Public Accounts Committee

Oral evidence: Sustainability & Financial Performance of Acute Hospital Trusts, HC 709

Monday 18 January 2016

Ordered by the House of Commons to be published on 18 January 2016

Watch the meeting: http://parliamentlive.tv/Event/Index/14eb6874-e74e-41b6-8231-27decf41e6ce

Members present: Meg Hillier (Chair), Mr Richard Bacon, Caroline Flint, Kevin Foster, Mr Stewart Jackson, Nigel Mills, David Mowat, Stephen Phillips, Karin Smyth, Mrs Anne-Marie Trevelyan

Sir Amyas Morse, Comptroller and Auditor General, National Audit Office, Marius Gallaher, Alternate Treasury Officer of Accounts, Adrian Jenner, Director of Parliamentary Relations, National Audit Office, Robert White, Director, National Audit Office, were in attendance.

Witnesses: Paul Mears, Chief Executive, Yeovil District Hospital, Paul von der Heyde, Chairman, Yeovil District Hospital, Tim Newman, Chief Finance Officer, Yeovil District Hospital, and Ms Shahana Khan, President of the Healthcare Financial Management Association, gave evidence.

              Chair: A warm welcome to our first panel. Today, we are looking at the financial performance and sustainability of acute hospital trusts, on the back of an NAO Report on the same subject. We are delighted to welcome representatives from Yeovil district hospital. Thank you very much Paul and Paul for offering to host us, and I am sorry that we could not visit you, but you are here now, and we will have a chance to hear from you what it is actually like on the frontline. If you are still willing to receive us, we hope to visit at some point, even if it is only a selection of the Committee, but you will appreciate that, when the Government have a tight majority, it is hard to let us all out.

              I am delighted to welcome our first panel. From Yeovil district hospital, we have Tim Newman, the chief financial officer, Paul von der Heyde, the chairman, and Paul Mears, the chief executive. We also have Shahana Khan, who is the president of the Healthcare Financial Management Association.

              The Department and NHS England have plans for how to sort out the problems in hospital trusts, and what we want to get from you is what it feels like on the ground. I am going to hand straight over to David Mowat, who is going to lead off our questioning.

              Q1 David Mowat: Thank you very much, Chair. I guess the first question is: what does it feel like on the ground? Historically, your hospital has been in surplus, and it now looks like it is moving into deficit. Paul, perhaps you could tell us first why that has happened, whether it is anybody’s fault, and whether the efficiency savings that are being required of you, which are perhaps driving this, are achievable. You are in good company: something like 75% or 80% of all trusts are in deficit, which implies a system problem, rather than an individual one.

              Paul Mears: You ask how it feels. It does feel very challenging. At the moment, in terms of the big drivers for us locally, we are in a rural area and we have a high proportion of elderly people living locally. Demography is having a big impact on us in terms of the number of people coming in who are very elderly. It is not just the age of the patients but the complex nature of the cases: we regularly have patients with three, four, five or six long-term illnesses, so when they come into hospital they need very complex care.

              The biggest driver of our deficit—of moving from surplus into deficit—has partly been demography and demand driven and has partly been the challenge around the workforce and the challenges of recruiting and retaining nursing staff and medical staff. When you are not able to do that, you have to bring in agency and bank staff. Our costs are obviously increasing. Drug costs have increased, as have supplies costs, and obviously our income has been quite challenged in the amount of money we are paid by our CCG. All those factors combined together have led us into the place where we now find ourselves in deficit as an acute hospital.

              Q2 David Mowat: All those things, to a greater or lesser extent, were occurring when you were in surplus. What has happened this year that has caused a deficit?

              Paul Mears: Probably the biggest driver over the past 12 to 18 months has been our increased agency spend on nursing staff and medical staff. Part of that is because we had a high vacancy rate—this time last year we had about 80 qualified nurse vacancies, and obviously we needed to make sure that we were able to fill those vacancies. We have invested to make sure that the quality of our care is sustained and improved because, as you well know, there are aspirations to increase quality and standards in all hospitals. That has had an impact on us, too, in terms of cost. The biggest challenge for us has been trying to fill vacancies, and part of that is also linked to our location and rurality. It is a bit more difficult sometimes to find medical staff to come and work in a smaller district general hospital. Also, the impact of things such as tariff changes over the past two years has continued to put pressure on us.

              Q3 David Mowat: Your location is the same as it was three or four years ago. Is there some issue in terms of retention that you are experiencing?

              Paul Mears: Not necessarily retention. We have a lot of staff who have worked at the hospital for a very long time, so one of our challenges is that we have a relatively older workforce. I mentioned demography: our staff are obviously a key part of our population, and a high number of our medical staff and nursing staff are in their late 40s into their 50s. Many people have retired. We have seen a bigger turnover over the past couple of years.

              Q4 David Mowat: Everybody has to make efficiency savings, which is right, but how does the requirement for those efficiency savings manifest itself in the processes that you need to manage, causing either a surplus or a deficit? Has that been an issue?

              Paul Mears: Obviously, we have efficiencies. Every year we have been required to deliver efficiencies as part of our contract with our commissioners. It is probably fair to say that efficiencies have become more challenging to make over the past few years. The easier things to make efficiencies on have been done, but we are continuing to push constantly for efficiencies. We are currently planning to deliver a 2.7% efficiency saving this year, but that is a challenge. Within the efficiencies, you obviously have to look at the mix between what is recurrent and what is non-recurrent, because if you constantly rely on non-recurrent savings, you are building up a problem. Historically, my trust has probably done that.

              Q5 David Mowat: Do you have a sense—your colleague Mr Newman is the finance man, and perhaps he can help with this—of what you have to deliver over the rest of this Parliament in order to meet the five-year forward plan in terms of efficiency savings?

              Tim Newman: We have to deliver over the balance of this Parliament, based on the latest guidance that we have had from NHS England and Monitor, around 2% per year, but that is just to stand still. The reality is that we have a large deficit, and our challenge is to reduce the deficit, which is currently running at around 15% or 16%. That effectively says, in four years, about another 4% on top of that.

              Q6 David Mowat: 15% or 16%?

              Tim Newman: Of turnover, yes.

              Q7 David Mowat: That is quite a large deficit, isn’t it?

              Tim Newman: That is a very large deficit.

              Q8 David Mowat: That’s going a bit, to get to that from a surplus last year.

              Tim Newman: We have to reinvent what a district general hospital does. It is about actually looking at the new models of care, as outlined by the NHS England strategy. That is how we will deliver the largest chunk of savings over the balance of this Parliament. I suspect that will probably not be enough to get us back into a surplus position, but it will make a big hole in the current state of our finances.

              Q9 David Mowat: What is your revenue budget?

              Tim Newman: Our revenue budget is circa £120 million.

              Q10 David Mowat: So you have a deficit of about £18 million, which has come just in this year.

              Tim Newman: It has built up gradually. As you said, three years ago we were break even, and before that we had a small surplus. Part of that is because we benefited from non-recurrent funding from our local commissioners, who had surplus cash, and they were able to give that to us; that probably explains about £3 million or £4 million of the change. Then, over the last couple of years, it has gone up: last year it was £7.6 million and, as I said, this year about £18 million.

              Q11David Mowat: You used the figure of a 4% increase in requirement every year, or some number of that order, because of ageing population and maybe more expensive drugs and treatments, and all the rest of it; and for the last decade or so we have just about managed to do that, principally by funding the NHS by more than flat funding—and it has sort of kept pace. We have now, with the five-year plan, said, “Actually, that is not sustainable. We can’t keep putting 4% more in,” and they have stopped doing that; but the result is that the requirement has continued and now you have got a deficit. Is that a simplistic way of looking at it? Because it is not just you that has got a deficit. Another 75% of the trusts have got deficits.

              Paul Mears: I think you are absolutely right. I think what has happened is that at the moment the financial challenge is showing itself most in the acute sector, but obviously this isn’t just an acute hospital challenge. It is a challenge for the whole healthcare system. At the moment they manifest themselves in hospitals—the deficits, predominantly—but the only solution in the long term is to try and manage more of these patients outside hospital. That is where we have got to try and work in a much more joined-up way with our colleagues in primary care—GPs, community services, social care—which is why we are one of the vanguard sites of the NHS Five Year Forward View. Rather than just focusing on what we do in the hospital, we can look at how to redesign the whole healthcare system and look at how the total resource is available. At the moment we only have control over money of which we have—

              Q12 David Mowat: I understand, and we will perhaps come on—

              Chair: Can I bring in Shahana Khan at this point?

              Shahana Khan: I am not just the president of the HFMA. I am also the finance director at George Eliot, Nuneaton, which serves about 300,000 population. We reflect exactly what is happening at Yeovil—a small DGH having the same challenges. What we are having to do is look at more systemic approaches and more systemic solutions, because as we stand at the moment we are not sustainable in our current form.

              Q13 David Mowat: Part of it, as you say, is social care coming together and all the rest of it. People always say that, when you look at health budgets. It is all very sensible and everything else, but it is hard to see it stopping deficits of the type that you have developed over the last year—presumably you were doing your best not to have developed it—and that suddenly that is going to get turned round by better integration with social care.

              Shahana Khan: At HFMA, we produce a survey once every six months of finance colleagues across the NHS, and what we have been pointing out is that yes, the Five Year Forward View is the right way forward—and we embrace that. We also embrace the financial incentives that are being put into the system and the £8 billion that is going in. However, what we have got to look at is how do we address the £22 billion that has still got to be delivered. That is where we see the challenges.

              Q14 David Mowat: That £22 billion which was in the five-year plan looks like a big ask—let’s put it that way—in terms of the efficiency savings and the trajectory that you have got. I am sure that you work really hard not to get a 15% deficit in one year. That is one observation or question.

              The other thing that interests me in this is how much of your total spend is under your control. Obviously, salary levels are set. Drug costs, I guess, are set. The actual performance standards on which you have got to run the hospital are set. All of this stuff is set centrally. Indeed, the CCG funding is also set centrally, as is the tariff formula. How much real discretion do you have in terms of, in your case, the £120 million to spend it differently?

              Paul von der Heyde: There are two other things that are not controlled by us: the number of people who present themselves to us and our ability to discharge them, so we are absolutely in the middle.

              Q15 David Mowat: If you take all those as a set of factors, it becomes—I was going to use the word “absurd”, but that’s the wrong word—almost daft to expect you to have a functioning P and L that you control, because all these things are controlled by other people. You are nodding, Shahana. What percentage of your total spend in your hospital is under your real control?

              Shahana Khan: You are right. There are a lot of dynamics in running a DGH, especially if you are a smaller DGH compared with others. For example, the big teaching hospitals or the tertiary referral centres can look to other sorts of income such as research or education, whereas in the smaller DGHs we are very much reliant on patient care through normal acute services. For us, it is more limited. Therefore, that is why they are called efficiency savings, because what we have to look at is how we can work in a more efficient way that will drive down costs. The areas that we are looking at are things like clinical variation and standardisation. They are the key areas and that is what the Carter review pulled out as well.

              Q16 David Mowat: But given that all your cost drivers, to use that phrase, are externally imposed—let’s put it that way—what percentage of your £120 million, Mr Newman, do you genuinely control? Because you don’t control so much of it.

              Tim Newman: I would say we control 100% of it, actually, and the issue we have is managing demand. So the pay grades are set centrally, but we still make the decision as to whether or not we want to employ somebody. Actually, the challenge for us is designing a model that delivers the service that the patients and community need in the most cost-effective way. That is about looking, for example, at the skill mix that we have. There was a reference to agency costs as well and finding ways of ensuring that we are not paying premium rates for staff.

              Q17 Caroline Flint: How are you going to do that in terms of recruitment locally, given the problems you have mentioned about recruiting locally? Presumably, it is about the colleges as well, given their limits on how many people can be trained in any one year.

              Paul Mears: In nursing, we our effort has been twofold: we have recruited locally and we have gone over into Europe to recruit. We have now filled all our nursing vacancies in the space of 12 months. From a place where we had 85 qualified nurse vacancies last year, we are now pretty much up to a fully substantiated workforce, which obviously means that, going forward, our agency bill will be reduced.

