position that we are in today before where we have a surplus across the NHS as a whole, we have a very small number of organisations that are in financial difficulty and we have learnt lots of lessons over the last three or four years in relation to how you manage the resources, so, on the one hand, we are in a much better and much more solid position financially and, secondly, we are coming to the end, I think, in terms of the delivery of the big national targets which drove expenditure, so we have delivered all of the things that Government have asked us to do over the last few years. We are in, I would argue, good shape to take it forward and we have over the last two years improved our delivery of efficiency, and most of the commentators would say that we have over the last two years done that, so we are, I think, in a much better position to do that, but it is a very tough call for the NHS as a whole, particularly, and this is why it is not meant to be a strap line, but the issue around quality, innovation, productivity and prevention is so critical to us because history tells us that one of the ways in which the NHS traditionally has dealt with problems around finances is to reduce service, and letting waiting lists go up was the way in which the NHS dealt with problems in the mid-1990s, but that is not acceptable anymore.

  Q7  Chairman: We may want to pick one or two of these things up with you during the morning.

  Sir David Nicholson: That is absolutely not what we want to do, so this drive for keeping a handle on improving quality and, at the same time, driving productivity is critical, I think, for the success of this endeavour.

  Q8  Dr Stoate: What you are saying, Sir David, it does sound very much like you are trying to improve efficiency and you are trying to get more bangs for the buck, and that is all very laudable, but I want to be a bit more specific because it all sounds like mother and apple pie just at the moment, "We're going to drive efficiency, we're going to get more goods for our money", et cetera, but I want to look in a bit more detail. The 2010-11 Operating Framework assures the NHS that there is, I think the words are, "plenty of funding available for significant growth". However, we have been told that the NHS will get a real-terms rise of just 1.6%. Now, do you think that is going to meet what, as you have already said, is the growing demand and increased activity of the NHS?

  Sir David Nicholson: Yes, I do not recognise the 1.6%.

  Q9  Dr Stoate: Well, our figures were that we get a rise of 1.6%, but you do not think it is as much as that?

  Sir David Nicholson: I do not understand the figure.

  Q10  Dr Stoate: Well, we can check that, but do you think the NHS is going to be able to meet its demand in the coming financial years?

  Sir David Nicholson: Yes, the NHS has got over 5% growth in that year, but obviously there is inflation.

  Q11  Dr Stoate: Well, I think the 1.6 is probably the real-terms growth rather than the headline growth.

  Sir David Nicholson: I do not think it is.

  Mr Douglas: It is 5.5% cash and GDP deflators of 2.25%, so it will be around about 3%.

  Sir David Nicholson: So we think that, in those terms, the NHS has got enough money.

  Q12  Dr Stoate: What the Chancellor said in his Pre-Budget Report was that again this would be "protected" financially over the coming years, but do you think a zero real-terms rise for about 95% of the NHS over the next few years is going to meet the needs?

  Sir David Nicholson: Well, if we deliver the productivity challenge, it will meet the needs, and that is, essentially, what we are going to try and do. It is going to be very, very tough and we are going to have to do things that perhaps we had not thought about in the past in order to deliver that, but, in order to make sure that we, on the one hand, can continue to improve services for our patients and live within the means that we have, we think that productivity gain is possible.

  Q13  Dr Stoate: Just to pick up on the figure, I have now been shown a document actually which is in your own written evidence. It is 2010-11, Table 1a at Ev 1, the first page of written evidence, and the percentage in real terms is 1.6.

  Mr Douglas: Just looking at the figures, that will include the capital numbers and we were talking about the revenue numbers on that. The capital numbers did shift quite a lot in that year, so, looking at that, the difference between the real-terms increase that we have just quoted and what is in the table will be largely capital. There are also elements of departmental expenditure in that, not just the PCT allocations, so what David talked about was 5.5% growth in PCT allocations. The central budget spend of the Department, the administration costs of the Department and arm's-length bodies will all be growing at a lower level than that, so I think that and the capital is what comes out with the difference.

  Q14  Dr Stoate: But, at the end of the day, this is what we are going to end up with?

  Mr Douglas: But this is not the money that PCTs have to spend, it is not the PCT allocations. I think the key point for looking at meeting demands is the amount of money that goes out of the PCT allocations.

  Q15  Sandra Gidley: Coming on to PCTs, some get more than the Funding Formula says they should and some get less, and this has, I think, been addressed by giving under-funded PCTs more growth money than over-funded ones, but, now that we are actually facing a real-terms freeze, will we actually have to cut the allocations for over-funded PCTs, such as Westminster and Chelsea, for example?

  Mr Douglas: I think that decision will be made at the point at which we have got the final spending settlement and decisions are made about PCT allocations. In the past, we have always managed to deliver at least flat real terms for everybody and then looked at moving people towards the target using growth money. If the growth money reduces or disappears, then it is going to be a different set of decisions, but we cannot make those until we have actually got to the point of the final settlement, and that will be for ministers to decide what the balance is between moving people to target and giving stability across the entire system.

  Q16  Sandra Gidley: What will you be advising ministers?

  Mr Douglas: Well, it will depend on ministers' priorities at the time and how much money we have there. I think the other point on that is that what we have got in the Pre-Budget Report is a guarantee of at least flat real terms for 95% of the Department of Health's spend, and it is not 95% of the NHS's, but we have really captured all the NHS spend in there, so there is the potential within that to, first of all, ensure that at least we get flat real terms for PCTs and, if we can squeeze efficiencies elsewhere in the system, there might be some headroom for growth in there as well, but that is going to be the decision for the next allocation round.

  Q17  Sandra Gidley: So you do not think that money will be cut to those that already have too much?

  Mr Douglas: I cannot pre-empt the decisions that will be made at that time, I do not know what those decisions will be at that time, and they will be made probably next November.

  Q18  Dr Taylor: Can we come on to cost pressures and, first, could you turn to Tables 71a and 71b on Evidence 224. The number of medical graduates is obviously increasing and, with the commitment that we have got to find £15-20 billion in savings, are we looking at unemployment for doctors, or does the table below, the retirements, take that into account? Also, with the retirements, is that actually predictable because this is only anecdotes and talking to people, but it appears that more and more, particularly primary care doctors, are retiring at 60 rather than 65? How can you balance the extra doctors, the retirements and the figures for savings that we have got?

  Sir David Nicholson: As part of the calculations that we have done going forward, the cost of training those doctors is just over £2.6 billion a year. That is what we spend on it.

  Q19  Dr Taylor: Sorry, total training of all the doctors?

  Sir David Nicholson: All the doctors, yes.

  Q20  Dr Taylor: So £2.6 billion per year?

  Sir David Nicholson: Yes, and out of that of course about 15% of those are overseas graduates, that sort of number. We think that within the total amount of UK graduates we can be in a position of getting a good balance between our ability to deliver jobs for them at the end of it and their requirements in line with the kinds of efficiency gains that we have set, so we believe that that can be done, that we can get that inter-balance, so we are not expecting lots of UK graduate unemployment coming out of that, so that is the first thing. The second thing in relation to GP retirements is that over the next five years our assessment is that we will get about 10,000 new GPs qualifying during that five-year period and we think that the total number of retirements that we have assessed again, taking account of the issue that you described there, is about 3,500/4,000, so we think there are enough GPs coming through the system to deal with that. Over the next ten years, there will be 24,000 GPs coming on to the market and we think there are about 10,000 retirements. Now, they are assessments based on the analysis, not based on asking every GP if they are fed up and they want to go, so we think again that gives us the confidence that we have got a production of GPs who will fulfil our demand.

  Q21  Dr Taylor: That is reassuring. Has the Department ever thought of suggesting differential pay for doctors in shortage specialties to try and attract more into some of the shortage specialties rather than the very popular ones?

  Sir David Nicholson: Certainly in the recent past, while I have been here, it has not been part of our decision, and it would be very difficult.

  Sir Hugh Taylor: The BMA have always been very resistant to the notion of differentiating actually even between surgeons and physicians or between particular groups, so that has never been an outcome of any of the formal negotiations. The level of flexibility that people have at a local trust, I think, is a separate question, but in terms of attracting people to particular specialties, that has not really been a route which has ever got very far. I am not saying nobody has ever sat down and thought about it.

  Q22  Dr Taylor: Moving on to the management costs, one of the things we keep hearing is that there are too many managers, and we keep having figures from you to say that that is not the case. Could you look at Tables 59a and 90, which is Evidence 179 and Evidence 252 because, unless I am being fairly stupid, they do not match. If you take the year 1996-97 in Table 90, the total management costs, if you add up the two columns, come to 8%, but in Table 59a what would appear to be that same figure is only 5.1% of the management budget. If you go down all the dates with those figures, none of them matches. We have differences in 01/02 of 8% and 4.1%. Now, I know that the definition of managers is an absolute minefield, but which do we take? When people tell us that there are far too many managers, do we say that it is 8%, as in 1996-97, or 5.1%?

  Mr Flory: The difference between the two tables, essentially Table 59a on management costs is based on the definition of the costs of all those who were in management and corporate functions which we would recognise as the management. Now, there are a whole lot of administrative and clerical people who would be picked up in Table 90 who will not be picked up by that definition of management costs, so there are more staff included in here and they would typically be administrative and clerical people who are working more in clinical support services and other areas, so that is why there is a difference between the two.

  Q23  Dr Taylor: If you look at Table 70a on Evidence 222, you do there try to divide them into managers and senior managers and admin and clerical. Does that cover all of them?

  Mr Flory: This table includes in the administrative and clerical figure of Table 70 those people who support clinical staff.

  Q24  Dr Taylor: So that is pretty complete, but there are some in that table which are not included in Table 59a which gives lower costs.

  Mr Flory: Yes. There is an element of cut-off at salary level when we describe management costs, so at Table 59a the management costs of the Service will not include, as I have said, the administrative and clerical people who are involved more in clinical support services, but they will also exclude the number of staff below a particular pay threshold, a number of which are just in each of these years, because they are not classified as in the group of people managing the Service and, therefore, are not part of the management costs.

  Q25  Dr Taylor: So, if we wanted to quote to people who tell us that there are too many managers, what figure do we take? Do we take the 8%?

  Mr Flory: I think you should take the number that is in Table 59a with the definition of what NHS managers are in there.

  Q26  Dr Taylor: Just switching tack a moment, with Table 70a, as far as I thought, we were trying to ask you to go back rather further than 1997 with the headcounts of managers to see the trend over the years, so I did tackle the Library about this, going back a few further years, and, to my amazement, 1986-87 managers, as a per cent of total staff, was 0.1% and by 1993 this had shot up to 2.6%. Now, that happened to coincide with the internal market coming in. Is that where the huge increase in managers came from, or are there other explanations, because we go from 0.1% of total staff to 2.6% in 1993 and 3% in 1994, and those are whole-time equivalents, not headcounts?

