Oral evidence: Financial sustainability (NHS bodies), HC 736

Oral evidence, 19 November 2014.

Witnesses

Richard Douglas, Director General of Finance and NHS, Department of Health, Simon Stevens, Chief Executive, NHS England, Dr David Bennett, Chief Executive, Monitor and David Flory CBE, Chief Executive, NHS Trust Development Authority, gave evidence.

Chair

Sorry that we are late; we had to vote twice, but I hope that that has now stopped. Before we get into it, I want to ask about Colchester because it is so topical. Is Colchester a foundation trust?

Dr Bennett

It is.

Chair

Right. This is fairly general, but it is interesting: Clifford Mann, the president of the College of Emergency Medicine, on whose training we apparently spent £400,000, said that the situation at Colchester “highlights almost better than any other story I’ve heard recently the chronic underfunding that is endemic in emergency care, throughout the UK but particularly in England”, so he blames the tariff system. He also said “I can guarantee that if”—the Government—“doesn’t spend money on staff and beds, then we’ll see more Colchesters up and down the country”. Is he wrong?

Dr Bennett

I certainly don’t think that he’s completely right.

Chair

I asked whether he is wrong.

Dr Bennett

He is partly wrong, for sure. The problem at Colchester was a specific issue with a very high level of demand in their accident and emergency department, as a result of which they did something that often happens. You will find that several trusts each day will declare that there is an incident to alert everyone in the trust and the health economy that they need special efforts to deal with that particular spike. In this case, it coincided with the CQC inspection, which is why it got a lot of media attention.

Chair

Honestly, I don’t want to interrupt you, but I do understand that there are issues with the quality of care in that hospital. What I was trying to get at, because it is pertinent to this hearing, is Dr Mann’s assertion—this is why I asked, “Is he wrong?”—that the situation at Colchester highlighted how endemic chronic underfunding was the cause and that if we do not get more money in it will happen more often. It was interesting to listen to my friend at Barking, Havering and Redbridge NHS Trust, because basically 90% of what he said was more money—it was either a bigger cake, a bigger slice of the cake, or getting paid properly, which is another way of having a bigger slice of the cake. He basically talked about more money. Dr Mann has said that if the Government do not spend more money, we will get more Colchesters. He is making the case that money is at the heart of some of the quality issues and certainly at the heart of the crisis.

Dr Bennett

This partly brings us back to the marginal tariffs—the split tariffs. We have looked at this. First, some people say it has not had an impact on reducing admissions, but, actually, it looks as if it has—you can see an effect. That is not to say that admissions have not continued to rise, but, almost certainly, they would have gone up faster had there not been the split tariff.

Chair

Is there evidence of that?

Dr Bennett

Yes. We have looked at that. Secondly, there isn’t a correlation between the overall financial performance of trusts and the extent to which they are reliant on the accident and emergency income.

Chair

Must be.

Dr Bennett

No. There are some trusts for which it is an issue, but across the spectrum there is not a strong correlation. But we have accepted that there have been issues about making sure the baseline is right, because there have been changes which have not always been reflected, and we have asked that that is reflected in the future. We have said that we need much greater transparency around how the 70% that is kept back is spent to reduce attendances and potential admissions. We are looking, in the longer term, as NHS England has come up with a redesign of the whole urgent and emergency care pathway, at realigning the payment system to that. But in the shorter term, for next year, in the tariff we are just finalising now, we are also looking again at whether there are further changes we can make.

Mr Jackson

Obviously, you have looked at the Report. Paragraph 2.7 on page 32 refers to a survey by the Foundation Trust Network of 26 of its member trusts. The network comes to a figure of £3.2 million. I may have misunderstood what you said, Dr Bennett, but when you say “review”, are you going to start again on that baseline 2008-09 figure?

Dr Bennett

That’s the longer-term goal: to completely restart.

Mr Jackson

What’s the time scale for that?

Dr Bennett

I think that’ll likely—

Chair

Which of you makes the decision on the tariff?

Simon Stevens

It’s a shared decision, and we’re completely aligned on this.

Chair

Whose decision is it? All four of you?

Simon Stevens

No. It’s a shared decision between NHS England and Monitor—

Dr Bennett

Between the two of us.

Simon Stevens

And we are completely aligned. What David said is absolutely right. In precisely the way he said, we are going to make some changes for next year to deal with aspects of the marginal tariff in the context of a broader set of changes we want to make to the payment system. At the moment, we believe that smaller hospitals are probably not getting their costs covered at an efficient level of production relative to larger hospitals, so we want to rebalance various aspects of the tariff, including emergency admissions, specialised commissioning and other things. This is a package; these things can’t just be seen in isolation. When you look at the financial performance of larger hospitals compared to smaller hospitals, they are doing a lot better for a variety of reasons we can talk about. So there is an adjustment we need to make for next year, which we will do, and then—

Mr Jackson

Can I just interrupt you? If you look at page 17 and the EBITDA margins, things are going a bit pear-shaped.

Simon Stevens

Yes, but the interesting thing about the EBITDA margins is that if you split them out, the larger hospitals—with over £400 million revenues—had EBITDA margins of 5%. Smaller hospitals had -0.4%. That is why we think that, in aggregate, they payment system is not properly helping those small and medium-sized providers.

Mr Jackson

No doubt we can talk about that in more detail a little later. However, page 32 says that the document Monitor is praying in aid for this review dates back to December 2013, so we are already a year on. If you go back to figure 4, everything is going rather south. The moral of the story is that you need to do this review pretty quickly, because what comes out of the Report is that these issues are having quite a significant impact now. Cumulatively, the deficits are only going to get bigger. I suppose my question is, why is there no alacrity and no imperative to get this done more quickly?

Simon Stevens

There is, and we were about to tell you what the other things were. We have said we are going to make adjustments, in the way David described, for next year. But, in addition to that, we have also made an offer to any part of the NHS that wants to come to us and say, “Here’s how we would like to amend the way the emergency payment system works for next year. We will work with you on what that looks like, but it needs to be a shared agreement”—

Chair

Who’s “we”?

Simon Stevens

The local CCGs and the hospitals.

Chair

Will they come to you, Simon, or to you, David?

Simon Stevens

To both of us. As we do that, we will put it in the context of a broader set of changes we want. Rather than trying to increase the amount we pay for each click of the turnstile, people actually want to completely change the way in which we pay for all care, so that it is easier to redesign, do the stuff you were hearing about from the GPs, get the upstream support for people at home so they do not end up going to the A and E department in the first place.

Mr Jackson

That is all tickety-boo—

Simon Stevens

Well, it is three timelines. It is now, it is next year and it is the year after.

Mr Jackson

Okay, but let me give you this scenario. The CCGs are in surplus. There is a sort of asymmetrical relationship there. They are in surplus, or a lot of them are, and everything is going swimmingly for them. They don’t have a vested interest. Okay, they can have a nice cup of tea and talk to the chief executive of their hospital trust, who is struggling. The point is these guys are struggling with numbers with A and E. They are being financially penalised by this system. I know it was put in place to be an incentive and a catalyst to drive down admissions, but I guess what I am asking is: what is the strategic body doing to force the health care economy in those areas to work together to help those acute district hospitals? They are under pressure because of demographic changes with older people, immigration and organic housing growth in some areas. In other words, those hospitals are not getting the help from the other key stakeholders in their area. What are you going to do about that?

Simon Stevens

You entirely accurately describe the pressures in Peterborough with population growth and the extra admissions in the hospital. We are doing several things. We are putting in extra money, as you heard in the last session, to support Peterborough, particularly given some of the infrastructure costs that you have in your hospital. We are working with the local CCGs and the providers on changing the way the payments system will work, beginning next year. In addition we are putting extra money in this winter. So each of the providers that you have heard about, including Barking, Havering and Redbridge, are getting extra cash this winter.

