Session 2010-11
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CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 764-i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Public Accounts Committee

Health Landscape Review

Tuesday 25 January 2011

Una O'Brien and Sir David Nicholson

Evidence heard in Public Questions 1 - 209

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Oral Evidence

Taken before the Public Accounts Committee

on Tuesday 25 January 2011

Members present:

Margaret Hodge (Chair)

Mr Richard Bacon

Dr Stella Creasy

Jackie Doyle-Price

Joseph Johnson

Austin Mitchell

Stephen Barclay

Ian Swales

Nick Smith

James Wharton

________________

Amyas Morse, Comptroller and Auditor General and Mark Davies, Director, gave evidence. Gabrielle Cohen, Assistant Auditor General and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

Examination of Witnesses

Witnesses: Una O'Brien, Permanent Secretary, Department of Health, and Sir David Nicholson, Chief Executive of the NHS, gave evidence.

Q1 Chair : We have a few visitors from the Sierra Leone Parliament, so a very warm welcome to you. I hope that we will be able to share the experiences of how we hold the Executive to account.

Welcome to Una O’Brien and Sir David again. This is a very different sort of hearing in that we are trying to tease out and understand, at a very early stage in the development of proposals for reform of the NHS, how it will impact on our role and how you will deliver accountability to Parliament and ensure value for money for this enormous amount of public spending. I hope you will see this as a conversation rather than an interrogation, and that you will feel free to really contribute so that we can develop our understanding, and hopefully we can add something to the work you are doing in the evolution of the proposals.

Now I have a bit of an odd question. We were told that Karen Wheeler was to be one of the witnesses, and somewhere along the line that changed. Is she the senior responsible owner of the project?

Una O'Brien: Karen Wheeler is a senior programme director. The senior responsible owners for the project are myself, Sir David and Richard Douglas.

Q2 Chair : And will Sir David be the senior responsible owner when he takes on his new job?

Una O'Brien: There will continue to be responsibilities for implementing the change, and we haven’t clarified the SRO responsibilities post-2012, but I fully expect that the accounting officers in the ALBs will have responsibility for continuing the implementation of the change.

Q3 Chair : It arises out of some discussions we have been having around accountability, and we are keen to know, at the beginning of a fantastic, huge, enormous change project, as this one is, who the senior responsible owners will be, so that we and Parliament can hold them to account.

Sir David Nicholson: The project itself is divided into three elements. There are the changes in the Department and the arm’s length bodies, where Una is the senior responsible officer now, then there are the provider side changes and the commissioning side changes. I am the senior responsible officer for the commissioning and the provision, but obviously on 1 April 2012, when I become the Chief Executive of the Commissioning Board, the senior responsible officer for the provision will be someone at the Department.

Q4 Chair : And that has yet to be settled?

Una O'Brien: That’s right.

Sir David Nicholson: Yes, that has yet to be settled.

Q5 Chair : That is very helpful. We hope that you will all be in post throughout the project, so that you can properly be held to account.

Sir David Nicholson: Thank you for the vote of confidence. It’s official.

Q6 Chair : The first questions are around accountability, because that is what we are about. It says in the Report somewhere that the current role of the Chief Executive of the NHS-your current role, Sir David-and the Permanent Secretary will no longer be necessary. Will those jobs go? Paragraph 2.5 states: "The new model for health envisages that the current NHS leadership functions-in which the Permanent Secretary of the NHS and the Chief Executive of the NHS both hold Accounting Officer roles-will either no longer be necessary or will"-so are these jobs going to go?

Una O'Brien: Perhaps in an attempt at brevity-and may I say it’s a really good and helpful Report-some of the richer detail hasn’t come through. It’s very, very clear that the accounting officer responsibilities will be set out in the new world, and the diagram in this document has captured that very well. The Permanent Secretary, the role I hold, will remain the accounting officer for the entirety of the spend voted to the Department of Health by Parliament and then-I’m talking here post-2012-there will be accounting officer responsibilities designated in each of the arm’s length bodies, the chief of which is the NHS Commissioning Board, and Sir David will be the accounting officer-

Q7 Chair : Post-2012, who will be responsible for the whole of GP commissioning? You, or David, or both of you? Who will we hold to account?

Sir David Nicholson: You’ll hold me, through my accounting officer process for commissioning.

Chair : So if a GP consortium overspends?

Sir David Nicholson: Yes, it’s me.

Chair : It’s your responsibility?

Sir David Nicholson: Yes.

Q8 Chair : And what will you be able to do?

Sir David Nicholson: Well, hopefully, I’ll prevent it happening in the first place.

Q9 Chair : How?

Sir David Nicholson: Well, there is a series of elements of the reforms that enable us to do that. The first and most obvious one is that the Commissioning Board is responsible for the authorisation in the first place of each GP consortium, so that the arrangements that they have in place for internal control, the way they manage themselves, the way they make decisions, will all be part of that authorisation process. So, the first thing is that we will identify, in order to become a GP consortium, the standards required to make that happen?

Q10 Chair : Down the line.

Sir David Nicholson: And then as you go through it, we’ll of course allocate the resources. We’ll have a relationship with the commissioning consortium whereby each commissioning consortium as a statutory body will have an accountable officer, and the Commissioning Board are responsible for the appointment of those accountable officers.

Q11 Chair : So each GP consortium cannot appoint its own accounting officers?

Sir David Nicholson: It has to be approved by the Commissioning Board.

Chair : Every time they change?

Sir David Nicholson: Every time they change. Yes.

Q12 Chair : Go on.

Sir David Nicholson: So that’s the third thing. The fourth thing is that the relationship between the Commissioning Board and the commissioning consortium will be determined around something called the Quality and Outcomes Framework, which is a series of measures and financial incentives that will go between the Commissioning Board and the consortium, one of which will be staying within the resources that you have been allocated, and they will lose money through that process if they don’t.

Q13 Chair : If they overspend-and they will lose money; it’s like a snowballing-what do you do?

Sir David Nicholson: And then finally we have the ability to intervene-

Chair : Which is based on what?

Sir David Nicholson: Well, we haven’t designed yet the intervention system, but you could see us putting people in there, supporting them, moving the management of the consortium to another consortium which is more successful at managing, bringing in people from outside; the kind of things that you would expect an intervention regime for-

Q14 Chair : So you won’t just let them fail?

Sir David Nicholson: No.

Q15 Chair : You will intervene to improve?

Sir David Nicholson: Yes, in to-

Q16 Chair : And that will be set in the legislation?

Sir David Nicholson: Yes, it is in the legislation. .

Q17 Chair : And if the whole thing overspends-we had Nick Macpherson telling us last week that the NHS budget in the past-what did he call it, Jo?

Dr Creasy: Special measures.

Chair : Had gone into special measures.

Joseph Johnson: Lost control.

Q18 Chair : So we know resources are constrained and we know we’ve got the Nicholson challenge. So you are coming in two-thirds of the way through the year and you look as if you’re heading for an overspend.

Una O'Brien: Can I just make a comment, if I may, first of all on the connection with history, because it’s so important that we do, and we definitely want to, learn from our history in what we do in setting up this programme? I haven’t had the opportunity to read the transcript of your discussion last week; I’ve only got the reported detail of what Nick said. I’m sure that whatever he said was right, but there is more to be said about it. The essential thing, just to be clear on the facts, is that the deficit that we’re referring to occurred on the provider side of the NHS in some providers and emerged before the reorganisations of the PCTs and the SHAs. They are sort of broadly around the same time, but if you look at the actual sequence of events, there’s no direct causality.

The other thing that is important for the record is that the Department of Health has never broken its delegated expenditure limit, so although there was an overspend in particular providers, the deficit was tackled very swiftly. It was just shortly after that, I think, that David became the Chief Executive of the NHS and that was then dealt with. So I think the idea that somehow there was a big financial problem and it was all linked to reorganisation is perhaps not the full story, or indeed, even the accurate one.

Q19 Chair : Well, I’ve allowed you to say that. Now if we look to the future and we’ve got these NHS commissioning consortia-we’ll come back to them in detail; I’m just trying to focus on the accountability-

Austin Mitchell: Can we ask what happens to the foundation hospital?

Chair : Yes, we will come to those.

Austin Mitchell: Is that likely to go bust?

Q20 Chair : Yes, let’s come to those. Let’s do GP commissioning first, and then I promise you, Austin, we’ll come back to the trusts. If you’re heading for a dozen, 15, 20 commissioning overspending your old budget, what happens? I’m trying to get the division of accountability between the two of you.

Sir David Nicholson: Well, I’ll be accountable for the totality of the commissioning spend.

Q21 Chair : And you, Una?

Una O'Brien: I have responsibility for the overall stewardship of resources voted by Parliament to the Department of Health.

Q22 Chair : Where does the buck stop?

Una O'Brien: It absolutely stops in the Department.

Q23 Chair : With you or with Sir David?

Una O'Brien: Well, as I explained, there is a scheme of delegated accounting officer responsibility. David will be the accounting officer for the commissioning spend and will be responsible for staying within that limit.

Chair : It’s a bit muddled. I just don’t quite get it.

Q24 Stephen Barclay: The language you used there was very interesting, because you said the buck stops with the Department, and that was the point that Sir Nicholas was making last week in terms of managing public money; the requirement to satisfy yourself. But at our hearing with Sir David last week, when the Chair challenged on variations in hospital performance in terms of foundation trusts-I’ve got the transcript here-"So in the new world, when they’re all foundation trusts, where will the buck stop?" Sir David: "The buck stops in the foundation trust." So, I’m just a little confused. If you’re saying the buck stops in the Department, and last week we were being told the buck stops in the foundation trust, could you just clarify for us how that works?

Una O'Brien: Perhaps one way in to thinking about this is perhaps to think of it as a scheme of accountability that is distributed across different parts of the system in different ways, so, of course, it is right that the money is voted from Parliament for spending on health and social care, and we have a scheme of accountability to deal with that. Currently, right the way up until April 2012, the accountability divides directly between David and myself, in so far as David is responsible for the NHS request for resources and I’m responsible for the much smaller amount that relates to social care, the arm’s length bodies and the Department of Health’s own spending. Separately, going back to the legislation of 2003, foundation trust chief executives are accounting officers in their own right and responsible, accounting to Parliament, and they lay their accounts before Parliament for the way in which they use their money, and also for their own statement of internal control and for the good use of public money following all the rules. So that’s already in the legislation and it’s been there for seven years. If it would be helpful to the Committee I could pause at that point or I could go on and set out how the scheme is going to change.

Q25 Joseph Johnson: Can I come in on Sir Nicholas’s point before we move off it completely. What you’re saying is a little bit at variance with what Sir Nicholas was saying, because he was very clearly, in the hearing last week, making the point that it is periods of reform that make Departments more likely to lose control of public expenditure, and what you’re saying is there was no link at all in the case of the NHS, and that in the periods when the NHS did lose control of public expenditure, particularly on the provider side, that was not linked to the reorganisation and the creation of the PCTs and SHAs. Is that correct?

Una O'Brien: Well, in the sequence of events they were not directly related. Those deficits were emerging in a small number of trusts and were not related to the doing of the reorganisation, so that was really the point that I was making from that.

Q26 Joseph Johnson: Do you think the period of reorganisation that we’re about to embark on increases the risk that the NHS will lose control of its public spending responsibilities?

Una O'Brien: Well, I’m sure David will want to comment on that in a moment, but in general terms, of course, if you’re organising a big change programme, it’s a lot of additional activity in what people are going to have to do, and knowing that risk and understanding that risk, which is our responsibility, we then take and implement a number of different actions in order to tighten the grip on the finances, which we are doing in the current year. I think David can give you a fuller account of that.

Q27 Stephen Barclay: Exactly, but that makes it even more pertinent, surely, that where there’s widely fluctuating performance those variations are understood, and what we got to the bottom of last week was that the Department’s view is it provides the tools to foundation hospitals; whether they use the tools or not is an issue for the board, not for the Department, and what surely flows is that if management focuses on the changes-a loss of personnel, more interims, perhaps bringing in consultants-not only will the risk increase anyway because focus is diverted, but the Department does not see its role as satisfying itself as to why there are wide variations.

Sir David Nicholson: There are two things. I don’t know whether you want me to take on the risk business, because the risk is higher. If you try and reorganise, the risk becomes higher. I think we’d be kidding you to say that it wasn’t, because it is heightened. That’s why it’s so important for us to get mitigating circumstances into place. I don’t know whether you want to talk about those mitigations now or later, but we have put in place a whole set of mitigations to make sure that the risk is absolutely minimised.