              Alongside that, we are also working with our local colleges and other people to try and make sure that the national drive to recruit more nurses into the system is followed through. We are looking at all sorts of innovative career options for nurses to come back into practice and into the acute care environment, so it has been a big drive for us, but it is a challenge. It is the same with the medical workforce, where there are specialities that are very hard to recruit to. That is not local to us; it is a national challenge, so we have to try and come up with creative solutions to that and try and work with the colleges and make sure that we are doing everything we can to try and influence the number of people who are going into the hard-to-recruit-to specialities.

              Q18 Mr Jackson: I am looking at table 9 and it seems to me that you have probably had the biggest reversal of fortune of any small acute trust in the table—someone may correct me on that. Is there any unique factor behind that in Yeovil? As Mr Mowat said, in terms of population change and the number of very old potential patients, it does not seem that things have changed that much. Is your clinical commissioning group fining you? Have you had “never” events? Is there something that we are not seeing here?

              Paul Mears: We have had no “never” events. We are obviously subject to the fining regime as part of the national contract, for non-compliance with waiting times and things like that. Our CCG has been applying those penalties to us as part of our contract. I would not say that it is a key driver, but it is a contributing factor to the pressure on our income. What you see is a smaller DGH. We are one of the smallest district general hospitals in the country, and we still have to carry a full-service A&E and a full maternity unit, with a consultant-led service.

              Q19 Mr Jackson: Do you serve the whole of Somerset?

              Paul Mears: No, we serve part of south Somerset and north Dorset, but we are about 50 minutes away from our nearest neighbouring hospital. When, for example, we had a review from the Royal College of Obstetricians and Gynaecologists, their view was that we could not manage without a consultant-led unit within our locality, because of our geographic isolation, but with that comes a cost. The maternity service we run—the obstetrics service—does not make any contribution; it makes a negative contribution, so if you were running it in a pure business sense, you would say, “We should not provide that service any more,” but obviously for our local population it is a really important service. It is the same with our A&E service. We have this tension with being able to carry on providing the full range of district general hospital services, but there is an opportunity to think about how we can work in a more joined-up way, network with our neighbouring organisations and think about creative solutions.

              On your point about the deficit, as I said, the biggest challenge for us has been recruitment over the past few years. Also, last winter we had some significant challenges in terms of pressures within the hospital that led to us having to cancel a lot of operations. That means we now have to catch up to meet our waiting time targets, which comes with a cost. There is a combination of demand pressures, workforce pressures and national influences that have had that impact.

              Q20 Mr Jackson: You alluded earlier to the balance between recurrent and non-recurrent costs. What is your balance now? One thing that came out in the Report is that a lot of trusts are delivering savings by non-recurrent costs. What is the balance in your case?

              Paul Mears: About 19% of our savings are non-recurrent this year.

              Tim Newman: This year is better than recent years. I am just looking at the figures. In 2014-15, it was about 50:50, recurrent to non-recurrent. Last year was about two thirds recurrent, one third non-recurrent.

              Q21 Mr Jackson: What percentage of your spend is on non-permanent staff in this financial year? Is it about the average?

              Tim Newman: How much do we spend on agency staff? It is about £7.5 million this year, which represents getting on for 10% of our workforce costs.

              Q22 Mr Jackson: So you are on the NHS average for acute hospital trusts?

              Tim Newman: Yes.

              Q23 Mr Jackson: Okay. Obviously, you are in a bit of a pickle financially if you are heading from a modest surplus of £500,000 to £18.4 million, which is not modest. Would you say that that is directly impacting on clinical care?

              Paul Mears: No.

              Tim Newman: No.

              Paul von der Heyde: No.

              Q24 Mr Jackson: Do you think it will do?

              Paul Mears: No, because we are very clear as a board—the chairman will have a view on this—that we have to make sure we maintain the quality and safety of everything we provide in the hospital. We are very clear at our board about that. We review every decision we make around money to understand the impact it could have on quality, and we have made some investments in the past 18 months in things we felt were priorities in terms of clinical quality. Even though we were in a difficult financial place, we had to make sure we invested properly, to ensure the safety and the quality of the services we provide.

              Paul von der Heyde: It is important to state that we are not surprised by where we are. We knew what was coming, and we have been taking action now for a good 18 months to try to recover the situation over a period of five years. We have had significant discussions with our commissioners and Monitor to confirm that through new ways of working, so that it is not just a question of, “It’s going to get worse and worse.” Through a better relationship with both our primary care colleagues and social care colleagues, we have plans in place already to help reduce that deficit.

              Q25 Mr Jackson: Were you able to complete your financial projection for Monitor? Has that been expedited in this financial year?

              Paul Mears: We have been through a process with Monitor in this current financial year of reviewing our plans. Monitor, because of our deteriorating financial position, undertook an investigation into our finances. We presented them in our five-year plan of how we saw the hospital getting back on to a secure financial footing. That was approved and supported by Monitor. They gave their endorsement to the plan and to our ability to deliver it, and we are on a trajectory to deliver the plan, as we have this year. In terms of Monitor and our relationship, we have a very positive relationship with them—they have been very supportive—but equally we are very aware that we have to make sure that we deliver, and deliver our commitments as part of the wider NHS ambition over the next few years.

              Paul von der Heyde: I think the reason for that was that we were ahead of the problem, so when they came to look, and said, “What are you doing to repair this situation?”, we had plans, which they approved.

              Q26 Mr Jackson: I have a final question, for Mr Newman. How much are you looking at accessing public dividend capital for this financial year, and what are the circumstances—the details—of that regime? Is it a loan? Is it an interest-free loan?

              Tim Newman: It is a loan. We have a loan from the DH to cover our cash. We ran out of cash at the end of last year, so we have had a DH loan this year equal to the deficit plus some additional capital expenditure, and we would envisage asking for a further loan next year as well, to the extent that we were still running a deficit.

              Q27 Mr Jackson: How much?

              Tim Newman: We are still working through our financial numbers. I would say somewhere between £10 million and £20 million. I can give you only a broad spectrum at the moment because we have to work through the numbers over the next couple of weeks.

              Q28 Mr Jackson: Do you think that is financially sustainable for the trust?

              Tim Newman: As my colleague Paul said, we have a longer-term plan to bring the deficit down to a much lower level, which is by coming up with the new models of care, working with other services in the community to reduce the flow of patients through the hospital and treat them in their homes.

              Q29 David Mowat: I have a follow-on question to the point made by the Chairman. You said that you saw this coming for the period of 18 months or so. Does that mean that this deficit was budgeted? Had you warned, if you like, NHS England that it was going to happen?

              Paul Mears: Yes.

              Paul von der Heyde: Yes.

              Q30 David Mowat: In a sense, then, did they allow you to set a target that was this deficit? Presumably, as you say, you could see it coming. Is that what happened?

              Paul von der Heyde: Yes.

              Paul Mears: Yes.

              Tim Newman: Yes.

              Q31 David Mowat: So they knew it was going to be this case?

              Paul von der Heyde: Yes.

              Paul Mears: Yes.

              Tim Newman: Yes.

              Q32 David Mowat: So you are basically on plan with what you said?

              Paul von der Heyde: Yes.

              Paul Mears: Yes.

              Tim Newman: Yes.

              Q33 David Mowat: It is just that what you have said is obviously a deficit.

              Paul Mears: As I mentioned, Monitor did a detailed piece of work to understand the drivers of the deficit and also to understand how our plan was going to address those drivers—

              Q34 David Mowat: If that was the case for the other hospitals in deficit—the other 80% of hospitals that are in deficit—presumably NHS England knew in advance that they were going to have a £2.2 billion[1] deficit at this point.

              Paul von der Heyde: I have no idea what the other hospitals—

              Q35 David Mowat: You don’t know that. But from your point of view, you told them.

              Chair: We will have Paul von der Heyde and then Shahana Khan on this, and then we will move on to Karin Smyth.

              Paul von der Heyde: I think that our situation is particular. We saw what was coming and discussed it with them and had a five-year plan to put it back to breaking even. I don’t know whether the other hospitals were in the same state as we were, but as a small rural general hospital we have a particularly high ageing population—in south Somerset it is 21% compared with an average of 15%. A lot of what we have to cope with is multiple co-morbidities, and better care of those people, in the home, is better and less expensive than their regularly finding themselves within our hospital on a weekend basis because no one else is prepared to take the risk. So it is about risk management and helping people to have a better life, and part of that is about not being admitted to the district hospital.

              Q36 Chair: Shahana Khan, on this wider point about who knew what when.

              Shahana Khan: As HFMA, we have been predicting that 2015-16 would be the crunch year, particularly around the fact that we have had increasing demand, increasing costs and the reducing squeeze on funds—

              Q37 Chair: For how long have you been predicting that?

              Shahana Khan: Probably for the past two or three years.

              Q38 David Mowat: Why is this the crunch year and not next year? What has crunched this year that is not going to crunch again next year?

              Shahana Khan: I think it would have been on a continuum if we had not had the £3.8 billion—

              Q39 Karin Smyth: Thank you for coming to talk to us. I think it was difficult to find someone to visit or to talk to, so well done for that.

              You seem optimistic about the longer-term plan, basing a lot on new models, but primary care—we talked about GPs here last week—is not awash with money. With social care, as I understand it, both Dorset and Somerset Councils are not in a particularly flush situation with their money, and we have also looked in this Committee at 37% cuts over the last few years in local authority funding. You also have your own contribution towards the £22 billion of efficiency savings over the next five years. So what I’m hearing is a very optimistic picture of the next five years. Let’s say you came before us in three years’ time. What is your risk analysis of that?

              Paul Mears: I think the work we are doing locally as part of our new care models work, which is part of the Vanguard programme nationally—we have made some massive progress in the past two years. You mentioned primary care. We have a very, very good relationship with our local primary care colleagues. That’s not to say they are not challenged, like other parts of primary care around the country, but they also recognise that we can’t carry on in the same way as we are working at the moment. There is the separation between hospital services, GP services and community services. People are receiving duplicates—duplicate care. We are not able to provide the care for people in their own homes. Hospital doctors and nurses don’t integrate and work alongside primary care nurses and doctors. If we can start to get that working well in our patch—okay, we’re only a microcosm of the whole NHS, but we very strongly believe that we have the ingredients locally to do that. We have the support; we have the buy-in from our local colleagues in primary care. You are absolutely right: the challenges in social care and community services and primary care funding are all very great, in the same way as our funding challenges are very great. But I strongly believe that if we can put those resources together and think creatively between us about how we could develop services in a better way, we would not be bringing people in as unplanned—

              Q40 Karin Smyth: It is a big ask, isn’t it, in three years?

              Paul Mears: It is a massive ask, and if I’m really honest, it is a massive ask of leaders as well, because it is a big leadership challenge for everybody in the NHS and social care to step up and really put aside their own organisational priorities. Frankly, sometimes it might mean that I have to say I would rather spend some of my acute hospital money on providing better domiciliary care services to get people home quicker. As of today, I have 50 people—patients—sat in my hospital who don’t need to be there. Why are we having to spend acute hospital money on keeping people in the most acute bit of the system when actually that money—

              Q41 Karin Smyth: I don’t disagree about the model, but—

              Paul Mears: You are absolutely right about the ambition, but I suppose that, as with any challenge, when you are faced with this scale of challenge, carrying on trying to tinker around the edges is not going to deliver the change. We have to make a wholesale system change.

              Q42 Chair: Mr Mears, you have talked, all of you, about how you can change the system, but two questions are prompted by that. How quickly can you do that, and can it really fill this huge deficit? I am now going to ask the Comptroller and Auditor General to come in.

              Sir Amyas Morse: I just want to make sure that I have picked something up right. As you look at your five-year plan, does that involve repaying these loans or are you just—no, so the loans are going to be part of your fixed capital in the future, would you say?

              Tim Newman: Yes, I guess that’s for further discussion, but there is an interest cost drag in our numbers of about half a million pounds a year. That will get bigger, because we will probably need to borrow more money this year, so that will be for discussion. That is money that is paid back to the DH.

              Q43 Chair: So the question about—

              Paul Mears: Pace.

              Chair: Yes, pace—how fast you can deliver this.

              Paul Mears: Yes, we absolutely have to deliver at pace. We have already begun to make changes. Just to give you an indication, in our local area, across health, community services, acute, social care, mental health and primary care, 4% of our patients incur 50% of the health and social care resources in our community. If we can get better at managing just that very top part of the pyramid, that will have a massive impact. We have already put in place a model of care to try to care for those patients in a different way. It started quite small and it only started at the end of last summer. We have already seen a 33% reduction in admissions to hospital.

