The Barnett Formula - Select Committee on the Barnett Formula Contents

Examination of Witnesses (Questions 940 - 959)


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

  Q940  Lord Forsyth of Drumlean: I understand that, of course, but if you then further adjust that to deal with what you call "inequalities" does that not actually have an equal and opposite effect? Perhaps not an equal effect, but an opposite effect.

  Mr Fillingham: I do not believe it does because the inequalities element of the formula is looking to address the fact that even though health services may be efficient, not everybody actually accesses them in an equal way. In areas of high deprivation it is often the case that people from the more deprived parts of the population do not get access to healthcare at all or access it less. Adding the health inequalities formula recognises that the capitation formula which is based on historic utilisation, may not be picking up all aspects and needs in the population.

  Q941  Lord Lang of Monkton: I was going to ask about preventive medicine. Presumably in your four-part formula you weight the population count higher than everything else in expenditure on preventive medicine? Am I right or wrong?

  Ms MacDonald: No. One of the challenges—and it relates to the last question—is that the formula until recently has been heavily influenced by utilisation, so most of the formula has related to data which is about the use of hospital and community services. It is a more recent development that we have actually looked at the impact of preventative services. I understand the point about if your preventative services were very good you might then have lower utilisation rates. Of course, if your preventative services are very good, your needs would be lower and the challenge is to actually be able to measure need. The spending on preventative services in the NHS is actually relatively small at the moment, but as part of the health needs adjustment that is the kind of thing we are looking at, what proportion of spend do you use the needs formula with, compared with the proportion of spend which you have for the utilisation? I think that is one of the challenges you will face if looking at formulae for Barnett. It is about different spending streams and how you bring them together.

  Q942  Lord Lang of Monkton: Could I just ask a supplementary? It really relates to Lord Forsyth's question. It sounds as though you are going to penalise success because the more efficient people are at using the funds given to them, the less they will receive in subsequent years. Is that the case?

  Ms MacDonald: I think what would happen is that over time I cannot imagine a situation where we have mastered all health needs, so at the end of the day what you are trying to do is to get the most efficient system which responds entirely to needs. Because of the statistical techniques we use in modelling, we take out things like the supply effect, but it is true to say that everybody in the NHS is trying to reduce the use of hospitals and have more preventative measures. The pace at which people do that is different across the country, but the statistical modelling techniques enable us to deliver the averages. That is a terrible word to use and my colleagues might do better.

  Mr Derbyshire: Can I come in there, because I understand what is behind the question. It is a question which goes back a long way in resource application formulae of a potential perverse incentive. The original allocation formula in the seventies was based on standardised mortality ratios in different parts of the country, so people said, rather cleverly, that if you were not very good at preventing death, if your death rate got higher, you would get a higher share of the total pot. Theoretically, that is a perverse incentive. It is very difficult to imagine that a health service would actually deliberately worsen the outcomes of the population to get more money. It just does not work like that.

  Q943  Lord Forsyth of Drumlean: That is not the point. It is not that they would worsen their performance but that the most efficient are penalised for improving their performance?

  Mr Derbyshire: They would get less money per capita if their population was healthier, that is correct, and if they are very good at improving the health of their population, you could say that they would be penalised by having less money in the future because they had a healthy population.

  Ms MacDonald: Could I just add, I think also it is about the relative spend between something like the use of hospitals and preventative services. We spend far more on the use of hospitals, so the formula is weighted much more to utilisation than it is to preventative services. As people get better at improving preventative services, then more of the weighting moves to that formula. That does guard to some extent against the supposed perverse incentive, so over time the weighting of individual elements of the formula do not stay the same. There is not one formula, there is a number of elements of the formula applied to different amounts of money.

  Q944  Lord Sewel: Two questions, if I may. Firstly, in your paper you say: "It is not currently possible on a technical basis to determine the weighting for this health inequalities formula." Why? Ministers decided on 15 per cent. Why? The second question is, has anyone done any work along the lines that if the Scottish NHS was part of your system how that would affect allocation to Scotland?