Mr Jackson

I am putting winter resilience moneys aside, because that is non-recurring. This is recurring financial structures and governance, which is what I am getting at. I suppose I am taking the side of the poor benighted chief executives of hospital trusts, who are struggling every single week to meet their four-hour targets; specialist trusts, which I mentioned earlier, have an easier time. I am just trying to weigh up how we can make the job easier for them. The public see the pressures at A and E for instance.

Simon Stevens

You are quite right. We have 1.3 million more A and E attendances than we had back in 2010. We have a strategic choice as the NHS: do we just continue to assume that that is in some way God-given and that we will continue therefore to put more and more of the money at the margin into A and E and emergency attendances? Or do we do what most people around the health service think we should do, which is beef up primary care, community health services and get the connections right with social services, so that if people don’t need to go to A and E, they don’t find themselves there because everything else has been hard to locate or has been scaled back? At the moment we are out of balance and we are just reinforcing a model of care which we think we need to change.

Chair

Mr Stevens, at present—and we had a very helpful letter from Dr Bennett on this—you have a growing number of trusts that are in deficit. Are they in deficit because they are under-resourced, or because they are badly managed?

Mr Bacon

Or because the CCGs are in surplus?

Simon Stevens

On that point we know that the answer is no; that is not the reason, as per the NAO finding. On page 34 the Report says, “The surplus or deficit of the clinical commissioning group that gives a trust the largest funding does not explain the size of the trust’s surplus or deficit…detailed analysis found no causal link, however, between the financial health of providers and that of their clinical commissioning groups.”

Stephen Phillips

Mr Bacon was making a different point. If the CCGs are in surplus, there is no reason why the trust should be in deficit if the money was shared.

Simon Stevens

We have to be clear about our terms here. The CCG surplus is, as it were, a historical stock of savings that in fact are being drawn down and used year by year. So CCGs as a whole are going to be about break even on their plan for this year. Of the 211, 19 are projecting financial pressures, but in the round, plus or minus £20 million, CCGs are going to be about break even. They are not running a surplus on the resources we are allocating them.

Chair

So why are they in deficit? Are they badly managed or under-resourced?

Simon Stevens

In many cases, the health service in that particular area is out of balance.

Mrs McGuire

What does that mean?

Chair

Under-resourced?

Simon Stevens

It means that we might be spending more in one type of service than another. It might mean that we have high fixed costs in some places. It might mean that you have different rates of emergency admissions in different parts of the country that are not just explainable by the number of older people or other demographics of the area. There is something going on with how those community and primary care services work that puts pressure on hospitals. We have seen the NAO helpfully document for the Committee that there has been a 124% increase in the number of emergency admissions that stay for less than 48 hours over the course of the last 14 years. Only 7% of that 124% increase was explained by the ageing of the population. That tells us that there is something else about the way that community and primary care services are out of balance. We know that, because we can see that the number of GPs has only gone up by about 0.5% a year—far lower than the growth in the population, the ageing of the population and so on. We have to get primary care right as well.

Chair

That still has not answered the question.

Mr Jackson

Can I ask you two quick questions? I will not dwell on Peterborough, not least because Dr Bennett’s specialist subject on “Mastermind” could be the finances of Peterborough and Stamford NHS Hospitals Foundation Trust. There was a practice where primary care trusts were fining acute hospital trusts for things like bedsores and poor food. Does that not happen any more? Do you have an official position on that?

Simon Stevens

Yes. There is something called the NHS standard contract, which lays those things out. One consequence of sending a very clear signal on those points, as well as huge clinical leadership across the NHS, is that there has been a fantastic reduction in the number of bedsores and hospital-acquired infections across the NHS over the last several years. Is the financial signal the only reason for that? No, of course not. Changed clinical practices and the increase in the number of nurses on wards will have helped as well—but it is all part of the mix. We are being encouraged by the ombudsman to contemplate setting financial incentives for sepsis and other things that we want in the way of quality improvement, to try to link more of the income that provider organisations get to quality, not just the number of people who are being treated.

Mr Jackson

One last point before we move on—what comes out of the Report quite clearly is that so much is about good relations between key people, which is a bit intangible and difficult for the Government to legislate on. One ramification of that is that there seems to be a problem with what CCGs are intending to commission, in terms of their plan, and the income that trusts expect to get. That gap remains through the years. How will you get over that? It skews the planning, ensuring that it is inaccurate. How do you improve the planning process?

Simon Stevens

That is a really powerful question that the three of us—David Flory, David Bennett and myself—are spending a lot of time on so that we get it right for next year. It is absolutely true that this year, as new organisations, CCGs set a level of ambition for what they thought they could do for changing demand. That has been different from what has actually occurred. We have a gathering on the better care fund coming up soon, and the planning for that fund puts this issue into quite stark relief. There has been better local planning between councils, CCGs and providers than there was last year or probably at any point in history, and that has forced people to have these kinds of conversation about what they will and will not do. There is a difficult judgment for us to make nationally. Where we see a level of ambition that is admirable but that we think might be at the stretching end of the spectrum, do we step in and say, “Actually, no. We want you to dial back your level of ambition because we don’t think it’s going to happen in practice,” or do we say, “Okay. We’ll back you in your local judgments. Go for it,” while recognising that that might not be what actually comes about as the year proceeds? That is the nuanced judgment that we have to make.

Chair

I will go to John Pugh, but I am really frustrated because I do not feel that I had an answer to my question.

Simon Stevens

In terms of whether it is money or competence—that bifurcation?

Chair

You said it might be competence in primary care.

Simon Stevens

No. Look, I don’t want to be anything other than supportive of people in difficult situations around the NHS. Generally speaking, people are working incredibly hard and doing incredibly well under the circumstances. Is it the case, however, that in some individual hospitals, you sometimes see a lack of operational sophistication and even, on occasion, clinical leadership, and that in turn shows up as poorer A and E performance than you might otherwise have? Yes, that is the case in a small number of institutions. But we have teams of people who go into help those providers raise their game, including the emergency care support team, and when that happens we see improvement. We are ensuring that people get that kind of focused support, particularly over this coming winter period.

Chair

I look forward to that improvement. I am just trying to find your letter, Dr Bennett.

Stephen Phillips

While the Chair finds the letter, let us turn back to Colchester. It has had three chief executives in the past two years, hasn’t it?

Dr Bennett

Yes.

Stephen Phillips

And it lost its director of nursing recently.

Dr Bennett

It has had an interim chief executive.

Stephen Phillips

So is Colchester incompetence or lack of money?

Dr Bennett

There were some quite serious failings in Colchester, as a result of which the leadership of the time has moved on. We have yet to get stabilised, long-term leadership in there, which is what we are working hard on, but that was the fundamental issue.

Stephen Phillips

The fundamental issue was the incompetence on the part of the leadership team, correct?

Dr Bennett

It was the way the trust was being managed.

Stephen Phillips

When you say that the incompetent leadership has now moved on, have they moved on to other positions within the NHS?

Dr Bennett

Not to my knowledge, no.

Chair

Can I just ask one thing? If we talk about competence, what I was going to lead to was that you have a growing number of trusts that are now in deficit. In fact, your very helpful figures 2014-15 suggest that 81 out of—remind me—a hundred and…

Dr Bennett

147.

Chair

So over half are now projecting a deficit this year.

Dr Bennett

Yes. Well, that was for Q2, so for halfway through the year.

Chair

Presumably they are mainly acute trusts?

Dr Bennett

They are almost entirely acute trusts.

Chair

So out of the acute trust cohort, what percentage is, in quarter 2 of 2014-15, reporting a deficit?

Dr Bennett

I think it is something like 80%.

Chair

So 80% of foundation trusts in Q2 of 2014-15, when the money is getting tight, are currently projecting a deficit. Is that incompetence or lack of resources?

