The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 938 - 939)


Mr David Fillingham, Ms Rhona MacDonald, Mr Keith Derbyshire and Dr Stephen Lorrimer

  Q938  Chairman: Could I start by thanking you very much for coming. You know what this Committee is about, you know our mandate and we are very grateful that you are here to help us. Could I just deal with one or two housekeeping matters first? This is a public hearing. The public will be admitted to it, if any of them turn up! If they do not, it does not matter. The evidence sessions are broadcast live on the Internet. A full transcript will obviously be taken and you will have an opportunity to look at the transcript. We will send it to you very soon after you give evidence. If you want to correct some of it, that is fine. I think on the Hansard basis you can correct grammar but you cannot actually correct the substance. I think that is all I have got on housekeeping. Can I start by asking you in effect to make an opening statement? It would help us, I think, to hear from you how you do it, how it works and what the effect of it is, please.

  Mr Fillingham: Okay. Good afternoon everybody. My name is David Fillingham. In my day job I am Chief Executive of the Royal Bolton Hospital, but I have also been Chair of ACRA, advising the committee on resource allocations since 2006. Perhaps my colleagues could introduce themselves as well, my Lord Chairman, and I will make an opening statement.

  Ms MacDonald: I am Rhona MacDonald. I am Chief Executive of the Bath and North East Somerset PCT, but I am also the Chair of the Technical Advisory Group to ACRA and a Member of ACRA.

  Mr Derbyshire: I am Keith Derbyshire, Senior Economic Adviser in the Department of Health and Deputy Director of Finance, and I sit on ACRA and TAG as well.

  Dr Lorrimer: May name is Stephen Lorrimer. I am also a Deputy Director of Finance and I lead the team which is responsible for the operationalisation of the resource allocation process and also provide secretariat support to TAG and ACRA.