  Mr Flory: There are a whole lot of factors in play at that time. Certainly, one of the issues was the Griffiths Report, if we remember, and the introduction of the general management into the Service which will have had an impact on these numbers. Also, as we have gone through at various stages, the difficulty with the time series comparison is that, as you highlighted in your earlier question, we can get quite precise and caught up on some of the definitional issues around that and we constantly seek to improve the definition to make these numbers more meaningful and easy to interpret, but, every time we change it, it makes the time series comparison more difficult to make.

  Q27  Dr Taylor: Okay, we will move on. I have got all the good questions; I have got the PFI ones now!

  Sir Hugh Taylor: There is a surprise!

  Q28  Dr Taylor: Can we go to Table 11a, which is on Evidence 17. First, I am afraid I am still confused. Unitary charges cover both the running costs and the mortgage repayments?

  Sir David Nicholson: Yes.

  Q29  Dr Taylor: Now, there seems to be tremendous confusion to me here because, if you look at Table 11a, expenditure profile of capital spending on PFI schemes, and then, if you turn to Table 11f, and I am including that because it is the only one I know anything about, the capital spend on Worcestershire, and it is the same heading of capital spend, was the actual building costs, which we all know were £87 million, so those stopped in 2001-02, so how do you equate Table 11a with all the other number 11 tables?

  Mr Flory: Table 11a should be an aggregation of the following 11 tables which simply give the regional breakdowns.

  Q30  Dr Taylor: Yes, but if capital spend is really labelled on the later tables as just the building costs?

  Mr Flory: Yes, and these tables, also Table 11b onwards, are that as well. These do not include any of the unitary payment charges.

  Q31  Dr Taylor: They do not?

  Mr Flory: No.

  Q32  Dr Taylor: So they are separate things?

  Mr Flory: Yes, they are. These are the capital costs.

  Q33  Dr Taylor: But on the first table, which does include unitary costs, you have still called it "capital spend".

  Mr Flory: That does not include the unitary charges.

  Q34  Dr Taylor: So where are the unitary costs?

  Mr Flory: The unitary charges are—

  Q35  Dr Taylor: Sorry, unitary are both the repayment of the mortgage and the running costs? That is right, is it not?

  Mr Flory: Yes.

  Q36  Dr Taylor: So where do we have the totals?

  Mr Flory: Table 13.

  Q37  Dr Taylor: So those are unitary payments which includes both, yes?

  Mr Flory: Yes, the unitary payment includes a whole lot of elements, does it not, what we would recognise as the hard facilities, the management facilities and the running annual payment to the contractor as well.

  Q38  Dr Taylor: So again, if you look at Table 13, the one for Worcestershire, the unitary payment there, a figure I recognise, of £24.6 million and 8.2% of their resource limit, if you take staff costs at, what, 70% plus and you add the PFI, another 8%, that brings us up to around about 80 per cent, so all the economies that have got to be made have got to be made out of that tiny proportion that is left. Is this feasible?

  Mr Flory: Well, there are two points there. Firstly, the costs that are included in the unitary payments are not unique to hospitals that have PFIs, so, for example, a hospital without a PFI will still have the costs of the facilities to run which are included in part of the unitary payment. If it has had build on public capital, it will have a rate of return to pay on that and it will need to depreciate its own assets. All of those equivalents are faced by hospitals which have not got unitary payment as a consequence of PFI, so everybody is in the same boat in that respect. There is increasing evidence around the piece now where, as hospitals look to review aspects of their PFI contract, which is typically every five to seven years, then they can look at renegotiating some aspects of the facilities element of the service charge, so I know, for example, that discussions are going on between the hospital and the service provider about the frequency with which windows get cleaned, the frequency with which office blocks, the non-patient areas, get maintained, so the opportunity is there at the review date to look at ways in which some of these costs can be contained and reduced.

  Q39  Dr Taylor: Do we know that there are actual reductions happening, or have we not yet got to the five-year point?

  Mr Flory: Many of the early schemes are now at that five to seven-year point, so those discussions are ongoing. We are not yet at the stage of having the evidence of reduction in the unitary payments as a result of them, but we know that all that work is going on.

  Q40  Dr Taylor: Is there any way of knowing, as PFIs have been going for quite some time, if they are proving more expensive than the non-PFI projects?

  Mr Flory: Well, I think it is quite interesting if you stay on Table 13 and you look at the right-hand column there which is headed up, "The organisational-wide reference cost index". This is a number if 100 is the average for the country, and what we can see in here is that in that last column, and I have not counted it up, there are as many two-digit numbers, ie people of below-average costs, as there are three-digit numbers, which is above-average costs, so we see a whole mixed bag on those with unitary payments where some are, for whatever reason, providing above-average costs and some are below. Again, if we link it back to the reviews that the National Audit Office have done at various times of PFI, they concluded that there was no read-across between those with PFIs and unitary payments and those hospitals which at the time, going back three years, were struggling to balance their books.

  Q41  Dr Taylor: So those cost indexes are across the whole PFI and publicly obtained hospitals?

  Mr Flory: Yes, they are.

  Q42  Dr Taylor: Does that take into account the bed occupancy rates when PFI hospitals are paying more when bed occupancy rates go above a certain level?

  Mr Flory: It takes into account that numbers are a product of the total cost for the organisation divided by the specific structure of cost units that are included in there and, as it says, it includes the excess bed days.

  Q43  Dr Taylor: Finally, going to Tables 12a and 12b, which are about the rate of return, could you translate for me out of those a figure that an investor in a PFI firm does actually get for his investment? Is it really sort of 10-14%, or am I misreading that, because they do seem to be incredibly high rates of return when we think what you can get in a building society at the moment? Am I over-estimating those, or are we looking at returns of 8 or14%?

  Mr Flory: Those are not investor returns we would recognise.

  Q44  Dr Taylor: So what are these figures?

  Mr Flory: One component part of that would be the rate of the return on the investment, but the blended rates in here include a whole lot of other quite technical factors as well that need to be included.

  Q45  Dr Taylor: That is why I am asking you to translate them, so, if I were going to invest in a PFI project, what rate of return would I expect?

  Mr Flory: I could not answer that, certainly not from the evidence in this table; that is not what this is trying to show.

  Q46  Dr Taylor: So what is the table trying to do?

  Mr Flory: I think that we would need to provide a more technical interpretation for you of both the pre-tax and post-tax rates of return in these. Suffice to say, it is not a proxy for investor return.

  Q47  Dr Taylor: That would be very helpful because the critics of PFI, as you know, I am sure, only too well, do say that the returns investors get are incredibly high. I was thinking that we could interpret this as pointing to what those were, but we cannot?

  Mr Flory: No.

  Q48  Dr Taylor: Is that something we could ask you to let us know about?

  Mr Flory: Yes.[1]

  Chairman: Well, David, you have passed Dr Taylor's statistical test of the session with honours, I have to say!

  Q49  Dr Naysmith: Sir David, the Department of Health has announced many new initiatives often called "priorities", although everything can be a priority, such as the National Dementia Strategy, improvements in maternity services and other policies, such as the better care of elderly patients in hospital, early detection of cancer, vascular screening for the over-45s and the soon-to-be-published Strategy for Adult Autism. Now, all of these initiatives can be priorities and they add up to much more than the development funds likely to be available to the NHS over the next five years, so why are they neither costed nor prioritised, and what is going to happen to them over the years?

  Sir David Nicholson: Well, the process that we have used up to date is that we have identified three levels of priority in the Operating Framework. The first level is those things that must be done and the timetable by which you must do them, and we performance-manage them very tightly, so they are the level one ones, which are the kind of 18-week healthcare-associated—

  Q50  Dr Naysmith: Do any of the ones I have mentioned fall into that category?

  Sir David Nicholson: I am not sure.

  Q51  Dr Naysmith: I will let you finish your answer.

  Sir David Nicholson: Then there is the second level which is, "We think these are important priorities nationally, but it is up to you locally as and when you can afford to take them forward and, when you think they fit with what you want to do, which you should take forward". Then there is a third level which is, "We think these are important. It is entirely up to you whether you do them or not or whether you take them forward or not", and that is the kind of process that we set around the Operating Framework, and it is pretty clear in the Operating Framework where these things fit. We have done that for 2010-11, but we have not done that for 2011-12, 2012-13 and 2013-14 partly because we tend to do things one year in advance, although I think there is an argument for doing it longer, but also we do not have a Comprehensive Spending Review settlement for those three years yet and, when we get that, then I think we will be in a much better position to be able to identify where in that pecking order those issues that you have just described are.

  Sir Hugh Taylor: Just to be clear, each of those initiatives will be costed before it is launched by ministers and there will be a relationship between that costing assumption and the overall allocation to the NHS. Now, of course the assumptions that we make nationally are the best estimates we can have, based on talking to people on the ground and so on about the likely cost of a particular initiative year on year. Once it goes out to the system, then, as David says, there is an element of prioritisation which goes into it. We do not allow ourselves to pump out a strategy or an initiative without it adding up internally within our assumptions about the allocations.

  Q52  Dr Naysmith: Some of these are things which have been announced by ministers as "going to happen" partly because of problems that have arisen, and the particular ones are the improvements in maternity services and cleaning, where there is a need there which has to be sorted out, and the National Dementia Strategy, and there has been tremendous criticism of both of these, are either of those likely to be amongst the ones that are delayed or not properly funded?

  Sir David Nicholson: The Dementia Strategy, nominally we identified an amount of money for 2010-11 and it has been allocated to PCTs, but it is not ring-fenced, so PCTs need to deliver, and the Dementia Strategy says that in year one and, to a certain extent, year two it is about planning and organising, so it is a relatively small amount of money, but the real heart of the Dementia Strategy is, essentially, moving expenditure from one place to another. It is about shifting a service away from, in NHS terms, a bed-based service, particularly with a large number of people with dementia having long lengths of stay in acute hospitals, to one which is much more community-based. The expenditure upfront is much more about levering that change rather than even more money being spent on the service, so that one, I think, is pretty clear.

  Q53  Dr Naysmith: Would you say that one was pretty safe?

  Sir David Nicholson: Well, I am saying it is pretty clear what we are doing in relation to that in the sense that there is some expenditure in 2010-11 where we will need to spend more money on dementia in 2011-12, 2012-13 and 2013-14, but what I am saying is that most of that will have to come from efficiency and productivity gains within the service to deliver it. In terms of maternity, the big expenditure issue in relation to that is the 4,500 midwives that the Government are committed to delivering, and we have built that into our thinking going forward.

