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Lord Clement-Jones: As quite a strong supporter of the new earned autonomy system, I feel rather less satisfied now than I did at the beginning of the Minister's response. There is a real cultural problem here. Quite honestly, if I applied what the Minister said to any organisation of which I had any experience I should find myself with a revolution on my hands. The

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setting of objectives is a mutual process. The noble Lord says, "We don't leave it to health authorities to come back to us with some suggested objectives; effectively, we set them. However, there are some safeguards". It is like me saying to my employees, "I'm not going to carry out an appraisal this year, I'll jolly well tell you what your objectives are".

The Minister says that the clause is not overly prescriptive, but this provision is bolted into its structure. I became more and more uneasy as I listened to his response. It is rather like looking at the objectives of one of my people and saying, "What we're after is X per cent growth this year", and then, six months later, saying, "Aha! It wasn't based on turnover, it was profit", which is a different system of measurement. It is extraordinary. We seem to have a system where the Secretary of State has all the cards and, culturally, the health authority is totally at the mercy of the centre.

The Minister has assured us that there are safeguards involved, but the culture of the clause is deeply unsatisfactory. We are not talking about a mutual discussion, or a mutual agreement; the system seems to me to be very centralist. Indeed, it is far more centralist than I thought it was when we started the discussion.

Lord Hunt of Kings Heath: At the risk of disappointing the noble Lord, I should like to speak further on the matter. In a national service, which is accountable to Parliament, it is surely right for the Secretary of State to take a leadership role in relation to encouraging the improvement of performance. That is what the performance fund is about. Surely it is right for the Secretary of State to set the criteria under which those performance arrangements will take place. It is a national service.

We are having a debate with the health service at present about the criteria, the targets, the "must dos", and the other targets that will need to be reached, to enable those bodies to become green light bodies. That is only right. As the years go by, we expect to have a close dialogue with the NHS. However, at the end of the day, it must be for the Secretary of State to set those criteria.

Lord Clement-Jones: At this stage of the proceedings, I am glad that I can respond to the Minister. As I said, I am all in favour of strong leadership, but objectives must be set in a mutual fashion. That does not appear to be the case under this clause.

Lord Hunt of Kings Heath: We have just consulted on a detailed paper, which asked for the views of the health service on how the whole programme should work. We shall continue to do that on a regular basis. Unless the NHS feels confident that we have the right system, clearly it will not work. I agree with the

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philosophy that the noble Lord is espousing; namely, that, at the end of the day, those concerned must feel that it is a fair system.

Earl Howe: I listened with great attention to the exchange between the noble Lord and the Minister. I am right with the noble Lord, Lord Clement-Jones, on this point. I have to say that I do not believe that the Minister has dispelled the doubts that I raised. I extend the point made by the noble Lord in the following sense. After spending hours and weeks of their time ensuring that they achieve certain targets, it is demotivating in the extreme for managers, who believe that they are doing everything that is required of them, to find that their way of evaluating the performance of their authority is not quite the same as the method employed by the Secretary of State. I am worried that the Bill explicitly leaves the way open for such a situation to arise.

I understand what the Minister said about the difference between setting criteria and what one might describe as the "weighting" attached to the performance. However, it still seems to me that the clause allows the Secretary of State to notify performance criteria to an authority without telling it what weight will be attached to those particular targets in the context of overall performance. Once that happens, you create a situation where the managers on the ground are in the dark about the resources that they need to allocate to address the particular issue. They may well allocate some money to the problem that the Minister thinks is appropriate, but they may allocate more money than he believes to be appropriate. But how are they to know?

I am disappointed that the Minister does not see more merit in my bottom-up approach to the setting of targets. It does not seem to be so difficult to do. There is no question in my mind of carte blanche being given to health authorities to set their own targets. I made it clear that Ministers would decide whether or not the targets were reasonable--the kind of mutual process to which the noble Lord, Lord Clement-Jones, referred. However, more important is the psychological point that a bottom-up approach would enable managers to feel a real sense of ownership of the targets they attempt to meet. They would know that these targets were 100 per cent relevant to the needs of their area. That will not always be the case under the scheme proposed by the Government. That is to be regretted.

However, having said that, I think that we have probably exhausted the topic for the time being. Like the noble Lord, I shall read carefully what the Minister has said as it may contain more words of comfort than I realised when the Minister was speaking. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 18 to 21 not moved.]

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On Question, Whether Clause 2 shall stand part of the Bill?

Earl Howe: The Explanatory Notes tell us that Clause 2 is directly linked to the concept of earned autonomy in the so-called "traffic light" system of ranking health authorities.

It is easy to see how the best authorities, rated as green light authorities, come within the clause as it is drafted. The clause refers to satisfying objectives and performing well against criteria. That is indeed what green light authorities will do in order to earn extra funding. What is less easy to see is how, as the clause is worded, the yellow and red light authorities can be allocated extra money, albeit with strings attached, if I can put it that way.