              Q44 Chair: Then the question is: if you can do that now, why is it only now you are doing it; why was it not done before?

              Paul Mears: Because it requires a complete shift in the way we operate. It requires GPs, community services, social care and acute hospitals to start to work together and do things in a very, very different way—

              Q45 Mr Bacon: And the only thing that causes that to happen is intense financial pressure, correct?

              Paul Mears: At the moment, in some ways, the only benefit of the current financial pressure is that it has made everybody absolutely realise they can no longer protect their own organisational balance sheets. You have to look at how you work together to—

              Chair: I am going to ask Shahana Khan to touch on that. Then Kevin Foster and Caroline Flint will come in, and then we’re going to finish off on this.

              Shahana Khan: On that point, if you remember the recent history, what we had was an NHS system that was encouraging competition. It was a contractual framework, which was having providers and commissioners there. Therefore, as we move forward, we have to revisit what that type of framework now needs to look at, because it has got to be more collaborative, and the systems that we have—like the contract that is in place at the moment—are now getting in the way as we move forward.

              Q46 Kevin Foster: I represent a constituency not a million miles away—in Devon, a little further to the south-west—and one thing raised with me is the impact of the market forces factor on funding. What impact does that have on you? My acute hospital trust gets 8% less than the average, but as they point out, a lot of the costs around staffing are set nationally, which almost inherently drives a deficit situation immediately. What impact does that have on you?

              Paul Mears: Our commissioners are, obviously, affected by the market forces factor, as is everybody. There has been recent work on that to try to bring different CCG areas into line. I could not give you the exact number for the impact on us. There is an impact. However, both our CCGs—Dorset and Somerset—work very closely with and have a good relationship with our local hospital, and we work wherever possible to try to mitigate the impact of those sorts of change. But it does mean, if this is an impact, that it is not just the hospital spend that they have less money for; it is all the other services that CCGs are responsible for commissioning as well.

              Q47 Caroline Flint: It appears, not only from your own example but elsewhere, that a crisis leads to a discussion about how the health community should come together and address the demographic changes, which I have to say I find really depressing, since the discussion about how what goes on outside hospitals is important to reduce the strain on what happens in hospitals is not new.

              Despite that, let us take all the things you have said about how you are going to turn things around, how you are going to come together with the CCG, local authorities and others to improve things and how you will try to recruit more young people from your local colleges and rely less on agencies. Even if you put all that together, isn’t it the case that actually, we are just not spending enough on health to meet the needs of our communities going forward, given what we know about our ageing population and the expectations of the health service?

              Paul Mears: I think there is absolutely, as you articulate, a challenge involving expectations—what people want to see from the health service. I think we need to have an honest conversation with the local population about our health services and the challenge that we face. We know that every day, people access different bits of healthcare, perhaps at the more expensive end in A and E and other places, when they could access services outside hospital. There is an educational element to this, in terms of the population and expectation. Fundamentally, it comes down to how we use the collective resources that we have available to us. Debates about funding are not taken at the local hospital level; they are at much more of a national policy level. For us locally, our ambition is to make the best use of the resources we have collectively in our health economy to deliver better services for our patients, despite the challenges we are all facing.

              Chair: We know you have a very big challenge. Thank you for your evidence, and thank you, Shahana, for giving the wider perspective. We will now move on to our second panel. I should say that the uncorrected transcript of this hearing will be available in the next couple of days on the website, if you want to revisit your words of wisdom or read the rest. You are very welcome to stay for the next panel. Thank you again for travelling, particularly those of you who have come from Yeovil. We couldn’t make it two hours down the way, so thank you for coming here and back in a day.

Examination of Witnesses

Witnesses: David Williams, Director General of Finance, Department of Health, Dame Una O’Brien, Permanent Secretary, Department of Health, Simon Stevens, Chief Executive, NHS England, and Jim Mackey, Chief Executive, NHS Improvement, gave evidence.

              Chair: Here is our second panel on the financial sustainability of acute hospitals. Our witnesses are David Williams, the director general of finance at the Department of Health; Dame Una O’Brien, the permanent secretary at the Department of Health; Simon Stevens, the chief executive of NHS England; and Jim Mackey, the chief executive of NHS Improvement.

              We have heard from our previous witnesses, but also from evidence we have had from colleagues around the House and from hospitals and others directly, and seen very clearly from the NAO Report, that it is not really an exaggeration to say that acute hospital trusts are at a crisis point. The NAO Report paints a very alarming picture; I think it is one of the most stark reports that I have read in my five years or so on the Committee. My vice-Chair is not here to give the longer historical perspective, but regarding the 4% efficiencies over the last five years, the proceeding of which is now unsustainable, the NAO Report shows that many hospitals are only getting by on cash handouts from your Department, Dame Una. The plan to get budgets back on track smacks a bit to us reading the Report of “jam tomorrow”, and we are a bit concerned that it could be a sticking plaster.

              We are keen to probe with you the £1.8 billion sustainability fund—that is less than the aggregate deficit so far, so there is a gap already—and what will that mean in future, because we understand that while it is recurrent funding to NHS England, Mr Stevens, it is not recurrent to the hospitals concerned.

              In looking at the Report, we also think that this was foreseeable, as those of you who were in the room for our previous evidence will have heard. So we will be asking you how you can reassure us and patients and hospitals that this is not just a quick fix when you are looking at tackling this in the future. Will your actions and the actions of hospitals actually address the systemic problems and make the long-term systemic changes that, Mr Stevens, you have really set your stall out on with the five-year plan? Today is really one of our first probes of your plan in toto.

              Over to David Mowat first of all.

              Q48 David Mowat: Thank you very much, Chair, and good afternoon.

              As the Chair said, when there is an issue that affects 80% or 70% of all hospitals, that implies that it is a systems issue of some kind, rather than necessarily an individual management issue in those hospitals. I suppose that my question to Dame Una first of all is this: was where we are now, with a £2.2 billion deficit[2]—apparently, it is of that order—predictable a year ago? Are you surprised that it is £2.2 billion, or is that what you thought it would be when you were putting your plans together for this year?

              Dame Una O'Brien: Thank you very much for inviting us and for the opportunity to talk about the future plan, because since the Report was written we have obviously got more details about the spending review, the mandate and the planning guidance, and a number of important communications have taken place to the NHS about 2016-17 and beyond. So, taking up the Chair’s invitation, I think it is important to talk about the detail of that this afternoon.

              You have asked specifically about the prediction for the deficit—the provider side deficit, I might say—for 2015-16, and my colleague, Jim Mackey, can give more details. But at the moment, I don’t reckon that it will be as large as you have suggested.

              Q49 David Mowat: Okay. What do you think it will be? What is your number for this year?

              Dame Una O'Brien: We are working currently towards a figure of £1.8 billion, so that is more than we predicted at the beginning of the year.

              Chair: Exactly the same as the sustainability fund.

              Dame Una O'Brien: You mentioned a figure significantly higher than that—

              David Mowat: I did.

              Dame Una O'Brien: And we are working to bring it down and keep it within £1.8 billion.

              Q50 David Mowat: Sorry. I understand that the £1.8 billion is the sustainability fund, but is the—?

              Dame Una O'Brien: No. It is the figure for—

              David Mowat: Oh, it is a coincidence that those are the same figures. All right.

              Dame Una O'Brien: They happen to be a coincidence—exactly.

              Q51 David Mowat: So your predicted outturn, if you like, in the NHS is that you are predicting a £1.8 billion deficit in the hospital sector.

              Dame Una O'Brien: On the provider side, that is correct, but as the Committee well knows, we have a number of different balancing factors, and we are working very hard and expect to—

              Q52 David Mowat: To repeat my question at the start, what did you think it would be? Your figure now is £1.8 billion. What did you think it would be about a year ago, when you were putting your plans together for this year?

              Dame Una O'Brien: Two different things on that. We set out with an objective to keep it as close as possible to where it had been in 2014-15, which was just shy of £1 billion. Then obviously we had a series of conversations with the provider side in the planning for 2015-16, when the original plans came back predicting that it was too high, and as the Report sets out, we challenged and tested those plans. We obviously had a problem starting in January 2015, when we had the challenge to the tariff, and that had an impact on delaying the planning process.

              Also, although we could see there was a problem coming, which was well set out, I think, in the NAO’s autumn 2014 Report, I do not think that anyone predicted the scale of exploitation, to be frank, that we have experienced from the temporary agencies, and the impact that that had on the deficit, in addition to the problems that individual trusts were facing for all the different elements—I will not go over them again—that your previous witnesses described.

              Q53 David Mowat: So how much of the £1.8 billion deficit —since you have raised this—do you think is down to the use of agency staff?

              Dame Una O'Brien: That is a good question. I do not have a precise figure for that, but I think it has had a significant impact it pushing it beyond what we thought. I do not know whether my colleagues could help you with that.

              Jim Mackey: It is hard to say specifically, but the locum and agency spend this year will probably get to about £4 billion in total. We are obviously making a lot of efforts to try to pull that back with the plan on locum agency staff. There are some signs that that is having an impact. The growth, year on year, at the half-year point was about £0.5 billion growth, so you could say that in this year’s forecast, there is about £1 billion of pressure year on year.

              Q54 David Mowat: So it is half a billion extra over last year.

              Jim Mackey: Yes.

              David Mowat: Right. So—

              Simon Stevens: Would it be right that the 2013-14 agency and temporary staff spend was £2.6 billion? So the idea that we would be at £3.5 billion or £4 billion on temporary staffing spend alone explains the vast majority—if not all—of the increase in the provider deficit for this year.

              Q55 David Mowat: That is quite interesting. So your position is broadly that all that has happened is that, collectively, the trusts have lost control of the agency budget and the increase in that delta is the result that has caused this. That is the principal—or the only—systemic issue.

              Simon Stevens: Yes, it is the principal, the largest, driver. Obviously there are many moving parts, but if you want a parsimonious explanation, the increase in temporary staffing pretty much matches the increase in the deficit pressures in providers.

              Q56 David Mowat: So it follows that if you are able to stop that, you will no longer have a problem. Is that your analysis?

              Simon Stevens: That will be a big part of the solution for next year. There are a number of other things. From my point of view, the creation of NHS Improvement with Jim as the chief executive will give real focus to the work collectively needed, because we have had a collective action problem across the totality of the health service. That has enabled individual agencies to play off one part of the health service against another at a time when there has been an understandable desire to increase staffing levels at just the same time as supply has been constrained. It is a kind of perfect storm in terms of our workforce.

              Q57 Chair: Dame Una, you used the word “exploitation”. Simon Stevens, you did not go quite that far but—

              Simon Stevens: I have previously said “rip-off”, so—

              Chair: There we go.

              Simon Stevens: That probably equates.

              Q58 Chair: So you are laying a lot of the blame at the door of the agencies. Is there any evidence that they have increased their charges and costs? It is NHS staff, by and large, who work for the agencies when they come back into hospitals.

              Simon Stevens: Look, the NHS is not blameless on this. We’ve got to—

              Chair: Good—just to get that established.

              Simon Stevens: Absolutely. We’ve got to exercise—

              Mr Jackson: Can I just come in on that? I have to defend the trusts a little bit.

              Chair: What—Stewart Jackson? Sorry, go on.

              Q59 Mr Jackson: It is slightly unfair. You will see in paragraphs 3.16 and 3.17 that there is an inconsistency in the advice and guidance given to the trusts about the balance between patient safety, arising from Keogh and the Francis report, and clinical work that is subject to target. You will know that it says in the Report: “When setting limits on trusts’ agency costs in June 2015—”

              Chair: This is page 45—the final bullet point.

              Q60 Mr Jackson: Yes, page 45. It says, “When setting limits on trusts’ agency costs in June 2015…the Department was explicit that the ‘focus is on saving money’; but that there should be no ‘compromise’ on patient safety. Monitor wrote to NHS foundation trusts in August 2015 asking them to adopt safe staffing guidance in a ‘proportionate and appropriate way’”.

              The next paragraph tells us: “In October 2015, NHS England, Monitor, the NHS TDA, NICE and the CQC wrote to all trusts recognising the need for clarity and consistency…the NICE guidance was ‘not a requirement’”. In short, the point is that you really cannot complain about increased use and the trend to use non-permanent agency staff when, essentially, the trusts are between a rock and a hard place. You either have to clarify and be consistent or release further funds for them to meet their obligations and imperatives for clinical work.