  Q54  Dr Naysmith: Let me just ask about the Strategy for Adult Autism, and you will know that the Strategy has not yet been published, it is in draft form, but that was as a result of a Private Member's Bill passed in the House of Commons. Does that make any difference as to whether it happens or not?

  Sir David Nicholson: Well, obviously the Strategy has not been announced yet, has it?

  Sir Hugh Taylor: It is due to be announced. There is a commitment to publish the Strategy before 1 April, so it will come out, but clearly it is coming out into a resource-constrained environment, so there is no gainsaying that, but I think a lot of people associated with this would say that we can make considerable progress on improving autism services right across the autism spectrum by better organisation, better commissioning of services and better joining up. Indeed, the NAO produced a report which demonstrated that, in certain circumstances, simply by better organisation of services for people with autism, which had been a bit neglected, there are potential savings for some bits of the system. The real trick in all these things, as David has said, the hard thing, is where the savings in one bit of the system amount to a need for increased expenditure in another and that is going to require much more sophisticated joint commissioning, particularly between the PCTs and local authorities, than they have always managed in the past.

  Q55  Dr Naysmith: Adult autism services are very, very patchy across the country and it really needs something doing to it.

  Sir Hugh Taylor: I think that for any Government going forward there is a danger in assuming that, because we are going to move into a period of little growth, that means there is no development in any services, and indeed the whole point of the CQUIN Strategy, which David and his colleagues have been leading, is to create headroom for service improvement, which is why we modelled into that elements of the strategies and so on which have already been declared, so it is not a standstill in terms of service improvement.

  Q56  Sandra Gidley: I want to move on to nursing. The Department recently announced a move to an all-graduate profession. What is that going to cost? Does anybody know?

  Sir David Nicholson: Well, the assumption that has been made is that, in terms both of the training and in terms of the cost to the Service, it will be neutral.

  Q57  Sandra Gidley: How can you assume something is neutral because, presumably, graduates will expect to be paid more?

  Sir David Nicholson: They will be part of Agenda for Change, and the Agenda for Change arrangements are as they are and there is no plan to renegotiate or change them in light of graduates.

  Q58  Sandra Gidley: So currently diploma nurses are paid less?

  Sir David Nicholson: No.

  Q59  Sandra Gidley: No?

  Sir David Nicholson: No, you are paid on your competence, not on your qualifications. That is the way Agenda for Change works.

  Q60  Sandra Gidley: So let me put this another way: do nurses with diplomas fall into different competency bands?

  Sir David Nicholson: No.

  Q61  Sandra Gidley: So why are we bothering to change it?

  Sir David Nicholson: Well, the argument for graduate nursing is to reflect the reality of the changing nature of the nursing profession, which is the only non-graduate profession in the NHS. With the kinds of things that nurses do these days, the skills and abilities that they need to do them are significantly higher than they were in the past and, if you are looking at the kinds of changes we are talking about in relation to more community services and the way in which we structure services generally, those kinds of technical skills and the ability to lead teams and to self-organise are much more critical for the future than they perhaps were for the past, so, for all of those reasons, a graduate entry scheme seems more appropriate in a modern world with a modern nursing workforce.

  Q62  Sandra Gidley: Is this just pandering to the aspirations of the RCN rather than asking patients what they really want?

  Sir David Nicholson: No, I do not think it is and, do not forget, qualified nurses—

  Q63  Sandra Gidley: But have you asked patients whether they know or care whether the nurse looking after them has a degree or not?

  Sir David Nicholson: Well, if you put it in those terms, I do not know what the response would be, but that is not the issue. It is whether the nurses technically are capable of providing the level of care and expertise that is required for that individual patient, and obviously patients would say that they would want nurses to be recognised in that way.

  Q64  Sandra Gidley: So what is the evidence that diploma nurses were not delivering on all of this, because a lot of the training is the same?

  Sir David Nicholson: The important thing, I think, for the nursing profession in relation to all of this is to be on a par with other professions in the Service and a graduate profession brings a level of credence and coherence to what they do and gives them a status with all the professions in the NHS.

  Q65  Sandra Gidley: So it is all about status rather than what is best for the patients?

  Sir David Nicholson: No, status is not all-important. Status for pharmacists or doctors is important in terms of recruiting the right kinds of people and giving people the element of self-worth that they need in order to deliver those sorts of services.

  Q66  Sandra Gidley: I do not see diploma nurses, nurses with diplomas, having a lesser feeling of self-worth and I do not see patients differentiating between the two, so I would still ask why you actually needed to create a degree other than some sort of intellectual political correctness.

  Sir David Nicholson: I do not think it is intellectual political correctness, but it is important, I think, for professions within the NHS to have some kind of equal status. That seems to be perfectly reasonable, and it is certainly what the nursing profession itself said and certainly what those diploma nurses have said to us.

  Q67  Sandra Gidley: So it is not going to cost any more money?

  Sir David Nicholson: No.

  Q68  Sandra Gidley: There will be no increase in the nursing pay budget over the next few years as a result?

  Sir David Nicholson: No.

  Q69  Sandra Gidley: That must come as a disappointment to all those who may be changing their courses. What about the effect on skill mix? Will it mean, for example, that we need more healthcare assistants if nurses are "too posh to wash", as has been said?

  Sir David Nicholson: A graduate nursing profession does not mean that nurses will not require the kinds of levels of compassion and caring and the kinds of nursing duties that they have traditionally done. That does not mean that at all, and indeed existing graduate nurses do not lose all of that because it is part of the holistic care of their patients, but it is absolutely true that nursing and clinical care for patients over the next ten years will change in all sorts of ways. Nurses will do more, they will take more responsibility for their patients, they will be involved in much more technical aspects, and there are lots of examples around, whether it is in endoscopy or treating cancer patients. In all of those things, nurses are becoming more autonomous and becoming more engaged in these kinds of issues and, when you consider the amount of work that is currently delivered in hospitals which will be delivered in community services with nurses working alone, that ability to do that will be great, so that will change undoubtedly. Now, will that have an impact on skill mix? Of course, it will have an impact on skill mix because the wards that are left with the patients that are in them will have different needs as well, so we obviously have to change the skill mix, and in some circumstances it will mean a concentration of skills and in some places it will mean more nursing support and assistance. I think part of the deal here of course is to make sure that the nursing assistants, the non-statutorily qualified nurses, are given the training and support that they require.

  Q70  Sandra Gidley: It does seem entirely right to me that nurses at senior level are taking on more responsibility, but ultimately, for a degree course, the entrance criteria are your A Level grades, so how can we be reassured, if you like, that the right interpersonal qualities are also part of that mix?

  Sir David Nicholson: In a sense, that is part of the assessment process and it is not just a question of getting A Levels. Indeed, when people are interviewed to go on nursing courses or indeed when they do the first part of the induction for those, there are people who drop out because they do not want to do it or are not seen as being appropriate, so you would deal with that through the course itself.

  Q71  Sandra Gidley: But should we not be better at picking those up earlier so that they are not wasting public money?

  Sir David Nicholson: Yes, and hopefully we can, but nevertheless, there will be people who get through in those circumstances.

  Sandra Gidley: I think there will be a lot of disappointed nurses who find out they are not going to get any more money as a result of being a graduate, but there we go.

  Q72  Dr Stoate: Sir Hugh, the DH have said recently that the NHS is the "preferred provider" of NHS care, which just seems to be a major shift away from the previous policies of contestability and outsourcing. Is this a change, as far as you can see, in government policy?

  Sir David Nicholson: I think the issue there is that what was pretty clear to us during the year is that this whole issue about contestability, tendering, competition and all of that sort of thing, when you looked across the country as a whole, they were being dealt with differentially, so we had some areas that were focusing, really driving this and some that were not, and it was really important, I think, for the Secretary of State to set out what the real position was, to get that consistency across the Service as a whole. The first thing I would say is that contestability and co-operation is a tool to improve service and it is not an ideology or a thing which in itself is good, and that is generally the approach we have taken and I think we need to set that out very clearly. The second issue was that none of our evidence and experience shows us that getting front-line staff frightened about their future improves their ability to deliver care to patients, so what the Secretary of State tried to do was to set out what the overall position was in a way which could at least give people working on the front line of the NHS some kind of assurance about what the reality of that position was and that is why we set it out. What we are saying in all of that is that, if there is a quality problem, if there is an issue about a service not meeting patients' expectations, then the NHS shall have the first chance to put that right, so immediately launching into a tendering or a contestability process if there is a quality problem is not the right response. The right response is to say to the NHS, "Show us how you will do it". If they do not, then absolutely contestability and competition is a tool that we can use.

  Q73  Dr Stoate: I do not disagree with you because actually I am in favour of what you are saying, but it is just that it does not appear to have been the policy of the last few years which is to get as much diversity into the market as possible, to get commissioners to commission from wherever they want to commission to get the cheapest possible options. This just seemed to me to look like a policy shift.

  Sir David Nicholson: I do not think that is the case at all. What we have been trying to do is to create a much more diverse provider service because there was literally no choice at all in order for patients to be able to make real choices about the services that they provide, but that is only one part of it. As I say, if you get that as a kind of ideology, you end up in a place where everything is tendered in every circumstance, and that was never the intention of the policy.

  Q74  Dr Stoate: A review for the Department of Business recently, in 2008, claimed that outsourcing had made a major contribution to value for money, and in fact in some cases it had seen reductions of up to 34% in costs for healthcare. Do you accept that figure?

  Mr Douglas: This is the DeAnne Julius report?

  Q75  Dr Stoate: Yes.

  Mr Douglas: I do not recognise the 34% number. My understanding from that was that what the report demonstrated was that there was evidence that a combination of good commissioning and contracting, contestability and outsourcing could lead to significant savings in costs, and I think for the UK the evidence was about 10-20% potentially, around those numbers. That was driven, as I say, by a combination of these different factors and it was not outsourcing per se, so I think in the report, even where there was contestability and an inhouse provider won, there were similar levels of savings. It was not the outsourcing, it was the process side and it was very specifically around particular bits of business. There are some elements of business you can outsource a lot more easily than others, and we have gone quite a long way in areas like shared back-office functions and we have done it around elements of procurement in the supply chains, so we have done quite a lot in outsourcing inhouse. Generally, when we have done it, we have seen efficiency savings, but I do not think you can then extrapolate that across everything we do and then say, "Because you achieved these savings in some areas, if you did it everywhere, you would get that level of saving".

  Q76  Dr Stoate: No, but in quality terms, if you are saying that you can achieve realistically, say, 20% reductions in costs rather than the 34 that the report actually does mention, let us talk about the 20, if we are talking about having significant savings over the next few years, is this the right time to talk about a preferred provider, or should we be being much more creative and much more diverse in how we supply services?