Dr Bennett

First, I think the other point that Simon was trying to make is that there is a third issue: neither incompetence nor lack of resources, but how the system collectively is working. That can sometimes be about relationships, but it is also about, historically, how different parts of it have worked and how well it has worked together. As Simon says, one of the things that we focused a lot of attention on at NHS England, TDA and Monitor over recent months in particular, is trying to get the systems to work better. For example, you can have a foundation trust that is struggling because it is seeing high levels of attendances or even admissions, which, if we can get the whole system working better, can be reduced. That is neither incompetence nor lack of resources; it is just getting the system to work better.

Chair

And the system has got worse, has it?

Dr Bennett

I think what is true to say is that of course the system is being squeezed. We have effectively seen a 4% productivity ask for every year for four years now. As the system gets squeezed, things that are working less well than they should be, start to show up more.

Chair

Does this new deal that you talked to Stewart about—in effect, putting more money in for A and E admissions—mean that we are going to have fewer foundation trusts in deficit next year?

Dr Bennett

It will make a difference.

Chair

Fewer?

Dr Bennett

Oh yes, absolutely.

Chair

And is it the same with you, Mr Flory?

David Flory

Yes.

John Pugh

We are all much taxed by the issue of systems. The system as a whole is solvent, but for pieces within it—the acute trusts in particular—many of them are not solvent and the position is worsening. We can see the explanations for that and we have heard some of them. They are all to do with A and E costs, but also, as you have mentioned, Mr Stevens, the fact that small hospitals are not adequately rewarded on the tariff, so the more work they do the more money they seem to lose. One of the stark conclusions here is the lack of relationship between good financial outcomes and good clinical outcomes. Is there any disagreement on the panel as to that—that actually we do have a situation where the two are not aligned?

Dr Bennett

Are you asking whether—

John Pugh

I am referring to sections 2.20 and 2.21. Clearly it appears that those organisations that have good clinical outcomes are not necessarily in a rosy financial situation, and vice versa.

Dr Bennett

Well managed organisations tend to have good outcomes, and their finances are in better shape as well.

John Pugh

So you are contesting the fact that financial outcomes and clinical outcomes are not neatly aligned? That is what the Report says.

Simon Stevens

There is pretty strong evidence both here and internationally that if you improve quality for some things, you can reduce cost; and so the discussion we were having with Mr Jackson about bedsores, for example, or hospital-acquired infections—when you have a bedsore, that adds a number of days of extra stay in hospital, and that ends up costing you more. So I think we believe that one of the good consequences that will flow from the big increase that there has been in ward nursing levels in recent times is that we will begin to see further improvement on some of these sorts of quality metrics. I think the particular analysis you are referring to in the NAO Report was doing a correlation across a range of measures—

John Pugh

There was “little evidence of statistically significant relationships with the other clinical performance variables”.

Simon Stevens

Yes, by the subset of measures of what constitutes quality in a clinical setting

Dr Bennett

In the previous sentence it says there are weak correlations between some measures of quality and—

John Pugh

But will you accept that something is going systematically wrong if we do not pick up a good correlation, given that we have got an internal market? The whole theory of internal market is that good financial outcomes should correlate with good clinical outcomes.

Dr Bennett

No, I think what that tells you is there are so many other things going on it is difficult to correlate the two things.

John Pugh

Can we talk, very briefly, about the other things going on? I empathise with Mr Jackson’s acute trust chief executive, who was trying to cope with these difficult budgets that need to be managed successfully. I drew up a list of the things that could affect his financial management, all of which appeared to be beyond his control. He does not know whether, for example, he will get a bung at the end of the year, from NHS England, to balance the books.

Simon Stevens

He won’t.

Chair

He does—every year.

John Pugh

There is quite a bit of evidence that he does. He does not know whether local commissioners will be funded at or below target—

Simon Stevens

He does, because we set 15 or 16 allocations last year.

John Pugh

Okay, but he had not done hitherto. He does not set the tariff. He does not know whether new targets will come from the Department of Health, NHS England, or wherever; and he does not know—and this is a big imponderable—whether the Treasury will pour more money in from time to time, or intends to.

Simon Stevens

That, I agree, is one of the great unknowns.

John Pugh

Yes, so in terms of actually managing as a player in the market, he has got a whole pile of completely uncontrollable variables he cannot deal with.

Simon Stevens

Except that he has got a several hundred million pound organisation, of which he is the chief executive, and 65% of his cost structure, if he is representative, will be his own staffing patterns. The variation in terms of clinical process and efficiency within organisations can be quite striking. As Mrs Hodge was talking about the Barking and Havering situation, I took the opportunity to look at their numbers as you were talking. I will just let the facts speak; if you look at their emergency length of stay for people over 75 years, it is 9.9 days, I think, compared with around eight or nine across the rest of London. If you look at the proportion of people who, with an emergency spell, are staying more than 15 days, that is in the 8% range. So there are lots of variations that are actually in the control of —[Interruption.] To say that one just washes one’s hands of it, really—

John Pugh

No, I am saying that there are a significant number of known unknowns, which make it unlikely, on the face of it, that the system as we have it will guarantee an efficient service, seamlessly delivered locally. I just think there are sufficient imponderables there, and you yourself have referred to some of them. The solution that most people come up with when they talk about their local context is that the guys who have to deliver this efficient, seamless and local service all meet at some point on the health and wellbeing boards. They agree a plan that will take them, by one magic step, forward five years to the seamless, efficient service that everybody dreams of and aspires to get. However, the health and wellbeing board has no executive power, has it?

Simon Stevens

The health and wellbeing board is a forum where sovereign bodies come together to make decisions. It has certain responsibilities laid out in the—

John Pugh

But it does not necessarily give you local, strategic leadership of a kind that can enforce a decision once made.

Simon Stevens

Well, we have assigned health and wellbeing boards the ability to have a significant influence. More broadly, we have set up these things called systems resilience groups. There are wonderful names for all this stuff. They used to be called urgent care—anyway, we know what we are talking about, which is the right people in each area coming together to have the conversation about how to ensure that their local services are properly co-ordinated and integrated. Talking to a number of those groups, they tell us that relationships have come on an enormous distance in the course of the past three, six or nine months. Let us be clear: in some places, they historically have very poor relationships; it has been an arm-wrestle. I have been pleasantly surprised when I have had folks in, and the chief executive of the council has come alongside the CCG and the acute trust chief executive, and we have had that conversation. I had it with the folks from Barking and Havering. The chief executive of Havering council came, participated in the conversation, and described what needed to happen in the local area. That filled me with hope.

John Pugh

What is their relationship with the regional branch of NHS England, and how does it compare with the previous relationship between the strategic health authorities and the PCTs?

Simon Stevens

Obviously, it is different. Prior to the creation of foundation trusts, all the wiring joined up at a health authority or a regional health authority level, as you know. That is taking us back a decade, because once foundation trusts were created, their accountability was independent of that regional tier, for good reason. The three organisations—TDA, Monitor, and NHS England—are, through our regional folks, increasingly ensuring that there is a shared point of view about what needs to happen in each geography. Indeed, the five-year forward view explicitly commits us to advancing that form of joint working, so that people have a coherent and unified perspective on what needs to change in different parts of the country.

Chair

Okay. Anne.

Mrs McGuire

I know that you heard our interesting conversation earlier about the use of temporary staff. The NAO, in paragraph 2.19, pointed out that we are nearly at 10%. It says that “9.7% of staff costs were for non-permanent staff”, which is an increase. I would imagine that that would increase again next year. Have you any strategy for working with the trusts to try to reduce the impact on their costs of the hiring of temporary staff?

Dr Bennett

Yes. Some trusts are much better at managing this than others. It does, of course, in part depend on what is going on among the work force in their area, but even in similar areas some trusts are much better than others. A very simple thing is acknowledging that you will never recruit as many people as you think you are going to, so try to recruit more than you think you need. It sounds simple but some trusts do it well and others do it badly. One thing that we are doing is ensuring that those simple lessons are well understood across all trusts. We are taking a look at whether there are any initiatives that we can take centrally to help to drive down some of the costs of agencies. The Department has been taking a lead on coming up with a toolkit that we can share with providers.