              Simon Stevens: First, I know that Jim wants to come in on this.

              Mr Jackson: Is that fair?

              Simon Stevens: I think there is a third alternative, which is for the NHS collectively—for hospitals together—to exert some downward pressure and some bargaining power relative to the prices that are being paid. It is the absence of that third alternative to date that has led to this. I might get this number wrong, but I think I have seen a suggestion that perhaps even at your local hospital, the spending on temporary staffing has gone up by 153% over the last couple of years. There is an issue there. Hospitals individually are not “to blame” for that, but collectively we have got to raise our game.

              Q61 Mr Jackson: You are the fourth-biggest employer in the world, as the NHS. What are you doing to assist them to use that bargaining power? You, the Indian railway service and the People’s Republic of China army are up there as world employers. What are you doing to use that financial muscle?

              Simon Stevens: We will describe what we are doing. As it happens, legally, of course, each individual trust is its own employer, so part of what we have got to do is a workaround to that so that we get more collective action. That is what Jim is leading to.

              Sir Amyas Morse: I would be grateful if you would just provide a couple of bits of analysis on this. Of the deficit that you are attributing to this—£800 million or £900 million, if I have that right—some of it, you have said, was an uptick in the actual hours of available temporary staff needed because of constraint in the supply of permanent staff. You are not saying that that bit of it is a rip-off; that is a shortfall in the supply of permanent staff. The rip-off bit, therefore, must be a higher charge rate or commission rate on providing those staff. How much of this total £800 million or £900 million would you hazard is inflated commission, assuming that they are entitled to a commission at all? What number would you put on that?

              Jim Mackey: I can’t give you an answer today, so we will try to do that analysis and come back to you. But if you look at the thing in the round, as Simon has said, on the locum and agency thing there has been a pressure for people to appoint people to meet regulatory standards. We agree on that point, and last week Sir Mike Richards and I wrote to the service to say, “Let’s look at quality and money in the round,” to try to keep this thing together. There is then a price and volume problem in the locum and agency supply market.

              Sir Amyas Morse: But you are not blaming the volume problem on agency suppliers.

              Jim Mackey: No.

              Sir Amyas Morse: Just the price.

              Jim Mackey: Yes. There is very big variation in the fees charged by agency providers, and the rates they charge for their staff have huge variation. There are the measures we took last week to go further—we have got the existing price cap mechanism, which is having some impact this year, but we will disrupt the market in the coming year by effectively reprocuring for new agency and locum contracts to have a competitive fee process, to squeeze the fees. More importantly, those contracts would give NHS Improvement the ability to set the terms and conditions. That is on your point; as a large employer, we will set the terms and, hopefully, prevent staff seeing that it is more lucrative to work as agency.

              Q62 David Mowat: There are several points there that I wanted to go to. First of all, it seems to me to be a relatively convenient—maybe it is correct—analysis of the situation that we are in to say “agency”. First of all, of course, one of the reasons that so many agency staff are needed is because retention in the health service of skilled people is so appalling. We have talked about that for GPs, latterly. Presumably, the same UK-trained nurses and doctors that work through agencies do so because the terms and conditions, and maybe the esteem, are better than they are used to in the NHS. I do not know, but for whatever reason, we have got ourselves into that situation.

              The second thing that strikes me is your answer about using monopoly purchasing or procurement power to, broadly speaking, stamp out this problem. That is what you have said, I think. In some environments—in some countries—it would be illegal, under antitrust rules. Presumably, you are happy that it is not illegal here, but it could be construed as using your monopoly power to very seriously impact the market that doctors and nurses work in. You may well be comfortable with that, because eventually that just gives them the option of going abroad, I suppose. It sounds to me as though that is the answer that you have hit upon, Mr Mackey.

              Jim Mackey: Yes. It’s not illegal—we have clarified that it is legal to do what we are planning to do. It is material. It’s not the only explanation for the deficit, but it is a very big explanation for the growth in costs in the last couple of years. About half of the locum and agency workforce actually work for the NHS; they are doing their extra time through an agency. That just feels absolutely wrong to me. It is toxic for the staff they leave behind, it is toxic for the staff they work alongside when they go there, and it is hugely inflationary. However it has happened, it has happened. There has been huge growth in that regard over the last two or three years, and I think it is our job to stop it.

              Q63 Chair: What about workforce planning? Isn’t it down to NHS England and the Department?

              David Mowat: Or retention? Some effort not to lose so many people.

              Jim Mackey: Yes. I think the retention argument is weaker than the supply argument. There are problems in workforce supply—I think I am coming here in a few weeks’ time to talk about that—and there are problems in that system, and those problems are being addressed in another way. There are also geographical pockets or structural problems where it is very hard to recruit people, but, in aggregate, I have been quite surprised since taking on this role that that problem now does not look as big as it did when I was in a trust in October. I thought there was a really terrible problem of supply; now I think it is just a very distorted market.

              Q64 Stephen Phillips: Mr Mackey, you say that it is not illegal, and you may well be right about that—I simply do not know. Have you taken legal advice that what is planned is lawful?

              Jim Mackey: Yes.

              Q65 Stephen Phillips: Have you had any discussions with the European Commission about whether it amounts to an abuse of dominant position under articles 81 and 82?

              Jim Mackey: No.

              Simon Stevens: No, but we believe that this would be appropriate.

              Q66 Stephen Phillips: Mr Stevens, do you not think it might be a good idea to have those discussions before the Commission comes along and tells you that what you are doing is illegal?

              Simon Stevens: As Jim says, advice has been taken. You will understand that, given that substantial profits on the part of a number of organisations are at stake here, it probably isn’t going to strengthen our hand to go into great detail about the legal preparations that have been taken here, but to secure taxpayers’ money, we think this is an approach that now has to be advanced.

              Q67 Stephen Phillips: I understand that, and the Committee is interested in it. The question I asked is whether you thought it might be a good idea to have a preliminary discussion at least with the European Commission, so that they don’t end up taking proceedings against the Government.

              Simon Stevens: I do not think it would be a good idea to reveal our legal tactics in public given the negotiations and discussions that will be taking place with potential litigants on this point.

              Chair: We have had contact from agencies about this.

              Q68 David Mowat: What we are left with is that you have told us that you intend to use your dominant market position to do what needs to be done to keep salaries lower than they otherwise would be.

              Simon Stevens: No, I don’t believe that is what we said. I think we said that we intend to make use of the “N” in NHS, which stands for “national.”

              Q69 David Mowat: I will make one point before we leave this subject. When I spoke to you last week about your personal responsibility for retention, you made the point that the NHS is really lots and lots and lots of different companies and organisations and that therefore it is not appropriate that somebody such as yourself, in a central role, should have that responsibility. You seem to have a different view as to this commercial aspect.

              Simon Stevens: That’s right, because the legal status of a GP practice is different from that of an NHS trust or foundation trust. Where Jim stands in relationship to the trust is different from the relationship that NHS England—

              Q70 David Mowat: I understand that, but do you regard yourself as responsible for retention in those GP practices that are directly NHS-employed?

              Simon Stevens: Yes, but I don’t want to misinterpret the conversation that we were having just a week ago, on my weekly visit to the Committee, which was on the collective commitment that we all have made—by “collective” I mean NHS England, Health Education England and the Department—to seek an increase of 5,000 doctors in general practice by 2020. Yes, there is a training piece and a retention piece to that, and we intend to put forward a big support package for primary care next month, February, laying out in considerable detail how, together with the Royal College of GPs and the BMA, we are going to take action on that front.

              Q71 David Mowat: All right, so let’s move on. We have this £2 billion deficit this year, which you are confident that you will be able to address, at least substantially, by bearing down on agency costs. Is any of it caused by an over-optimistic analysis or expectation of efficiency? Mr Mackey, you are the NHS Improvement man. 4% is quite chunky and seems to be quite ambitious.

              Jim Mackey: So when I was in NFT last year, I didn’t think 4% was achievable, and I am on record as saying that. When I look back, I don’t think there were many alternatives given the resources available, so it is entirely understandable how the tariff was set at that level, but most providers did not think they could achieve 4%, and I accept that.

              Sir Amyas Morse: Didn’t?

              Jim Mackey: Didn’t.

              Q72 David Mowat: Okay. And now do you think they can?

              Jim Mackey: Next year they don’t have to. They have to deliver 2%. So the big difference between this year and next is the deployment of the transformation fund—the £1.8 billion—and a more reasonable tariff efficiency factor at 2%.

              Q73 David Mowat: It might be that I have misunderstood it. In paragraph 3.2.1 of the Report, I found quite a useful analysis of what the NHS is expecting. The Five Year Forward View talks about moving towards a 4% efficiency saving against a historical achievement of nearer 1%. I know there are always things we can do to do things better, but it seems to me that quite a step change in performance is expected in order to deliver the Five Year Forward View. I wonder whether what has happened this year is a preliminary shot across the bows to say that it might be overly ambitious.

              Jim Mackey: I am sure Simon will talk about the forward view. Just to be clear, from my perspective—the provider perspective—the efficiency requirement next year is 2%. That is embedded in the tariff. The reason we can be more optimistic is the deployment of the £1.8 billion transformation fund and the more reasonable efficiency requirement of 2%.

              Q74 David Mowat: Isn’t most of the £1.8 billion transformation fund going to be used to pay off the deficit?

              Jim Mackey: It will be deployed to bring organisations back into balance next year—

              Simon Stevens: Not to pay back this year’s overspend.

              Jim Mackey: Not this year’s; next year’s.

              Q75 David Mowat: Okay, thank you for that. So it is to prevent it from happening again next year?

              Jim Mackey: Yes.

              Q76 David Mowat: So the £1.8 billion this year will be left as loans on their balance sheets or whatever.

              Jim Mackey: Yes. There is a historical question of how we sort out the accumulated cash damage, damaged balance sheets and stuff from previous years up to now, but the important thing is that next year we stop bleeding. We will have a transformation fund and a more reasonable efficiency ask and, importantly, providers will then have a bit of breathing space to start thinking about future years.

              Q77 David Mowat: But of the £8 billion that Mr Stevens asked for, £3.8 billion of it has been front-loaded and most of that will be spent on keeping the deficit next year in check so it does not rise further. Does that not imply that there is a cash-flow crunch coming, unless you get another £3.8 billion the following year, or something pretty dramatic happens, of which we have seen no sign yet?

              Simon Stevens: The £1.8 billion in sustainability support will be available to trusts next year from the transformation fund. The reason why I say that is that the transformation fund is actually £2.14 billion next year, so £340 million of that is not being deployed for this, and £1.8 billion is.

              Q78 Chair: The rest is going to other bits of the health service.

              Simon Stevens: Absolutely, yes. So the £1.8 billion is not the only relief, as it were, that providers will be getting next year. Actually, on the prices being paid, the cost base is going up by 3.1% in the tariff, with a 2% efficiency, so the tariff will go up in addition to the £1.8 billion being put in the system. That is different from what happened this year, 2015-16. You have got to see those two things together, I think.

              Q79 David Mowat: Okay, so what is your prediction of the accumulated deficit or surplus at the end of next year when the NAO do their Report?

              Simon Stevens: I defer to Jim on the accumulated position. We are, obviously, going into the last eight weeks of planning for 2016-17, and we are seeking to have a balanced plan for the national health service for 2016-17.

              Q80 David Mowat: So next year you are going for a balanced plan with this £1.8 billion.

              Simon Stevens: Taking account of the £1.8 billion and the tariff efficiency uplift. But it is still going to be—

              Q81 David Mowat: So actually, you could say that next year is roughly the same as this year, no? I thought you were saying £1.8 billion for this year as well.

              Chair: Well, there is money going in this year in different forms.

              Dame Una O'Brien: Jim will give the detail, but it is important to be clear that this £1.8 billion, which is going to address the deficits in 2016-17, is not without conditions. What is going to be extremely important is the process and the conversation with each trust about what we get for that money, and that means changing practices and behaviours.

              Q82 David Mowat: Sure, we understand that it is not without conditions, but with it—I think Mr Stevens just said—you expected a, roughly speaking, even outturn, so with the £1.8 billion plus the conditions you will get an even outturn, which is about the same, it seems from your analysis, as it is going to be this year. I am not criticising you for that; it’s reasonable. It sounds to me that that is where you are with it.