  Mr Douglas: I think, as I say, the savings that we put, and where the 10/20% came from, came from some particular areas, I think, of compulsory competitive tendering in local government and it was around some very particular services where those savings were delivered. In the areas where it is appropriate, we have gone quite a long way, and we will probably go further, in looking at contestability, particularly when we are looking at the savings on back-office functions. It is one of the work streams that David has got in the quality innovation and productivity work, to look at how much further we can go in that, but I think the other element of it, and the important element for me from that report, was that what it also focused on was that a large element of this was about how you commission things and, if you have proper a commissioning and contracting process, then you can drive down costs and improve quality, and that is why that is the area we have really focused on in the NHS in recent years, how you drive up and professionalise that commissioning function. It is not just that outsourcing and contesting bit that drives the change, but it is that mix in different areas of good commissioning, contestability in some cases and outsourcing in some cases.

  Q77  Dr Stoate: But I repeat my point: is that going to be a more major driver in the future, given that the constraints on finance are not going to be easy to meet?

  Mr Douglas: It is going to be one of the areas, and it has to be one of the areas, where you can, and we were looking across the piece at where we can best deliver efficiency savings. If some of that is best delivered through outsourcing of functions, and, as I say, we have done it on the back-office functions quite significantly in the NHS, then that is what we would have to do.

  Q78  Dr Naysmith: Against the background we have been talking about of making savings and increasing productivity over the next few years, what is the planned cost to the Department of Health and the National Health Service of the rollout of the patient-reported outcome measures, PROMs, because the programme started running in 2009-10 and will continue in 2010-11, so what is the expected cost for these two years?

  Mr Flory: Our current estimate of the costs, and bear in mind that the actual cost in the end will be driven by how many patients fill in the questionnaires and the volume, our estimate at the moment over the three-year period is that it will cost £6.5 million, excluding VAT.

  Q79  Dr Naysmith: When will the benefits, and how will the benefits, of this investment be evaluated?

  Mr Flory: I think that the cost-benefit case around this is a very compelling one. Clearly, the patient-reported outcomes is one of a whole number of strands of ways in which the Service looks to drive up quality in services and the patient-reported experience is an absolutely key part of how we measure and assess quality. I think we were, in large part, influenced in taking this programme forward by a report that the Office of the Health Economics Commission did in 2008 which strongly recommended the introduction of patient-reported outcome measures. Many of the commentators at the time supported it as a way of taking forward and embedding the assessment of quality in the Service in a way that we have not done before, so we see it being a really important part of the whole package of embedding quality in the way in which we assess, measure and improve service.

  Q80  Dr Naysmith: So will these patient-reported outcome measures be used to inform assessment of performance and productivity at the organisational level?

  Mr Flory: Yes, one of the issues that we have been very committed to is that over a period of time, and the Operating Framework alludes to this, patient experience becomes an increasingly significant influence in the way in which income to hospitals works, so we see a development going forward whereby income could be withheld from the tariff for hospitals which are not meeting the standards and are not receiving the necessary feedback and standards through this outcome measure.

  Q81  Dr Naysmith: Will this data be used to inform GMC re-accreditation and the allocation of clinical excellence awards to consultants and, if not, why not?

  Mr Flory: I do not think at this stage we have thought about how that could work.

  Q82  Dr Naysmith: Do you think it would be a good idea to start using that sort of measure?

  Mr Flory: It is certainly an interesting idea.

  Q83  Dr Naysmith: You have just said that it is going to be a key measure in measuring quality.

  Mr Flory: That is right. We need to make sure of course that we have got the sufficient reliability and coverage of this. What we are starting with at this stage is a limited number of procedures that are covered by this particular rollout of the PROMs and, therefore, we need to work through the benefits or otherwise of being in a situation where the scenario you describe could apply to some clinical professionals and not to others, but it is certainly something that we would explore going forward, I am sure.

  Q84  Dr Naysmith: So it will be explored. You quoted £6.5 million as the cost. That will be the cost for the Department of Health, will it not, so what about the total cost for the NHS?

  Mr Flory: The cost of establishing and rolling out the systems that we have at the moment, we cannot put an estimate on the total cost as it goes forward for the NHS because there are lots of indirect costs that could potentially be brought, but our expectation is that NHS organisations will welcome this and all the evidence suggests that so far it is not something that we are going to have to push on them. There is not going to be an argument about who is paying for this, but it will become embedded in the way that the Service works.

  Q85  Dr Naysmith: But it is an additional sort of measure which has to be recorded and somebody has to record it and process the data.

  Mr Flory: Yes, but lots of hospitals already in many, many parts of the Service are developing their own ways of capturing patient experience and what people think. Again, the evidence around that is that the cost-benefits of it become self-evident, the intelligence that they get from that, the richness of the patient stories that they get from that.

  Q86  Dr Naysmith: I do not think anyone is doubting the value of doing it, but it is just a question of how realistically the costs have been assessed in the light of all the other things that are going to have to be done.

  Mr Flory: I think it is very realistic, and the paybacks in this area are very significant.

  Q87  Dr Naysmith: So that takes us on to the cost of commissioning for quality and innovation, the so-called CQUIN. How will this programme be evaluated, after you have told me what the cost will be?

  Mr Flory: Well, in the current year we are in the first year of CQUIN and how it is working this year is that it is part of the allocations that have been given to primary care trusts. We ask PCTs to reserve 0.5% of their allocation and to pay it to service providers they contract with who can demonstrate some achievement of commissioning quality improvement locally.

  Q88  Dr Naysmith: So they are PCT decisions?

  Mr Flory: Yes, but we were very clear in the Operating Framework for this year that there is an expectation that that 0.5% would go to service providers who were able to demonstrate that they were moving forward in terms of their quality. For many people, in the first year that is a question of measurement, so locally commissioners and providers would agree on particular quality measures that they were both interested in and which really mattered to the patients using that service locally and would begin to measure and share that information and, in return for that, would receive an extra 0.5% on their tariff prices. Across the whole country, that is working pretty well this year and that money is passing to providers. In the Operating Framework for 2010-11, we are now making this more significant and a more central part of the whole local commissioning and contracting process, so we are increasing the amount for CQUIN to 1.5%. If we look at it in the broader picture of the contractual arrangement between the PCT and the service provider on the one hand, we have got contract prices and specification, so the provider does all the things that it said it would do to the necessary standards and then it gets the contract price. We have included in there now a whole lot of things which, when they happen, the provider does not get paid for, and they are events and other things, so, if you do not deliver to the right standards, you lose some of your income. Where CQUIN plays now is that, where you go beyond the core expectations of the contract, where you can demonstrate through your own innovation quality improvement for patients, then you can earn up to an extra 1.5% on your contract income, so our aim is to incentivise providers, working with their commissioners, to explore ways in which patient service can be delivered over and above the contractual requirements. We are looking forward to seeing how the Service deals with this and prepares for it, looking to capture best practice in the contracts that people put in place for next year and to spread it through the Service. There are one or two common elements of this, that we want patient experience to be built into CQUIN in schemes locally and how that works people will work out locally, but we also specifically want them to include measures that trusts take to deal with venous thromboembolism and this will be a standard part of the—

  Q89  Dr Naysmith: That will be throughout the whole country?

  Mr Flory: That is what we are looking for PCTs to do in CQUIN.

  Q90  Dr Naysmith: How are you going to evaluate whether this is value for money, the CQUIN programme, overall?

  Mr Flory: We have not considered yet whether it would be through a structured national evaluation or something that we would want people to do more locally, because there will be some variation in the way that these schemes are taken forward locally. What is the most important thing for us is that, however that gets done, we identify where best practice works, where it really works well between the commissioner and provider and spread that learning through the service.

  Q91  Dr Naysmith: It was a deliberate decision to let CQUIN vary according to local choices, was it not?

  Mr Flory: An element, yes.

  Q92  Dr Naysmith: What is the evidence that this was the right thing to do? It is going to make it much more difficult to evaluate whether the project is value for money, is it not?

  Mr Flory: What is consistent nationally is the concept and the principles of how much people care. It is very, very clear about that.

  Q93  Dr Naysmith: Venous thromboembolism; is there anything else?

  Mr Flory: And the patient experience dimension is included as well. We also wanted to create space for people to be more creative locally and we are conscious that sometimes if all of this is too prescribed in a top-down way, it does not capture the imagination and engagement of clinicians in local services and local organisations, which is where we are really trying to get to with this to incentivise people to work together and to create and think about how to improve services for patients.

  Chairman: You have probably made one ex-clinician, Dr Taylor, happy with the thromboembolism. He has been campaigning about that for a very long time.

  Q94  Sandra Gidley: Moving on to health inequalities, the review of PSA 18.2 shows that all of the investment in trying to reduce health inequalities does not seem to have prevented an actual increase in the inequality gap. Given that, what justification can there be for continued investment in this area where money is tight?

  Sir Hugh Taylor: You are right that we are struggling to start to narrow the gap in life expectancy, although we should always preface that with the qualification that life expectancy for both men and women in the spearhead groups, which are the focus for the PS 18.2 targets, has gone up since the baseline by over three years in the case of men and over two years in the case of women. The problem is the rate in England has gone up even faster. What is very difficult to judge in all this—and we have to put up our hands that it is difficult to make this judgment—is that the investment which has gone in through the allocations formally over that time, which has weighted funding to PCTs to take account of the commitment to reduce health inequalities which has been in place effectively since 2000, whether things would have been worse without that and without the focus which we have brought to health inequalities. We have taken on the chin the serious comments that the Select Committee made about this. We have Professor Marmot at the moment leading a major review of what the health inequality strategy should be going forward with from 2010. That report is due very soon. We are still focusing very, very hard in the spearhead areas on things which we know make a difference, but it is making a bigger difference in the case of the at risk groups than in the rest of the population, which is proving challenging at the moment.

  Q95  Sandra Gidley: But is there not a problem in as much as the money has been chucked at the spearhead PCTs and there has not been any real accountability for that money; that in many cases areas which have worse outcomes have actually used the money to improve secondary and tertiary care rather than putting it into inequalities. Why has there been no real tracking of the money that has gone in?

  Sir Hugh Taylor: Of course, money goes into the general formula so in that sense it is pretty difficult to track. What I think we have found on the whole when the national support teams and others have gone to PCTs and local authorities to talk to them about this is that the problem is as much as anything getting really focused on the assessment of need in particular areas. So the development of relatively simple screening tools, for example to make an assessment of how many people in their population that they might expect to have diabetes, and matching that with people who have been reached and identified by those services. By doing that we have been able to encourage PCTs and local authorities to target particular elements of the population more accurately. That is something, to be honest, that some of those tools and techniques we have developed over the period that we have been going at this, and of course the latest figures at which we are looking are the 2006-08 health inequalities figures; so it is a little difficult to work out how all the effort that has gone in with PCTs through the national support teams on health inequalities and infant mortality are playing through at the moment.