Chair

How much was spent in 2013-14 on agency staff across the piece?

Richard Douglas

Across the piece in 2013-14, it was £2.6 billion, which was up from about £2.1 billion in the previous year. That has grown exponentially in the past couple of years.

Mrs McGuire

Could you give us a flavour of what in this toolbox will drive down the costs?

Richard Douglas

We have got a mix of things.

Mrs McGuire

It is a mixed toolbox.

Richard Douglas

It is a mixed toolbox—most toolboxes have a number of tools in them. There is work that has been done before by NHS employers on what the high-impact actions would be, which are about how you manage the work force and how you roster. Some of that is pretty basic stuff, but it has not always happened in the same way everywhere. On top of that, we are looking at what further work we can do. There are three issues for us on this. One is the management of staff now. The second is predicting volume and ensuring that you have the right people to meet the volume of need, which was one of David’s comments. The third is a price issue. The other thing that we want to focus on is whether there is anything we can do to drive down price, so that even if you end up with a higher volume, some of the issues of price can be addressed.

Chair

How?

Richard Douglas

We have got a number of framework contracts with agencies that try to deliver the best price possible by getting decent volumes. There are some agencies that won’t take part in that framework, and there is a question for us about how we address those agencies.

Chair

You could insist that, when students become—

Richard Douglas

Well, then you look back and think: are there bigger policy questions about overall employment?

Chair

How much does it cost? Were they right about it being £400,000?

Richard Douglas

It sounds about right. The other thing that we may need to think about is that whole area of terms and conditions and training, but none of those have an impact on the very short term.

Mrs McGuire

We always talk about the internal market within the NHS, but effectively you are also operating in an external market, because if you have a shortage of particular consultants or doctors or nurses or whatever, you have to go out there into the market. I am interested in how you will interfere in what is a competitive market to drive down prices.

Richard Douglas

We are the main buyer. We have tended to operate very much at a local level. At the end of the day, there are other people who buy from the agency nursing market, but the bulk of it is us. What we are trying to get into is: how can we use that clout, particularly when the volume side is going, to get better prices?

Mrs McGuire

What links do you have with the major universities who are producing medical students for the provision of medical staff—we will deal with doctors, but I will use that generic term—in terms of numbers? We are forever hearing that more doctors are being churned out—I do not mean that in a nasty sense—than ever before, so if there are more of them, where are they all going? Is it just that the pressure on A and E has become greater because there is difficulty in trying to see a GP at certain times? Mr Stevens is eager to answer that question—his enthusiasm is overwhelming.

Simon Stevens

Absolutely. Where are they going? They are coming to work in the national health service. The fact is that we have—

Mrs McGuire

We have already heard that some hospitals are operating with quite a significant deficit in consultants.

Simon Stevens

Sure, but we have got 160,000 more clinical staff working in the NHS than we had back in 2000, when we began on the big catch-up spend to try to improve the quality of and access to services.

Mrs McGuire

I remember it well.

Simon Stevens

The answer is: we are employing them. What is more, we have more now than four or five years ago; there are 13,500 more clinical staff working in the NHS. So, in some cases, would we like more? Have we got gaps in particular specialist areas? Sure we have, but the truth is that the NHS work force is growing as the needs and funding for the service have grown.

Mrs McGuire

Does that mean that we have to have a conversation about how much it can grow?

Simon Stevens

That is the conversation we were attempting to initiate with this five-year forward view: what will the next five years look like; what will be the shape of services; and how do we get the balance right between investments in hospital medicine versus GPs, nursing versus social care and all those kinds of judgments?

Mr Bacon

I realise that you cannot do this overnight and that you have 160,000 more clinical staff, but you have not got 160,000 more A and E consultants. You wouldn’t need that many, but there is a current, and apparently chronic, shortage. What are you doing now to ensure that in five, six or seven years’ time you don’t have that shortage, specifically in that one domain?

Simon Stevens

The number of training places in emergency medicine has increased quite substantially. I am sure that the folk involved would like there to be more. There is an issue about ensuring that we fill the places that are there and, more profoundly, there is an issue about redesigning the way acute medicine works and the interface with general practice.

Mr Bacon

What about the status of A and E consultants, as opposed to other kinds of consultants? I have heard it said that they do not appear to have the same status. It is noticeable that you have the Royal College of Radiologists and the Royal College of Paediatrics, but it is the College of Emergency Medicine, not the Royal College. Nobody seems to have thought that they need a royal charter like the others do. What are you doing about the status of A and E consultants, about paying them more than other kinds of consultants, and about making them feel wanted?

Simon Stevens

They obviously are a crucial part of the team in any major hospital, and their numbers are going to expand. If Bruce Keogh or Keith Willett were here talking to you about the urgent and emergency care redesign that we are embarked on, they would make the point that it is certainly the front door, but it is also the connection between the A and E and the acute medicine taking place in the rest of the hospital that often explains why patients sometimes wait too long in A and E departments. That piece is crucially important. It is actually a broader conversation about acute medicine in the round, and the Royal College of Physicians is actively engaged in that.

Mrs McGuire

Is that also because there is an issue at general practice level? People are now going to A and E because of difficulty in accessing general practice appointments or even, alternatively, just because of a change in attitude as to whether your first port of call is an A and E department as opposed to your general practitioner. You just cut out the middleman and go straight to A and E.

Simon Stevens

I think that is part of the explanation. That is why the conversation we began about A and E payment is not completely black and white. If we just keep putting what extra investment we have into yet bigger, more expansive A and E departments, rather than investing it in primary care, we are just going to perpetuate that very dynamic that you rightly describe. There are some choices for us there. We must also not forget pharmacists, who are a hugely important part. People with coughs, colds, aches and pains, particularly over this coming winter, should certainly think about whether the pharmacist can help. Pharmacists train for only one year less than a doctor. There are 11,500 pharmacies around the country. The NHS winter campaign will remind people that the pharmacy is often a very good first port of call, compared even with the GP surgery or the A and E department.

Mrs McGuire

Even opticians are often the first port of call, and are where someone finds out if they have glaucoma, high blood pressure or other medical issues.

Simon Stevens

That is right. We would certainly encourage people to go, over the winter period, to www.nhs.uk/asap, where they will get good-quality medical advice on which would be the right port of call.

Chair

Right, Amyas and then Stewart.

Sir Amyas Morse

I just want to ensure that I understood what the form of intervention next year will be, and what resources would be involved. I fully understand that there are possibilities of achieving efficiencies, and you quite rightly want to pursue those. You will be going forth and talking to trusts and telling them how they can be more efficient. Will you go forth telling them how they can be more efficient and helping them with funding in any way? Or is the prediction that you will arrest the trend towards negative financial performance based on giving them more advice on how to be more efficient? Is there something more substantial involved in the intervention than that? I was not quite clear.

Simon Stevens

There certainly will be funding. There is obviously next year’s commissioning round. People will be making agreements about the levels of activity that they are likely to have to undertake.

Sir Amyas Morse

Will it be real money or not?

Simon Stevens

It will be the money from the allocations that are available to CCGs to pay for these services, together with the specialised commissioning budget. I do not think any of us would pretend that the financial pressures that exist there now are going to disappear overnight, or indeed next year. I am sure there are going to continue to be financial pressures in some of these stressed parts of the country.

Sir Amyas Morse

Do you expect that to be for the next two or three years, in fact?

Simon Stevens

If history is our judge, some of these have been multi-year problems. I think that what we are seeing is that we need a much more profound intervention in changing the way in which care is provided in some parts of the country. If you look at Staffordshire, parts of Cumbria or Medway, it is pretty obvious that, with the exam question as it has currently been set, people are not going to be able to provide the answer, so we will have to change the exam question, which is what we are trying to do through the forward view, with new care models, new sets of options and better forms of integration.