  Mr Fillingham: Perhaps I could make a couple of introductory comments on that and then I will ask my colleagues to comment. As far as the health inequalities formula goes, which is your first question, the research team last time they looked at the formula spent quite a lot of time to see whether or not we could incorporate a health inequality element within the utilisation formula and they felt that technically it was not feasible. Therefore, we developed this separate mechanism. We then looked at a range of ways in which we could provide objective evidence to say what the level of weighting should be, so we did consider, for example in relation to an earlier question, the amount of money which is currently spent on preventative services and should it relate to that. We also looked at the differentials in ill-health between different groups of the population. We concluded that this was a matter of judgment and that the evidence base was not strong enough to recommend to ministers a particular level, although I think ACRA did consider a range of possibilities and 15 per cent was within the range of possibilities we suggested would be appropriate, but the process of actually deciding on 15 per cent was subject to ministerial decisions.

  Dr Lorrimer: The 15 per cent was a ministerial decision and it was based on looking at the way the various options, drawing on the ones which had been proposed by ACRA, distributed funds across PCTs. It was a matter of judgment rather than anything dramatically objective because there was this lack of evidence as to what the weighting should be, so ultimately it had to be a judgment for somebody and that fell to ministers. On the second point about whether we looked at whether or not we should apply this to Scotland, we have not. Firstly, we are an English department and so that would not be part of our normal remit. It is also not clear whether or not our formula would be appropriate for Scotland.

  Q945  Lord Sewel: I appreciate that. I just wondered whether you were aware of any sort of sad academic who has done it? We have seen lots of sad academics who have done all sorts of various things.

  Dr Lorrimer: I do not think I can think of any sad, or indeed interesting academics who have looked at trying to apply it for Scotland.

  Mr Derbyshire: But they would if you paid them sufficient money!

  Q946  Lord Moser: There are two parts of your paper which I find quite difficult to understand as a statistician. I have to admit that. There are two references where you shy away from trying to produce a formula and both of those struck me. I think they are unrelated. The first one relates to the first report combining age-related and additional needs. What you are saying is that you tried to get a formula which took account of the age composition of a population, not just the total numbers, and that is a very relevant point to us, but you shied away from it because for some reason you could not do it and you ended up in fact having a different formula for each age group, so you ended up with 18 formulae, if I understand that rightly. Maybe that is inevitable. Maybe we have to end up with 18 formulae. I hope not. The other one is the one which Lord Sewel has already asked you about and I did not understand your answer. When you were talking about health inequalities you said that you really wanted to find a formula but for some reason, which I think you have tried to explain but I did not understand it, it was impossible and therefore judgment was brought into the game and you ended up with 15 per cent. So two examples, which perhaps we should take very seriously, where you ended up saying, "No formula."

  Mr Derbyshire: Yes. If I can try and understand that in the context of Barnett, which is obviously about having a formula which does a slightly different thing to what the NHS formula needs to do, the first thing to actually make quite clear is that we did not fail to take account of age in the formula, and formulae used to allocate resources to the NHS prior to this formula actually had four stages in the calculation of the weighted capitation. The first was to count the population and then adjust for age, because we know and have good quality data on the relationship between age for the average individuals and their needs for health services. Previous formulae had an adjustment for age and then had an additional adjustment for need over and above the age effect. What this formula does for the first time is to actually simultaneously estimate the effects of age and need together, which is why we consciously chose to have 18 different formulae for different age bands because the additional needs drivers for each age band are different. We have separate needs drivers for the 20-year-olds and the 50-year-olds. So we did not fail to take account of age, we just took account of age and need simultaneously.

  Q947  Lord Moser: I think I understand your answer, but the whole point for us is that if one recognises something like the importance of age in the revised Barnett Formula, say, you talk about statistical modelling but it is not explained what you actually do. Is it not possible to get all that together by weighting?

  Mr Derbyshire: It is by simple weighting, and previous health formulae in England and the health formulae used in Scotland, Wales and Northern Ireland do first of all adjust the population for age because demography plays a great part in the relative needs for healthcare. The second order is adjusting for relative need. All I am saying is that the current formula in England, which is regarded as an advance, estimates the age and need effects simultaneously.

  Mr Fillingham: Perhaps, my Lord Chairman, I could give an example to explain that. The research has shown that there is a series of socioeconomic characteristics which impact upon the demand for healthcare, but they differ in differing age groups of the population. For example, if you look at young people not staying on in education, that has an impact upon the health needs of people in the 15—24 years age bracket. It does not impact upon the health needs of people in the 65 plus age bracket, whereas for pension credit claimants, for example, the opposite would be true. So what the new formula does is to look at the socioeconomic characteristics of the population in those particular age bands. That is what Keith means by combining age and need together.