              Dame Una O'Brien: Well, no. We are expecting action to take place that addresses the run rate in the deficits, because we are going to start to implement the Carter work next year, and there are a number of other actions in terms of productivity where we will be working with trusts to change the underlying—

              Q83 David Mowat: I was just doing the arithmetic. You said at the start of the session that you were expecting the outturn to be £1.8 billion for this year. I think Mr Stevens said that he is expecting it to be nil next year, effectively, but to get to that he would need the £1.8 billion of sustainability. That is all I’m getting at.

              Simon Stevens: You are right. There is a lot of work to be done for that to be the case, but we would like the run rate going into 2016-17 to be at £1.8 million, which can then be funded through the sustainability part—

              Q84 David Mowat: I have two more questions. One is: does it really matter very much that there are all these deficits? I understand that in patient care we are keen not to change the targets, and all the rest of it, that you set, so they do what they have to do, they staff as they have to staff and they keep the quality as you expect it to be, and then some of them get deficits and some don’t, and then the deficits get paid off in some way, either with loans or something happens—we don’t close the hospital down. So does it matter?

              It seems to me that it would matter only if because if it they started to take sub-optimal actions—for example hiring consultants to keep the deficit lower in an artificial way and spending millions of pounds on stuff like that. I wonder whether your view is that that happens, or that they take a loan, which causes interest to be charged, which is an impediment going forward.

              Simon Stevens: My view is that it does matter a great deal, and I think that all of us would take that point of view—obviously the others can speak for themselves. Part of the reason it matters is because when we see big unplanned deficits we might not be getting maximum value for money, which clearly is what is happening with the temporary staffing, for reasons we understand. Along with the training reductions of five years ago and the restrictions on international recruitment, all of those things have not helped, quite frankly, and we can no doubt talk about that.

              It matters for another reason, which is that potentially it skews the investment decisions that the national health service wants to make. Thinking back to our conversation of last Monday, around primary care and GPs, obviously the point that that NAO Report made was that, relatively speaking, investment in primary care has not kept up with overall increases in NHS funding over a long period of time—10 or 15 years or more. If we want to do something about that, we absolutely are going to have to make some feasible allocations for acute services, and stick to them.

              David Mowat: Okay. Do any of your colleagues want to add to that?

              Dame Una O'Brien: I completely agree with Simon. It matters because in any case the NHS has a very good record of stewardship and financial management. Up and down the country, there are extremely capable finance professionals who want to do a good job and want to be able to plan their finances properly. We do get, overall, much better value for money if spend can be properly planned in advance.

              Q85 David Mowat: If it can be predicted.

              Simon Stevens: Yes.

              Q86 David Mowat: I have one final question. You have this ACRA formula that drives CCG funding. I understand that it was set up to be changed 18 months ago, but that in the end you did not change it. Is there any impact on the analysis by individual trusts as a result of your not implementing the ACRA formula that you developed?

              Simon Stevens: We have actually implemented the recommendations from ACRA that we received. Obviously, the history—

              Q87 David Mowat: Am I right in saying that the first time you didn’t? Was it two years ago that you did not implement it? You just gave flat-rate changes.

              Simon Stevens: NHS England obviously came into being, and since then we have put our thumb on the scale in terms of moving to fair shares across the country. Last year, 34 CCGs were more than 5% below their fair shares; we halved that this year, to 17; and for next year every CCG will be no more than 5% below its fair shares allocation, not just on its CCG-commissioned services but on its total spending as well, taking account of specialised services and primary care services.

              For next year, we have also introduced for the first time a new sparsity adjustment for rural areas. For the first time, we have added an inequalities adjustment on specialised commissioning funding. So an enormous amount of work is being done. The NAO has previously examined the approaches that we have been taking here, so I think we have got a very important story to tell about the fairness in which money is being allocated now through 2020. And obviously this is an effort that began in 1976, with the resource allocations working party—RAWP—which has become progressively more sophisticated over time.

              Q88 Chair: So work that will never be finished, I think, in that case; no one ever thinks it is fair for them.

              Simon Stevens: Painting the Forth Bridge.

              Q89 Chair: Can I just say that you are both sat there—Dame Una as accounting officer for the Department, Simon Stevens as accounting officer for NHS England—saying it is not desirable, it is not good, but it was between you or your organisations that set the 4% efficiency savings over the last five years. That has led to a structural budget issue in acute hospitals. I mean, the Minister admitted in the House two or three weeks ago that three quarters are in deficit; that is more than when the NAO Report was published. Don’t you think that there is a systemic problem and that the buck stops somewhere with you—?

              Simon Stevens: Can we just clarify what this 4% efficiency is and isn’t? Actually, of course—

              Q90 Chair: Well, can we?

              Simon Stevens: Yes, it was 3.5% actually. Most hospitals for this year are on something called the enhanced tariff option, which has a 3.5% gross efficiency. The problem in prior years has been that there has been a disconnect between the headline efficiency target and then, by the time it kind of trickles down into something in the front line, you end up with much less than that.  

              What we are doing now—and the creation of NHS Improvement frankly is going to be a big advance on this so we do not have parallel systems between TDA and Monitor—is a single, doable number, which will be the real number. That is the 2% that Jim referred to—

              Q91 Chair: Just 2%. So doesn’t that suggest that the 4% was 2% higher than it should have been?

              Simon Stevens: Look, I would rather we had not been faced with that degree of pressure in the system, but given the overall funding available to the NHS, that was the situation we were faced with.

              Q92 Chair: But as accounting officers, my point is, and I’m going to throw to Stewart Jackson in a moment, that there was a political mission, there were austerity measures, a coalition Government came in. All Governments do this—they set a target. As accounting officers, you’ve got to say to the politicians, “Is this feasible? Is it deliverable or not?” We now see very starkly as we sit here today that it is not, that there is still another £1.8 billion being thrown into the system next year to try and sort this out. We can touch on how long these improvements are going to take; I know that Anne-Marie Trevelyan will be coming in on the improvement side a little later. You are the accounting officers. Couldn’t you—shouldn’t you—have said, “This isn’t going to work?”

              Simon Stevens: Well, it is no secret that I have been making arguments, both privately and publicly, about the overall funding and the phasing of resourcing in the NHS. I think there is another piece that is relevant when thinking about 2015-16, which is that we began the year with £1 billion effectively of purchasing power from the NHS taken off the NHS and given to local government to support social care services through the Better Care Fund. That was a legitimate policy decision, but nevertheless that shows up in the NHS Budget, but actually it is a cut on 1 April in the resources available to local CCGs—

              Q93 Chair: Dame Una, you are at the Department of Health; you have been Permanent Secretary there all throughout this period. You are the accounting officer. These things were foreseeable. When did you want to call it—

              Dame Una O'Brien: Well, everything is crystal clear when you have the benefit of hindsight, and if you go back to the basis on which decisions were made at the time—SR 2013, the final preparations for the last year of the Parliament—I am confident that all the different issues that we could see we discussed openly and we made the judgments with the resources that we had.

              Actually, just to come back to the point, because we could see some of the problems arising as they were, that is why there has been huge support and encouragement for Simon to issue the five-year forward view in the autumn of 2014, and I think the timing of that is significant. And that has had a very big influence on the discussions that followed about the spending review. So, I think that behind the scenes people do give advice, as they are required to do, about all the options that are available, and we had to work within the resources that we had. So, I think that behind the scenes people do give advice, as they are required to do, about all the options that are available, and we had to work within the resources that we had.

              Q94 Chair: It was such an onslaught this year, but I am not going to dwell on it because I think we have made the point and we will come back to it.

              Sir Amyas Morse, and then I am going to ask Stewart Jackson to come in.

              Sir Amyas Morse: I listened to what Jim Mackey was just saying, and I am appreciative of witnesses being so frank about this. You have “stopped the bleeding”—to quote you—and you have a substantial amount of long-term balance sheet damage that you are going to have to find ways of fixing in the future. You could do with spending the money on other things besides worrying about that, frankly. Can we take it from that that having overly aggressive efficiency targets can be damaging in the long term? It is not neutral, it is actually really damaging. Would that be a fair conclusion to come to?

              Simon Stevens: Expressed as a syllogism, of course.

              Sir Amyas Morse: Thank you.

              Dame Una O'Brien: May I just add to that? The only thing I would say is that there are huge differences between providers. And may I put on the record that Lord Carter’s work has revealed very big variations in the utilisation of resources? I would not want to generalise one way or another because there are some organisations that could do with a much tougher efficiency requirement than 4%.

              Sir Amyas Morse: I am not trying to take away from that, but it is a bit difficult to say that one cannot generalise when so many trusts are in such large deficit.

              Q95 Mr Jackson: May I ask a couple of quick factual questions? One is: given the importance of working together between the acute trusts and the CCGs, is it your official position that you deprecate the fining of acute trusts by CCGs? Are you encouraging them to stop doing that because it is rather self-defeating?

              Simon Stevens: Our official position is that the Government sets the NHS a mandate, and in order to use the funds available we have to link those funds both to incentives and to penalties for not delivering. How we frame those incentives and those penalties will, I think, evolve, so the approach that we intend to use for next year will be to avoid double jeopardy, as it were.

              When a trust has agreed with Jim and me what their share of the £1.8 billion will be, alongside that they will have to agree their performance improvement trajectory for next year, and as long as they are on that trajectory they will not be dinged, through penalties, for performance against the key access standards that matter a great deal to patients—A&E four-hour waits, the waits for operations, cancer waits and so forth. We do need to have carrots and sticks in the system; we just need to make sure that they are aligned to a realistic improvement trajectory for individual hospitals.

              Q96 Mr Jackson: Were you concerned with the fact that it took until October of last year for NHS foundation trusts to provide Monitor with their projected financial budgets going forward? That surely is a very significant failing.

              Jim Mackey: Yes. That was not acceptable. As Simon pointed out earlier, there were things that happened last year that just should not have happened. Since I arrived in November, we have been changing the way Monitor interfaces with foundation trusts, how the TDA interfaces with NHS trusts. We have been working on better data collection. We have a plan to improve the planning process. We have various things ongoing about making the transparency of data, results and so on more visible. But yes, absolutely, the plans should have been in earlier. There should have been more rigour. There should have been more challenge.

              Q97 Mr Jackson: We said earlier that we did not like non-recurring expenditure being offset against savings, and I think that there is a general acceptance of that. May I ask you about disposal of capital assets? On page 38 of the Report we were looking at the public dividend capital. We are now in a position where the Department is bunging hundreds of millions of pounds to hospitals in difficulty, essentially on the never-never: interest-free loans and fee-bearing loans under the auspices of the public dividend capital. Is there any factoring in of the capital assets that are within the ownership of those trusts in order to offset some of that borrowing? That seems to be an issue that the NHS has not got to grips with for a long time. I use the example of my own very unique trust, which took a considerable period of time—five years—to dispose of the old Peterborough District Hospital in order to help finance the PFI and the new Peterborough City Hospital.  Is that common across the country? Are you looking at capital and revenue costs?

              Jim Mackey: We are, yes. We are looking at utilisation of the estate and the opportunity to realise proceeds from estate rationalisation. All those things have started to happen in the last few weeks. Some are underpinned into the spending review, so there are assumptions about land sales and so on. On Una’s point, there is a huge variation across the NHS in ability, capacity and capability to do these things. In my view, I have led quite a few big capital projects over the years. They are not easy things to do. It is not something you want people trying to do as a one-off, so I think we need to get our heads around how the NHS uses its internal resource better to help people when they are doing those things.

              Q98 Mr Jackson: After the Ministry of Defence, I think the NHS is the second largest or certainly one of the largest departmental landowners in the UK. Given that the Government’s overall strategy is to deliver 200,000 affordable homes, or starter homes, in the next four and a half years, that is surely an opportunity to deliver both strategic objectives for Government.

              Jim Mackey: Absolutely. The NHS estate is huge. There is huge variation in its utilisation, in its value and in its ability to be used for other things. It is a big part of the Carter programme, the transformation fund and the assurance process, and a big part of our efforts between NHS Improvement, the Department and NHS England to make sure we get a proper grip of that.

              David Williams: As part of our assessment process before we decide whether to make a PDC or a conventional loan to trust, we will look at their capacity to generate capital themselves through asset disposals. Looking at the spending review supplement for this Parliament, we are looking to generate around £2 billion of capital receipts across the period through estate disposals, partly to free up money for investment in transformation and partly to play our part in supporting public sector land sales for the homes target as part of the wider Government initiative. One of the issues that we are currently looking at as part of the incentive regime is that where trusts owe me money, as it were, through loans, I might be willing to take land disposal receipts in return for reducing the level of loan or debt level that they have.