Chair : I think we want to come back to transition later. We all accept that in the process of transition the risk is higher.

Sir David Nicholson: But the Department is not responsible for managing the number of nurses on a ward or anything of that nature.

Q28 Stephen Barclay: No one is suggesting they are; that’s not the point that’s being made.

Sir David Nicholson: We use the tools that we have with foundation trusts, which are the contractual tools, which is setting out guidance and supportive help to enable them to create information, but we do not instruct foundation trusts how many nurses they should have on a particular ward.

Q29 Chair : Let’s come back to foundation trusts, because you didn’t actually answer the question about whether you will need a Permanent Secretary for NHS? Is there a quick yes or no-in the new world?

Sir David Nicholson: The Chief Executive of the Commissioning Board is the accounting officer and he-who happens to be me-is outside of the Department. So the Permanent Secretary then is responsible for the whole system in terms of the accountability for the finance.

Q30 Chair : Do you want to come in on that? I want to move to the foundation trusts.

Amyas Morse: Just let me ask one thing at that level if I may, Chair. Thank you very much. It’s really just to be clear. As I understand it in the logical scheme of division you’ve got the commissioning side of the house and the providing side, if I can put it very simply. How are you going to conduct the dialogue about what the appropriate balance of resources between those should be? Because you have a lot of demand, you’ve got your providing capacity and you’ve got demand coming up from the GP consortia. It’s not a difficult question; I’m just curious to know. So at some point you’re going to be having a discussion about what capacity you need and estimating that. How is that going to go on now you’ve got a sort of twosided dialogue; how are you going to bring that together into a total decision about resource? I’m curious to know how you’re going to do it.

Una O'Brien: I’m not sure whether your question is about planning or about request for resources.

Amyas Morse: I guess, starting with planning. You’re obviously going to be having a dialogue about it, so it’s not a difficult question. You’ll start with planning; then, if it turns out the demand is more than the supply capacity, how will you handle that to-ing and fro-ing? You’ve got the supply side and the demand side and they’re both running up separate chains, suppose one is asking for more than the other can provide? How is that going to be done?

Una O'Brien: In general terms, looking to the new system, the policy that the Government has set out, the intention is not to have some grand plan for the supply side of health care services. The approach is to introduce a diversity of supply and to enable the suppliers to come forward to respond to what commissioners actually want, whether that’s commissioners in consortia or commissioners led nationally by a programme of national commissioning that the Commissioning Board will lead. So there isn’t some sort of grand planning process that would try and calibrate those two things and then plan for provision; it’s a more dynamic process to enable new providers to become available to provide new and different forms of care.

Q31 Chair : Let’s take that a step further, which is really Austin’s question. What happens in that world? As I read the Report, you’re weakening your controls on foundation trusts in that Monitor will no longer be able to remove members of the board, which has been one of your powers of intervention. In that world, where you’re encouraging diversity of provision, what happens if a foundation trust goes bust for any reason: just no demand for its services or actually it’s a right old shambles?

Austin Mitchell: Or it’s crippled with a huge PFI bill?

Chair : Yes.

Una O'Brien: If I could just set out the policy as it’s described in full in the Command Paper, which was published just before Christmas, first of all we’re not planning for failure; that’s not the point here.

Chair : It’ll happen.

Una O'Brien: I just want to make that clear.

Q32 Mr Bacon: Can I just stop you there? Actually, I object to that sentence. You absolutely should be planning for failure. Part of your job is to design for a failure regime. I’ve sat on this Committee for 10 years and I can tell you: things will go wrong. If you don’t think things will go wrong, you shouldn’t be doing your job. I don’t know what will go wrong; I can’t tell you where it will go wrong, but that something will go wrong somewhere in this enormous, £80 billion organisation, is as near to a certainty as we will get. So you should be planning for failure. Hoping for success, but planning for failure.

Una O'Brien: Indeed. As I pick up the rest of my sentence-thank you for that-what I was going to go on to say was of course we have set out in the White Paper, in the Command Paper, indeed now, in the legislation, more detailed plans for a comprehensive failure scheme should that occur.

Q33 Chair : What is it? Because it seemed to me reading it that it’s weakened, you see? We had Sir David last week telling us trusts are in their own world, which was Stephen’s question. We have, as I understand the Bill, a weakening because of the removal of the capability of Monitor to remove board members. We have an intention to have a much greater diversity of provision. There will be failure. What tools will you have to intervene? We just really want to be specific?

Una O'Brien: To be specific, if I could take the three stages in terms of the highlevel points, there is already a failure regime in the 2009 legislation, which was put in place just recently. That regime will be adapted in the legislation going through Parliament this year so it can be triggered by Monitor in its current role. At the moment it’s for the Secretary of State to trigger that regime; there’s a possibility of de-authorising foundation trusts and that’s going to be removed in the legislation. Thirdly, a more comprehensive insolvency and special administrator regime will come into effect in either 2013 or 2014. Depending on progress on the development of that regime, a lot of it will be developed through secondary legislation so that there are opportunities for engagement and to clarify the details of how it will work. And that regime-this is a very relevant part of this-also links particularly to what we would call designated services. That can be any services that are provided-NHS services regardless of the type of provider-and the process of working out what those designated services are will be between Monitor and the Commissioning Board. David may be able to fill you in on how that will work in practice.

Chair : Well, no, let’s stay on the trusts.

Q34 Austin Mitchell: The Bill merely provides that Monitor could give them instructions and Monitor are responsible, as you know, for maintaining services. What happens if a foundation trust goes bust?

Chair : Quite.

Una O'Brien: You’re asking about the future; well, it would depend on the degree to which the services in that trust had been designated. That’s a critical part of the design of the failure regime. So the actions that would be taken for the designated services would be absolutely for the regulator to step in on behalf of the public and patients to preserve those services for patients.

Q35 Austin Mitchell: They can go bust and they can be pushed out and Monitor will take over the services?

Una O'Brien: Monitor would appoint a special administrator whose job would be to ensure continuity of services that had been designated.

Q36 Chair : Does the Board get sacked?

Una O'Brien: Well, I wouldn’t expect-sorry there is one other piece of the design that I haven’t referred to, which is that the legislation is strengthening the role of the governors of foundation trusts and giving them more power in relation to the-

Q37 Austin Mitchell: But they don’t all start from an equal basis. Some are lumbered with big PFI bills, which they’ve got to pay whatever happens. That isn’t starting from the same level as the other ones, which haven’t got PFI. So what happens?

Una O'Brien: In the unlikely event that we were dealing with a situation like that, there would be a process whereby the creditors and the debtors of the process would be worked through in the administration regime, and the responsibility in the end to resolve that would sit with the Department of Health.

Chair : We’re still muddled.

Q38 Dr Creasy: There are two areas, in my original set of questions, which are about your concept of what you would intervene on. But paragraph 2.27 in the Report actually says that Monitor will have those powers that you’re talking about removed.

Chair : Quite.

Dr Creasy: So I’m a little bit confused. Now you’re setting out that Monitor will be the organisation that will intervene. It also talks about a subset of existing foundation trusts. It sounds like some are more monitored than others.

Una O'Brien: Monitor’s powers as the new regulator apply to all providers of NHS services, not just to NHS foundation trusts, and that’s the critical difference. At the moment it relates only to NHS FTs and in the new arrangement it is a regulator-

Q39 Dr Creasy: So will those powers apply to everything?

Chair : Monitor can take over Bupa?

Una O'Brien: It sets the competition regime, the pricing regime and also the designation regime-it would be helpful if David explained that a bit more fully-and its powers apply to providers of NHS services, regardless of their ownership, and that’s the critical difference between Monitor as it currently exists and Monitor in the future.

Q40 Chair : This is really fascinating. So if Bupa ran a hospital-for some of us this is very real, looking at the east London MPs.

Austin Mitchell: Well it can, because any willing provider can run any service.

Chair : If Bupa ran a hospital and it overspent; it went bust; it was incompetent; it failed on the quality regime, you wouldn’t sack the directors because there are no powers so to do, but Monitor would come in and do a takeover, really, of that service, and run it because it’s an essential service or a designated service in that area.

Sir David Nicholson: I perfectly understand why this is confusing and I guess there are very few people who’ve-there are very clever people in the Department who spend all their time thinking about all of this.

Q41 Chair : But we should understand it.

Sir David Nicholson: No, I understand. Monitor will have two roles: it will have its old role, as old Monitor, and its new role as new Monitor. If I just take the old role-I’m sorry, you’re not supposed to laugh when I say that-old Monitor has significant powers over foundation trusts; it’s the regulator of foundation trusts. Its responsibility is to authorise foundation trusts, i.e. make sure that they’re capable of running and then setting a compliance regime to make sure they deliver what they’re supposed to deliver, and it has wideranging powers of intervention. That will carry on for a selection of foundation trusts after 2012 that we think are particularly challenged. So for those that we’re worried about, Monitor will continue to have those powers for two years after 2012.

Austin Mitchell: Temporarily.

Sir David Nicholson: It will also, for the new foundation trusts that come forward, have the ability to keep those powers for two years after they’re authorised. So old Monitor could have all of those powers right up to 2016 in terms of existing foundation trusts, and that is an important way of managing the transition and making sure that we’re in the right place and we’re keeping those controls in place. New Monitor is an economic regulator. It’s not interested primarily in the viability of an individual organisation. What it’s interested in is the continuity of supply. So just as the water regulator is interested in ensuring that water is always available, the economic regulator, new Monitor, will be responsible for ensuring that designated services-i.e. those services that are designated in a particular organisation or where there is no alternative anywhere else for patients-continue to be run. So new Monitor’s intervention powers will be around keeping supply going; making sure that patients have access to services. And they’re two quite distinct roles, but because they’re in the same organisation people run between the two. So that’s essentially what we’re trying to do. Is that clear?

Chair : Yes, it is clearer.

Q42 Dr Creasy: I have to say that I don’t think the water regulation industry, having done quite a lot of work on it in another life, is a very good parallel to make, because one of the ways in which the water regulator does ensure continuity of supply is to look at the viability of suppliers and to take that into account in the decision that it makes.

Sir David Nicholson: Yes.

Q43 Dr Creasy: Something I really wanted to push you on, and something I think we have a great concern about on in this Committee, is you talked before about staying within the resources allocated and obviously that’s quite a strict interpretation of what an economic regulator would do. That’s not the same as value for money. Under this system, how are you going to ensure not just that they don’t go bust but they’re spending their money wisely, because that’s what we have a concern for?

Sir David Nicholson: The main way in which you do that is by setting price. That is fundamentally the way in which the system operates.

Q44 Dr Creasy: But you just said that you wouldn’t necessarily look at viability, so how are you going to-in a monopoly system, price is-

Sir David Nicholson: No, I said their prime concern. In a sense it comes back to a question that was asked earlier about how you make sure the commissioners and providers work together to make something sensible, because it’s not in the interests of the Commissioning Board to have an unviable provider side, because we need to provide services and it’s not in the providers’ interest for the commissioners to go bust. So the main arrangement there is the setting of price, and that is a kind of joint responsibility between the economic regulator and the commissioner. So the economic regulator will collect and has powers of collecting huge amounts of information from individual NHS providers, including the private sector; huge amounts of information about the way they structure their costs, the way their costs operate and all the rest of it. It will make judgments about the price that you have to set that will give you that viable provider side. So that is the main way in which the economic regulator will do that.

Q45 Dr Creasy: That’s not the same as value for money though, is it, as a metric?

Sir David Nicholson: No, but it is in terms of the leverage that the Department and the system has over individual organisations, that is the main way that that gets played out.

Q46 Dr Creasy: How does that tally in with what Una talked about before, about not focusing on the supply side and not having a grand plan? It doesn’t quite tie up.

Sir David Nicholson: Well, it’s not the Department that’s doing it; it’s the economic regulator.

Q47 Dr Creasy: No, but do you understand the concern that we have?

Sir David Nicholson: I absolutely understand it, yes.

Q48 Dr Creasy: If you are a foundation trust trying to meet the needs in all our communities of people who have quite complex health needs, and your only metric for whether or not the services that you can provide are value for money and therefore meeting that need is price, and you don’t have any connection with the supply side, you’ve now cut those two adrift, it’s not a great guarantee that you’re going to be able to deliver the services that community needs and plan for the services that community needs in the years to come within the budgets that you’re setting. Price can’t be the only metric you have about whether or not you’re actually going to be able to deliver that, can it?