Sir Amyas Morse

That all sounds great, if I may say so, but I want to be sure that we are not indulging in any short-term optimism bias in what we expect to be achieved as a result of pointing out how people can do things efficiently. I take it that you are not indulging in that. You are being realistic. We have heard various predictions about how much by way of efficiencies can be realistically delivered by foundation trusts, and they do not sound like enormous numbers.

Simon Stevens

No, next year will be incredibly tough. Let us be absolutely clear about that. That is point one. Point two: those parts of the country that have deep financial pressures now are almost certain to continue to have deep financial pressures next year; there is no doubt about that. Our point of view is that just doing more of the same will not get us to where we need to get to. That is why we have got to make some quite profound changes to the way care is delivered, of the sort that we advocate in the forward view.

Chair

What I just do not get—we have heard this so much in the last four years—is that that means you have to spend money up front. All of us can take you to our local patches. You have to spend money, investing in GPs and facilities and all that, yet here we are, with the deficit growing and growing in the trust. You will not have the money to do the change unless somewhere—the Treasury—gives you more money to do it, not next year or the year after, but now. It is one of these massive investments up front to get the savings downstream, and nowhere do I see any indication that you are getting that. Nobody has said that you will get more than current inflation level expenditure. All the discussion that I hear is that it will go down, post-election.

Simon Stevens

Our shared point of view—others may want to come to this as well—is that there are still efficiency opportunities available, from the range of tools available to providers and CCGs.

Chair

Where? Where are you, Mr Douglas, going to find the money? Who is going to find the up-front money to transform community services?

Simon Stevens

If you look at the range of efficiency performance across providers in England, an independent econometric survey has shown that there is an opportunity of between 5% and 5.6% of efficiency—

Chair

I am sorry to keep interrupting, but the record so far—looking at both Mr Flory and Dr Bennett—is that they have not even managed to reach the 4% they were set.

Simon Stevens

Actually, the NHS has delivered between £18 billion and £20 billion of efficiencies over the course of this Parliament.

Chair

Hang on. Do not quote those figures. Both the trusts for which Dr Bennett and David Flory are responsible are delivering between 1% and 2%, and the main way in which savings have been delivered—let us be realistic; all I want is an honest conversation—has been through a salary freeze. That is the record after four or five years of real attempts by this Government and all of you guys to try to get money out of it.

Simon Stevens

About a third of the savings that have been achieved over this period have come from pay constraint. We stuck our neck out in the forward view and said that we do not believe that over the course of the next Parliament that is going to be an indefinitely repeatable strategy. You mentioned the 1% and 2% The conventional methods are, over time, going to have to be increasingly replaced by the broader system changes that will indeed require some pump-priming investment. That is the case we make.

Chair

Where will that come from?

Simon Stevens

Well, that will be for the next Government to decide. Our argument, quite explicitly, is that, absent that, it will be harder to get the 2% rising to 3% efficiency to sustain the kind of modern, compassionate health service that we believe the people of this country want.

Chair

So the only way forward is a massive injection of up-front cash for 2015-16.

Simon Stevens

That is not quite what I said. If you look out over the next five years, the composition of the efficiency opportunities is going to have to change over time. In order to kick-start that, yes, we will need some up-front investment, but if we do that, we think that the NHS can get perhaps two thirds of the way towards the kinds of efficiencies that will be required.

Mr Burrowes

In terms of clues as to where it could come from, last year Monitor discussed surplus assets. What is the current level of surplus assets in the NHS?

Dr Bennett

Surplus assets? I don’t have a number for that.

Mr Burrowes

Last year you identified £7.5 billion of surplus assets across the NHS, and said that urgent work should be undertaken to examine the extent to which those assets were still available. Has that work been undertaken?

Richard Douglas

Most of that work is being done by the department. I would agree that when you look at what we need to do to create the headroom to pay for change and to invest in the system, a large chunk of that may be around capital expenditure. I do not have the number with me, but we do have a lot of surplus assets and, even more importantly, potentially surplus assets if we reorganise some of them.

Mr Burrowes

Would you be able to give a figure?

Richard Douglas

I do not have the figure with me, but I can come back to the Committee on that.

Mr Burrowes

Will you do that?

Richard Douglas

It is an estimate of surplus assets. You tend to get assets that are declared surplus by the system—someone says, “We don’t need this anymore”; you get underutilised space that you can look at and say, “It has not actually been declared surplus, but with a little bit of change we could make it surplus and sell it; and you get other situations where people really have not thought about whether they could move facilities or whatever.

Mr Burrowes

The report from Monitor was in 2013. Have you come up with a plan of how to release some of the surplus?

Richard Douglas

We are doing a mix of things. Some of that surplus estate got moved into property services, and we are currently going through a process of selling that. The other thing, which is one of the more fundamental changes that I think we may have to make to support the investment, is to look again at the capital regime that we operate in the NHS. We currently have a capital regime that basically allows people to borrow against their income; there is no strategic ownership of capital planning. We need to change that in order to release some of the resource for investment.

Mr Burrowes

In terms of implementing new working and trying to ensure that there are productivity savings, do you think that that requires more or less management?

Simon Stevens

Do you mean to ask whether we are over-managed or under-managed as a share of spending in the health service?

Mr Burrowes

Yes.

Simon Stevens

By international standards, the NHS is very lean in its management costs. On the OECD definition, we spend under 3%, compared with between 5.2% and 5.8% in France and Germany, and obviously way north of that on the other side of the Atlantic. Anyone who claims that too much is being spent on good management has not actually studied the international comparisons or the facts. We know that good quality management makes a huge difference to the performance of different parts of the health service. That is an argument that I would definitely agree with you on.

Mr Burrowes

What is your view? Do you think that there are too many or too few managers? There has obviously been a reduction over the course of this Parliament.

Simon Stevens

There has. There are now 21,000 fewer back-office administrative and managerial people than there were prior to the last set of health changes. This many come as a surprise to the Committee, but at NHS England we took 20% of costs out over the course of the past year, and we are taking another 10% out going into next year, so we will have cut the cost of running our part of the health service by more than 30% in two years. We are running pretty lean as well.

Mr Burrowes

So what is your view? In terms of being more efficient—more productive in savings—do you need more or fewer managers?

Simon Stevens

Obviously there is a legitimate concern that if managers just get to decide how many managers there should be, perhaps there will be more managers. Nevertheless, my personal view is that given that we have GP-led CCGs, it would be a good thing if the clinically led CCGs themselves were able to make that decision in the same way as they are able to make so many other decisions.

Mr Burrowes

But your personal view is—

Simon Stevens

My personal view is that, as long as the GPs are doing it, CCGs should be able to make that decision.

Mr Burrowes

Do you agree with the Health Foundation argument that we now have an undermanaged service, which makes it more difficult to implement and embed new ways of working in order to achieve ongoing productivity savings. Do you agree with their analysis of those data? They are looking comparatively across international data.

Simon Stevens

You can spend money on all kinds of administrative stuff and get absolutely no bang for the buck for the taxpayer at all. Have there rightly been opportunities to take costs out? Sure, there have. But does that mean that we will not need a significant leadership and management effort to bring about the kinds of service transformation that we need in the broad view? Yes, we will. We have to preserve and nourish that, rather than castigate or eliminate.

Mr Bacon

Before we leave this point about capital assets—you used the word “lean” in terms of managers. Do you think that the NHS is lean in the way that it uses its capital assets? You are shaking your head, Mr Douglas.

Richard Douglas

No, I don’t actually.

Simon Stevens

The London Health Commission said that there was about £1.5 billion-worth of surplus assets available in London.

Mr Bacon

Is that just London?

Simon Stevens

That is just London. I think that they said you could fill Hyde park with all the unused buildings and premises. We have a huge opportunity there, which will create some of the fighting fund for the kinds of up-front investment that Mrs Hodge was talking about.