              Q99 Mr Jackson: Thank you. That is very helpful. I am a localist, but I think you need to crack the whip centrally, because you have responsibility for the cumulative deficit and efficiency of the NHS. If trusts or local authorities are holding up these issues, tough action needs to be taken.

              You have prayed in aid the Lord Carter of Coles review. One of the most striking sentences in this whole Report, which must chill your soul, is in paragraph 3.20: “Although there is no detailed plan for closing the £22 billion efficiency gap, preliminary work is being carried out to identify where acute trusts can make savings.” That’s all right, then. Incidentally, congratulations to the DOH official who came up with “success regime” as a name. It is up there with the Kim Jong-un PR office for oxymoronic terms.

              Chair: We haven’t done our awards yet.

              Q100 Mr Jackson: “Success regime” refers to hospitals that are actually broke. Anyway, moving swiftly on.

              Simon Stevens: There is an important point there—

              Q101 Chair: Mr Stevens is going to try to defend this. Well, we will indulge you, Mr Stevens.

              Simon Stevens: I certainly am, and I will tell you why. It is too easy to label and to poke and prod individual institutions and say, “You are failing. It’s all your fault. If only we fired the chief exec and got a new one in every five minutes, all will be well.” Actually, in many parts of the country where there are these deep-seated problems, those problems have been there for many years, and it will take all the players in the health service—often it will be the local authorities with social care as well—coming together to turn the thing around. In a way, it was just an attempt to signal that instead of poking and prodding and naming and shaming, trying to get a sense of shared endeavour back in the system is how we will turn some of these places around.

              Chair: Mr Stevens, in another life you should have been in politics.

              Q102 Mr Jackson: It is a bit Emperor Hirohito, August 1945, when he said that events had not necessarily gone to Japan’s advantage in the war after the Hiroshima bomb had been dropped.

              Simon Stevens: We are being very east Asian in our referencing.

              Q103 Mr Jackson: Let us get back to Lord Carter of Coles. Over and above there not being a quantitative and qualitative detailed plan—

              Simon Stevens: Can I just say something on that, because Sir Amyas and I did exchange points of view on this?

              Q104 Mr Jackson: You crossed swords.

              Simon Stevens: We sign off the factual content, but we disagree with that statement. It may have been accurate at the time that the report was written prior to the outcome of the spending review, but we have a detailed set of plans, and some of those relate specifically to the provider sector and some relate to other parts of our cost base. The NHS and the Government will be making a series of announcements on the individual elements of those over the course of the next month to six weeks—something like that.

              Q105 Mr Jackson: Yes. I think there is a consensus on the general overview and strategy of the plan, but let me just go to the bit that did worry me, which is our old friend data collection. That is not just a Department of Health issue; all Departments do not collect data properly. Obviously we are pleased that the interim report found that the NHS could save £5 billion a year within the next five years by making better use of staff, using medicines more effectively and getting better value for money, but the problem is, as it says in the Report, that the “quality of reference cost data relies on accurate data being submitted by trusts. A recent audit by Monitor of reference costs for 2013-14 found that 49% of trusts sending these data had made ‘materially inaccurate’ submissions.” I know what you will say, Mr Stevens, because you always say it.

              Simon Stevens: No, Jim will reply to this.

              Q106 Mr Jackson: You will say, “Things can only get better”, as someone once said.

              Simon Stevens: Things will get better, now that Jim is here.

              Q107 Mr Jackson: On a serious point, you cannot point up remedial action for trusts, which we all want to see in terms of their finances—that will feed through into clinical work—if you have not got the data as to what is going wrong. I guess my question is: what are you going to do now in this financial year to ensure that you know what the problems are and that you can amend and tackle those problems as we go forward?

              Jim Mackey: So, first, that was quite old. That was 2013-14. At that time, reference costs were not reused for much, so it is understandable at that time that people did not put that much effort into it. We have got a huge job over the next year or so to improve data quality and to make it more meaningful. As people will see now, the link to the Carter productivity savings means that they are real. Individual organisations will have targets based on that, and that will improve data. Through NHS Improvement, we will lay on training and so on across the country. That will start in a couple of months’ time to try to get some of the basics sorted out.

              Just as I was coming in today, I had an email from a finance manager of a trust in the south who had translated the transformation fund announcements on Friday. It was a really nice email from a middle-ranking finance person to say, basically, “Thank God for that. We have got a chance again.” Data are important. We had a few good years of service line management a few years ago, where Monitor put a huge effort into improving financial reporting engagement between clinicians and managers, and we need to get back to that, but we need good data to do this, and we will be doing our level best to improve that.

              Q108 Mr Jackson: My final point is maybe a bit leftfield and technical, but it is on tariffs. Obviously we alluded earlier to the dispute about tariffs and the 70%-30% split. What is your view on where we are now with tariffs? Do you think that we will have plain sailing on that among yourself, commissioners and acute hospital trusts?

              Jim Mackey: First, what I would say is that, very quickly on arriving into this job, Simon and I discussed the matter and took the view that we should suspend the progress to HRG4+, because it was too unstable. It presented a risk that there might be financial instability as a result. That was the first thing. I am a really strong believer that we can use payment mechanisms and financial mechanisms to incentivise the NHS to do what is required at a particular time, but the current system is not fit for purpose in that regard.

              Our teams will be working together over the coming year. We had a discussion last week about creating a formal shared team or shared resource to work together on pricing. The really important thing is to look at the challenge we have and at what we are trying to do, which is to incentivise out-of-hospital care. Let’s create some financial mechanisms that do that. In some health communities, it might be that DToC is the thing to incentivise, so let’s do that. It is one of those things where a standard few national mechanisms will not actually work any more, so it needs to be more nuanced. There is a lot of really good evidence in other systems using normalised tariffs. For example, if you can do a hip operation in Northumbria today as a day case and that costs X, that should be a standard. We should be trying to improve performance across the NHS by using those mechanisms. The current system will not do that and we need to reconstruct it to do it.

              Q109 Mr Jackson: Thank you. I am going to shut up after this question. Can I ask you, Mr Stevens, a very specific question? Forgive me that you won’t necessarily be expecting it. You will know that the UnitingCare Partnership, which was the collaboration between the Cambridge University Hospitals NHS Foundation Trust and the Cambridge and Peterborough mental health partnership, fell apart just before Christmas and is subject to a lot of discussion and debate. Will you confirm that you undertook to launch an inquiry into that? Could you give us an idea of when the findings will be published and confirm that they will be made public? What other assistance will you be giving to healthcare providers to ensure that there is a continuation of care for people in Cambridgeshire and Peterborough?

              Simon Stevens: The CCG has taken back the responsibility for the contract and there will be no disruption to patient services, but this is a very important moment for the whole of the NHS to learn from what did not work there. We have said that we will conduct an inquiry and will publish the results. I expect that we will have that and will be able to do so within six or eight weeks, because this needs to be a quick, targeted, thorough piece of work that everybody else can then pay attention to.

              Mr Jackson: I am most grateful.

              Chair: Other colleagues have written to us about that and I know the NAO has had a letter as well. We will wait to see where that goes.

              Q110 Caroline Flint: We were having a little discussion a moment ago about Lord Carter’s saving targets and during the course of that discussion Mr Mackey very helpfully talked about how there needs to be improvements in data to get a better picture. I therefore suggest that you agree with the Report that Lord Carter’s proposals are based on inaccurate data. How realistic are his savings for hospital trusts if they are based on inaccurate data?

              Jim Mackey: Through the engagement process we have had with trusts, there is very strong support in the service for the work and it is seen as very credible. You will find hardly anybody who will say that they can deliver their number entirely, but I would argue that it is also not nil. If an organisation is down to look at maybe £20 million-worth of efficiencies, they can absolutely argue that the reference costs were inaccurate in that it may not be £20 million, but it is absolutely not nil. We need to agree organisation by organisation how to get underneath it, how to get an accurate costing, and what the true variation is. It is a start. It will be much more accurate next year than this year as we build on that. The year after, it will be much more accurate again. I have met nobody who will say there is no efficiency or productivity improvement as a result of this work.

              Q111 Caroline Flint: I totally agree with you. I am sure that there is room for improvement. Having been an MP for 18 years, I remember when, for example, in the South Yorkshire health community, at hospitals such as my own, the Doncaster Royal Infirmary, as it was then—it is now the Doncaster and Bassetlaw Trust—at the end of a financial year we used to find ourselves having to bail out other parts of the health community, often in Sheffield, because of the overruns in A&E in that city. We tried to stop that, because it seemed unfair to those hospitals that were keeping in balance—there was almost no incentive because you would lose money that would go elsewhere in the health community at the end of the year. A lot of work was done during and post that period by Patricia Hewitt and others to get trusts into balance. Of course, foundation trusts were brought in as well as another way to encourage good financial planning.

              Having listened to today’s discussion and read the Report, it seems that we still have a problem in the fact that it is only when there is a crisis that the NHS seems to rise to the challenge of a self-improvement model based on the very best practice. Would you agree that one of our biggest problems is getting best practice shared across the NHS? Surely that has to come back to organisations such as Monitor, the NHS Improvement agency and NHS England, as well as the strategic health authorities before, which seemed to have failed to provide the overview to get the individual parts of the NHS to deliver on what they need to do for not only their community but their financial accountability.

              Jim Mackey: That is our core job as NHS Improvement over time. We probably have a tough 18 months ahead of heavy lifting to get the basics back in order.

              Q112 Caroline Flint: But why is it that it is only when there is a crisis that there is this attention by everybody—the Department of Health and these national organisations, but also within the health community? I noticed that part of the push is to get the wider health community—we were discussing access to GPs just the other week—to recognise the importance of prevention, not just treatment. None of this is new. Why is it that, within the health community, both inside and outside hospital, there is a failure of people to come together and see the writing on the wall?

              Jim Mackey: The NHS is a huge organisation. I would not agree that we do that only when there is a crisis.

              Q113 Caroline Flint: I should say that my hospital happens to be in surplus at the moment.

              Jim Mackey: It is in good company.

              Q114 Caroline Flint: A decreasing amount of good company, according to the statistics.

              Jim Mackey: The best two years of my career were the first two years as a foundation trust. There wasn’t a crisis then; there was actually a reasonable amount of money around. You were in a position where, if you did the right thing, you got a lot of autonomy, and there was an incentive to do the right thing, look after your own affairs and get on with things. Anne-Marie was a governor at the time.

              Colleagues across the country—people who have been around longer than I have—would describe phases other than that one where the NHS has managed to hit a sweet spot and incentivised people to do the right thing and build earned autonomy. We have to create a new model of earned autonomy where local organisations in their local systems look after themselves and are supported to do the right thing. Periodically, over my time in the NHS—20-odd years—there have been four or five times when it just broke down and the system needed to be regrouped and reassembled so that we could get back on with things. That is how it feels to me now: it is another moment for us to reassemble, regroup, rethink of the priorities, get everybody refocused again and start to allow the NHS to do what it is very good at.

              Q115 Caroline Flint: Can I push you a bit more on that? Part of that earned autonomy, which I do not disagree with, was the development of foundation trusts. When will every NHS trust become a foundation trust and where are we on that? Just remind us how many are there. Have you any idea about what the timespan is for that?

              Jim Mackey: My view—and I am a big foundation trust fan—is that the world has changed a bit in the past few years. We have new models being created, we have people looking at accountable care organisations, and we have devolution and so on. For me, the key is whether we can create a system—

              Q116 Caroline Flint: Is it a defunct prospect?

              Jim Mackey: No, it might still be the right answer for some people, but frankly it is also a huge distraction at the moment. If you have a deficit, ED problems and recruitment problems, the last thing we want is people focusing on getting through a governance change.

              Q117 Caroline Flint: On that point, how much of Monitor’s resources is devoted to supporting NHS trusts to become foundation trusts? Would those resources better be put into some of the things you have been outlining?

              Jim Mackey: Almost none of Monitor’s current resource is targeted at supporting people to become foundation trusts. Since I arrived, we have focused a huge effort—some of it started before I got there—on trying to support getting the system back in order, delivering what we need to do next year financially, restoring ED performance, supporting new models of care, developing chains, the progress of devolution, etc. There is not a huge activity in Monitor at the moment on the FT pipeline. Frankly, there are probably fewer than 10 organisations that are not FTs at the minute that are in good enough shape to have a chance of getting there.