Sir David Nicholson: No.

Una O'Brien: There are a number of different operational pressures on any foundation trust that force the board of directors to take full responsibility, as is the intention of Parliament, for the proper and best use of the resources that they earn from their contracts. That exists first of all from the accounting officer responsibility; secondly the contractual arrangements, and there’s quite a lot of power in those contracts to drive value for the use of the money. After all, the commissioners have a deep interest in the value for money. Obviously, the role of patients and the public and, increasingly, the choices that they make, forces pressures and opportunities on to that organisation. So I think it’s really about seeing those things in the round, and also it’s price, as David has said.

Q49 Dr Creasy: Our difficulty is that we have to be able to see how we hold people to account for value for money. From that model it sounds like we should be evaluating the contracts for each service. That’s where you’re saying the pressures will be and where you can be held to account. That would be a very, very good change in the current system, wouldn’t it?

Una O'Brien: Well, what I was saying was those are the forces that are driving good use of resources within a foundation trust.

Q50 Ian Swales: A quick point on pricing. How granulated will your pricing mechanism be, because clearly somebody performing an operation in a 50yearold cottage hospital may have a totally different cost base from somebody working in a new PFI hospital, and there are the different parts of the country; there are all kinds of factors that mean that even the same thing will have a different cost and therefore, potentially, a different profit regime for the provider depending on how you decide to set price. I’d be interested to know how complex you’re going to make this. It’s Stella’s point: value for money means getting both equality and the price right, given the local circumstances, and it could vary a lot.

Sir David Nicholson: For an increasing amount of activity within the NHS there will be a fixed national price and, as you say, that is quite a blunt instrument to deal with the system as a whole and that’s why it’s so important we get it as right as we can.

Q51 Chair : Can I just get this clear: is it a fixed national price or is it a fixed maximum price?

Sir David Nicholson: At the moment it’s a fixed-

Q52 Chair : But under the new arrangements, as I understand, it becomes a maximum? Is it a maximum?

Sir David Nicholson: It is now a maximum price.

Q53 Chair : So you could go down?

Sir David Nicholson: You could if you satisfy the test that I set out at the last Committee, which is that you’ve got to be able to measure what you mean by quality. So you’ve got to have real clarity about the quality standards you want to deliver. You need to monitor them and then you need to have patients who are sufficiently educated and informed to be able to help you do that. We have yet to come across any services that have done that, but it seems to us that to leave that open would be sensible way of taking things forward.

Q54 Ian Swales: So are you really saying that, if I want to have my hip replaced at St Thomas’ across the river, it will be exactly the same price as at my local hospital in Middlesbrough, for example?

Sir David Nicholson: Yes.

Ian Swales: Really?

Chair : That’s not what our Report says.

Q55 Ian Swales: That really is stunning if that’s the case, because that means that you’ve got massive differences in local circumstances, age of assets and so on, and you’re not going to give competitive power to the providers to work inside that, which was the Chair’s question.

Sir David Nicholson: Can I just explain? That’s the pricing system. There is another funding system for the service that operates in parallel with that, which is known as the market forces factor. So although for the commissioners there is one price, hospitals get slightly more depending on where they are in the country and what the market forces factor is. So, if you take Guys’ and St Thomas’, as far as the individual local PCTs are concerned, they will pay the same price there as they will at UCLH and the Homerton; any hospital that they use. But underneath all of that there’s something called the market forces factor, which provides support to organisations in areas of very high expenditure or whatever.

Q56 Chair : Hang on a minute. I’m just going to stop you, because there’s a lot of muddle in thinking. Paragraph 2.20-tell me if it’s wrong-states: "Foundation trusts will face increased pressure to improve their cost effectiveness through a wider adoption of the practice of reimbursing hospitals for treatment given to patients according to the costs incurred by the most efficient hospitals, rather than the average." That spells to me diversity; there won’t be a tariff, there’ll be diversity of tariffs.

Ian Swales: Otherwise how will we extract value for money?

Sir David Nicholson: That’s another complexity in it in the sense that at the moment the price that is set is the average price. What we do is we look at the costs across the whole country and we set at the average. In future we might think about setting the price not at the average but amongst the most efficient in order to drive efficiency elsewhere in the system.

Q57 Chair : So you don’t spend the same at St Thomas’ as you do at Ian Swales’ local hospital? You don’t spend the same for a hip replacement?

Sir David Nicholson: As far the commissioners are concerned they do, but there’s a set of subsidies underneath all of that in relation to the market forces factor that offsets some of the pressure that they have. That’s the existing arrangement.

Q58 Dr Creasy: What’s going to drive that though? The commissioners are paying the same price anywhere. What would be the incentive to Guys’ and St Thomas’ to do it more efficiently and perhaps at a lower price?

Sir David Nicholson: Because it drives their surplus and their surplus enables them to either invest money, to borrow money or to improve services for patients. That’s what drives it; it’s the delivery of the surplus.

Q59 Chair : This is very muddled. Just say yes or no to us. Will you pay the same for a hip replacement in every hospital in the country?

Sir David Nicholson: When you say "you", who do you mean? A commissioner?

Q60 Chair : A GP consortium.

Sir David Nicholson: Yes.

Q61 Chair : Pay the same price?

Sir David Nicholson: Yes.

Q62 Chair : So is this sentence wrong?

Una O'Brien: The sentence is correct because-

Sir David Nicholson: No. No.

Q63 Ian Swales: Sorry, this is crucial. A GP consortium will have no incentive whatsoever to go and find the most efficient provider. Is that right?

Sir David Nicholson: The national price that’s set is the same across the whole country.

Mr Bacon: What’s the answer to Mr Swales’ question?

Sir David Nicholson: What we are saying is that is a maximum price-

Mr Bacon: What’s the answer to Mr Swales’ question?

Sir David Nicholson: I’m trying to answer it. If you want to get a lower price, you have to be able to demonstrate that you can identify what the quality is-because what we can’t have is that lower price providing lower quality-so you have to identify what the quality is quite clearly, you have to be able to have a mechanism for measuring it and you have to have talked to your patients about it.

Q64 Mr Bacon: When you said "you", who were you referring to?

Sir David Nicholson: The commissioner.

Q65 Mr Bacon: Yes, well Mr Swales’ question was about the GP, and that’s why I kept on saying, "What’s the answer to Mr Swales’ question?"

Sir David Nicholson: The GP will have to do those three things.

Q66 Mr Bacon: Mr Swales’ question is: what is the incentive to the GP? That’s his question. In fact his question was: is there no incentive to the GP?

Sir David Nicholson: The incentive to the GP is that they create more resource to spend on other things.

Q67 Dr Creasy: You said they’re paying the same price?

Mr Bacon: They’re paying the same price?

Sir David Nicholson: I’m sorry, there is a national price-this is from a commissioner point of view-there is a national price that is calculated using all the evidence we have from what all the various providers do. At the moment we rank that at the average price. We could think, in the future, about making that national price lower than the average price, in order to drive efficiency, right? So that’s the first thing. So you have a national price that is a maximum price, and our expectation is that in most of the activity that people do they will pay that maximum price. They have the opportunity to try and get a price lower than that, or be offered a price lower than that in the locality by an individual organisation, but in order to do that they have to show that they are getting the equivalent quality.

Q68 Ian Swales: So I’m a GP consortium and I’m buying a hip replacement. Will I see a difference in my budget if I go to hospital A or hospital B as a result of hospital B having lower costs than hospital A? Will I see a lower price in my budget or not, or will I be charged the national price?

Sir David Nicholson: If the organisation can demonstrate that they can provide equivalent quality and monitor it, then you can pay a lower price and you will get the benefit of that lower price because you will keep the difference.

Q69 Ian Swales: So I will see two tiers of prices set with reference to this national price? Is that possible?

Sir David Nicholson: It’s possible that you’ll get a local price offer.

Chair : I think where we’re muddled is where you say there are national prices and local prices.

Q70 Nick Smith: It sounds like the buyer has to show that the supplier is providing a better cost and quality service from your explanation.

Sir David Nicholson: The commissioner has to demonstrate that to pay the lower price it is getting equivalent quality, yes. That’s true.

Amyas Morse: I think that the point is-I’m trying to help here-that the national price is a ceiling price, isn’t it?

Sir David Nicholson: Maximum price.

Amyas Morse: So that if you have a very popular hospital you can’t say, "Oh, actually the price is going up here." You can’t charge more than a certain amount, but you could charge less if your hospital costs are low; you could offer to provide for less if you can show that you can maintain the service quality. Is that it?

Sir David Nicholson: Yes.

Q71 Joseph Johnson: But it’s a maximum price based on the costs incurred by the most efficient hospitals, so it’s a maximum price but it’s also going to be the lowest price available nationally, so therefore how can anybody shop around for a better price when the tariff is already the lowest possible price available in the market?

Sir David Nicholson: It isn’t at the moment.

Q72 Joseph Johnson: No, but you’re moving to a new world where it is.

Sir David Nicholson: That’s one option, but to do that-

Q73 Joseph Johnson: You’re not saying it’s an option. In paragraph 2.20 it’s saying it is the plan.

Sir David Nicholson: Yes, but you have to take into account the impact that will then have on the provider side.

Q74 Joseph Johnson: What do you mean?

Sir David Nicholson: Well, we could set the prices at the lowest of any provider in the country. What that would mean is that huge numbers of providers would fall over because they wouldn’t be able to deliver-

Q75 Joseph Johnson: But this is what paragraph 2.20 says you’re going to do.

Sir David Nicholson: No, we have always used the average. We can move that average down as we become clearer about the way in which the provider side operates.

Q76 Joseph Johnson: Hold on a second, are you saying that paragraph 2.20 is incorrect, because it’s saying you are going to do this, and at the moment you’re saying, "We may," subject to everything not falling over?

Sir David Nicholson: One of the criteria you will use to decide how to pitch it is the viability of the provider’s side. It’s not an academic exercise; you have to think about the consequences of putting it lower.

Q77 Joseph Johnson: So you’re not certain you’re going to move to this pricing structure based on the most efficient provision in the market?

Sir David Nicholson: I think we would like to. That’s absolutely what we would like to-

Joseph Johnson: Even though, as Mr Swales says, that would effectively create a situation where the GP commissioners have no incentive to shop around, because the price you were offering them would effectively be the lowest price in the market.

Q78 Mr Bacon: That’s what I don’t understand. That’s why I kept on going on about it. You were busy conflating the yous and theys with commissioners and GPs. Mr Swales was focusing on the incentives to the GPs.

Sir David Nicholson: To the GPs as commissioners.

Q79 Mr Bacon: He originally asked what incentives the GPs would have to shop around. That was the question I was asking.

Q80 Ian Swales: Consortia.

Q81 Mr Bacon: What incentives would the GP consortium or consortia have to shop around? But if the price that they can get is already the most efficient-set on the basis of the most efficient in the market-it’s hard to see how the GPs by shopping around are going to get a yet better price. It might be the case that some of the poorer providers will improve so that they could do it at that cost, but that’s not the same thing.

Sir David Nicholson: It may not just be price, of course, that people decide to-It may be quality.

Q82 Chair : I’m going to move us on. Let me draw together this bit of the discussion. There will be a maximum price, but if quality standards are met, there could be a lower price, which will have to be quality assured, and, if there is a lower price, GPs can accept the additional thing. But in answer to Jo’s very important point, you will not be lowering your maximum price to the most efficient hospitals until you are assured that providers will be able to deliver within that price. So you will not be doing what they say here-moving to the most efficient quartile-until you are assured that won’t impact in a bad way on the provider’s side. Is that a yes or no?

Sir David Nicholson: Yes.

Q83 Chair : Right. And even though-

Sir David Nicholson: -ish.

Joseph Johnson: Ish?

Chair : Even though, accepting what you’ve said to Jo, which is really important, that might impact on your ability to deliver the efficiency gains you need for the Nicholson 4% per annum. True? Yes.

Sir David Nicholson: Yes.

Chair : Okay. Thank you.