  Q96  Sandra Gidley: GPs will tell you that actually it is QOF that has made all the difference, so should we be putting, heaven forefend, more money towards general practice and giving them more money in their QOF? Would that be a better way of reducing inequalities than these sorts of fairly random lumps of money?

  Sir Hugh Taylor: I do not think we have been giving them random lumps of money. It has been going through the formula and that has had all the benefit and the wisdom of ACRA and the number of other people looking at it. The amounts of money which have gone out through central programme funds have largely been in area capacity building rather than anything else. The QOF, I think, is an important tool in relation to health inequalities. There is evidence that in some of the spearhead areas that the QOF has been effective in some of those areas in improving health outcomes. NICE have been looking at the balance on QOF and obviously one of the options for the future is to rebalance the QOF to take even more account of health inequalities. Whether that amounts to putting more money into the QOF is a slightly separate question; it is also a question of prioritisation within the existing mechanism.

  Q97  Sandra Gidley: Some have advocated that the money going in for inequalities should be ring-fenced; do you agree with that suggestion?

  Sir Hugh Taylor: The Government's position on this so far has been not to go for ring-fencing on the basis that if you are really going to tackle health inequalities, you need to tackle them at all stages of service provision. If you just take big areas like cardiovascular disease, diabetes and so on, the way to tackle that is by focusing on the question of whether you are addressing the people with the most needs. It is really a commissioning question as much I think as a financial question. I think the argument is out on ring-fencing to some extent, but certainly the view of the Government has been that ring-fencing sometimes is counterproductive in terms of effectiveness because you say, "That is the spend that goes on that," whereas in fact what you need to be doing is looking right across the board.

  Q98  Sandra Gidley: That is the Government's view. We are likely to have a change of Government. You advise Government; would you be advising an incoming Government that ring-fencing is not a good idea, or would you then just change your view when before a Committee like this?

  Sir Hugh Taylor: How can you ask me such a question! As you know, I have been trained for my whole career to be the strongest possible advocate for the policies and priorities of the Government of the day; so I will just wait on that one, I think!

  Q99  Sandra Gidley: A very civil servant response! A final question. You alluded to our earlier report and I think one of the frustrations of the Committee when looking at the whole area of health inequalities was that there had been many initiatives that seemed very worthy but had not been baselined, had not been evaluated properly. We recommended more rigorous evaluation of programmes, including the collection of baseline data, proper comparators and programmes to design so that they could be evaluated. Are policy evaluations now meeting these—I say requirements, but you might see them as suggestions?

  Sir Hugh Taylor: I think we accept the principles that were set out by the Committee. I am not going to say that every single initiative that was ever brought forward to deal with health equality met the strictest criteria for evaluation. Just as a little aside, sometimes just getting on with something is not a bad thing, particularly when you are piloting and testing out an idea. Some of these areas where you are trying to do big community-based interventions are quite difficult to get randomised controlled trials working and so on. We had that discussion, I think, at the time of the Select Committee. Nevertheless, on two of the programmes that we have going in this area at the moment—the Communities Health Programme and the Improvement Foundation Programme—we are setting them up in a way which we hope should be able to give us some proper evaluation at the end of it. The disciplines which you ended in your report are certainly ones with which we agree in principle and we passed them on to Professor Marmot to take account of in his strategic review. Whilst I think most commentators would agree that this is a fairly intractable area in terms of evidence and so on, nevertheless getting some discipline into evaluation on the lines that you recommended is exactly the right course.

  Q100  Sandra Gidley: A final quick question. It should be an easy one but I do not think we have the answer in the PEQ. How much money has being spent by the DH and the NHS on initiatives to reduce health inequalities since 1997?

  Sir Hugh Taylor: It will be a very difficult question to answer, which is—

  Q101  Sandra Gidley: Why we do not have it.

  Sir Hugh Taylor: —possibly why you do not have the number. We can give you a pretty clear account of what has happened in relation to the approach to health inequalities through the resource allocation formula, which is the key denominator there. Between 1999 and 2002, which was the first time after a Government commitment to build in health inequalities as an objective of resource allocation formula, there was a special element of the formula which went on health inequalities. They were between 2003 and 2008, effectively there was a single resource allocation formula which had a health inequalities component built into it; and since 2009-10 we have introduced a new health inequalities formula as a separate component of the overall formula, with a weight of 15%. To some extent you can disaggregate it in that way. Then associated with the Choosing Health White Paper there was quite a big drive on health inequalities. It is difficult to unpick the health inequalities element from all of that. I can tell you for the last two years what the dedicated DH spend, overhead spend if you like, on health inequalities is, which was £34 million in 2008-09 and £21 million in 2009-10. We trimmed it back as one of the casualties—which no doubt we will come to—of the cost of the swine flu programme. Most of that funding, those two specific pieces of funding, are related to capability building; so, for example, the national support teams which we now fund to go out.

  Q102  Chairman: What are the health gains of the 18-week elective maximum waiting target and the four-hour A&E waiting target as well?

  Mr Flory: I think the significant improvement, progress, that has been made as a result of the 18-week maximum wait has had a whole lot of people in all specialties all over the country getting their treatment sooner than otherwise would have been the case. They have been able to resume their lifestyles without illness at an earlier stage. Indeed, when we reflect on the last 15 years, when we think about some of the very long waits at the time and the stories and examples of people who were dying whilst on long waiting lists for heart surgery and other things, it is all now by and large a thing of the past; the benefits have been significant.

  Q103  Chairman: Why 18 weeks and four hours for A&E? Was that a clinical judgment or what was it?

  Mr Flory: The A&E four hours goes back to about 2004-05, I think, and at the time it was determined of course there was a lot of clinical judgment that went into all of that and the consideration of how that would be best. We experienced almost a background controversy around some of these things on 98% and so on. The aim at the time was absolutely that everybody should be seen within four hours. What was recognised was that for some people it might not be clinically appropriate for that, according to the judgment of the clinician facing the patient at the time. To go to 98% was to recognise that not that we could not do it but for some people it was not the right thing to do.

  Q104  Chairman: Given that this target of the 18-week time is set, is there any move to reduce it to below 18 weeks now?

  Mr Flory: On an 18-week achievement we published more numbers this morning in terms of the latest monthly figures and they show that both on the patients on a pathway which results with an admission to hospital and an operation, and for those where they go into a different pathway without admission to hospital, they are significantly in excess of the standards that were set. This has been a huge success. Underneath the 18-week maximum—because, remember, we used to measure the outpatient wait and the inpatient wait for the operation—the diagnostics, in the middle I think, is the most significant area of improvement that we have seen in the whole 18-week initiative. The median wait experience for patients within the 18-week maximum is now just under eight weeks for all stages of that journey. We latch on to the maximum wait but I think that is the most significant number, and that is down recognisably from where we were going back 10, 12, 15 years. But we still have a whole lot of attention to pay to some hospitals and some specialities where this is not yet achieved for every patient. Trauma and orthopaedics continue to be a challenge in some places; neurosurgery continues to be a challenge in some places in the supply and demand balance in those particular specialities. We continue to work hard to reduce the variation, to make sure that those hospitals with particular specialities that still are not at their defined standards for 18 weeks get there. At the same time some parts of the country, in their responses to Lord Darzi's report in 2008, made their ambition clear to go beyond the 18-week maximum and to reduce the median wait even further. We do not see it as holding people back or saying that that is the best that can be done, but it is a standard that everybody has the right to expect as we go forward and many places have ambitions to do better.

  Q105  Chairman: Have you looked at what savings could be made, if any, by removing that target, both the 18-week and/or the four hours as well, in terms of looking at efficiency savings?

  Mr Flory: We have not looked at the 18-week programme from a point of view of what could be saved; it is difficult to imagine how we would do that. What 18 weeks has done is transformed the way that care is organised and delivered across organisational sectors; it is by definition a more efficient way of doing it. Wasting time and waiting is a costly, inefficient bit of the process.

  Sir David Nicholson: There are people who say that in the climate of financial pressures and all the rest of it we should look at the basic offer that we make to our patients. I think we are a long way from that and we certainly do not want to get into that discussion at all; the focus for us is to keep the offer to our patients and see how we can improve productivity and efficiency and make that happen. Debates in those terms, for me anyway, in the NHS are more about attempting not to deal with the real issues in front of us, and when every organisation is really delivering top quality services at the most efficient gain then I think we can think about that, but at the moment we should not do that. The couple of things I would say about all of this are that one of the things about the 18 weeks was this median and this was the eight weeks, which was the European average. If you look across France, Germany or wherever, this is the kind of average wait that people would expect. Part of our determination to make it happen was the commitment to the Government to give us European levels of funding. So I think that is a perfectly reasonable thing for us to do and we do not want to get away from that, we think that would be letting our patients down.

  Q106  Chairman: This would not be an area you would be looking at for efficiency savings?

  Sir David Nicholson: No. To be honest, our experience of this if we take you back to the mid-1990s when we let waiting lists go out significantly, faced with financial pressures in the system, we saved thruppence ha'penny and it cost us two-thirds of the GDP in the country to get it back. It does not work in those terms.

  Q107  Chairman: Some of my local orthopaedic waits were in not weeks but months and years back then. Do you think that if these targets were removed that the Health Service itself could regress into times of yore?

  Sir David Nicholson: It is perfectly possible for that to happen but we are talking about a third larger NHS than we had in those days. That sophistication of managing waiting lists and all that is much greater. Our commitment connection with clinicians is in a much better place than it was, but that danger of slipping back is always there for us and we need to keep absolutely on top of it.

  Q108  Dr Stoate: I do remember in my early days as a GP receiving a letter from a consultant saying that this patient was so unlikely ever to have an operation done, therefore he was not sending an outpatient appointment, literally; and the consultant very shortly left the hospital on the grounds that there was no point in being there because he could not do anything. People forget how bad things got in the 1980s in terms of waiting times which were literally years and sometimes indefinite.

  Sir David Nicholson: The Chief Medical Officer tells a story of a patient in his 80s who had been on the waiting list for a cataract for 14 years and wrote to the hospital saying that he thought he was too old now for that operation, could he leave it in his will to his son!

  Q109  Dr Stoate: We laugh about it now but that is, luckily, a distant memory and long may it remain there.

  Sir David Nicholson: Yes.

  Q110  Dr Stoate: One thing you are planning in the future is a reduction in tariffs to hospitals. What effect will that have?