              Q118 Caroline Flint: Finally, I want to come on to figure 19—“The new models of care outlined in the Five Year Forward View”. I am sure anybody reading it would say that they look interesting and are common sense, but the Report goes on to say that it is not so clear how much the new models of care will save. As a constituency MP, one of the biggest problems I face in taking up casework for constituents between hospital and social care in the community is the cultural issue: people are just not talking to each other. Of course that is important, and a new model of care integration is key to that, but that in itself will not necessarily create a huge amount of savings; it is just making better use of the money we are already putting in and improving the way in which the different cultures come together and work together with a focus on the person who needs support, whether in hospital or out of it. Mr Stevens, are you convinced that those models—perhaps not in and of themselves—will produce a substantial contribution to savings? The Report says that “the ‘vanguards’, will have access to a share of a £200 million transformation fund”—another sum of money put out there to encourage good practice—but the NHS England guidance says that “unless the vanguards demonstrate ‘quantified changes’…it will be hard to justify national investment.” Where we are we on this? Better care does not necessarily mean cheaper care.

              Simon Stevens: Let’s get a few facts out. First, we do not expect the new care models to be the principal or sole route through which we generate the efficiencies or headroom we need to sustain the national health service over the next five years, but they are going to make a contribution. About 5 million people across the country are covered by one of the vanguards that are currently underway. They are obviously new. They have existed for only 12 months; in some cases, only for the past three or four months.

              The process we are going to use across the whole of England is that, by June, each geography will have come together and set out their stall—what they will do with the money on offer between now and 2020. As part of that, they have to say, “Here are the extra pressures we can see in my part of the country, here is the funding available through the CCG, and here is what, if we get our share of the national sustainability and transformation fund, we could do to redesign care to give ourselves headroom to deal with some of those extra pressures.”

              It is important to say, given that this conversation is sometimes around the £22 billion of efficiencies and all the rest of it, that it is not £22 billion that we have got to take out of our current cost base. It is just that there are going to be extra demands and extra things that we want to do. We need to create some headroom above and beyond the £8.4 billion-worth of real terms increases by 2020. I don’t think that anybody around the national health service thinks that we have stumbled across the exact optimal combination of joint working between primary and secondary care hospitals, between the mental health teams and the physical health teams, and between the health service and local councils for social care. Everybody can see that that triple integration is where we have got to go. This is a vehicle for making that real.

              Q119 Mrs Trevelyan: I have worked with Jim Mackey as an elected governor for the past 10 years. I stood down when I was elected. May I just say that I think you couldn’t have picked a better person to try to tackle the monster that is the NHS? Please look after him—don’t break him—because he is really, really good at what he does.

              Chair: You’ve got a lot to live up to there, Mr Mackey.

              Mrs Trevelyan: No pressure. Mr Stevens, it is a breath of fresh air to hear Mr Mackey talking in this arena. We saw him turn a fairly ordinary, not necessarily terribly functional system into what you know to be one of the UK’s leading foundation trusts, with a joined-up model of care that works, but it took him 10 years, with an incredibly committed team. The amount of work that went on to build relationships with County Hall and to ensure that that development could happen and that funding streams could work more effectively was also huge, and it was led by a man with enormous skills. Do you actually think that it will be possible to do that across the country? As Dame Una said, some trusts will need more transformation than others, and I have seen first hand how that was done by the man you have taken on to lead this work. Is this a realistic proposition?

              Simon Stevens: First of all, I agree with the endorsement. Secondly, we are not expecting the whole country—the whole national health service—to be covered by one of these new care models, firing on all cylinders, by 2020. This is going to be a rolling programme of different approaches being tested and developed. Part of the answer to the primary care debate we had last week is that the way GPs work will change. We are going to see quite a lot of uptake of the new care models— the primary care-focused ones. I did not hear the earlier evidence session, but in terms of what Paul Mears at Yeovil is doing—the local hospital or the Jim Mackey model—there are probably going to be fewer places where that is the right answer, but there will be places. So, our overall approach, as you know, has not been one size fits all, but nor has it been let a thousand flowers bloom; it is horses for courses.

              Q120 Mrs Trevelyan: Realistically, how far do you think you will have been able to get in a year’s time, knowing in detail, as you do, those that really are not in a good place?

              Simon Stevens: In a year’s time, I would hope that perhaps a fifth of the country was covered by most of the active ingredients that we are seeking to bring about through these new care models. In doing that, we are going with the grain of what front-line nurses, doctors, therapists and others are saying: “Here are the things we can see need to change. Back us in making those changes, and we will produce improvement.” I believe them when they say that.

              Dame Una O'Brien: If I may just add to that, there are two things that come out of your comment. The first is that the things that are capable of being done quickly should actually be done quickly. To pick just one example—the effective use of rostering in trusts—Lord Carter has revealed huge variation. We know we could get better deployment of our staff—managing sick leave and other absences—if rostering were done well everywhere. I am impatient, where things are capable of being done, for people to get on with them.

              However, your point raises something much broader—that really sustainable transformation takes time and does not, unfortunately, always fit within the exact parliamentary cycle. One of the risks with transformational change is that we all reach too much for everything to be concluded by a given date in 2020 when, in real life, that is actually not going to happen. This is about having the wisdom to judge those places that need the time and leadership to bring about change, while being able to see plans that are being delivered year on year. So, I am a supporter of that stability of leadership, but only if it means that the things that should be done sooner do get done, and I think it is possible to have both.

              Q121 Mrs Trevelyan: Do you feel you have the—“sanctions” is the wrong word—tools you need to make sure that that happens and, where it doesn’t, but you know it should, to apply levers?

              Dame Una O'Brien: We are working on it, in terms of all the things we have talked about today. Jim’s points about the payment mechanisms and the currencies are incredibly important in terms of getting the incentives right. The behaviours are really starting to shift. I see the debate about devolution and about leaders in a locality stepping up and coming together shifting behaviours, compared with when I started my job five years ago.

              But we do have more to do to give leaders the space and the tools to deliver complex change. It is self-evident that you cannot stop delivering services to people while you do this, so it is about finding the headroom for leaders to come together, to make plans and then to deliver them while doing their day job, and that is tough. They need to be supported and to be challenged by being compared with best practice and so on.

              Q122 Chair: But, Dame Una, don’t you think that this has been made harder? I say this to Simon Stevens as well. For instance, we touched on the tariff earlier, and I will cite just one of the organisations that wrote in. Alder Hey were saying that the position reflects the challenge of delivering a 5% planned CIP, which was influenced by tariff reductions and cost pressures in a year of considerable internal change. In that case, they moved into a new hospital and implemented an electronic patient care record IT system. South Devon Healthcare NHS Trust talk about the merger that they had. So does that not suggest that the way in which the hospitals are paid—the national tariff—is not fit for purpose, that it has been one of the contributing factors to this whole sorry mess?

              Dame Una O'Brien: The tariff is a PhD in itself. There are definitely—

              Chair: We are a bit suspicious. It does not have to be that complicated, we tend to think, as simple, humble MPs.

              Dame Una O'Brien: The reform of it is going to have to be done thoughtfully. It has built—

              Q123 Chair: But my question was: do you not think that the national tariff, as set, has contributed to this sorry mess?

              Dame Una O'Brien: I think that there are dimensions of the tariff that need to be reformed, definitely, and we have talked about those today. We have talked about the currencies. We have talked about—

              Q124 Chair: So what about the 30% marginal increase—now 70%?

              Dame Una O'Brien: That’s right. That is one element that we have changed on emergency admissions for 2016-17.

              Simon Stevens: The fundamental point is the one that Jim made earlier, which is that a tariff is a way of paying for each click of the turnstile, for hospitals to do a component of care. Increasingly, that is not the right way of allocating investment to drive improvement and joined-up services.

              Q125 Chair: So the new model—

              Simon Stevens: Yes, the tariff that is used at the moment to directly or indirectly influence about £72 billion of health service expenditure was the right answer at a time in the mid-2000s when the NHS was trying to expand the availability of routine operations, buying a lot of elective care with the extra purchasing power that was going in. We did not want that to go on inflation; we wanted to buy more operations to cut waiting times.

              We did that successfully, but is it the right answer for trying to get joined-up services for frail older people, between the community nurses, the GP services, the 111 and the hospital out-patients department? No, it is not. So, exactly as Jim said, that is why I think we are going progressively to be moving away from buying widgets.

              Q126 Chair: Jim Mackey, you made a revealing comment when you talked about the cycles in the 20-odd years you have been in the health service, about there being almost inevitably a five-year one, or a crisis that we have to deal with. So surely the challenge for you, Simon Stevens and you, Dame Una, or your successor, is to make sure that you are pre-empting that problem.

              Our concern, looking at the NAO Report, and hearing what you and the previous witnesses have said, is this. In spite of Jim Mackey’s great write-up—and we do wish you well—there is a big challenge. You probably won’t be here in five years’ time with the normal turnover, unfortunately—we would love it if you said now that you would be—but we may in five years’ time be coming back and saying, “Oh, it’s the five-year point where there’s another crisis that wasn’t foreseen by the NHS”. How can you be sure you are already planning ahead?

              Simon Stevens: We can’t be sure, but we have to get a consensus about how change is required in the health service and then go hammer and tongs to bring that about. I think, frankly, that that is what we are doing. The broad direction around improved health, service redesign and leaving no stone unturned on the financial challenges—that triple challenge for the health service that we set out in the forward view—is a triple challenge that most people see is the right way we should be orientating ourselves, but we also need to have financial fuel in the tank, and that is why the spending review outcome, in which we set five criteria for which the NHS—

              Chair: Mr Stevens, you do not need to give another advert for that. We know you have £8.3 billion. That’s fine.

              Simon Stevens: Absolutely. The funding matters. These are tight times for the national health service, viewed over its approaching 70-years history.

              Q127 Chair: But whether it is a thousand flowers blooming or horses for courses, whichever of the metaphors you choose—

              Simon Stevens: We are in favour of horses for courses.

              Chair: You are in favour of horses for courses today, well fine. So what about the position on mergers?

              According to the King’s Fund, which did this bit of work, which, as you know, came out in September of last year, there have been about 50 mergers in the past five years. I don’t have time to go through all of them, but one of the failed ones, I would say, is Barts—a huge merger, not done necessarily for the right reasons. A weak hospital has been taken over by a seemingly stronger partner but causing damage to the strong partner. What is NHS England’s and the Department’s view on mergers? Are you going to let there be horses for courses? Who decides? Will you push it? Will they decide and what about the financial impact and the impact on patients?

              Simon Stevens: We are not going to push it, but we are going to support integration across campuses where that makes sense. The way in which we are going to flesh that out will be through the local sustainability and transformation plans that each part of the country will produce in June. Jim and I with our teams will review what they look like in a given geography and we will support and challenge the propositions that people put forward.

              Q128 Chair: What about the financial problems? If a hospital that has previously been well run takes over a hospital with a deficit, it has a structural deficit very often that has come over with it through a PFI or something else. When you say supporting it, will that mean money?

              Simon Stevens: As the King’s Fund rightly pointed out, the history is that often where you have a troubled site that ends up distracting attention from the high-performing institution and you don’t get improvement. That is true not just in the health service, it is true in many other walks of life as well, so I think that point is well made.

              Part of the issue, however, is that the conventional merger or M and A model has been that the acquiring trust then assumes the full responsibility for the balance sheet of the organisation they are taking over. We are interested in whether there is a model where you can get some of the benefits of applying our top management talent to more than one institution but without them having to take on the full balance sheet risk that goes with that. That is the first point.

              The second point is that all of these to date have been with your near next-door neighbours. My view is that there is a sort of pattern recognition for types of hospital that have got challenges across the country. Often, you might have more in common with a hospital quite a long way away but which faces the same kind of size constraint or clinical staffing constraint, and so on.

              I will give you an example of that. Scarborough, West Cumberland hospital, Barnstaple, Weston-super-Mare—

              Chair: They are a long way away from each other.

              Simon Stevens: —and possibly Medway. You will spot the fact that they are all quite near fish, because they are on the coast. They are also smaller hospitals. What you need to solve in Scarborough or in Barnstaple might have more in common than the link between Scarborough and York. I am not saying that somehow you can create an all-embracing solution, but as we reinvent what is going on inside these smaller general hospitals, we have to share models much more widely than just 30 miles down the road.