Q84 James Wharton: I’ve been quietly following this and it becomes increasingly clear to me that I mustn’t understand it, because it seems to make sense to me and that puts me at odds with everybody else here. I’m quite interested in something we touched upon earlier, which is the idea of insolvency of trusts or administration, and the process through which a trust is going to be allowed to become insolvent and allowed to go into administration, and also linking that in with something that we talk about a lot on this Committee, which is PFI costs and new PFI projects. I’m particularly interested because my local trust, which is North Tees and Hartlepool NHS Trust, are trying to get themselves a new hospital by PFI and I would like to understand how they’re going to do that. The concern I have is, if you’re going to allow trusts to go into some sort of insolvency or administration mechanism-I’d like you to explain how that’s going to work, please, if you will-then when they go to bid for a PFI, is that not going to drive the costs of the PFI up? Because if you bid for a PFI now, the Secretary of State, the Department, effectively, is standing behind that PFI. So if the trust falls over or if the trust can’t pay it’s PFI, the private-sector lender knows that the Government is going to step in and they’re going to get their money, so it derisks it and they can lend at a lower rate. If you’re saying that you’re going to actually give more autonomy and more responsibility to the Trusts, including a mechanism through which they can become insolvent or go into administration or some sort of mechanism of redress if they get this wrong and they can’t afford their PFI, does that not increase the risk, and therefore the cost, of future PFI projects? Sorry if that’s a long question.

Una O'Brien: I think it’s worth stating at the outset that all the details of the special administration regime have yet to be worked through. The high level principles are set out in the Command Paper and in the Bill, so this is precisely the development work that we’re going through right at the moment, but I think the important thing that I would like to stress about the special administration regime is there will be a range of options open to the special administrator to ensure continuity of services. So that’s the really important thing here; it’s not about taking the services away or putting them somewhere else, but actually getting in there on behalf of patients and the public to ensure continuity of services.

Q85 James Wharton: Obviously that is extremely important but we’re looking specifically at value for money. At the moment, my understanding is that if you enter into a PFI with your trust, the Secretary of State signs it off and the Department stands behind it. So if something goes wrong with that trust, you as the private PFI provider know you’re going to get your money. If that changes and you’ve had an administration regime or an insolvency regime there’s a new risk, whatever that regime is. You may have different options, but unless the only option is the Department stands behind it and pays it, then the risk is increased. If the risk increases then you want a better return on your money. What are you doing to make sure this is not going to drive up the cost of future PFI?

Una O'Brien: Well, that’s exactly what we’ll have to focus on now as we work our way into the details.

Q86 James Wharton: So we don’t know yet?

Una O'Brien: Well, we’re seven or eight months into this. This is a big and complex thing. I wouldn’t want to suggest that we’ve got every nut and bolt sorted out. That’s absolutely not the case, but I think the principles of the regime are very clearly set out.

Q87 Joseph Johnson: Just to try to give a concrete example of what James is getting at, the South London Healthcare NHS Trust is, I think, the most indebted in the country. Under the proposals, unless it achieves foundation trust status by 2014, which at the current rate at which its deficit is increasing rather than decreasing seems a stretch, it will either cease to exist as a separate body or merge with existing foundation trusts, if I understand the proposals correctly. What does "cease to exist as a separate body" under option 1 mean, and what if independent foundation trusts, with their own board of trustees, do not wish to merge with this, frankly, basket case of a merger of itself three NHS trusts? So what happens?

Sir David Nicholson: At the moment we are going through-not to personalise it to South London, although I acknowledge there is a significant issue-

Q88 Chair : You could personalise it on Queen’s hospital.

Sir David Nicholson: I thought we were going to have a debate about who was the biggest basket-case. There are over 120odd organisations that are not foundation trusts and the moment, and currently we’re going through each of them individually with the strategic health authorities to work out the trajectory to get them to foundation trusts by 2014. Most of that number are relatively straightforward-we see a pathway to do that-but there are about 20 across the country as a whole that enter the places that you’ve just described, and over the next six months or so we have got to work out what the trajectory of each of those organisations could be. You’ve identified a couple of options there: the demerger in a sense, the splitting up of organisations and moving them to different places; the taking over of organisations by foundation trusts. You are absolutely right; we would have to put the right incentives in the system to enable that to happen. There is also the model that we’ve developed at Hinchingbrooke, where we’ve got a franchisee coming in. So there are some options; we haven’t worked all of that detail out yet, but we’re currently working on that.

Q89 Chair : So at the moment, to take that to its conclusion-it means we have got to talk to you again at some point in the not too distant future-you haven’t quite worked out your failure regime for foundation trusts, taking on board issues like the PFI. Also, you haven’t quite worked out-it is interesting that Jo’s got it; we’ve got it in east London where we probably have two basket-case hospitals-how on earth you will ensure the continuation of local services, A&E onwards, in organisations that we don’t think will ever achieve foundation trust status.

Sir David Nicholson: I understand why you use the term basket-case, but I think it’s highly unfair to the people who work in the organisations-

Q90 Joseph Johnson: They’ve been lumbered with structurally very difficult PFI projects; that’s the fundamental problem.

Sir David Nicholson: There are structural issues there that need sorting.

Joseph Johnson: Absolutely. No, I don’t at all denigrate the work that they’re doing.

Q91 Austin Mitchell: I can’t help thinking that , when I successfully surviv e the next election and become the oldest MP in the House and probably the oldest MP ever and I go to the Grimsby consortium for my hip replacement operation , they will say , "H op off to London , because economies of scale give London hospitals a huge advantage in pricing and we’ll have to pay less for it. " I don’t want you to answer that, because it’s going back over old ground, but in this section we’re dealing with the changes. Now, taking those changes overall before we come to the transitional arrangements, isn’t it true that this is really a gigantic leap in the dark that is justified because the Government promises that it will be more economical; that there’ll be big economies from scrapping strategic health authorities and the primary care trusts. The costs are clear but the economies are unproven and unlikely to materialise. Every experience we’ve have of big reorganisations tells us on this Committee that they always cost more than is prophesied and the returns, the benefits, are always less than are prophesied. Isn’t that the case with this?

Sir David Nicholson: Well-first of all I don’t-

Q92 Austin Mitchell: Or how can we stop it being the case?

Sir David Nicholson: We need to talk about the transition now. I don’t accept that it’s a leap in the dark. I think we have learnt a lot of lessons over the last few years about how to do this sort of thing, and we have learnt quite a lot of lessons around, for example, GP commissioning. We have had 20 years of experience of involving GPs in commissioning at various levels; from GP fundholding, through total purchasing, through practicebased commissioning and through now. So it is not as if we are on a blank sheet of paper here. We have really good ideas about how that might go forward, and we’ve got a set of GPs who are very keen to make that happen. On the foundation trust provider side, we have experience over the last seven or eight years about independent providers and how they function in the system. So it is not a leap in the dark in that sense. It is a big leap forward; it is a big change. I would not underestimate the size and scale of that change, but I do not think it is a leap in the dark in the way that you describe it.

Q93 Austin Mitchell: But you cannot guarantee either, can you, that the costs won’t be higher or the benefits smaller?

Sir David Nicholson: Well I think the risks are obvious and no doubt we are going to discuss these as part of the transition.

Q94 Chair: Can I just get one assurance from you? Will you be monitoring the costs of transition to the new-

Sir David Nicholson: Yes, absolutely.

Una O'Brien: Absolutely.

Q95 Chair: So we can hold you to account for the costs of transition on a regular basis?

Sir David Nicholson: Yes.

Una O'Brien: Yes.

Q96 Stephen Barclay: I just wanted to look forward to the Nicholson challenge and the cost savings that you have set out, I think of £15 billion to £20 billion. The starting point for me was therefore to look at the last value for money programme that you ran, which was the Comprehensive Spending Review programme set out in 2007 for the period 2008-09 to 2010-11. How much was that to save and what percentage has been delivered?

Sir David Nicholson: Well, if you look at a top level in terms of the resources that were made available to us and the way that they were used and the outputs that we delivered for it, without going through the whole of our last Committee, we delivered virtually everything that the Government asked us to do, whether that be waiting time reductions or improvements in healthcareacquired infections; all of those things, we delivered them. And at the end of the day we delivered them with a £1.5 billion surplus on the resources that were made available, which was the biggest surplus the NHS has ever made.

Q97 Chair: Stephen, let’s stick to the future, because-

Stephen Barclay: No, no, Sir David has answered-

Sir David Nicholson: As part of that, every year for the first two years of the spending review we expected all NHS trusts and foundation trusts to deliver a 3% efficiency gain and they delivered it. In the last year, we asked them to deliver a 3.5% efficiency gain and they are well on target to deliver that for this year.

Q98 Stephen Barclay: With respect, you have answered a totally different question to the one I posed. I was referring to a different hearing that this Committee had, where we looked at the breakdown by Department that is set out in the National Audit Office Report HC 291 on page 17. It showed that at the interim stage the Department of Health had delivered 20% of its target. We are now in 2011. First, it was just an opportunity for you to bring us up to date as to what extent we have moved on from 20%, so my question was what is the percentage that you have delivered and what was the total figure? Because if we are looking forward to trying to make a saving of £15 billion to £20 billion, is it not relevant to look at how many billion the last saving was for and how much of that has been delivered?

Sir David Nicholson: I have not got the document you talk about to hand and I have not got the graph that you show. I am sure it exists.

Stephen Barclay: Sir David-

Sir David Nicholson: Yes, but what we did not do in the way that we run the NHS is we did not set out a set of requirements on the NHS in the way that you have just described it. The way we did it was to say to each individual foundation trust and organisation, "You have to deliver a 3% improvement in your efficiency."

Q99 Stephen Barclay: Again, with respect, you are answering a different question. What I am saying is that at the interim stage of your last value for money programme, your department had delivered only 20% of its target. Now, you are now setting the Nicholson challenge; you are setting a new target. Surely you have an idea how you did on the last one without having to refer to the document. You must have a ballpark idea what percentage you delivered.

Chair: You have set that out. I really want to push us to the purpose of today’s hearing, which is to look at the arrangements in the reforms, which is where I thought you were taking the question.

Stephen Barclay: It is where I am going.

Chair: Will they deliver the 4%, which I think is a-

Joseph Johnson: This is directly material to that, because if you are only achieving 20%-let us say for sake of argument it has gone up to 30% six months later-that implies that if you are aspiring to achieve 20%, you would have to aim for £60 billion of savings in order to achieve your 20%.

Stephen Barclay: And that is two-thirds of the NHS budget.

Joseph Johnson: It is.

Q100 Stephen Barclay: But actually Jo, it was even worse than that, because 20% was the reported savings, but the NAO Report found that only 38% of what Departments had booked was actually green-was valid. So actually, there is a degree of that 20% not being real savings. But I did want to come on to the future. Pulse magazine reported that PCTs’ management salary costs increased by 25% in the two years between 2007 and 2009 and they needed a number of Freedom of Information requests in order to establish that. When the Department of Health was challenged on that, apparently it said, "It is for PCTs to determine their management costs and to ensure they are securing value for money." Therefore, what safeguards are there in terms of the management costs of GPs’ consortia, and how is the Department going to satisfy itself that we are not going to see a similar inflation in terms of their admin costs?

Sir David Nicholson: It is one of the big changes in looking forward to looking back. In the past, you are absolutely right, we have made it a policy of the Department that it is up to individual organisations to decide what management arrangements they require in order to deliver the services for their patients. Going forward, and in a different financial climate, we have said that is not acceptable in the future. What we have identified for the total running of the system-by this I mean the Department, arm’s length bodies, the strategic health authority; the whole of the commissioning function-that there will be a running cost limit. The current cost of that is £5.1 billion and we are going to get it down over the period to £3.7 billion.

Q101 Stephen Barclay: Does that include consultants and interim spend?

Sir David Nicholson: Yes, it does. It includes all of that. So what we are doing at the moment is identifying how you allocate that to the different-sorry, it is £3.4 billion. Slightly less ambitious, £3.4 billion. We are currently going through a process of identifying which bits of the system will get the running cost allowance they require. So for example, we have announced that we are looking at about £35 per head of population to run the GP consortia. That will be performance-managed rigorously from the centre and we expect both to deliver a totality across the commissioning system and each individual organisation to deliver to their target.

Q102 Chair: This is very interesting. That is a very helpful answer. It’s interesting; it is very central control, so it is slightly different from the decentralisation. Let me ask you a few more questions. Are you going to have a regional structure?

Sir David Nicholson: The Commissioning Board is one organisation.

Q103 Chair: But will it have regional arms?

Sir David Nicholson: Well it will have management tiers in it.