  Q948  Lord Rowe-Beddoe: In your opening statement you suggested that your recommendations from ACRA were, I think you said last time, accepted by the minister. I am not quoting directly. Can you give examples of where your recommendations in the last five years have not been accepted and what was the result?

  Mr Fillingham: Certainly since I became Chair of ACRA, which is three years ago, our recommendations have been accepted in full but there may be earlier instances.

  Dr Lorrimer: In preparation for this Committee we looked back through the records and we could not find any examples where a recommendation had been rejected.

  Q949  Lord Rowe-Beddoe: I see. So your recommendations have been, as it were, taken up, the prescription taken?

  Mr Fillingham: Yes.

  Q950  Chairman: Except that there is a ministerial input, is there not? The 15 per cent, for example, was a figure the ministers produced, not you?

  Mr Fillingham: There is certainly a ministerial input in a number of ways. The Secretary of State commissions our work programme and also sets the objectives for the Committee, so in the first instance there is a ministerial involvement there. There are occasionally some issues which we say are beyond the remit of ACRA or where we do not think there is the technical evidence and the weighting on the health inequalities formula was one of those, and of course the pace of change policy.

  Q951  Lord Sewel: It is critical, is it not? That is the big one. The pace of change is the big one.

  Mr Fillingham: Absolutely, because what we do is determine the target allocation. The actual allocation which is received is determined by the pace of change policy. I am conscious we did not answer your earlier question about the health inequalities formula. Just to be clear, there is a formula which determines on the basis of health inequalities, using disability, free life expectancy, what the differential is between different PCTs. For that there is a formula. The issue there is how you put that together with the needs formula to come to a bottom line. There is a number of options there. You could multiply them or you could add them together, and we recommended that they should be added together. The issue of judgment was the scale, the emphasis which you placed on health inequalities compared with the emphasis which you placed on the utilisation element.

  Q952  Chairman: Could I just follow the 15 per cent for a second. I do not want to leave the 15 per cent sort of up in the air. As I understand it, you said to ministers, "Look, we can't really give you a precise figure," but the ministers said, "Well, we think 15 per cent is about right so that's what we're going to do"?

  Mr Fillingham: In actual fact—and I think it is in our published report—we suggested, I think, four options, which were not having a health inequalities formula at all, 10 per cent, 15 per cent or 20 per cent, and there was a series of rationales for each of those, but there was not strong evidence to choose one or the other so we said we will not make recommendations, to which ministers then went for the 15 per cent. So it was not simply, "We can't make our minds up. What do you think, Secretary of State?" There was a range of options, but we did not recommend a single option.

  Lord Forsyth of Drumlean: This is the same point. How do you ensure the integrity and acceptability of the system in those circumstances? I have to say that if I were the minister I would be running the numbers and seeing which marginal seats were affected, and things of that kind! Of course, it might not influence my judgment!

  Chairman: That is why you are not the minister!

  Q953  Lord Forsyth of Drumlean: But I would be tempted and people might think that I would be tempted. Surely the whole point of the system is that it should be objective?

  Mr Fillingham: Absolutely, that is the point of the system and one of the key tests of ACRA is, is it felt to be fair by the NHS, and I think we were therefore pleased with this allocation round, but most of the commentary was suggesting that the recommendations we had made which were accepted by the Secretary of State were felt to be fair. Part of that is because we can point to an evidence base for those recommendations and people can see how that links back both to the need for healthcare and to health inequalities.

  Q954  Lord Forsyth of Drumlean: But if you have a spread from nought to 20 per cent that is quite a wide margin for adjustment?

  Ms MacDonald: Could I add something? I think in the papers one of the things we have made clear is that there is no such thing as the perfect formula. We have been doing this for a number of years and every year the aim is to be more refined and get it better. One of the things which have been missing from resource allocation has been any recognition—we have been so dependent upon utilisation we have not been able to pick up un-met needs, so nought would be an option which made no attempt to recognise that actually there were factors of need which were not addressed through utilisation of services. 20 per cent. What that does is to give you an idea of how much of the NHS budget would be focused on addressing inequalities, and that is not just about preventative services, that is about whether in a hospital people are treated equally, how you have to put special services into an acute hospital to manage people's learning difficulties. In giving the options to the Minister we were able to give him some ideas about the issues which the inequalities adjustment actually addresses, and we will do further work in order to improve it. I think the question was very much about should we take a step and how far should the step be? I think ACRA tried to produce enough evidence to say that there is definitely merit in taking a step towards inequalities. The service had long recognised that the formula was not as good as it should be, so we had to go somewhere. This is a journey and we have to keep pursuing it.