  Mr Fillingham: If I could try and briefly explain who ACRA is and how we work—and apologies for the acronyms, the NHS does like its acronyms, being one itself—ACRA is the Advisory Committee on Resource Allocation. I will say a little about the funding formula and how the funding formula works. ACRA is an independent expert committee which overseas the development of the formula which is used to allocate resources to Primary Care Trusts in England. The Department of Health has actually used a funding formula for quite some considerable time. It was one of the first health systems to use a formula in this way and it has used it since 1977 to allocate resources to PCTs or to their predecessors. ACRA itself was established in 1997, so it has already got quite a pedigree, and it is made up of 27 members, and that is a combination of expert academics, namely statisticians, economists and geographers, and general practitioners, NHS managers (of whom Rhona and myself are two), Department of Health officials and experts, and then representatives from other government departments as well. Our role is to oversee the development of the formula and make recommendations to ministers. So, to be clear, although we are an independent advisory committee, ultimately it is for ministers to make decisions about funding levels and about pace of change, and I will say more about that in a moment. We have two objectives which have been set for us by the Secretary of State for Health in carrying out this work. The first is to make sure the funding formula ensures equal opportunity of access to healthcare for people who are at equal risk, and that is our definition of fairness or equity, I guess, and then secondly to contribute to the reduction in avoidable health inequalities. We try, through the funding formula and the allocation process, to achieve both of those objectives. The funding formula covers hospital and community health services, the drugs bill and primary medical services and by far the largest part of that, the biggest single component, is hospital and community services. ACRA, as I have said, has 27 members but we are supported by a technical advisory group, which actually Rhona MacDonald chairs, and that has a stronger make-up of expert academics, particularly statisticians and economists. Our work programme follows the Department of Health's allocation of resources to the NHS and since 2003/4 typically we have moved to see two or three year allocations of resources rather than single years, which means our work programme tends to span a two to three year period. Then following each allocation round we make recommendations to the Secretary of State based on his commission to us, and that involves us carrying out our own analytical work and research, particularly drawing on analysts within the Department of Health, but we also commission extensive external research from experts in the field. I said I would mention the pace of change, because I think it is important to say that ACRA does not determine the funding for any given PCT in any particular year, and that is because what we do is develop a formula which determines the target allocation for each PCT. The funding which a PCT gets is then a measure of the distance that PCT is from its target allocation. So PCTs have a historic position. We set a target and the pace of change policy is then determined by ministers and the way in which that worked in the last allocations round, for example, was that all PCTs got a reasonable uplift, a good settlement, but those which were further from their targets got a higher settlement and those which were some distance from their targets a slightly lower settlement. My colleagues from the Department of Health could explain that in more detail if you wish. Just to turn to the formula itself, there are four main stages to the way in which we develop the allocations formula. The first is the population count, so the starting point for the funding formula is the population for which the PCT is responsible. That is made up of those people in that area who are registered with general practitioners, who are on GP lists, together with people who live in the area but who are not actually registered with a GP, so that would include, for example, prisoners, the Armed Forces and asylum seekers, and the populations are based on ONS (Office of National Statistics) estimates of the sub-national population projections. That is the first thing we have to do, to count the population as accurately as we can, and I guess I was a little surprised, coming on to ACRA, at how difficult it is just to count the number of people and to do that accurately. Secondly, we then weight that population for the needs of that population and that is potentially a contentious process. Not all individuals have the same needs for healthcare. Need varies with gender, age and social circumstances. The very young or the very elderly in particular make greater use of the NHS. Even after age has been taken into account need is not uniform, so we do make a range of additional adjustments. That is something which has developed and evolved over the years I have described before into what is now quite a sophisticated approach based on research commissioned by ACRA, which examines the relationship between the utilisation of health services on the one hand and the socioeconomic characteristics of the population on the other. So we weight the population count to reflect the predicted demand for healthcare which we believe that population will need. The third thing we then add is a separate health inequalities formula. Because our weighting of the population is based on what has happened in the past, based on existing utilisation, there is the risk that it does not account of un-met needs. There are the groups of the population who do not access health services early or do not access them at all, so we have developed a health inequalities formula to meet that second objective of reducing avoidable health inequalities. That is actually based on disability-free life expectancy, looking at a measure not only of how long people are expected to live but on how healthy they are during their lifetime. That formula was used for the first time in the last allocations round. We are quite unusual as a system in having a health inequalities component in our allocation formula for health services and in fact as part of our next work programme we have commissioned research to see how that can be developed further. The fourth and final element is an adjustment for the costs of providing healthcare, so the first three have been trying to estimate the demand from the population, the needs the population is going to have, but there is a final adjustment known as the "market forces factor" and that recognises that the costs of providing healthcare are different in different parts of the country. There is a number of elements to that—staff costs, London weighting and estates and land costs—but by far the biggest element is staff costs, even though the National Health Service has a national pay deal and national pay rates, the costs of recruiting and retaining staff are higher in higher cost (labour costs) parts of the country. In central London, for example, it is difficult to recruit staff and hospitals pay more in agency and overtime rates and the so pay costs are higher and the market forces factor has to reflect that. So based on those four elements our recommendations for the content of the capitation formula go to the Secretary of State for consideration. In 2009-10 allocations round our recommendations were accepted in full and have now been implemented for the financial years 2009-10 and 2010-2011. That is a very general introduction to who ACRA is, what we do and the way in which the funding formula is developed, and then where that is given effect to actually give allocations out to PCTs. We would be very happy to answer any questions on any aspect of that from the Committee.

  Q939  Lord Forsyth of Drumlean: Having read the paper and listening to you, how do you avoid the problem of very efficient and good health authorities being punished for delivering? Perhaps they have more emphasis on preventative or other aspects, it could be anything. How do you avoid more money going to those people who do less well not as a result of what is inherent in their area but perhaps because of their own performance?

  Mr Fillingham: I think that is exactly one of the problems which the weighted capitation formula is intended to address. If we go back before 1977 when the NHS had incremental budgets handed out to it, there was a risk that the people who used the money most efficiently would suffer. The idea of the weighted capitation formula is that it allocates money to a given population on the basis of that population's need, regardless of how that money is then used by the Primary Care Trust and the hospital within that area. So clearly for those health services which can get the best use out of that money, being the most efficient, they are going to get more healthcare per pound of taxpayers' money spent than a health system which is less efficient.

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