              Q129 Chair: Can I just ask you about Barts particularly? We know that it was predicted widely that it would be problematic and it has proved to be so. What, if any, plans does NHS England have—or Jim Mackey do you have—to help resolve the problems, particularly of the big financial deficit at Barts?

              Jim Mackey: We had a session with Barts last Thursday to understand what is going on financially and some of the other challenges. Barts is a good example of the kind of challenge we have. It looks like Barts has spent about £70 million more on the pay bill over the last two years. At the same time, performance has deteriorated and lots of other things have deteriorated as well.

              Chair: Lots of things.

              Jim Mackey: The staff and patient experience has deteriorated in that time as well. So we need to find a new approach to turnaround that addresses that, working with the CQC in tandem to make sure that we can address the financial problems without popping out quality problems. That is the first thing.

              The second thing in terms of quality, sustainability, configuration and all sorts of issues, we have some other work going on with the trust to have a look back and see what happened with the merger—were those risks planned in the right way, are they things that are going to be continual problems going forward? If so, what are we going to do about them rather than sleep-walking into another couple of years of it getting very complicated and messy? That work is not yet done.

              Q130 Chair: So if you had been here five years ago looking at a Barts merger, would you have recommended it?

              Jim Mackey: I don’t know enough about the organisation to say that, to be honest.

              Q131 Chair: Deftly side-stepped; we might have you back on that one.

              Q132 Nigel Mills: I have an interest in partnerships/mergers because some of my constituents use Sherwood Forest Hospital Trust or Kingsmill, which I think may be one of the ones you might want to have a look at. How do you have senior management being accountable for quality of care and those kind of issues without having any financial accountability? Is it not the rather easy solution that you spend as much money as you want without having to look at the downside? I am not sure how you can have people running something without being accountable for key bits of it.

              Jim Mackey: The people running Sherwood Forest and every other organisation in the country are accountable for the money—

              Q133 Nigel Mills: You said you had a partnership, or may have, with management running and using their experience and skills but not being financially accountable for the balance sheet. I want to work out how you do that.

              Simon Stevens: What I mean by that is that basically you would be holding people accountable for improvement, but without the legacy, the stockpile of debt, you would not expect perfection on day one. That is the point. At the minute, if you do the formal merger, then the new FT combines the legacy organisation and the new entity straight away, and that frankly puts off some of the best boards and managers from lending that helping hand.

              Q134 Nigel Mills: Is that not an argument for wiping the slate clean rather than taking away accountability? I am not sure how you would not be accountable.

              Jim Mackey: I will try to explain this in a different way. If you are an organisation which is probably, by definition, quite large and has a really serious improvement capability, it can offer that capability to a smaller organisation that, frankly, on a small scale will not ever be able to do it. If you are a smaller hospital and doing a big capital investment you can lean on a big chain, a big group of hospitals, to do that, where they are doing that all the time. That is entirely possible and uses the NHS’s management capability and resource effectively.

              The people running the day-to-day operations at the hospital will still be accountable for the money, the quality and so on, in that local institution. What Simon is referring to is that we are just exploring whether there is a model that can deliver that without giving the acquirer all of the risk, and certainly all of the risk on day one. Frankly, people have seen what happens to Barts and what has happened in other settings and are worried about taking it on. I was in that position myself in the past.

              David Williams: If you look at the arrangements we have put in place with two more recent transactions around the Royal Free, on the one hand, and Frimley Park, on the other, what we have done there is agree with each of those strong organisations, as it were, a deficit-recovery plan for the organisations that they have taken on. If they better that deficit-recovery plan they get a gain share. If they are off trajectory then there are some sanctions, but it means it is not a day-one fix. That is quite a productive way in which DoH cash support can support the transformation that we want to see.

              Q135 Chair: While we are talking about people moving, merging and staff changeovers, in this Committee we have looked a lot at the revolving door of senior managers going out and being re-employed somewhere else very quickly on the same pension, so it seems to us that they are in the same job more or less, certainly in the same organisation. Jim Mackey, are you absolutely sure that that will not happen in the changes that you are proposing? Have you got safeguards in place to ensure that there is no leaching of taxpayers’ money on staff redundancies and redeployment?

              Jim Mackey: We are not where we want to be from a leadership point of view. We don’t have a talent management programme like you would like to see in this kind of organisation. We don’t have queues of capable people wanting to step up to do these jobs. We have to address that; it is not going to be fixed overnight. I know my chairman, Ed Smith, is very keen.

              Q136 Chair: To answer my specific point, how are you going to ensure that people who might have to move because of some of the changes you are discussing do not just leave, get a redundancy and go and work somewhere else? Are you going to be managing that? Is that what you mean by talent management programme, managing them into another job with no redundancy?

              Jim Mackey: We will be working absolutely to minimise any redundancy or restructuring costs. It is absolutely wrong that somebody leaves one institution one day with a pay-off and starts the next within the NHS, and just starts as though nothing has happened.

              Q137 Chair: Also people can game it. You can have a six-month break, a nice long holiday, and then go.

              Simon Stevens: As of this year, from April 2015, we introduced into the NHS standard contracts for the first time, clawback arrangements and a cap on the redundancy payment. Obviously, the Government, as I understand it, are also going to legislate across the public sector, which would also deal with that situation.

              Q138 Chair: We will keep watching. I will quickly touch on a point for you, Mr Stevens. You have talked about the five-year forward plan; you are Soviet in your aspirations for the NHS. It is on the proviso that—

              Simon Stevens: I must say—Soviet, Hirohito, Kim Jong-un—are there any other parallels that we might ask the Committee to consider instead?

              Q139 Chair: Choose which one you like the best or the least. The basis on which that will work is that social care will work well, and the other changes that we have heard about from Yeovil trying to bed in, are about social care and primary care working well. In a way, it could be your get-out-of-jail-free card. Because of the enormous pressures on local government, social care is also under great pressure. How can you be sure that that bit of the equation is in place and will deliver, and will help to make the savings—or headroom, as you put it—that the NHS will need over the next five years?

              Simon Stevens: First, by drawing attention—more explicitly than at any point in our history—to the interconnectedness between what is happening in social care and the NHS, and explicitly drawing it to people’s attention that if there is a problem on one side of the equation, that will create pressure on the other side of the equation. I think that case is understood. The spending review settlement has given local authorities the ability to set a precept for social care for the first time. Perhaps that is the camel’s nose under the tent for further—

              Chair: If you are holding out hope for that, then you are more of an optimist than I realised.

              Simon Stevens: And additional funding—in this case, new funding—for the Better Care Fund. All of that said, I believe that the debate around the proper funding of adult social care in this country is unfinished business. My personal view is that it would be highly desirable if we could have a settled and durable political consensus on this question, preferably by 2018 to coincide with the 70th birthday of the national health service.

              Q140 Chair: An advert well made. I have had an interesting intervention, and not from only one person. As you might have picked up from our questioning, we were a bit sceptical about whether this £1.8 billion was miraculously the same as the gap, and had therefore been managed down. The finance director of an acute trust has written to me to say that the £1.8 billion headline for the 2015-16 outturn is the best state-sponsored suppression of the facts that they have come across in 30 years of public sector finance. This individual predicts that it will be between £2.5 billion and £2.8 billion, which is nearer the figure that the NAO came up with and which we are hearing predicted elsewhere. Is this the best state-sponsored suppression of the facts, Mr Stevens and Mr Mackey, or will it actually be deliverable? Are you really going to be able to deliver these changes in the long term, and make sure that the taxpayer is not bailing out the system because of all the problems?

              Jim Mackey: To get the figure of £1.8 billion, the provider system will end up at a higher number and then there are other things that will come into play, such as capital revenues transfers and some other accounting adjustments that we will make in the final quarter. We expect to have a bit of an impact on things such as the final quarter of the locum spend, and so on. I understand where that finance director is coming from, and it does look like it is heading towards £2.5 billion or perhaps even north of that, but then there are a lot of adjustments which will kick in in the last—

              Q141 Chair: Is that adjustments or jiggery-pokery?

              Jim Mackey: That is entirely legitimate accounting adjustments and changes to accounting treatment that we are working on with colleagues. The key thing is how that lands on a sustainable basis going forward. That is the nub of this thing. We have the transformation fund, which buys us a bit of time, and a more reasonable tariff and efficiency settlement for next year. I think that we underplayed the impact of the locum and agency issue earlier on. It is entirely reasonable to get an absolutely—

              Q142 Chair: I think that we had a good run on that. We don’t want to repeat it all now, after 6 o’clock.

              Jim Mackey: I think it was dismissed slightly. It is a huge number, and if we do what we are planning to do with the normal tariff efficiency, a chunk of Carter and a serious disruption of the locum and agency market it is entirely possible—

              Chair: We did get the point about the agencies, Mr Mackey. We have to cover a lot of ground.

              Simon Stevens: And continued flexibility on international recruitment. The Migration Advisory Committee produces recommendations, and it is very important that that continues to—

              Q143 Chair: You have made that advert already. That is the second or third time in this hearing that you have mentioned that, Mr Stevens. We have clocked it. I am aware of the time. I wanted to touch on the £2 billion of capital receipts over this Parliament, which I think was mentioned by Mr Mackey or Mr Williams. How are you going to make sure that that is not a fire sale of public assets? How will you make sure that it is for housing, as the hon. Member for Peterborough said?

              David Williams: We have signed up for a target of around 26,000 houses over the lifetime of the Parliament, which is about twice the level of land release in the previous Parliament. The £2 billion figure is a reasonable calculation on the acreage of land at a decent price, so there are not particular assumptions there around discounting. Where we can—and this plays slightly into the development of approaches under devolution—I would like us to get our hands on estates early and get good deals with developers and partners that allow us to unlock basic value in the profile that we need, because of the access to overage and so on as the full value of those sites is realised. It is a challenging target across the Parliament, but from my knowledge of the health estate it does not feel like one that should drive us to short-termism in our approach.

              Q144 Chair: We are doing a pre-scrutiny of the Government’s plans for land disposals next week with the Department for Communities and Local Government, but one of the concerns on this is the double whammy for the NHS. Yes, there is the money to fill the hole, which you have outlined, but there are also the staff, who need somewhere to live. When I raised that with Barts, they said it was not really anything to do with them in terms of the sale of sites, but they have consultants and doctors, let alone nurses and more junior and ancillary staff, who cannot afford to live in central London. That is one of the issues around workforce planning, yet the Department of Health will be selling its land to the highest bidder to create housing in numbers, but that is not necessarily the housing that could help the NHS be sustainable.

              Jim Mackey: Part of the plan is to produce homes for nurses and other health professionals where that is required.

              Q145 Chair: Will that dent the £2 billion receipt that has been predicted?

              David Williams: It is built into our assumptions around the £2 billion. Indeed, in some cases it may make it easier to get planning permission on land close to health facilities that would otherwise not be available for development.

              Q146 Chair: I had a nurse in my constituency write to me. She moved into a brand new housing association property on a nurse’s income, and she immediately had to claim housing benefit. Housing benefit might be the system now, but it seems to me that that is not sustainable in the long term. I hope that this is given more thought in the Department of Health. We will be touching on that again on Monday, so I will not go into detail on it today.

              Dame Una O'Brien: It definitely is. I just want to say that it is a very salient issue. I was up at the trust in Oxford just before Christmas, and it was the No. 1 issue they raised with me in terms of their ability to recruit and retain staff. We have clocked that, and the idea is to generate space for that and to encourage trusts to release the land, because they have got their own recruitment and retention needs built into it.

              Chair: I hope that they have some say locally, because the danger is that it is done by the centre. It may sound extraordinary to colleagues in Northumberland, for instance, that consultants cannot afford to live in the area they serve, but if consultants cannot afford it, just think what it is like for a nurse or a healthcare assistant.

              I will finish the session here, because we have already gone past our six o’clock deadline. Thank you for your patience. It is a very stiff challenge that you have, and it matters to patients and to taxpayers. We want it to work, but I think you have gathered from what we have said that we will be watching this very closely. Mr Mackey, you have had a nice ride today, but you will be back to defend what you promised, along with Mr Stevens, who is one of our frequent fliers. Thank you very much. The transcript will be out in a couple of days, and we will send you a copy of the report. Thank you.

              Oral evidence: Sustainability & Financial Performance of Acute Hospital Trusts, HC 709                            42