Mr Bacon

I do not want to spend long on this, but am I right that the NAO has a Report coming out on PropCo? CAG, does the NAO have a separate Report coming out on NHS PropCo?

Richard Douglas

I think that there is going to be one. From my end, I think that there will be.

Mr Bacon

We looked at NHS estates many years ago, and there was £23 billion of assets then. There seemed to be no appreciation at all of how they might be managed, when they might be added to or when they might be sold. There was nothing being done at all. My information on PropCo at the moment is that anyone out there with money on their balance sheet who would like to do something cannot get them to reply to an e-mail or get anyone to make a decision. Would getting that fixed help you to solve your other problems?

Simon Stevens

Definitely. In terms of the GP angle, one thing that we have to do better is GP premises investment. We talked about that last time. There is a huge unmet need for that—not necessarily just an extension of a clinic’s existing front room, but doing things at scale with proper investment.

Mr Burrowes

The barrier to that is GPs.

Simon Stevens

No, the barrier to that has been constraints on the ability to liberate some of this investment to invest in those kinds of—

Mr Bacon

We are talking about money and the availability of money to do the things that you say you want to do. There are billions of pounds sitting there and it is not being used. You mentioned GPs; I did not. But it just so happens that I have a GP surgery in my constituency that has twice paid for planning permission to get something done and then NHS blockages further down the pipe meant that nothing happened. This is not just about GP surgeries; it is about other kinds of asset and much bigger assets. You have said, “Definitely.” When?

Simon Stevens

Richard will provide you with the answer.

Richard Douglas

I will come in on the wider properties. Are we lean in our use of assets? No, we are not. Most people looking at our system would say that we invest a lot more in bricks and mortar than most, comparatively, and a lot less in equipment and IT, despite some of the conversations that we have had here. We have not always invested in the right properties. Yes, there is a lot to take out on the property side. PropCo is one element of this, and it is a small element relative to the rest. The majority of estates sits with provider organisations. If we focus all our attention on PropCo, we potentially miss a big opportunity. PropCo takes a lot of stick from people. It is taking a bit of time to get it up and running properly but, actually, it has done a lot more in terms of disposing of assets and reducing costs than all the constituent bodies that we brought together to make PropCo two years ago. It has a long way to go, but it is making progress.

Mr Jackson

I concur with what Mr Bacon says. The delay in the disposal of capital assets, which I saw in my own constituency, has an impact on clinical services and the structural debt for trusts. On money and finance, I refer you to page 36 of the Report, which is about providers’ costs. There is quite a surprising finding in paragraph 2.12: “Trusts do not collect and record cost data consistently enough or in enough detail for systematic analysis.” That is a reference to the Monitor report, “A guide to the Market Forces Factor”, which was published in December 2013. It is quite astonishing, really. I am getting old, so I will have to switch on a light on my phone to see the report, because it has such small writing. It says that Monitor reported that “it is almost impossible to distinguish between avoidable and unavoidable components of expenditure.” That is quite a surprising, not to say shocking, finding and I wonder, Mr Stevens or Dr Bennett, whether you want to comment on it, before I go on to my second question.

Dr Bennett

It is an issue, and so one of the things that we are right in the middle of doing as part of revamping the whole pricing system is to get a much more systematic, detailed and consistent approach to costing across the whole of the provider sector. In any case, we need that to do pricing properly, but it will then provide the individual providers, the commissioners and us with much better insight into what is going on. So, yes, it needs to be fixed.

Simon Stevens

I agree, although equally it is worth noting that what we will try to do with the way funding works in the health service is to move away from paying for each component of care and instead move towards paying for a year of care—capitation, if you want to use the jargon. David and I will publish a paper quite shortly on how to move that forward. So, yes, you need the underlying costs, but we don’t just want to price each widget; there is an enormous administrative cost in doing that. The bigger question is, “What is the opportunity to reshape services—”?

Mr Jackson

Will the Better Care Fund allow you to do that in a more holistic way?

Simon Stevens

The Better Care Fund certainly will. Let me just express a sense of historical humility on this. I happened to be reading, as you do, the speeches of Aneurin Bevan the other day, and in a speech to the Nuffield Trust in about 1946 or 1947 he talked about the importance of hospitals getting costing systems in place for the start of the National Health Service. So, there we are.

Chair

He should have been tougher on the GPs.

Mr Jackson

That has caught almost a micro-issue; now, I will move to the macro-issue and our friend, private finance initiative. If you look at figure 17 on page 38, what is quite frightening is the impact of where surplus meets capital charges in PFI schemes. It does not look very healthy. On the positive side, the Report makes mention in paragraph 2.17 of a refinancing of a PFI. I know that that is not strictly your pay grade; it goes right up to the Treasury—

Simon Stevens

No, it is Richard’s pay grade. We have got some senior people here today.

Mr Jackson

It may be above his. But how much serious long-term work is going into the refinancing, or alternative financing, of PFI, because the figures bandied around are an enormous amount of money? I think that in the NHS PFI schemes are £63 billion of encumbrance to the taxpayer. That will have a big impact on clinical services in the future for financial sustainability. What is your view on that?

Richard Douglas

The annual payments are about £1.8 billion. We have 77 providers with PFI schemes; around 31% of our providers. We have a number of them in financial difficulties and I think that, as the Report made clear, we have got four out of six with deficits in excess of £25 million on PFI schemes. We also have a number of providers that have PFI schemes that are doing pretty well, so I think we have to be careful that we do not pitch this as being just a PFI problem. We have got 44 providers that have surpluses in excess of £5 million and 36% of those have PFI schemes. A PFI scheme does not, in and of itself, cause you financial problems. We have to be a little bit careful about how we present that as an issue. Now, are there circumstances where we could think about buying out a PFI scheme? If we get propositions that are both affordable and value for money, we will look at them. The two that are referred to in the Report came to the Department—well, Northumbria came to the Department. We discussed it with them and worked on the value-for-money issues. However, I don’t see there being lots of cases that are like Northumbria, if I look at this situation honestly. The characteristics of a scheme that potentially make it susceptible to a buy-out mean that it is not the majority of PFI schemes in the NHS at the moment. However, we are seriously looking at options about where this could work and what we could do more widely to look at reductions in the cost of PFI.

Mr Jackson

The reason I bring it up is obviously I understand it is not the experience of every trust; but obviously in this situation, where we are looking at long-term funding, we have got to look at areas where we can have some control. You cannot legislate to stop people getting old and falling over in winter. You cannot legislate, really, for population changes. You cannot legislate for the cost of drugs, generally speaking—and there are lots of other examples; but you can change or seek to change the long-term financing by refinancing, which is the challenge. How do you change the financial regime, where you have control?

Richard Douglas

There are two big issues for us—well, three big issues. One is the affordability—so how much would it cost to buy these schemes out? There are a lot of them. The capital cost is pretty high, in that you have to find the one-off finance to do it. The second is doing that in a way that gives value for money. On some of these it will be quite difficult to get to a value-for-money solution. The other thing, on the flexibility point, which I think is important to remember: some of the inflexibility people complain about with PFIs is that it means their building is maintained; their equipment is replaced. They cannot save money by cutting back on maintenance and replacement. I am old enough to remember what happened in the 1990s when we faced financial problems, and a lot of people dealt with those by cutting back on essential maintenance, cutting back on equipment—which then led to the whole programme of replacing hospitals in the early 2000s; so I think we have got to be a bit careful.

Stephen Phillips

Looking at figure 17, there does seem to be a very close correlation between the trusts facing significant deficits and their capital charges. One of the things that you said, Mr Douglas, is that you are looking at various options. What are those options across the provider estate that you are looking at? Because PFI is very expensive. I quite understand that they have led to decent buildings, which are maintained, but the taxpayer is being asked to fund these at vast cost over a number of years. So what are the options you are looking at?