  Q955  Lord Forsyth of Drumlean: That is very helpful. It is just that in the paper it says that in understanding from the ministerial decision how ministers decided to target the 15 per cent, they targeted it to ensure the most deprived areas have the resources they need, and that made me think they were looking at tables which showed that it was not ten, 15, 20 per cent, which PCTs would benefit. What you are saying is that that was not the case?

  Ms MacDonald: I do not know what the ministers saw. What I am saying is that in presenting the information to the ministers ACRA and TAG were able to look at the options we were offering and do some empirical checking about how that looked in relation to what we knew about deprivation. It was not a straightforward, "These are the ones that gain and these are the ones that don't gain." What you get are some interesting gainers and losers when you apply the formula. Then what you have to do is to look at that and say, "What does that say when we look at what we know about services and what we know from other formulae? What would that tell us? Does it feel fair?" So there is an element of ACRA and TAG exercising a "felt fair" judgment, but then recognising that actually we do not have the evidence. It would not be peer reviewable, so we have to give ministers a choice at that point. I have no idea and would not want to comment on what went through their minds when making the decision.

  Q956  Lord Sewel: I am just making mischief! May I just ask Dr Lorrimer, you, in an aside, said you did not know whether the formula would be appropriate for Scotland. If you devised a formula which allocates resources according to criteria you set out, what on earth would be different about Scotland that would make it not appropriate to apply it there?

  Dr Lorrimer: The first question would be, what would be the objectives and the policy context for the Scottish NHS as opposed to the NHS in England, and would those be different? For instance, ACRA has these two objectives of meeting need and also of addressing health inequalities. Those are set and commissioned by the Secretary of State. In Scotland would those necessarily be the same? I think you are right, that is probably a minor point. I think probably more significant from a practical point of view is that there will be two questions in my mind. One would be that some of the issues in Scotland are different in the sense that, for instance, the Scottish formula used at the moment includes a rurality correction which ACRA could find no evidence we needed in England, but it would be understandable why that might be more important in Scotland. The other question would be actually are the datasets which are available to us in England available in Scotland or not, and vice versa, are the datasets which are used in Scotland available in England? That would be the big practical barrier.

  Q957  Lord Rooker: You said you used other formulae. With the local government system in England there is a point in time when the decisions are announced by ministers and there is actually an appeal window for local authorities. Is there any similar system operating within the Health Service?

  Mr Fillingham: No, there is not a similar mechanism linked to the allocations round of the NHS.

  Q958  Lord Rooker: So have you never been challenged by, let us say, a PCT which felt especially aggrieved about something? Is there a means of challenging it, and has that happened?

  Mr Fillingham: Lots of people wish to draw their views to ACRA's attention. They write to us, they commission research papers, they seek to have various issues raised and presented, and we have listened to those, but we do not take on board lobbying because clearly our job is to try and use the best evidence which is available and the best expert advice available to come up with a formula that is as objective as possible. So there is not a formal appeals mechanism. Yes, it is true that clearly PCTs will have views on the process and their own position within the process and they raise issues and on occasions we have commissioned research to examine the issues they raise.

  Q959  Lord Rooker: I appreciate that. I was thinking more of when the decisions are announced, if they are announced in principle. I do not quite know how it is done, but at that point. Obviously during the ongoing period of discussion people will always be bringing issues for you to look at. One other point is that there is an awful lot of money involved here in terms of the overall budget and the formulae. I do not know whether it is probably that there is nothing similar. Could I just ask you, you are all from the Health Department, does the Treasury take an interest in what you do?

  Mr Fillingham: First of all, Rhona and I are from the National Health Service, not from the Department of Health. It is a small distinction, but important to those in the NHS. The Treasury reaches a settlement with the Department of Health. ACRA's role then is to determine how the money which is allocated to the NHS is allocated, so the Treasury does not have an active involvement with ACRA.

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