  Sir David Nicholson: There are two ways. One is that we are squeezing the tariff itself and we are doing that in 2010-11, ie not waiting for the financial position to become tighter; and we are putting a marginal cost on activity beyond a certain level. So in those two ways we are trying to squeeze the amount of money in the system, for two reasons. First of all, to drive efficiencies in the system, to make sure that acute hospitals are driving productivity efficiency in their own organisations to make them as effective as they can. Secondly, particularly in relation to emergency services of which we have seen a growth over the recent period not everywhere but in the NHS as a whole, and it is going to be a critical part of getting the productivity and quality gains in the right place; and we want to drive PCTs and acute hospitals together much closer to work out how we can deal with this increased demand. Because there is no doubt in our mind that leaving it to primary care on its own to try and deal with emergency care will not work, nor will it work by just saying, "If patients come through the door, we will pay them." So we need to drive community and primary care on the one hand and hospitals together to come up with initiatives and ways forward to make sure that we can manage that. So we want to drive efficiency and we want to focus people's attention on how we managed the demand for services.

  Q111  Dr Stoate: But is there not a risk that hospitals may just abandon certain procedures if they cannot match the tariff price—just stop providing the service? Is that not a real risk?

  Mr Flory: I do not think that is a risk at all.

  Q112  Dr Stoate: The hospital is going to say, "If I cannot do this operation for the new tariff price what is the point of doing the operation? I might as well forget that service and concentrate on the areas on which I can meet the tariff price." Is that not the possibility, that they simply abandon certain services completely?

  Mr Flory: We looked at some of the reference costs in the context of the unitary payment question earlier and what our experience shows us is that you have reference costs across the whole sector of all care resource groups and in most hospitals the cost of providing some service will be perhaps above the national average and in other services it will be below, but the whole reference cost tariff pricing dynamic is about showing what can be done—not as the lowest cost that anybody is doing it, but the average cost—and requiring hospitals to drive up their efficiency, to drive down their costs in order to be able to do it in that way. Of course, for commissioners to secure the full range of necessary services for their population, yes they can look at the competitive price level—they are only paying the price wherever it goes to, it is the price that is fixed. But if in dialogue with a provider who, for whatever reason—I cannot imagine why it would be—would say, "For these reasons we just cannot match the tariff price"—bearing in mind it is only an average—"therefore, we do not want to provide a service," if we have really got to that situation, then the commissioner would need to secure from elsewhere. Of course, with Foundation Trusts where there is potentially a greater risk of the Trust working out for themselves what services they will or will not provide, essential services are built into the Foundation Trust licence so that the Trust have to continue and they cannot just say, "We do not fancy it any more," or "We cannot afford it."

  Q113  Dr Stoate: There are plenty of discretionary services that they might decide are not worth the candle. You say this is unlikely to happen but I can tell you from experience that GPs look very carefully at what services to provide dependent on whether there is anything that will match their costs. When PCTs come to GPs and say that they want to look at, for example, an incentive scheme to reduce referrals the GP will do a very simple calculation and say, "Actually, can I make this pay or not and if I cannot make it pay I am not going to sign the contract." I am quite sure that hospitals must think in the same terms. What I am trying to get at is if we continually force down costs that we give to hospitals in order to save money at the centre, there will come a point when hospitals will say, "We cannot do this any more, therefore we are not going to," and that will reduce patient choice.

  Mr Flory: Certainly in the tariff for the current year, which is the 3% efficiency gain an additional 0.5% in next year at those levels we are not convinced that competent, well run, well organised, efficient hospitals cannot deal with that scale of charging.

  Q114  Dr Stoate: I am quite sure many will but I am also sure that some might not and I am worried about the effect that that might have, for example, on employment levels in the hospital and inpatient service.

  Sir David Nicholson: It does not take away the PCT's responsibility to secure the totality of healthcare for their population, but even if there is a reluctance on a Trust to do particular things, PCTs have a responsibility to make it happen, so that is clear. The other thing, I would reinforce what David said; if it was an NHS organisation with a direct accountability to us we would do whatever we needed to do to make sure that they did not do that, withdraw from the market. With the Foundation Trusts it is part of their licence and we would expect Monitor to do the same.

  Q115  Dr Stoate: I am still not totally convinced. The Operating Framework for 2010-11 has suggested that fixed price tariffs could be abandoned completely in future, leaving people to negotiate for themselves. Is this the plan?

  Sir David Nicholson: I think what we have said is that we might consider thinking about the tariff as a maximum price; so we would still have a national price but it might be a maximum in future and we want to explore whether that is possible. If you look at it as an average, there are lots of organisations which can deliver it below that average.

  Q116  Dr Stoate: On student fees universities are supposed to charge a maximum of £3,000 and I have not met one yet that charges any less. Generally speaking, maximum prices end up as the market price in most situations, particularly in areas of shortage.

  Sir David Nicholson: That is why we are going to have a look at it.

  Q117  Dr Stoate: But it is not your policy yet?

  Sir David Nicholson: Our policy is to explore it.

  Q118  Dr Naysmith: Could we come on to the National Programme for IT. Table 23b on evidence 62 is a very helpful summary of what is going on. Could I be the first to congratulate you on the Picture and Archiving Communication System, PACS, which is really absolutely splendid. At the moment, as far as I am aware, films are available throughout different hospitals in an acute Trust. When are these going to be available across regions to primary care practices or even nationwide? Is there an expectation that, eventually if you are on holiday somewhere and you see a specialist there, far away from your own place, and if you had an X-Ray a few weeks ago and they want to look at it, that that would be possible?

  Sir David Nicholson: Yes.

  Q119  Dr Taylor: Can you give us a timescale roughly? Will that be towards the end of the implementation of the whole system?

  Mr Flory: The important first stage was to get the PACS systems—

  Q120  Dr Taylor: Working locally.

  Mr Flory: Yes, and the benefit that made. As we were going through the PACS programme, there were a number of hospitals wanting to explore whether or not they could find their own local systems outside of the national procurement. We did not endorse those sorts of discussions because the really important part of the PACS systems that we had through the national procurement is their capability of sharing images, and absolutely put in place with the view that the images that are taken locally become available on the spine and the data store facilities on the spine and so can be accessible from elsewhere, because it was the whole purpose of us doing it as part of the national programme.

  Q121  Dr Taylor: Moving on to Choose and Book, table 64 on evidence 187, give us percentage of GP referrals to first outpatient appointments, booked via Choose and Book. There is an amazing range. Barnet only do 10%, Sandwell do 88%; and if you go to the West Midlands, Sandwell, Dudley manages 74% but Walsall and Worcester manage less than 50%. Why is there this incredible variation in something that ought to be of tremendous value to patients? Is there any explanation why? Take the West Midlands: Sandwell 88%, Walsall, geographically probably next door, 45%. What can you do to tackle it?

  Mr Flory: We tackle it through strategic authorities, the way in which we hold primary care trusts to account through their practices locally and the way they are embracing this and taking it forward.

  Q122  Dr Taylor: I met our strategic health authority Chief Executive yesterday, so I should have asked him this, which I did not, I am afraid.

  Sir David Nicholson: We have taken a relatively permissive approach to this and we have had financial incentives for GPs to use it more; we have had a support team out there supporting people to make it happen, but there is a reluctance in operating with some GPs to use it. There is a question as we go forward because the thing about Choose and Book, apart from anything else, is that it is probably the safest way of taking a referral from a GP to a hospital, so I think there is a patient safety issue attached to this and at some stage we might want to think about how we take that forward in a much more directive way. It seems to me that for the service to work appropriately we need to increase those numbers significantly over the next period.

  Dr Taylor: Coming to the electronic patient record, again on table 23b, the summary care record, to date 74 GP practices have gone live. Is there any way in which we could know where and which those practices are because probably two or three years ago we were planning to visit one in Bolton and our visit was cancelled at the last moment.[2]

  Q123 Chairman: The pilot scheme.

  Sir David Nicholson: The good news, but not good enough, is that I think there are over 160 GP practices now who are using them.

  Q124  Dr Stoate: Out of 10,000.

  Sir David Nicholson: I say good news but not good enough! I have even better news coming in a minute and the even better news is that we can provide you with that list of practices, so you can have a look at that! Now there are a million patients who have summary care records. We have just sent out another million letters to patients for the next million to come on and in February we will be sending out 20 million letters to people about the summary care record because obviously we have to do that to get their consent to be in this. As you can see, as we scale that up during this year, there is going to be a big shift in those numbers.

  Q125  Dr Taylor: Are you able to translate to patients the huge advantages for them each to have a summary care record rather than the fears of lack of confidentiality?

  Sir David Nicholson: Less than 1% of patients come back to us and say that they do not want to be involved.

  Q126  Dr Taylor: The message has got across?

  Sir David Nicholson: Yes.

  Q127  Dr Taylor: Since we have had this PEQ evidence the Secretary of State has said that there is going to be greater local flexibility in the use of IT systems, provided they can demonstrate that national standards are being complied with. The whole idea of NHS IT was to get computer systems speaking to each other, and at the time when it came into the practices many of the GPs said, "We have a perfectly good system; why can we not keep it?" Are there methods to make sure that existing local systems are compliant?

  Sir David Nicholson: Yes, there is a series of standards.

  Q128  Dr Taylor: So this is realistic that you can get local flexibility pretty quickly.

  Sir David Nicholson: Yes, and technology is moving on as well and I think that there is no doubt that, given the scale of investment we have already made and we are continuing to make, we can make faster progress if we give people more flexibility. The old fashioned idea that you can shove a system down someone's throat whether they want it or not does not work in practice.

  Q129  Dr Taylor: That was a very good lesson to learn. Where are the £600 million savings quoted going to come from and how are you going to achieve that?

  Sir David Nicholson: Obviously we are working with the suppliers on all of this, this is not an adversarial discussion that we are having. We are close to getting agreement across all of that. We think that about £400 million of that will come from the suppliers, so in some cases it is slightly reducing the scope of the scheme to make sure that the things which clinicians have said are important, like electronic prescribing, are at the forefront of what we do. Then £200 million out of running costs nationally.

  Q130  Dr Taylor: So you are using a bit of muscle as a major buyer?

  Sir David Nicholson: Yes.

  Q131  Chairman: In your answer 60 of the PEQ you show the uplift in tariff for pay inflation in 2009-10 at 2.7% and the average pay settlements for staff being at most 2.4%. How do you explain the differences between pay settlements and average pay inflation?

  Mr Flory: The pay element in the tariff includes elements in addition to pay inflation, so pay drift that is built in to scale progression and so on is the key bit that makes the difference between the two.

  Q132  Chairman: Can you control pay drift?

  Mr Flory: You can significantly influence it in terms of the structure of Agenda for Change and the contracts and the rules that apply are quite clear about which posts go into which bands and the way that people progress through different points within a band. So there is an established structure in place for that.

  Q133  Chairman: And is that the national picture or do we have pay drift at different levels in different parts of the system?

  Mr Flory: We have the staff groups and organisations for which Agenda for Change applies across most of the service; indeed, some Foundation Trusts would have the flexibility or freedom to go into other places; there are very few examples of people going away from those national structures.