Richard Douglas

The options vary. There are some schemes where it may be possible to buy them out entirely. There may be some options—and again it depends on what the market is like at different times around refinancing. A chunk of the cost in a number of these is around soft facilities management services, where there are elements of that that you can renegotiate without unpicking the whole deal; and there is some from the hard facilities management. There is a whole range of options around that. The fact that new hospitals, whether it is publicly financed or privately financed, tend to cost people more money in the facilities side of it, is not really a surprise. In some of these cases, as well as actually costing money in terms of facilities, they are helping to save money in terms of delivering the service, because they are better configured hospitals.

Stephen Phillips

By the same token what figure 17 indicates is that if you could eliminate significant PFI costs for the majority of trusts with significant deficits, the number of acute providers with significant deficits would also reduce significantly. So is this not an area which you and NHS England and, indeed, the Department, ought to be looking at in a great deal of detail?

Richard Douglas

It would. We are looking at a great deal of detail. What that reflects is that hospitals have to pay the costs of the facilities they are in; so I think there is a question—just eliminating the cost of having a building would not be appropriate. I think what we have got to do is: how can we reduce the cost of that building in a fair way to the whole system?

Stephen Phillips

Thank you. I just wanted to take Mr Stevens back to efficiency savings, if I may. I am not sure we got a clear answer, but in 2013-14 providers were required to deliver 4% efficiency savings: correct?

Simon Stevens

That was the tariff top line as it were, yes; but in net it was nearer to probably 2%, 2.5%.

Stephen Phillips

Was that achieved, or not?

Simon Stevens

Yes, 2%, 2.5% was achieved; so that is why in a forward view we assume that something net in the zone of 2 to 3 is feasible.

Chair

Explain net. I do not understand net.

Simon Stevens

When we say that overall we are looking for a 4% gross efficiency, for various reasons—so-called leakage—that tends to become about 2%.

Chair

I do not understand that.

Dr Bennett

Broadly speaking, for several years now we have set a 4% efficiency factor, which is in the tariff and focused therefore on the acute sector. The acutes have actually achieved we think about a 2% real efficiency improvement, but until very recently their finances stayed broadly in line, which suggested that they were finding other ways of closing that additional 2% gap. Some of that has come through demand growth generating extra revenue for them.

Stephen Phillips

That is unrelated to achieving the target of 4% savings, isn’t it? Even if you have growth, you are still supposed to achieve a 4% saving.

Simon Stevens

Our expectation, net, is that it will be nearer to 2%. We say that in terms in the planning guidance and that is what we say in the forward view.

Stephen Phillips

Right, so you would say that 4% gross has been achieved for the 2013-14 year?

Chair

4% savings.

Simon Stevens

The net has been, as David said, 2% or 2.5%, something like that.

Stephen Phillips

Let us be clear. I asked you about the 4% and you said, “Oh, 4% gross is 2.8% net.”

Simon Stevens

2% to 2.5% net, and that was achieved we think.

Stephen Phillips

That has been achieved, has it?

Simon Stevens

In 2013-14, yes.

Stephen Phillips

That was the target you were set as NHS England and Monitor, yes?

Dr Bennett

There is a difference here. In the system overall, roughly speaking, if you look at underlying cost drivers, demand growth and so on, the revenue to the system went up by around 4% less than the underlying drivers, so that was the overall 4% ask. For the 2% figure, there are various ways of doing that, including changing which bits of the system provide services and so on. The 2% figure is looking at individual providers and what they are able to achieve. We will have to acknowledge that the system will only be able to achieve the underlying efficiency improvement in the longer term.

Stephen Phillips

That leads me on to my next question. The NAO reports that it is anticipated that 4% will be required for the next four years on the part of each provider—that is in paragraph 11 of the Report. Is that achievable or not?

Simon Stevens

Not 4% net, no. In fact, when we publish jointly the tariff document for 2015-16 in the next few weeks, you will see that we have made a judgment about what 2015-16 will be both gross and net, but for the rest of the next Parliament, our proposition is that, net, it needs to be in the 2% zone, which is consistent with the levels of achievement delivered in the previous years. How we get to that 2% will need to change during the course of the next Parliament, from being unit improvement at individual institutions to broader system efficiencies as a result of the new care models that are being introduced.

Stephen Phillips

Right, so if I look at it in broad terms, what you are saying, or will be saying, is that 2% to 2.5% will be achieved across the system—that that is capable of being achieved—for the next Parliament?

Simon Stevens

That is right, with the caveats that we have put into—

Stephen Phillips

But not the 4%.

Dr Bennett

No. One of the things that has contributed to the 4% improvement in recent years has been wage freezes, and as you said very clearly, that is not sustainable. That is one of the reasons why we are not going to be able to sustain the 4% for the whole system.

Stephen Phillips

Which leads me to two more questions. Mr Stevens, you referred to an independent econometric study indicating that between 5% and 5.8% efficiency savings across the system, as I understood it, could be delivered in addition to those that have already been delivered.

Simon Stevens

Let me be precise about this. What it said is that there are two elements to the net efficiency that are achieved by providers. One is catch-up—that is, less efficient providers becoming more efficient relative to the best, and if you look at the spread across the 90th percentile, that was estimated at between 5% and 5.6% of spending through providers. In addition to that, each year it becomes possible to be more efficient as a result of changes in the way medicine is delivered, technology and so on, which in the jargon is called “moving the efficient frontier”. That, looking back, has been estimated to give you another 1.2% to 1.3% a year. The important distinction here is that the 5% to 5.6% is a one-off opportunity, and the 1.2% or 1.3% frontier shift is an annual opportunity. So what Monitor and NHS England have looked at together is how much of the 5% to 5.6% catch-up is it feasible to expect each year. We believe that 1% of that 5% could be delivered each year, and then in addition 1%-plus from frontier shift. That is why we believe that 2% net, based on that evidence, is not unreasonable, but as you get towards the back-end of the Parliament, the composition of that 2% net will have to change. Sorry, I know that was an incredibly dense—

Stephen Phillips

No, it is very helpful. At some point, the “moving the frontier” efficiency—the 1%—will become incapable of being delivered.

Dr Bennett

Not necessarily, if this is new technologies and new ways of doing things. The point that Simon is quite rightly making, though, is that the catch-up you can only do once, and then you are left with 1%, if you stick with the current ways of delivering care. That is why we are saying that, over the course of the five years, we have got to shift away from simply looking for people to deliver the care in the current way better, which in theory you could keep on doing that at least 1% a year for ever—

Stephen Phillips

I am sorry; I don’t want to interrupt you, Dr Bennett, but we are a little bit pushed for time. So you would say, based upon past experience, in terms of moving the frontier forwards, new technologies and everything else, you can achieve efficiency savings on an ongoing basis of 1% each year?

Dr Bennett

In the long run, if you don’t fundamentally redesign the way you’re doing it, and that is what we need to do.

Stephen Phillips

With the catch-up element of the efficiency saving, at some point that comes to an end?

Simon Stevens

Yes. If you are doing 1% a year on that opportunity, you have got about five years in front of you.

Stephen Phillips

From which it follows, looking in the medium to long term, that the budget for the NHS as a whole, as a proportion of national wealth, will have to increase if we want to deliver the same standards of care in the future.

Simon Stevens

I think that statement is true, but I don’t think it follows from the premises. The reason I think that statement is true is that, if you look in the post-war period for all industrialised countries, as countries have got richer they want to spend a higher proportion of their national income on health services, and it would be pretty hard to think you would suspend the laws of social choice and economic gravity and that that would not continue to be true over the long term, including in this country. As to why I don’t think that necessarily connects to the premises, we believe that there is quite a big opportunity—based on new medicines, new technology and new ways of delivering care—that will not only sustain the 1.2% to 1.3% frontier shift but could potentially improve it quite dramatically.

Stephen Phillips

Historically, those new technologies have always been more costly than what they have replaced, haven’t they, which is why health inflation in the health sector runs ahead of inflation in general?