Q104 Chair: So will it have regional arms?

Sir David Nicholson: Well there will be management tiers. You could call them regions or not, but there will not be me here and all of the consortia there; there will be something in the middle.

Ian Swales: Location. That means location. The question was: will the Commissioning Board have a regional structure?

Sir David Nicholson: Well we have not worked all of this out yet, but if you think about the responsibilities of the Commissioning Board, on the one hand it is going to commission itself big, important national services, so the kinds of services that only need to be commissioned once, and there may be only one or two or three sites in the country. But it is also going to commission directly primary care; it is going to commission the 8,500 GP practices. So it will need both a national and a much more local representation in order to deliver that.

Q105 Chair: So you will have a commissioning body and you will have regional arms. You will have to.

Sir David Nicholson: Well at the moment, we have set out we are going to have 50 clusters.

Q106 Chair: 50 clusters to the commissioning body?

Sir David Nicholson: Yes. Those clusters, which are currently clusters of GPs, will be accountable to the Commissioning Board on 1 April 2012, so you will have, in a sense, 50 of those in the environment we are going into.

Q107 Chair: I am sorry to pursue, but maybe we will get this clear. In your answer to Stephen, you said there is going to be really rigorous monitoring to ensure that we keep down management costs.

Sir David Nicholson: Yes.

Chair: Great. There is a little bit of, "Is this local; is this national?" but great. But on the other hand, you will then need a machinery of governance to ensure that accountability. All I am trying to get out of you is: is that machinery of governance going to be a regional or a local thing? Are you going to have 150 of these at local authority level or are you going to have a regional structure? You, Sir David, as boss of this new commissioning whatever it is.

Sir David Nicholson: We have to work all this out. We are only just working out how much money is available.

Q108 Chair: If I can then take it to its next point, it is not going to be that different from the SHAs, is it?

Sir David Nicholson: Well the SHAs do providerside stuff, they do work force and they do commissioning; they do the whole system.

Q109 Chair: They may do slightly different things but it will be the same structure.

Sir David Nicholson: That is a big difference. That is a significant difference. We have not worked out yet how we are going to organise the Commissioning Board. Do not forget we have got until 1 April 2012. What I am doing at the moment is trying to put transitional elements in place in order to manage the arrangements as we take it forward.

Q110 Stephen Barclay: Can I just then tie in with that, because you said, "We haven’t quite worked it out," and when there is big organisational change, often that is when consultancy spend or interim spend goes up. We know from the Cabinet Office they want to have a tighter grip on that. We had a hearing on consultancy spend and, interestingly, the Department of Health is one of the two biggest spenders within Whitehall on consultancy; that is after your consultancy spend went down by 45% from 2006. So what are you foreseeing budgetwise in terms of your consultancy spend and your interim spend over the next two years? Are you seeing that going up at the same time as you are delivering the Nicholson challenge?

Sir David Nicholson: It will go down.

Q111 Stephen Barclay: It will be going down, will it? Even while you are delivering this major change programme?

Sir David Nicholson: Yes.

Q112 Stephen Barclay: Given that the Cabinet Office have said that they want monthly data from Departments on consultancy spend, can I assume that you will be publishing monthly what is spent on consultants, interims and professional services, both in terms of the Department centrally and any of these other agencies set up as part of the reforms?

Una O'Brien: All of this will be made more transparent by the Cabinet Office. Just for the record, because I do think it is important, I know you have observed the scale of DH spending on consultancy in the past, but in the first six months of this financial year, our consultancy spend was £12 million. The full year cost for 2009-10-last year-was £155 million. So I think that just gives you a sense of the dramatic reduction in consultancy spend. We are absolutely, across Government, committed to bringing this down and indeed it is going to be a very important opportunity for civil servants to build their skills and to really make the most of what we have learnt from working with consultants in the past.

Q113 Mr Bacon: Of that £155 million down to £12 million, how much is NPfIT?

Una O'Brien: I could not give you the breakdown, but I am happy-

Q129 Mr Bacon: Could you send us a note?

Una O'Brien: I am happy to do that, yes.

Mr Bacon: It is probably mostly NPfIT, isn’t it? It is really aside from-

Una O’Brien: Yes.

Q114 Austin Mitchell: On these clusters, we are now clustered in a big Humberside cluster, which will inevitably be dominated by Hull. Now you know from your experience of Trent that devout prayer in Grimsby is always, "From Hull, Hell and Halifax, good Lord deliver us." You are delivering us on to Hull. Now, I am not concentrating on that point, but it does mean surely that, if the cream of the officers of the present PCTs in that cluster are creamed off to run the overall cluster in Hull, the ability of the doctor consortia, which I assume will be on the old local authority level of North East Lincolnshire, to pick the best for the management of their consortia will be deeply damaged because the best people are going to go to Hull.

Sir David Nicholson: Not necessarily.

Austin Mitchell: But probably.

Sir David Nicholson: And in fact the only guarantee the cluster people have is that there is a job until the end of March 2013. There is no guarantee after that that they have a job. So quite a lot of people will want to work in the GP consortia and we would encourage them to do that, because I think that is exactly the right place-

Q115 Ian Swales: And are they getting redundancy payments on the way through? That is a legend that is starting to emerge.

Sir David Nicholson: A lot of this depends on minimising the redundancy cost to the NHS as whole, and, in a sense, what we are trying to do here by a system of assigning people to consortia is to reduce the redundancy cost, which I think is an issue for us.

Q116 Austin Mitchell: Let’s move on to another point, because North East Lincolnshire is a primary care trust plus; in other words, it involves the local authority and brings them together. Now, I see there is a new clause in the Bill-or a clause that I did not realise was there until I saw the Bill-that provides that care trusts plus-there are only six of them in the country I think-because they involve the local authority on the care side and bring it into a close working relationship with the NHS, will be continued and the desire is that that situation should not be disturbed. Now, how is that going to be maintained when at the same time we are going to be part of a cluster of other primary care trusts based in Hull? In other words, shouldn’t there be a distinct regime for North East Lincolnshire Care Trust Plus?

Sir David Nicholson: Yes, there should be and there will be. The point about the cluster is we are trying to do two things. We are trying to concentrate our people in one place to ensure that we do not go through a process over the next two years where individual primary care trusts fall over because people go off and work in consortia and all the rest of it-so to concentrate them in that-and also to provide a very clear line of sight and accountability. That does not mean you have to disrupt some really good services and relationships on the ground to make that happen.

Q117 Jackie Doyle-Price: I just want to explore the transfer from the primary care trusts to the new consortia, because the final sentence of paragraph 2.15 of the Report says: "The Department is seeking to clarify other issues, including, for example, the handling of legacy debts and liabilities from primary care trusts." I ask that question because my primary care trust is South West Essex.

Sir David Nicholson: We want to give the GP consortia the best possible chance of success, and part of that is to get them into a place where in their first year of operation of a budget, which is 2013, they do not have a legacy debt attached to it. That is our ambition. We are not saying that we will write everything off, because we cannot; we have not got the resources to do that and it would not be the right thing to do. So what we are saying is, in your part of the world, you have got two years now, working with the GPs-because it is in their interest as well as that of the PCT-to get rid of that legacy debt. That is what we are focusing our attention on.

Q118 Jackie Doyle-Price: So what about ongoing liabilities? For example, the PCT’s commissioning of Brentwood community hospital has been a very expensive PFI with a lot of sunk costs in it. What would be the implications for the transfer of that liability?

Sir David Nicholson: Yes, sorry-

Jackie Doyle-Price: Because there is a fixed cost in the PCT’s annual expenditure.

Sir David Nicholson: Does the PCT run it? I do not know that particular hospital, I’m sorry.

Q119 Jackie Doyle-Price: Right. This particular community hospital was commissioned directly by the PCT and there is sitting in there an annual fixed cost. It was very poorly executed and the management of the PCT will readily acknowledge that. Now, obviously, that fixed cost is going to have to be absorbed somewhere. Is that going to be transferred to the GPs? Because it is a very underutilised hospital-when I went round there I was switching lights on-and it would be very unfair, again, setting up the GP consortia, to have this sunk debt that is setting it up to fail.

Sir David Nicholson: We have got two years to try to sort all these issues out. We want the GP consortia to start off with a blank sheet of paper, if you can possibly do that. So we will be seeing how we can make that a reality. It may not be that we can do it in every single case, but certainly that is our ambition.

Q120 Ian Swales: I was on the same paragraph, 2.15. When we had a private session a few months ago, Sir David, one of the issues that came up was what sort of size GP consortia should be. I remember the figure, because it was about the same size as my local PCT, strangely enough, which was a minimum of, say, 100,000 to 150,000 patients. I note from paragraph 2.15 that the Pathfinder practices run from 14,000 to 672,000, which is a massive difference. The reason we had the discussion about the size of GPs was because of the internal insurance in terms of what might happen with a given population in terms of rare diseases and so on. What happens to the consortium with 14,000 people if it has the misfortune to have half a dozen expensive rare conditions occurring? How will it deal with it?

Sir David Nicholson: The Government policy was very, very clear, which is that was entirely a matter for general practitioners to come together in consortia of whatever size they thought was the right thing to do, and I perfectly understand why that is the case in terms of getting the innovation and the commitment to it happening. But there is no doubt that in this world you have got this very different set of arrangements. Of course, what the Commissioning Board will run is a series of risk pools in the system, because I do not think any of the consortia, even the biggest, will be able to deal with every particular arrangement. So what you will have to do in those circumstances is identify a mechanism for setting up risk pools at various levels with individual consortia all paying into a pooling system in order to ensure that when those do come along we are capable of doing it.

Una O'Brien: It is perhaps just worth adding that part of the purpose of the Pathfinder process is to learn and address some of these questions about size.

Q121 Chair: The 14,000 one might not work?

Una O'Brien: Well, that is what we are going to find out. What is really good is that people are coming together early on so that we have an opportunity to learn those lessons early.

Q122 Chair: But Ian raises an interesting point. If they do not work, will you legislate to ensure that the practice has a minimum number of patients?

Sir David Nicholson: First of all, we will not authorise them, because they will not get through the process if they do not work.

Q123 Chair: But in effect, you will take a view on the minimum number of patients?

Sir David Nicholson: No, not necessarily, because if you take the 14,000 one as an example, it may be when you look at it that it is a perfectly reasonable population size to deal with 70% or 80% of what they do. In those circumstances, they always have the opportunity for the 30% that it is not appropriate that they do to be taken on by either a risk pool arrangement or directly by the Commissioning Board itself.

Q124 Chair: But just to pursue the 14,000 very quickly, if it has a lot of elderly patients-somebody over 75-they are a small proportion-

Dr Creasy: Bournemouth. East Bournemouth.

Austin Mitchell: Sorry-

Chair: Oh yes, Austin and then me. They will cost much more, so how will you ensure that, in that example that Ian gave, they will look after that elderly patient?

Sir David Nicholson: Well that is the point I am trying to make. For a population size of 14,000, there is quite a lot of activity that operates on a population size of 14,000.

Q125 Ian Swales: Sorry, can I just come back on something you said, Sir David? I suppose as a child of the sixties, the rock-’n’-roll nature of all this should appeal to me really, but you actually just said that you felt the Commissioning Board could come in and take 20% or 30% of the work of a GP consortium. Is that what you said?

Sir David Nicholson: The legislation allows for consortia to ask the Commissioning Board to take responsibility for some of its activities.

Q126 Ian Swales: So they would become local commissioners for certain activities?

Sir David Nicholson: Well the Commissioning Board then would make a judgment about whether they would give that to another consortium to do or whether they would set up their own arrangements to make it happen, but yes, that is what would happen. That is, in a sense, the safeguard in the system.

Ian Swales: Okay.

Q127 Nick Smith: Sir David, when Austin challenged you about these plans being a great leap forward, you said no-

Austin Mitchell: Great leap in the dark.

Nick Smith: Sorry, leap in the dark. You said no, you thought they were a great leap forward, and I was reminded of other people’s earlier remarks about Maoist political processes. But tell me something. I want to come on to QIPP and the expected savings of £20 billion-a big number. We need to know more about the processes that you are going to engage on QIPP programme. We want to look at the impact of it and how you are going to measure the success of this massive saving that you expect. Have you got confidence that you can make these £20 billion savings?