  Q134  Chairman: I did personally get some examples where Agenda for Change was put in and then at some stage in the future there were reductions in the levels that people were on and were being put into a grade that was either the wrong grade or looked like it was unaffordable in the immediate future, which seems to me that this could be happening all the time in the National Health Service, or would that be wrong?

  Mr Flory: I think the introduction of Agenda for Change was a huge step forward in the way in which the structure of pay across the service was performed. At the point at which it was being introduced a whole lot of job evaluations were going on and working out which posts were where, much of which could be worked out through standardisation. Nationally there was a lot of guidance that local NHS organisations used, but there were always some matters of judgment, interpretation and consideration in that. My guess is the process that you have just described is that, having put it in place initially and reviewing where they were at, then people recognised that some needed to be moderated.

  Q135  Chairman: You do not think that Agenda for Change is going to be affected by efficiency savings in some respect?

  Mr Flory: No, I think we now have a structure with greater consistency and transparency to support us doing what we need to do with efficiency.

  Q136  Dr Naysmith: Table 50i, which is not published and so there is no point looking at it in the document, states that low spend on agency staff indicates good performance and acknowledges that there is a role for agency staff in the NHS. Yet agency spend has "risen significantly" in 2008-09. What is the value for money justification for this? If you could look at the table—and I have an extract here—it shows that in 2001-02 all agency staffing cost as a percentage of NHS spend on all staffing was 5%. The equivalent figure for 2006-07 went down to 3% and for 2008-09 it has gone back up again to 5%. What is the value for money justification for the use of agency staff at that sort of level?

  Mr Flory: I think that we can sometimes look at the agency staff numbers and immediately conclude that it is an unnecessary expenditure of an excessive expenditure or expensive resource to use, but there are many examples across the service where the flexibility to bring people in to deal with particular circumstances or particular pressures in the system at particular times in the year can be a much more cost efficient way of resourcing the healthcare provision of employing people all the time. It gives more flexibility, it is less rigid and there is less of a recurring ongoing cost and commitment. Having said that, one of the things that we are determined to work through is the unnecessary instances when local organisations might engage agency staff. Again, through successive years of operating a framework of workforce guidance we have emphasised the importance of doing your workforce planning properly and looking at recruitment and retention and best practice to make sure that we do not have to pay a premium for agency staff when good HR practice would have prevented us from having to incur that expenditure. We are looking at the instances when it happens. We have also done more work on the rates that we pay when it has to happen. NHS Professionals was introduced almost like an in-house service agency, a nursing agency; but it is not just nurses now, we have extended it into other clinical areas, which was put in place to impact upon the market: ie, people could draw agency staff from NHS Professionals without paying as high a premium as would be the case with a number of more commercial and private agencies. We are beginning to see NHS Professionals having an increasing impact throughout the service. Many Trusts now in the NHS will contract with NHS Professionals, either solely as their only provider of agency services or as the preferred provider of agency services. We have seen the impact that has had on the market rates that get paid.

  Q137  Dr Naysmith: It had quite a troubled start, did it not?

  Mr Flory: It did.

  Q138  Dr Naysmith: Over the ten-year span I was talking about the spend on agency staff was 5%, went down to 3%, and presumably at about the time the NHS Professionals is coming in, it has gone back up again.

  Mr Flory: Where the NHS Professionals has had the impact is more on the price that is being paid and less on the volume of usage, if you like.

  Q139  Dr Naysmith: If it is costing less now, then the 5% means that it is being used more than it was being used ten years ago.

  Mr Flory: That is why we need to keep the pressure on, recognising that there are instances in which the use of agency staff is sensible and efficient, but nonetheless to keep the two strands of pressure on local organisations thinking about only using it when necessary and, when you do use it, the price that you pay for it. There are two things.

  Q140  Sandra Gidley: Table 74c on page 233 shows that GP retirements are on an upward trend. What are the implications of this for the NHS?

  Sir David Nicholson: The implications of this is that there are some good and some not so good. In terms of the NHS generally we are using experienced people. On the other hand it will give us, because of the concentration of these individuals in particular areas, the opportunities to increase the size of GP practices and get more people working together. One of the issues around retirement is that quite a lot of single-handed practices will be going. So it gives us an opportunity to reshape general practice in that area. In terms of the numbers, as I said to a previous question, we think that the numbers coming through are more than adequate to backfill all of those retirements over the next five to ten years.

  Q141  Sandra Gidley: One of the columns seems to show that we do not have much idea why in the last few years there seems to be a big increase in numbers—it is not down to age or illness, we just do not know why they have retired. Has any work been done to try and tease that out?

  Sir David Nicholson: As far as I know no work has been done to analyse that; there are lots of anecdotes about it but I do not think any detailed work has been done.

  Q142  Sandra Gidley: You say that some GPs were single-handed. Is that mostly in London or are there any other areas of the country?

  Sir David Nicholson: The big cities.

  Q143  Dr Taylor: Turning to the consultant contract, in answer to question 76, evidence 236, you say that the cost of implementing it for the three years—you give us three figures which add up to £715 million. The question is what has the NHS had in return?

  Sir David Nicholson: The first thing I would say in terms of what the NHS has had in return, for the first time we have a handle on consultant time because, as you know, in the past very often we have given consultants a salary and not been absolutely clear about what is expected in terms of time.

  Q144  Dr Taylor: Like MPs!

  Sir David Nicholson: So that was a big step forward for the NHS in terms of getting a handle on and managing what is a really important and valuable resource to the NHS. So our ability to do that and then to plan has been very, very important for us. When we first did it of course the number of fixed sessions was lower than we had imagined, but over a time now we have got to a place where we think we have delivered the number of fixed sessions that we expected at the beginning. The second thing I would say is if you look at that £700 million and look at the pay increases that the consultants had over the five years before the contract and you look at the pay increases over the five years after the contract they have been lower, so again I think value for money for the taxpayer and the idea that the consultant contract was giving lots of gold to consultants is not true. The third thing I would say is that over the last two years—and we did have a dip, there is no doubt, at the beginning of the consultant contract implementation, that productivity per consultant went down—it has gone up, and I understand it is the first time it has gone up since 1948. So that is a remarkable benefit for the implementation of the contract.

  Q145  Dr Taylor: So hard evidence of productivity.

  Sir David Nicholson: Yes; the number of consultant episodes by consultant.

  Q146  Dr Taylor: Has there been any thought of turning the distinction award systems—I cannot remember what you call them now—into a sort of QOF system, like the GPs have, to reward extra productivity?

  Sir David Nicholson: There are two levels to this. Of course there is the local level, the merit awards; and then there is the national awards. There has not been a conversation with the consultants or indeed with ourselves internally about whether a QOF for consultants was the right thing. What we have preferred to do in terms of the local awards is to give local flexibility to do that and there are some places where they do recognise productivity in that but relatively small. Nationally the approach that we are taking with the committee is that the criteria that you use for those awards should be much more clearly linked to the kinds of things that were in Lord Darzi's review. So they could measure their clinical activity, whether they could demonstrate quality improvements; whether they work within the existing national arrangements for audits—all of those things will increasingly be important for those distinction awards.

  Q147  Dr Naysmith: Sir Hugh, in reply to question 80 you state that you are working with York University and the Office for National Statistics to improve the measurement of productivity. Is it not time that the Department agreed a measure of productivity with the Office for National Statistics, which is transparent and reflects quality as well as activity? And why is it taking such a long time?

  Mr Douglas: That is probably for me because I have been trying to answer the same question for about eight years and failed to satisfy you.

  Q148  Dr Naysmith: Perhaps this year will be different!

  Mr Douglas: What we try to do each year is refine the measure. I am not convinced that we will ever get to a measure that is comprehensive, transparent and does not change over time. I do not think we will get there.

  Q149  Dr Naysmith: You cannot really compare the before with after unless you have something that is relatively stable.

  Mr Douglas: Each year at the moment what we are trying to do is improve it a bit. If you look at what happens elsewhere in the world, compared to any other health system we have gone far further into measuring our output and quality and adjust those outputs. What we feel is that we probably do not have the full quality adjustment right. So the work that we have been doing both with York and with the ONS has been to continually try and refine those quality adjustments and not to try and capture things that people will then argue about. The first set of quality adjustments that we came in with, people generally did not accept the validity of a lot of the elements of that because we could not measure them properly. So I think we will continue to improve it. We have got to a position now with ONS where we are basically working off the same sorts of data; we are reporting it in the same way. The work we are doing now and the work we will get from the Centre of Health Economics later on this year really tries to refine a little bit more some of the input elements of the measure but also start to look at this at a sub national level because everything we have done at the moment with ONS and, frankly, ourselves on this has tended to look at national level data. The report we will be getting probably in the next couple of months now takes us down to getting that data at a lower level. The numbers we get—and I think we have been through these numbers before—interestingly are now showing, as David mentioned, on consultant productivity, an upward curve in productivity. If you look at the data trends over the time that I have been coming here I think the first half of the decade we were basically seeing falls in measured productivity, just about each year. What we saw in the mid part of the decade was that that productivity measure started to show improvement year on year. The data broadly fits with it—what we have all seen and felt intuitively.

  Q150  Dr Naysmith: Do you expect the work to be completed then in the forthcoming 12 months?

  Mr Douglas: I think it is a bit like painting the Forth Bridge. It will be completed but we will probably start again afterwards. So we will have the report from York I think in March of this year; we will look at that and we will look on further refinements. We talked earlier on with David about PROMs measures. There are issues about as you start to get other measures that allow you to look at other ways of quality improvement, they should feed into the productivity measure. So there is a measure there. I think it is fit for purpose at the moment but it will get better and it will continue to improve.

  Q151  Dr Naysmith: It seems a great pity that I have been here either asking this question or listening to it being asked by one of my colleagues for the last nine years. Next year I will not be here and when it is asked it may be answered properly!

  Mr Douglas: We will write to you!

  Q152  Dr Stoate: How much emphasis is there put on FCEs as your measure of productivity?

  Mr Douglas: It goes way beyond FCEs. What we try to do is to capture a whole range of different outputs. The problem is how you capture the full range of outputs from the Health Service and then weights them in a way to allows you to look at that basket together against all your inputs and that is the problem.

  Q153  Dr Stoate: If you ask any GP, if you send someone to a clinic, whereas previously they might have said, "I will ask my cardiology colleague to look at this patient to see what he thinks," it is now back to the GP and I have to refer back to the cardiologist if that is what is appropriate in order to notch up another FCE. A lot of that goes on, which will make it look as though productivity has gone up but actually the only productivity that has increased is the amount of referrals that the GP is forced to make because they no longer get internal referrals.