Simon Stevens

No. They have expanded the realm of things you can do, which is one of the reasons why health services expand, but actually a number of the technologies can themselves be cost-saving and certainly cost-effective. But one of the big opportunities in front of us, I think, is that the National Information Board last week published a series of road maps for what we need to do on bringing broader technology to bear in health services. Those benefits will be spill-over benefits over and above all the benefits that we will get from personalised medicine and from new drugs. Think about what has happened: cardiovascular disease deaths in this country are down by over 40%, partly because of secondary prevention and the discovery of statins, which are incredibly cost-effective and may even be cost-saving. Smoking rates have helped as well. So there are some things that will actually do—

Stephen Phillips

Where I am trying to get this discussion to, and I promise the Chair that this will be my final question, is that, to take the party politics out of this, at some point as a country we will need to have a discussion among ourselves about whether or not we are prepared to plough a lot more money into the NHS in order to deliver the best care free at the point of need. Would you agree with that?

Simon Stevens

Yes, because we have said in the Forward View that the choice facing the country, at least for the next five years, is a choice between the constrained funding increases that of necessity there have had to be in these times of economic recession and austerity—so somewhere between what we have just had and what the health service has been used to during its post-war history, which has been real-terms increases of 3% to 4%. Our proposition is that somewhere at the mid-point between those two, given the other changes we want to bring about, is what would be viable over the course of the next five years.

Dr Bennett

That means that if we can do all that is possible to drive the technical efficiencies in the current ways we deliver care, make better use of technology and change the way that care is delivered—that includes more effective prevention, which can obviously have substantial savings upstream, and better integration of physical and mental care. If we can get all that right, we think that the residual ask is something like 1.5% in real terms each year, which will hopefully be less than GDP growth. That should not be driving up—

Chair

We hope.

Meg Hillier

I should declare, for the record, that I am an ambassador for Healthcare DENMARK. It is an unpaid honorary role, and I am one of four UK ambassadors. That brings me to the international comparisons on capital—Mr Stevens’s specialist area.

Simon Stevens

I might be about to disappoint.

Meg Hillier

If the Department is not doing it, Mr Douglas, it should be. I still have some analysis to do but, on the face of it, in terms of capital build, the Danes are moving to 21 acute hospitals. Those seemed to be built for about 40% less than the typical NHS bill. That is a back-of-the-envelope calculation, and I have not done analysis of some of the clinical costs yet. But if that is true, it is staggering. It may be down to greenfield versus old Victorian buildings, but the question is: are you doing international comparisons? Who is doing it well and which countries should we be chasing? I do not think that we are leading.

Richard Douglas

On the capital costs—the hospital build cost—a well-known management consultancy recently gave me the same number for Denmark.

Meg Hillier

I wonder if that was my fellow commissioner.

Richard Douglas

The estates team at the Department of Health are looking at that to see whether it is true and whether there is something that we can replicate. If it is all greenfield sites, it is very different from doing something within a city. But we are looking at it on the back of that.

Meg Hillier

Just the Danes or anywhere else?

Richard Douglas

The Danes and the French are the two that we are looking at particularly, at the moment—the capital costs. We do a lot of work on international comparisons and always have done, around how care is delivered, relative costs and a number of other matters. As part of our efficiency work at the moment, Lord Patrick Carter is doing work on how we can create some headroom for trusts and help them to manage the efficiency challenge over the next few years. He is doing a lot of work on international comparisons and what we can learn from other countries.

Meg Hillier

I am glad that it is starting. Does anyone else have any comments? Mr Stevens, you have a history in this.

Simon Stevens

I have to declare an interest: I am a non-exec director of a charity called the Commonwealth Fund, which does a lot of international health comparisons. In terms of the challenge in front of us in England, I hope that we are not in a situation where we have to contemplate lots of hospital building expansion over the next five or 10 years. Some hospitals will need to be replaced because they are still in old premises or could be more efficient. But generally speaking, if we carry on doing what we have always done, one consequence of population growth and ageing—according to the Nuffield Trust—would be that we would need 17,000 more hospital beds by the end of the decade. That is the equivalent of 34 new 500-bed hospitals. We will have succeeded if we do not have to build a single one of those 34 new hospitals, because we have instead invested in services that are much more attuned to what the people on the receiving end of them would prefer.

Chair

We have four organisations in front of us this afternoon. David Flory has not contributed a lot. When are we expecting every trust to be a foundation trust?

David Flory

There are still 93 NHS trusts. The focus of our work, as the NHS Trust Development Authority, is assessing the clinical and financial sustainability of those organisations. We are now going through a process with the trusts, including those run by earlier witnesses Mr Hardy and Mr Hopkins, to review the timeline prospects of achieving foundation trusts in the current context and environment. Through that process, we are identifying those of the 93 that will not be able to make it.

Chair

Ninety-three will not make it?

David Flory

No.

Chair

Some within the 93.

Mr Bacon

How many are not going to be able to make it?

David Flory

We are still working through all of that. The plans for next year will give key information about the prospects of organisations demonstrating sustainability into the medium term. Now, my view is that the majority of the 93 will be able to produce plans and demonstrate their plans for the future, both clinical and financial, in order to get in front of Monitor to be assessed for authorisation.

Chair

By?

David Flory

There will be a number that we are pretty clear will be able to do that within two years, and a further number that we think will be able to within four years. There is a third group that we are still working on fitting into whichever of the two time scales they are in. Typically, the group for which we can’t work out the answer yet is made up of organisations—some of which we have referenced today—that face significant financial challenge and need to recover that position before they can produce a viable plan going forward.

Chair

Disproportionately represented in this Committee.

David Flory

The time frame will definitely be at least four years.

Chair

The reason I asked the question is that you have four organisations. We have talked about management at the trust level, but there is also management cost at the centre.

Simon Stevens

But that is rapidly shrinking and is lower than it was when you had one organisation.

Chair

That is true across Government.

Simon Stevens

That’s therefore a success across Government.

Mr Bacon

On that logic you should double the number of organisations. You aren’t planning to do that, are you?

Chair

If you didn’t have four—if you had fewer of you—the costings must decline.

Simon Stevens

I actually do not think so, because we are doing different things.

Chair

You’re not. What we’ve had the whole afternoon is, “David and I are in the same place.” What we see is duplication.

Mr Bacon

You are not really telling us that what Mr Flory does with his hospitals and what Dr Bennett does with his hospitals are fundamentally different things, are you?

Simon Stevens

I do not have a dog in that fight.

Mr Bacon

Look at the chart of bungs. You said there weren’t going to be any bungs, Mr Stevens, but figure 22 describes 31 bungs.

Simon Stevens

Additional year-end bungs was the question, just to be precise.

Mr Bacon

Twenty-one of them are to Mr Flory’s hospitals and 10 are to Dr Bennett’s hospitals. Fundamentally, the two of them are engaged in the same activity, which is monitoring what the hospitals under their care are doing and intervening when they think it is required, with a slightly higher pressure of the foot on the gas for Mr Flory than for Dr Bennett.

Chair

How many people do you employ, Dr Bennett?

Dr Bennett

Doing what David Flory does in TDA, about 80.

Chair

No, how many entirely?

Dr Bennett

Entirely, 450.

Chair

And how many are there in your organisation, Mr Flory?

David Flory

There are 240.

Chair

And when you do these great and wonderful deals with Simon Stevens about everything—the world—you are doing the work within your organisation and it is being duplicated in NHS England?

Dr Bennett

Well, it’s not being duplicated. We have joint but different responsibilities for pricing, for example, which is most of what we have talked about. If I can just illustrate the point on the stuff that David Flory and I do that is similar, if you put together looking after the foundation trusts, which is the bit where we have about 80, and looking after the non-foundation trusts, the first thing that someone would do is say, “You know what? We need one unit that looks after those that are better performers, on the whole—the foundation trusts—and another unit that looks after the other ones.” Before you know it, you have recreated our bit and TDA’s bit, but now you’ve got someone who has to be in charge of the two of them.