Sir David Nicholson: Well we have never done it before-we have never done anything of this scale before-so it is new territory for us. We expect levels of efficiency gain that we have never seen, against a background of an NHS that has grown at 4.5% every year since 1948. So it is a big change-a step change-in the way that we deliver services and the way in which we take money out of the system. Having said that, we are in the position whereby the money that we generate we actually keep. It is not as if we are giving this money up to somewhere else, so there is a shift in the way that the money is allocated in the system. That is a good thing as far as I am concerned. So we have to do something we have never done before. We identified this sum 18 months ago, we spent a long time talking to the service-talking to clinicians and organisations in the system-to get people to understand what we are trying to do and to start to think about how they might do it. Unusually in the NHS, there is a consensus about the requirement to do it, which is not always there in the circumstances. Also, when we have set out our overarching strategy for dealing with it, all the various commentators-the King’s Fund and all of these people-have said we have broadly got the right figure and we have broadly got the right areas by which we can make the changes happen.

We have been through all of that, and we are now in the place of working with individual organisations as to how they are going to do it. We have set out the operating framework that they will work in, and all the organisations-you will no doubt see them in your locality-are now working through the practical implications of making the kinds of savings that we need to do. All that activity is going on and we expect by the end of March, beginning of April, to have a plan for every individual organisation in the country that sets out how they are going to do the first year and some ideas about how they are going to do year two, year three and year four. All of that is in train and people are working on that at the moment, so we will have that in position by the end of this financial year for next financial year. You can read in the newspapers about action that has now started to be taken in order to deliver those savings in future years. Now, if you look at the totality of the savings, about 40% of those-sorry, am I going on too long?

Nick Smith: No, no, I want you to-

Sir David Nicholson: You’re bored?

Nick Smith: We’re leaving that space there for you to fill.

Sir David Nicholson: 40% of those savings come from a variety of the pay freeze that we have over the next couple of years, the significant reductions in the amount of money we hold nationally-the central budgets-and the delivery of the management cost savings, which we are driving nationally through the work I talked about earlier around the running cost envelope. For 40% of them, we have a national handle on them and we are pretty confident we can deliver those. The next 40% of the savings are essentially the delivery of efficiency gains in the provider arm. The way we deliver that is we set the tariff and we have set the tariff with a 4% efficiency gain for next year. We have done that and we have created a whole set of help and support for people to enable them to deliver it, whether that be the Long Term Condition Programme or whether it be the work we are doing nationally on the Productive Ward. So there is a whole series of help to people to make it happen. Then 20% of the savings are around service change. It was the kind of thing that I talked about last week around shifting services from hospitals to community. That is the level. In degrees of confidence in terms of our record in this, I think the first 40% we are confident about; we can deliver it. The second 40% we are medium confident about and then the final 20% I think is going to be the most difficult to do. So that is the overall approach.

Q128 Chair: We did have this discussion last time and we are going over old ground. What we are trying to focus on here is where the new arrangements are going to-

Nick Smith: Can I come in on that point?

Chair: Okay, if you promise me it is on that point.

Nick Smith: I can see how you can anticipate savings by cutting staff costs and pay freezes; I can see where the 40% is coming from. I am less confident that you can save 40% on tariffs and 20% on service changes. How are you going to measure the impact of those changes?

Chair: Nick, I am going to stop you, because we really covered that ground last time. We have got another half hour and we have a heck of a lot of ground to cover, honestly, on these new arrangements. I am not being mean, but the whole of Productivity was around those issues. So if people can just focus, there is a huge agenda here of change that we have really got to try to get our brains around.

Q129 Dr Creasy: I have two questions. The first relates just in following up on what Ian was asking you there. Do you envisage a situation where patients could be turned away from their GP under these new arrangements because they are in that 30% of need that they cannot meet? So that the consortium will say, "Look, I’m sorry, we cannot deal with you," at which point you have to intervene and you have to find another doctor somewhere else who will deal with them. What happens to the person who is the difficult 30%?

Sir David Nicholson: If you are talking about the individual and their relationship with their GP, they go to their GP-

Dr Creasy: I am really sorry; I cannot hear what you are saying.

Sir David Nicholson: The individual patient who goes to their GP with a rare condition will be referred to wherever and whatever service the GP thinks appropriate; that is unaffected by what I have just said. The issue is who holds the contract for that patient; who allocates the resource to that patient. In normal circumstances that will be the consortium. In an environment where the consortium has put that into a risk pool, it will be the risk pool that pays for it. If it has gone to the Commissioning Board, it will be the Commissioning Board that pays for it then.

Q130 Dr Creasy: So who manages your care?

Sir David Nicholson: Your doctor.

Q131 Dr Creasy: So your doctor says, "I think you need x treatment but we do not have the budget for it, so somebody else"-

Sir David Nicholson: No, that is not how it works. I am talking about the individual doctor and the consortium. The consortium is a statutory body with statutory responsibilities. It is not an extension of the GP. It is a statutory body. The GP as a deliverer of service-someone who does that-is quite separate from the consortium.

Q132 Chair: But the consortium hasn’t got the money for this expensive patient.

Sir David Nicholson: It is no different from the position that we have now.

Q133 Chair: So what happens to the patient?

Sir David Nicholson: Well, by and large the patient gets treated, don’t they? At the moment.

Chair: No.

Q134 Dr Creasy: By and large?

Sir David Nicholson: Sorry, the patient gets treated.

Q135 Chair: By-go on.

Sir David Nicholson: By a provider.

Q136 Dr Creasy: But who makes the decisions? What you are talking about is the allocation of resource for a particular condition. If it is somebody with a long-term condition, it might be a very expensive patient. Who makes the decisions about the allocation of resource in that situation? Who is the risk pool?

Sir David Nicholson: The risk pool would be a group of consortia. At the moment you do not have a position for most cases whereby if a GP refers you to hospital, someone else gives them permission in order to make the treatment. There are a small number of cases where that does happen and that is done by a clinical panel. That will be no different from the arrangements we have at the moment.

Q137 Dr Creasy: But now 30% of people could be covered by that risk panel.

Sir David Nicholson: Well, I use the example 30% just to illustrate that.

Q138 Chair: Sir David, can I get this clear? There is a consortium. The consortium gets a budget and they can spend that budget. Along comes a patient who is hugely expensive. The consortium decides they cannot afford it. They go to another bit of your organisation that controls this risk pool money. Is that right?

Sir David Nicholson: Carry on. I understand what you are saying.

Q139 Chair: This is why I was asking about regional structure. Within your structure you have got consortia with their budgets; above that, you have got a bit of your organisation with extra money, which is a risk pool. So if consortium A has a very expensive patient, they can go to the risk pool and get extra resources. If that fails, they can come to you at head office and say, "Hang on, we have this huge issue here. We want extra dosh from you."

Sir David Nicholson: No, the risk pool is what it says it is. It spreads risk across the system.

Q140 Chair: But it is money.

Sir David Nicholson: It is not a permission pool; it is in order to help various organisations manage it-

Q141 Chair: I understand that. It is a pot of money.

Ian Swales: It’s an insurance company.

Sir David Nicholson: Yes. It is an insurance; it is not giving you permission, so-

Q142 Dr Creasy: Aren’t you then creating a situation whereby it is an incentive to the GP commissioners to refer things to the risk pool because it takes the risk out of their budget?

Sir David Nicholson: Well, there will be a conversation between the consortia and the Commissioning Board about what they ask the Commissioning Board to take on. That is absolutely true.

Chair: It is no different from a PCT.

Q143 Dr Creasy: So if you have a patient with a debilitating and expensive condition, who is going to make the decision about paying for their treatment and who will hold that responsibility?

Sir David Nicholson: It is no different from what it is now.

Q144 Dr Creasy: So this GP commissioning body says, "No, we cannot afford it, we’ll go to the risk pool." The risk pool says, "Sorry, you should be paying for it." Who makes the decision? Where’s the appeal?

Sir David Nicholson: The GP.

Q145 Chair: You might have got the answer there. What was the answer?

Sir David Nicholson: I don’t understand.

Una O'Brien: I think the most important thing to manage is if consortia are small-

Q146 Chair: We want the specific answer.

Sir David Nicholson: Okay, let me-there are two-

Q147 Dr Creasy: We ask in a completely selfish fashion, because my fear is all these people are going to come to our surgeries and say, "Help me."

Sir David Nicholson: Okay, there are two issues. If you have a risk pool, what you do is you set out in advance the kind of conditions that you want to have in the risk pool and how much money you will have in order to support that risk. A patient will come to a GP, they will have the condition, the GP will refer them to whatever services they have got and the risk pool will resource and pay for it. That is it.

Q148 Dr Creasy: So they will always pay for it, no matter what?

Sir David Nicholson: That’s the arrangement. That is for the pre-arranged stuff.

Q149 Dr Creasy: But will they always pay for it no matter what, whether there are any complications in the treatment, whether they develop any other-

Sir David Nicholson: Well that’s what happens now.

Q150 Dr Creasy: Can you see our concern that there’s a real risk there that patients who develop debilitating conditions that are quite complicated-

Sir David Nicholson: No.

Dr Creasy: -or develop complications become very expensive?

Sir David Nicholson: No. The risk pool would have to pay. They would have to pay it out of the resources that were made available.

Q151 Chair: Can I just ask a supplementary on that one? We are hearing stories in the press that in some areas of the country, under the present system, you may be limited to one cataract op, not the two you need. In the new system, focusing entirely on that, who would pick up the tab to ensure that there is not a postcode lottery on cataracts and that wherever you live you can get your two cataract ops if you need them?

Sir David Nicholson: Yes. That is the role of the Commissioning Board.

Q152 Chair: So quite a lot of this money-the £80 billion-will be held back to pick up expensive patients and to ensure equity of treatment across the country?

Sir David Nicholson: Well, for the expensive patients, only when asked to by the individual consortia.

Q153 Chair: And equity of treatment?

Sir David Nicholson: But the Commissioning Board will have a budget of about £20 billion itself.

Q154 Chair: Okay, and equity of treatment?

Sir David Nicholson: That is the responsibility of the Commissioning Board. The new system sets out, through national quality standards, the high quality services for patients, and those quality standards will be set out in commissioning guidance for each of the consortia. So it will be very clear what the national standards are in that place.

Q155 Dr Creasy: I have a patient who has come to my surgery who says, "The commissioning consortium has said they will not pay for my treatment because the risk pool should and the risk pool say the consortium should." Who adjudicates if there is a disagreement on that model?

Sir David Nicholson: At the moment, if there are particular conditions-I am sure there must be some, but I cannot think of any-there is a mechanism locally where clinicians oversee exceptional referrals, and that is the way it would be done.

Q156 Dr Creasy: So the doctors would make the decision?

Sir David Nicholson: Yes, the doctors would absolutely make the-

Q157 Dr Creasy: Which doctors? The GP consortia?

Sir David Nicholson: The GPs.

Q158 Dr Creasy: So the GP consortium says, "We think the risk pool should pay," and they trump the risk pool saying, "No, we should not pay"?

Sir David Nicholson: But in a sense this is a debate for the bureaucracy to have after the event.

Q159 Dr Creasy: But do you understand from our perspective as people trying to judge value for money that it is a very worrying situation, because you have created an incentive in which GP commissioning bodies will want to put as much as possible on to the risk pool and the risk pool may not want to take that? So we cannot judge where that money is going and if it is being spent well if there is an incentive to try to push cost on to someone else.

Sir David Nicholson: Okay, but that is a preorganised thing; it is not something that is going to happen. So at the beginning of a period the commissioning consortium will have to set out what kind of conditions it does not think it is equipped to deal with.

Q160 Dr Creasy: But who will adjudicate on that decision as to what they should and should not take? Could that lead to delays, because at the moment in the system you are talking about, there are delays in treatment to people if there is a disagreement about who should pay and whether or not a treatment can be authorised, aren’t there?

Sir David Nicholson: In very exceptional circumstances.

Q161 Dr Creasy: But it does happen.

Sir David Nicholson: But not for complex, lifethreatening conditions. That is not what it is.

Q162 Dr Creasy: What about long-term debilitating conditions if somebody wants a different type of treatment? That is an expensive process as well, isn’t it? Who will adjudicate, Sir David? That is going to be the critical question for all of us, because we will be the ones writing to them.

Sir David Nicholson: I think the doctor will. The doctor will decide-

Q163 Dr Creasy: You think the doctor will?

Sir David Nicholson: No, the doctor will decide what is the best-

Q164 Chair: The doctor will, but the doctor does not have the money.