By definition, yellow and red light authorities have failed in some measure to satisfy the objectives that they have been set. How does a clause which provides only for success cater for those health authorities that are not successful? Anyone reading the clause might be forgiven for thinking that the idea is to reward green light authorities with extra money but not to reward yellow and red light authorities. Yet we are told that even the less good or failing authorities will receive extra money. I simply do not understand how the clause achieves what the Explanatory Notes say that it does.

My other question relates to the way in which the traffic light system will work. My noble friend Lady Noakes said quite correctly during the debate on the gracious Speech last December that the NHS Plan anticipated a 25/75/25 per cent split between green, yellow and red light authorities respectively, yet she received a letter subsequently from the Minister which stated:

    "Work to develop a fully operational traffic light system is still ongoing and no decision has yet been taken as to exactly how or how many NHS bodies will be classified green, yellow or red. Therefore it is incorrect to assert that 25 per cent of health bodies will automatically have red status, as was suggested in the King's Fund article in the HSJ on 7th December".

So much of the detail of the NHS Plan seems to be changing and evolving that it often looks as if the department is making things up as it goes along. Of course, I am sure that it is not. We need to be told with a little more clarity how in the first instance it is envisaged that health authorities and, indeed, other health bodies within the scheme will be classified as to their colour and what sort of split between green, yellow and red Ministers have in mind. How many green light authorities are there likely to be? Will there be any kind of quota or limit set on those numbers and, if so, will the quota be large or small? What of red light status? At the moment we do not know whether the red light is to be an exceptional measure for a seriously failing authority or trust or whether it is likely to be accorded to a significant number of organisations. Without that information we simply cannot tell how the scheme is likely to operate or what its impact will be on the NHS. If there are arbitrary limits placed on the number of authorities eligible to receive red light

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status, be it 10 per cent, 25 per cent or even 50 per cent, there is bound to be considerable damage done to NHS morale.

Good managers in the NHS have a choice. They can go and work for an authority that has earned its autonomy and can spend money as it chooses or they can apply to work for an authority whose extra money may only be spent in ways laid down by the NHS Executive. For which working environment would you opt? Would you not want to be paid more to go to a failing authority than to go to a successful one? As far as I can see, there is no provision here for incentives of that kind.

The over-arching problem with the traffic lights scheme is the one to which I have already referred. How do those organisations at the bottom of the pile succeed in recruiting and retaining staff in the face of their red light status, and what is certain to be a terrible dent to staff morale? How do they present themselves to the public as places in which patients would want to be treated? One can imagine a doctor telling a patient that he needs an operation and the good news is that the waiting list at the local acute hospital is quite short, but the bad news is that it is classified by the Government as red and failing. What the patient cannot say is "send me to another hospital". If he says that the doctor will be obliged to tell him that as a patient, effectively, he has no choice as to where he is treated because of the limitations placed on freedom of referral.

The flaw in the system as currently proposed is that hospitals will be encouraged to compete with each other for the valued green light status. They will be competing to meet targets set by the Secretary of State. Those targets will not necessarily be those directly in the clinical interests of patients, the waiting list initiative being an example and the cancer pledge being another. They will be in a double bind. To meet politically driven targets such as the waiting list initiative they may have to compromise on clinical priorities. Even when they have done that successfully they may still not achieve green light status because they will find that the quota of green light organisations is full up. Without each and every hospital having the realistic prospect of achieving green light status because of the limit imposed on how many can get it, there will always be yellow and red light hospitals struggling to present themselves as attractive to both staff and the public. It will be a very difficult trick to pull. We all agree with the need to drive up quality in the NHS, but I have grave doubts whether an openly divisive scheme like this is the way to do it.

10 p.m.

Lord Clement-Jones: My Lords, I hold a slightly different position with respect to the traffic lights system. I believe that properly applied it could be a very effective way of ensuring that quality standards are improved in the NHS and that we see a

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considerable increase in quality. It is an edifice on which a great deal of the success of the NHS Plan is predicated.

Since it was announced my party has always had doubts about the fixed allocation or the possibility of fixed allocation. There have been mixed messages coming from the department and the Minister about there being a fixed allocation of red, green and yellow status. Initially, it appeared that there would be such an arbitrary allocation. Later, messages have suggested that that is not the case. Certainly, at Second Reading the Minister denied that there was going to be a fixed allocation. The more detail the Minister can give about that the better. If there is a situation where a red light status trust or health authority cannot move into the next category--although by any reasonable standards it has met the criteria--that is grossly unfair. It means that one is "disincentivising" managers, lowering morale and effectively driving them into trusts which are already in a different category. That is an extremely negative way to proceed. A proper performance management system should not operate in that way. It should give every chance for the failing hospitals to achieve a higher status.

The noble Earl, Lord Howe, raised many extremely good points. Since the consultation on the performance management system is so important, can the Minister undertake to make public the framework of performance management which the health authorities have agreed as the sensible way forward? If that is a possibility, perhaps the noble Lord can give the dates that we are talking about. It is an important new instrument. If we are to make the best use of new resources, we have to ensure that the system works and is not an arbitrary, centralising process. I have argued that it is not; but I do not want to be proved wrong in a couple of years' time.

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