  Mr Douglas: We have moved very much away from just having simple measures. When this was first kicked off it was a simple measure of what cost has gone up and by how much the FCE is changed by, and the only measure of efficiency was the relationship between those two. It has gone way beyond that.

  Q154  Dr Naysmith: I will ask a question that has not been asked before, which is to talk about the swine flu epidemic which frankly seems to be not nearly as serious as some people had predicted, and that is leading some people to suggest that the expenditure of £1 billion on swine flu preparations has turned out to be a huge waste of public money, given that the expected pandemic turned out to be something of a false alarm. How would you respond to this?

  Sir Hugh Taylor: It is good news that the pandemic is not as severe as it might have been but all along the line on this we have taken clear scientific advice about the best form of response and we have responded in this country, to be honest, in much the same way as comparable countries elsewhere in the world. It is important to emphasise that quite a lot of the additional investment we have made is simply in a sense accelerated preparations that we would have wanted to make for a pandemic anyway, so we are now better stocked and will be better stocked for the future with antivirals, with face masks, which were all within our plan in our preparation for a pandemic, and which would certainly be necessary if the pandemic were more severe. For example, to some extent we would always be planning against the eventually of an H5N1 virus. So quite a lot of the additional investment that we have now made has, in a sense, brought forward expenditure to which we will have been committed as part of our overall pandemic plan. We had originally committed £500 million in expenditure as part of our pandemic preparation funds and will have spent more than that by the time the pandemic is over, assuming that there is not a third wave, and the scientific evidence seems to suggest that that it is not. We feel very strongly about wanting to rebut the suggestion that all this has been a scare. There is an excellent article, to which I can commend colleagues, in the Guardian this morning, from a scientist called Tom Sheldon, who says that with swine flu there was not a conspiracy and hype, just scientists patiently performing the analyses and explaining the possibilities and I think that is a very good summary of how we feel about the approach that has been taken.

  Q155  Dr Naysmith: Interestingly you mentioned the antiviral, Tamiflu, because there is another article which appeared in December in the British Medical Journal, suggesting that Tamiflu barely works at all, and that even when it does work it is only effective in the very early stages and most people were past that stage when they were given Tamiflu.

  Sir Hugh Taylor: Clearly there is an optimal moment for taking Tamiflu. It has been assessed by the scientists and the medical specialists we have consulted as being potentially very, very important, particularly in the case of a severe pandemic, in handling the early stages of flu where some of the most serious conditions are manifested. Clearly one of the things that we will do at the end of this process is stand back, review what happened, review the impacts of the different interventions that we have made, talk to our professionals—scientists and medical experts and others—and review all that. But I do not think at the time that the pandemic was declared that there were many people pressing us not to give Tamiflu to people—if anything, I think the pressure was the other way around.

  Q156  Dr Naysmith: You referred me to an article; I will refer you to the BMJ of December 2009.

  Sir Hugh Taylor: Very good.

  Q157  Dr Taylor: Could I come on to arm's length bodies. The Pre-Budget Report said that there was going to be further rationalisation. You have given us a table on page 329 of the arm's length bodies 2008-09 and there are 25 listed there. Obviously it is less than that because the Care Quality Commission has taken over three of those. But could you give us an idea of which of those might go and how that will save money?

  Mr Douglas: I do not think at the moment I could give you an idea of which ones could go from that.

  Q158  Dr Taylor: Some will go.

  Mr Douglas: I can give you one that has gone already. The NHS purchase and supply agency.

  Q159  Dr Taylor: Has that gone or has that been merged with somebody?

  Mr Douglas: That went on 31 December this year. Its functions moved—some into the Office of Government Commerce, in the centre of Government on wider ranging procurement and some out into the NHS. Subject to legislation I believe that the Postgraduate Medical Education Training Board will be merged into the GMC; so that will go. What we are doing in response to the Pre-Budget Report and the Smarter Government document that went with it, is going through a process of reviewing all our arm's length bodies, looking at not just should we abolish the organisation or should we merge them, but also issues of cost efficiency, whether we would be sharing back office functions more across the organisations; whether in any cases there has been a degree of mission creep in what the organisation does and whether we could pull that back. So we do not have a target cost reduction set from that work at the moment. We are due to report back into the Treasury and the Cabinet Office before the Budget to give an idea of the work going forward. One thing I would mention is that we have done a lot of work in this area in the past and you might recall that a few years ago we had a review of arm's length bodies and we took them down from 38 to 21 organisations and we took £250 million out of the cost in that sector and it stayed out.

  Q160  Dr Taylor: So that rationalisation in 2004 did lead to savings?

  Mr Douglas: It led to real savings. Thirty-eight bodies to 21; about a 25% reduction in headcount; and £250 million savings, roughly, administration costs. If I look at the administration cost spending of these bodies, from their accounts you would have had a spend of £950 million in 2003-04 on the administration of the organisation. By 2007-08 that was less than £700 million across the whole sector.

  Q161  Dr Taylor: So there were savings. Was there any evidence of lack of result, impaired regulation or whatever it was?

  Mr Douglas: There has been no evidence of any quality impacts as a result of that. The work we did was subject to a published report by the National Audit Office, where they looked at the whole arm's length body review programme. My strong recollection is that that did not identify independently any issues around quality reductions; it confirmed savings and it was so positive that it was never taken to a PSE hearing. That was a very thorough process that we went through.

  Q162  Dr Taylor: So you are optimistic that further rationalisation could lead to further savings without loss of quality of service?

  Mr Douglas: What I would say, particularly if Treasury colleagues were listening to this, we start from a position where we have already taken a lot out of this sector; so having done the work we have taken a lot of what maybe other people have yet to do. But there is clearly scope to make further savings and we are going to have to as part of the savings programme that David has talked about.

  Sir Hugh Taylor: I think that is the point we want to underline. If you look at the thing going forward, and if the NHS overall—frontline NHS as it is described—is going to get real term's growth we all know, I think, that in one sense the challenge facing any future Government is going to be pretty tight in public expenditure terms. So the arm's length bodies, the central departments are going to have to look very, very hard at the costs. So in a sense all we are saying to the arm's length bodies at the moment is that it is rather similar to the conversation that David has had with the NHS—a day of reckoning is coming and we have to start to think about how we begin to slim down to meet the future pressures, which I think will come because of the consensus around the need to reduce the deficit.

  Dr Taylor: Chairman, could I raise one other subject that would produce huge economies that is not on our list?

  Chairman: I certainly got the Treasury's—go on.

  Q163  Dr Taylor: I do not need you to look at them now but tables 35b to 35e show different costs of nursing care costs, costs per week at local authority rest homes, independent rest care and home help per hour. These variations are absolutely amazing. Nursing care costs, £240 per person per week up to £753; cost per week local authority rest homes, nought to £2,400; independent rest care, £204 to £720; home helps per hour, £8.6 to £25. Is there any possibility of looking at these and trying to get a national tariff or whatever you call it for these because are those variations acceptable? Are they inevitable? Could you reassure us that you are aware of them and you are going to do something about them?

  Mr Douglas: I would worry about the nought that is in there. If I could find a place where it cost nothing I will have that one! There is and always has been with this data some elements about the accuracy of the reporting.[3]

  Q164 Dr Naysmith: Nought—Southwark and Harrow.

  Mr Douglas: I will find out about that one. There has been a programme or work under our Social Care Directorate that has been looking at some of the differential costs and what we can do to support efficiency savings in that sector. It is different because it is a different delivery mechanism to the one we have for the NHS, but it is an area that is being looked at. In the same way that on the NHS side we will face a big financial challenge we will have to drive for efficiency, exactly the same position as with social care.

  Q165  Dr Taylor: I do realise that these are not NHS responsibilities.

  Sir Hugh Taylor: They are, in a sense, in the end a departmental responsibility but we do not have the same level of control over the data quality in relation to these areas. I think you are probing at a good area for further exploration. We are working very closely with local authorities on efficiencies. To be fair to them, the local authorities took out a lot of money over the course of last year and have continued to invest in social care, but particularly with the pressures on the social care budget that are likely to come about these are very real issues.

  Q166  Dr Stoate: Just very briefly, I was at a meeting last night and I was chatting—and I will not say who said what—and there was a very strong feeling at the meeting—and there were some very senior people there from social care—that the social care budget needs to increase by 3.6% per annum until 2026 just to keep up with demographics. We have not even looked at that.

  Sir Hugh Taylor: These figures are very much in the public domain actually, to be fair, and my Secretary of State at the moment is spending a lot of time pounding the streets of Whitehall promoting the case of the National Care Service. But what will go with that is a need for investment in the future of social care, so the whole argument about that is where the money is going to come from.

  Q167  Chairman: In your Department's annual report of 2008-09 the status of the DSO indicator (3.4) the number of emergency bed days per head of weighted population was recorded as too early to assess. In the more recent autumn Performance Report this status has changed to improvement. But over the last year there has been nearly an increase of a million emergency bed days on the statistics that have been given to us. How is this improvement and why is this happening?

  Sir David Nicholson: There are two issues; one is the number of emergency bed days, which I understood had gone down over the period and consistently over the past few years. The issue of going up is the emergency readmissions; is that the issue?

  Q168  Chairman: It is probably the issue, but on the baseline you have set it has gone up by nearly a million bed days in the last year. Why is this happening? I remember going back more than five years ago now, before I came on this Committee, we had the annual winter crisis and indeed GPs were effectively contracted to look at the most vulnerable people who were adding to these stats every winter and to all intents and purposes I thought we had removed it. So why have we had this increase in emergency bed days in the last year?

  Mr Flory: The increase is recognised in emergency readmissions rather than emergency bed days. On the readmissions the trend that you highlight in the numbers is something of concern and further investigation. It is difficult for us to generalise why. There are some bits of it about changing clinical practice, so what we see more of now in many parts of the country are what we would call short stay emergency facilities with very low lengths of stay, to be linked to A&E departments where people can be admitted to be assessed over a short period of time, but counts as a readmission. So there is something in the consistency of clinical practice. There are two types of readmission that we look at carefully—those that are admitted as an emergency after having elective surgery. This is a crucial measure for us and one that we are building into our overall look at quality in the service, and in that number we do not see a discernible trend of improvement. The other area is where people with long term conditions, chronic conditions have been admitted in an unplanned way and that is where we are focusing attention in thinking about the models of care involved and how we best support people in managing their own care in those situations. We already highlighted this earlier on in talking about potential for quality and productivity improvement for management of long term conditions, and keeping them out of hospital is a very important part of that programme.

  Chairman: These are the very people that the targets to get rid of the winter crisis were for. Gentlemen, could I thank you all very much indeed for coming along and helping us with today's evidence session.

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1   Ev 356 Back

2   Ev 358 Back

3   Ev 363 Back

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Prepared 21 July 2010