Dr Creasy: Yes.

Sir David Nicholson: Yes, but in a sense, that is not the problem of the individual GP as a provider.

Q165 Chair: It is; it is the commissioning-

Sir David Nicholson: It is not; it is the Commissioning Board. It is absolutely the consortium’s problem, not the individual’s.

Q166 Ian Swales: What about the rogue GP consortium that does not even pay into the risk pool in the first place; decides not to: "Oh, we can carry whatever, because we are quite large"-or we get our sums wrong-"so we are not going to pay into the risk pool"? Will you have any sanction over them or will you force people to cover certain-

Chair: No, he will delicence them.

Sir David Nicholson: But also, the Commissioning Board allocates the resource, so the Commissioning Board decides who gets what.

Chair: Okay, we have been around this one.

Sir David Nicholson: This is not a change in the arrangements around people getting their care; this is not trying to put an obstacle in front of-

Q167 Dr Creasy: No, the issues is about budgeting where the money goes and who is held accountable for how it is spent, because right now, we challenge the PCT. If you take away the PCT and you are now leaving those decisions to the GP commissioners or the risk pool, at some point people are going to fall through the cracks unless there is an adjudication mechanism.

Sir David Nicholson: Well you will hold the consortium to account in the way that you hold the PCT to account.

Q168 Dr Creasy: And the consortium says it should be the risk pool; the risk pool says it should be the consortium. Who will make an intervention in that process? Where is the accountability for that decision?

Sir David Nicholson: Well the accountability is the consortium’s accountability to their population.

Chair: There is a lot evolving, so I think you should take this one away and if you can write to us with clarity on it, that would be really, really helpful. We are not trying to catch you out, but to ensure that there are proper accountabilities, particularly in a situation where we have reducing real budgets, where this could occur. But I am really pleased to hear you can have your double cataracts wherever you are because somebody is going to pick up the tab.

Q169 Mr Bacon: Two questions, one immediately following on from something that Stella just said, which was that in the old world we have held the PCT to account. It reminds me of what you said earlier about the fact that hospital trust chief executives are accounting officers and are held accountable to Parliament. Indeed, we have had hospital chief executives sitting here as accounting officers. In the Report, in the table on page 23, it describes who is accountable within the organisation and there is a list there, including the Permanent Secretary and the NHS Commissioning Board; you two represented here. Underneath that, it says, "Accountable officer", and then underneath those two are two further accounting officers; the Trusts and the arm’s length bodies. What is the difference between an accounting officer and an accountable officer?

Una O'Brien: Perhaps I can give you my interpretation of it.

Mr Bacon: It might be a question for the NAO.

Una O'Brien: Of course and I am sure that Mark may wish-

Mr Bacon: Because I know what an accounting officer is.

Una O'Brien: I certainly know how I operationalise it, but Mark, if you want to-

Mark Davies: Well, yes. An accountable officer would be somebody appointed within the health hierarchy and accountable through that hierarchy to David or Una. An accounting officer is somebody who will be appointed and would be accountable to Parliament.

Q170 Mr Bacon: What I am really asking is if a GP consortium decides to go haywire and runs off to the Netherlands Antilles with the money-we have seen public money going off to Caribbean tax havens since I have been on this Committee, so it is not such a stupid question-will the chief executive or managing partner of the GP consortium be coming before us to explain his actions, assuming he has not been arrested and in jail, or will you be?

Sir David Nicholson: It will be me.

Mr Bacon: It will be you, okay.

Q171 Chair: And will you on hospitals?

Una O'Brien: The accounting officers-which is a different role from the accountable officer of the consortia-are directly accountable to Parliament where there are NHS foundation trusts.

Q172 Chair: So we are expected to see however many foundation trusts we end up with?

Una O'Brien: Yes. On the specifics of what goes on inside that operational unit of a foundation trust, that is what the legislation currently says.

Chair: It is a bloody nightmare.

Una O'Brien: Yes.

Q173 Ian Swales: Can I just clarify this, because I think one of the issues we have had as a Committee is this question of arm’s length bodies and the extent to which the National Audit Office can intervene in what they are doing. When it says "accountable to Parliament", it has not been evident to me that that direct link between an arm’s length body and Parliament, particularly as expressed by this Committee, is actually happening. So can you just, perhaps by way of an example, pick an arm’s length body and say how you see them being accountable in the future?

Una O'Brien: Well the first thing I would like to say is that, in relation to Departments and their arm’s length bodies, across the board we are tightening up the governance of that relationship. In any case, it is something that I would want to do inside the Department and am taking this opportunity to do that, as we bring new arm’s length bodies into place and we implement our arm’s length body review. The important thing to say is that there is a line of accountability to Parliament, because where there are accounting officers, just as in the future you may wish to speak to David, you can call them directly. In terms of a full and fair account to Parliament, to simply do it through the Permanent Secretary as the sole accounting officer does not give you the full picture that you need. So where appropriate and where the responsibility for spending is held very clearly within an arm’s length body, I think it is right that their chief executive should be designated as an accounting officer and that you are able to call them.

Chair: You may think it is right; it is just ruddy impractical that this Committee is going to have to hold to account I don’t know how many foundation trusts that we will end up with. As Richard said very much earlier on, there will be things going wrong-there has to be another system; there has to be. If you are evolving it, I am saying to you at this point and I will say it in the House next week, it is not acceptable to have in that system Parliament having to hold to account 200 to 300 hospital trusts. It is absolutely bonkers; it will not work and it therefore, I think, undermines proper financial accountability to Parliament. It is a reform too far.

Q174 Ian Swales: Because you have removed the Department of Health-sorry, you haven’t removed the Department of Health. Just to finish my question, can you pick an arm’s length body? I think we understand the foundation trusts. Pick an arm’s length body where you think this new arrangement will apply, just to make sure we understand what sort of bodies we are talking about. Because we are not talking about private providers here, are we?

Una O'Brien: No, no.

Ian Swales: So what are we talking about?

Una O'Brien: The arm’s length bodies of the Department of Health will be the NHS Commissioning Board, the Care Quality Commission and Monitor. The Health Protection Agency is actually coming into the Department of Health, so that will no longer be an arm’s length body. Those are the sorts of bodies that I am talking about; that is what encapsulates an arm’s length body.

Q175 Chair: You haven’t got a job, Una, at the end of this.

Una O'Brien: I certainly have, because the Department-

Chair: We have, holding them all to account, but you don’t.

Una O'Brien: If I may, I think there is a very, very important point that I would like to make about the way in which the accounting system is changing, because this is really significant in relation to your point about foundation trusts. Currently, the foundation trusts’ accounts are laid before Parliament separately.

Chair: I understand that.

Una O'Brien: Okay. Under the alignment arrangement and the changes that are being brought in from 2011-12, in order to bring a full account to Parliament of the total amount voted for Health and the total amount that is spent, the accounts of foundation trusts will be consolidated within the Department of Health’s accounts. We are in the process now of implementing that change and I think that will improve accountability to Parliament, because it will give you a fuller picture. But the accountability also lies in the system for which the Department is responsible, and that is another really critical element of it; it is not simply-

Q176 Chair: I do not understand what that means.

Amyas Morse: It is important and it is-

Q177 Chair: What does it mean?

Amyas Morse: This came up in our accountability hearing and I have been pondering it and it is quite clear in management of public money. We can call the accounting officers from individual Trusts if we need to; that is true. But what we can also do, and probably do rather more rigorously than we have done, is to examine whether the system of accountability-If Una is the chief accounting officer, the people in arm’s length bodies are still accountable to her, actually, and therefore she is still accountable for having a system of control and management that holds them to account properly. If it does not work or it is inadequate or it is seen not to work in practice, we can very reasonably ask you to come and explain whether that system works properly or not. I think there is something to be done in that area. I am not saying it would be easy, but I think that is part of the solution.

Q178 Ian Swales: Let me give you an example of the confusion. You just gave the Care Quality Commission as an example of a group that would be an arm’s length body and would be accountable to Parliament, yet on the top of page 24, it says, "A new body, Health Watch England, will be kept independent from Government by being established as a committee of the Care Quality Commission."-will be kept independent from Government. That seems to cut across the idea of whom they are accountable to. If the Care Quality Commission is accountable to Government, how can one of its committees by design be independent from Government? It just does not seem to hang together.

Una O'Brien: Foundation trusts exist within a regulated system. They are independent, autonomous public sector organisations that exist under the umbrella of the regulator-currently Monitor-and will be in a different regulatory regime after the legislation is passed. So I think that there is a different relationship between the Department of Health and its immediate arm’s length bodies on the one hand and the Department and foundation trusts on another; it is not a parallel relationship. So I am not in a line management relationship to foundation trusts at all and that is set down very clearly in the 2003 legislation. That is the legislation and those are the powers that I have and I do not have.

Mark Davies: Can I just make one point to clarify this? In a sense, on the foundation trust side, you have the accounting officer within the Trust itself, but you also do have those two regulators in the form of Monitor and the Care Quality Commission, which both have very specific duties past, present and future. They have accounting officers who could be called alongside the relevant chief executives of the Trusts themselves.

Chair: But I like to know where the buck stops, and at the moment I cannot work out whether the buck stops with the foundation trust, the Department, Monitor or the Care Quality Commission and if somebody could make that clearer to me, I would be much happier about proper accountability to Parliament. I just do not know where the buck stops.

Amyas Morse: I think we do need more clarity over this, although-and this did come up last week-it is fairly clear in Managing Public Money that your duties as an accounting officer do not stop because you have appointed somebody as delegated accounting officer, and that part of your job as an accounting officer is to make sure that those other accounting officers do their job.

Q179 Mr Bacon: Presumably part of your statement of internal control is that you have the mechanisms to do that. Is that correct?

Una O'Brien: In relation to the arm’s length bodies, I see the board minutes, I receive the statements of internal control-

Mr Bacon: I was talking about the Trusts, actually.

Una O'Brien: Yes. Well when it comes to foundation trusts, it is different in the legislation, because the accounting officer responsibility goes with the role of chief executive and that is set down in the legislation. So it is not something that I can give and take away or that Monitor can give and take away currently; that is just the way the legislation is set up, in order to fulfil the intention of Parliament that foundation trusts should have those freedoms. That is the situation that we have at the moment and that is the intention of current Government policy as well.

Q180 Mr Bacon: Can I come on to another issue relating to central and local? That is something Sir David mentioned earlier about the savings and where you are going to get them from. One of the headings was a lot less money kept at the centre. How much less money do you anticipate will be kept at the centre?

Sir David Nicholson: I am just thinking about this coming year. I think we are going to keep about £100 million at the centre. At its peak, that has been several billion in the past.

Q181 Mr Bacon: Okay. So when you say several: two, three, four, five?

Sir David Nicholson: I couldn’t tell you. Certainly more than four or five.

Q182 Mr Bacon: But it is now down to £100 million?

Sir David Nicholson: It is now down to £100 million for next year.

Q183 Mr Bacon: That brings me straight on to my next question, because it says in the Report, Ms O’Brien, that you are going to become a banker, in paragraph 2.20. Doubtless you are getting very excited now, because of the prospect of all these bonuses that will be coming your way. It says, "The Department"-that is you-"will provide an ‘operationally independent banking function’ to foundation trusts, including making repayable loans to Foundation Trusts when there is a reasonable expectation that they will be repaid." It is good to know that you are going to make loans that you expect to be repaid rather than ones that you think will not be. How much money do you think you are going to be putting aside for this function?

Una O'Brien: I think it is just too early to say. We have a lot of details to work out. The purpose is to regularise a system that happens anyway at the moment and to put it on a more transparent basis to make the principles absolutely clear. It is a strengthening of the current system, and the transparency is to be welcomed. We have had a very constructive and challenging conversation today. This is month seven and month eight. We have done a lot to close down the policy uncertainty in so far as we have the White Paper, the Command Paper and the legislation. The next stage for us is to work through these operational uncertainties, of which there are many and they are interconnected. I think that it is good to have your challenge at this point, when we are turning our minds to those things, and we will be more than happy, David and I, to come back at any point on some of these subissues that in themselves merit an indepth conversation.

Q184 Mr Bacon: This is a rather important subissue, because if it turns out under the new world that foundation trusts cannot actually make a go of it unless they are in deep hock to you as the Department, Sir David’s number could go back up from £100 million to several billion, potentially quite easily. So it is really quite central; I certainly would not think of it as peripheral. I am not saying you said it was peripheral. This is loans to foundation trusts, isn’t it-acute hospitals, basically-not loans to consortia?

Una O'Brien: That is right. But they do not have to come to us for a loan; they can go anywhere they like.

Q185 Mr Bacon: They could go to a bank.

Una O'Brien: Exactly.

Q186 Mr Bacon: Yes, and banks would also make loans on the reasonable expectation that they would be repaid. Would you be offering market rates or better than market rates?

Una O'Brien: As I say, no details on that have yet been worked through.

Q187 Nick Smith: Do any other health systems in the world have their own internal bank like this?

Una O'Brien: I couldn’t say.

Q188 Mr Bacon: Would these loans all be inside one financial year, or would they potentially be borrowing from the Department to enable them to tide themselves over and balance within a financial year, but the loan continued to outstand over the financial year into the next year?

Una O'Brien: As I say, all those details will have to be worked through and they will become clearer as we start to develop how the regime will work.

Q189 Mr Bacon: At the moment they have to balance, don’t they?

Una O'Brien: What has to balance and what has to be met is the Department’s expenditure limit, and that is the fundamental discipline that we work within and that this would be contained within.

Mr Bacon: Okay, thank you.

Q190 Nick Smith: Can I just come back to the question? Are there any other health services across the world that have this internal banking suggestion that you put forward?

Chair: Write to us about that.

Una O'Brien: I just do not have that information at my fingertips, but of course I will write to you.

Chair: It will be quite interesting.

Q191 Stephen Barclay: Three specific questions from me; I am conscious of time. In the new landscape obviously the reforms rely on the role of the GPs. Just picking up on one of the earlier points about unforeseen events, can I just clarify whether the final salary pensions of GPs are within the scope of Lord Hutton’s review and, given how powerful the GP trade body is, as we saw from their previous contracts, is there any risk attached with changes to GP pensions?

Sir David Nicholson: I couldn’t answer that question; I will have to send you a note on that.

Q192 Stephen Barclay: Thank you. Out-of-hours GPs has obviously been a hot topic and a big constituency interest of mine; it was my constituent Mr Gray who was unlawfully killed by the German out-of-hours GP Dr Ubani, who is still able to practice in Germany although he is banned in the UK. So there is an imbalance firstly between someone being able to work here because they are qualified in Germany but being banned here and not being banned in Germany. The GMC do not have unfettered control in setting language and competency tests for European qualified doctors when they come to the UK. It may be something you want to send me a note on, but I would be very keen to establish by what time UK legislation is going to allow the GMC to set the language and competency tests in the new health landscape in order that they can ensure that those coming to this country are correctly qualified and can speak the language.

Sir David Nicholson: We will send a note on that, yes.

Q193 Stephen Barclay: The third thing is around confidentiality agreements for clinical staff who have left their posts for nonclinical reasons or for whistle-blowers. This really ties into Amyas’s point around your ability as the accounting officer to meet Sir Nicholas Macpherson’s test, which, as he set out, is in order that you can satisfy yourselves that the financial systems in place in organisations are correct. Could you clarify in the new landscape whether those sorts of confidentiality agreements are going to be allowed to continue?

Una O'Brien: It is not something I have any reason to think is changing, but I will certainly verify that.

Q194 Stephen Barclay: I am very keen for it to change; that is my point. Do you have sight-

Una O'Brien: Could you rephrase your question?

Q195 Stephen Barclay: Yes, okay. At the moment there is concern that whistle-blowers or clinical staff who-

Una O'Brien: That their confidentiality is protected?

Stephen Barclay: Well, the Trust that is potentially at fault-or there are serious issues within the hospital that the Trust management may want to cover up-are signing confidentiality agreements with those clinical staff that in essence cover up what has gone on.

Mr Bacon: Some years ago the NAO did a report on the management of the suspension of clinical staff in situations where their clinical competence is not in doubt. The most famous case that comes to mind is that of Dr Raj Mattu, which ran for several years. He was a cardiologist who pointed out that the hospital management’s proposal for changing the number of specialist units-so that instead of having one per patient, you would have, shall we say, four sets of machines for five patients on the basis that that would probably be all right most of the time-was actually causing deaths. He was suspended, but there have been lots of other cases-the NAO did quite a substantial report on this many years ago now-where clinical staff were suspended by a Trust where their clinical competence was not in doubt and then public money was used to pay them salaries for sometimes 18 months, two years or even longer, while the NHS managers-in this case a foundation trust-and the employee-the competent clinician-were in a longrunning dispute that got settled more or less satisfactorily from somebody’s point of view and was then subject to a confidentiality clause, including quite often a big payoff.

Chair: I think you are going to have to write to us on this one.

Stephen Barclay: It is just that it is even more important during a major change that clinical staff and whistle-blowers are able to speak out. This has been flagged in the past and these confidentiality agreements are still continuing. So if it needs to be in a note, so be it, but as the accounting officer, surely you should be driving the change by saying, "Let’s get transparency on this so we can see exactly what’s going on."

Q196 Chair: We have to draw this to a close, but can I just ask you finally on transition, because we have not covered that enough? Transition is obviously a huge area. Currently your estimate of the cost is-

Sir David Nicholson: £1.7 billion.

Q197 Chair: And your redundancy costs are?

Sir David Nicholson: Just slightly less than that.

Q198 Chair: Right, and in those redundancy costs, people are constantly raising with me whether you have put into that the whole load of people who are going to go at 50 and therefore you will have to roll up their pension costs into that?

Una O'Brien: The redundancy estimate in that £1.7 billion is based on a detailed set of assumptions. We do not know all the individual cases yet, so it is very difficult to be precise about the costs, and I would emphasise that, because we do have more work to do in the coming months to get the precision of cost that we want and we need. But in the impact assessment, we have included assumptions about average salary and length of service-

Chair: That might have changed.

Una O'Brien: And we put it high in order to make sure that we are not underestimating the costs. So we have actually got underlying assumptions that are set out in the impact assessment.

Mark Davies: Just to clarify that, actually the redundancy costs currently are around £1 billion; the estimate is £1 billion, plus or minus.

Q199 Chair: Okay. Now, this is a massive change and therefore clearly preventing those costs-the £1.7 billion-escalating is going to be a huge challenge. Going back to the very beginning: are you satisfied now-you two, as the owners of this project as you have announced yourselves to be-that you have got mechanisms in place to contain those costs so that they do not spiral?

Sir David Nicholson: We think they are a good estimate of what will happen. However, the unknown for us and what will drive that cost up is if the GP consortia choose not to use existing NHS arrangements for commissioning support. That is the big unknown as they go through the process of identifying what commissioning support they need and how they are going to spend the £35 a head. The more they decide to use nonNHS but go out to the private sector, the bigger that redundancy bill will be for us. So on one level we are saying to the NHS people, "You had better organise yourselves and get yourselves into a place where you are very sellable to GPs, so the things you are doing are responding to what their needs are"; that is one way we will reduce it. On the other hand, we have to make it clear there is only one pot of money, so if GPs go and use lots and lots of people from outside the NHS, there is only one pot of money and that will be the Commissioning Board budget.

Q200 Chair: But actually, you have just talked about commissioning; the same thing could happen on the provider side, because if you suddenly get new providers popping up all over the place and existing providers going out of business, somebody will have to pick up those redundancy costs.

Una O'Brien: The estimates that are made in the impact assessment relate to the management changes in the arm’s length bodies, the SHAs, the PCTs and the Department of Health itself.

Q201 Chair: They do not relate to the providers?

Una O'Brien: They are very specific to those management cost reductions.

Q202 Chair: That is interesting, because that means that an extra cost of transition could arise out of the change in the landscape of providers.

Una O'Brien: These are things in the future about how the new system will work in practice. So there will be change in the new system and it is designed to drive change; to drive innovation; and to drive greater transparency. It would not be possible for us two to three years out to have any sense of, or even to be able to understand, what that dynamism in the new system might introduce in terms of costs and benefits.

Q203 Chair: Okay. The 2% that you have taken out of PCTs to meet nonrecurring costs, which I assume are the costs of transition, is money that has gone out of paying for direct patient care in one way or another.

Sir David Nicholson: This is the money that we have identified-

Q204 Chair: But it has gone out of direct patient care?

Sir David Nicholson: Well it is not just the cost of redundancy, of course; 2% of the budget is significantly greater than the total cost that will be described there.

Q205 Chair: But it has gone out of direct patient care?

Sir David Nicholson: No, but quite a lot of it is going in double running; it is actually going in investing upfront in the community in order to make the savings in hospitals. So it has not all gone out of direct patient care by any stretch of the imagination. The other thing I would say is that the savings we are going to make on the management side, on which we are putting this money into redundancy costs at the moment, come back within two years, which I think is a remarkable payback.

Q206 Chair: Yes. I am very sceptical. Have you got the proper databases and information for us to test that over time?

Una O'Brien: Just to pick up on your earlier point, we absolutely are going to be monitoring all the costs. These are assumptions in the impact assessment and we have set out all these assumptions; we now have to build the real cost. But the point about the reduction is that it relates to the total amount that is spent in 2010-11 on management costs and what will the total amount be when we get to 2014-15. That is how the difference is calculated. It is on that basis that we are able to express a figure, because we know that we have to bring the budget down.

Amyas Morse: Just one little point to be careful of, I guess-I am sure you will have this in mind, David, in particular-you mentioned £35 per head for administration. Of course, quite honestly, if you have a large, wellorganised consortium they will have much more economy of scale in how they administer and other GPs may struggle. I guess you will do some modelling to make sure this does not turn out to be a Christmas present; in other words that we are really in control of those costs. Because if you actually totted it up, most of the population of England must be patients somewhere, so it is about £1.75 billion in total if you add it up. That is quite a large chunk of money on a pretty broad-brush assumption about cost. Hopefully by the time you are implementing you will have something a little bit more targeted than that in place.

Sir David Nicholson: Well we announced the £35 a head in order to give people a planning assumption on which to take it forward; that was the basis of what we did, because if you do not do it, people are stuck with: "How many?" But I should say it is the running costs of the totality of that system, which is the largest integrated healthcare system in the world and has running costs and administrative costs significantly lower than almost any other system you would like to identify.

Amyas Morse: I was not trying to challenge; I was just saying that over time what would be very helpful would be to see how we go from a ballpark number, which I understand you need now, to something that is not driving behaviours you do not want to see.

Sir David Nicholson: Yes.

Q207 Chair: Richard has a final question. Before we come to that, I just want to say that I am really grateful, because I hope that in today’s proceedings we have raised some issues that you will go away and think about. Arising out of it-we will discuss this with the NAO-we will probably ask you to come back pretty regularly over the coming period of transition, I am afraid, to account to us so that we can keep you thinking about accountability to Parliament for both money and value for money.

Una O'Brien: We would be happy to do that and what really matters is that we can have that sort of relationship.

Q208 Mr Bacon: I would welcome that too and, Sir David, you did say there were some clever people in the Department you hoped; I would just like to remind you-you probably do not need reminding-that out there are a lot of general practitioners who are both very clever and very adept and agile. There is somebody nodding behind you, which is always a dangerous sign in this Committee. So just be aware of that, I would say, in light of what the C&AG has just said, because the medical community in this country quite often wins over vis-à-vis the Department of Health, and we want to make sure that we do get value for money.

I had a question. Very quickly, there has been a lot of concern that I have heard expressed very recently about the position of cancer networks and how they are going to work. Can you just say something about how cancer networks will be protected in the new world?

Sir David Nicholson: We are obviously protecting them next year. They are currently funded out of what is described as "the bundle", which is a bundle of money that is made available to the service to do these sorts of things. After 2012, then it is a matter for the Commissioning Board to decide whether it wants to take those forward.

Q209 Mr Bacon: Can you just remind us who is the boss of the Commissioning Board?

Sir David Nicholson: I have been appointed the chief executive of the Commissioning Board-

Mr Bacon: It will be you, yes. I thought I was asking the right person.

Sir David Nicholson: I am absolutely fine to say on the record that cancer networks are a fantastic thing that have created huge opportunities for improving outcomes across the system. I cannot imagine a period where we would not have vibrant cancer networks operating in the system.

Chair: But you are holding less money at the centre.

Sir David Nicholson: How they are paid for obviously is a whole series of other issues, but I think they are a vital part of improving outcomes for patients.

Mr Bacon: Thank you.

Chair: Thank you very much indeed.