Financial Flows (NHS) (Hansard, 25 February 2003)

§ Ms Julia Drown (South Swindon)
The national health service plan sets out a vision of prompt, convenient and high-quality services that treat patients as partners, and the Government have worked hard to make significant progress towards that end. There has been major investment in the NHS as well as huge reform, and that is ongoing. However, I am sceptical about the proposed reform in "Reforming NHS Financial Flows", and I am pleased to have the opportunity to raise some of the potential problems.
My first concern is that Members of Parliament have not been properly informed of this major change in the way in which NHS institutions are financed—a change that could ultimately have a huge impact on patient services. MPs did not receive the discussion document, and this is the first parliamentary debate about it. That is surprising, given that the proposals have the potential to recreate the Tories' disastrous internal market. The proposals will have significant political ramifications and should be subject to adequate parliamentary scrutiny.
Part of the background to the document is the principle of supporting patient choice. No one wants to say no to choice, and I certainly support the Government's use of choice for patients who have been waiting a long time and who can be referred to other units. However, making it a Government priority to provide choice for all patients at all times may lead to distortions in the NHS that overall will not produce the best patient care. Creating a system in which people who have to wait less than a month for treatment are given a choice between two hospitals should not be a priority over getting down longer waits in the health service. For example, 102 patients are waiting between 10 and 12 months for orthopaedic operations at Swindon's hospital, and 1,070 are waiting up to 10 months. Focusing on reducing those waiting times is the priority for my constituents.
The truth is that, to create choice, surplus capacity is needed, and despite the huge increase in health service resources, few parts of the health service have surplus capacity. I would not support creating surplus capacity in some parts of the country if the funds could instead go to meet the real shortfall in resources elsewhere.
The document says that patients will benefit from the ability to choose between providers, knowing that funding will not be an obstacle. However, that cannot happen. To keep control over the budgets, commissioners will have to set limits—cost and volume contracts—so when the contract is complete or ahead of schedule, funding will be an obstacle to the ability of patients to exercise choice.
At the centre of the new proposals is the move towards a nationally agreed set of prices in an attempt to make commissioners focus on the quality and volume of service provided, thereby minimising the transaction costs and conflict involved in local price negotiations—getting hospitals to manage costs efficiently, and creating greater transparency and planning certainty in the system. 63WH However, the national tariff will not be a national tariff. The Government have said that each hospital will have the national tariff altered to reflect the local market cost factor, so they themselves are saying that there will be different prices in different areas. The Government's document also makes it clear that commissioners will have to cap the number of operations that they can buy, because they have to manage their budgets. If a hospital says to a commissioner, "We'll give you a cost and volume contract and offer 10 per cent. more procedures free above the cap," their price per patient will not be at the national tariff. The hospital might gain from that, but such deals would in effect bring back price competition to the NHS. Will the Government outlaw hospitals making such offers?
The system in Victoria, Australia that is cited allows bonuses when waiting list targets are hit—again moving prices away from the tariff. Will that be allowed here? Using a national tariff seems to ignore the way in which costs are built up in the NHS. There will always be cheap hospitals and expensive hospitals. Some cost differences can be categorised crudely and summed up by a market forces factor, but others cannot be categorised so simply. High land costs or building costs could mean that a procedure at one hospital is more expensive, while the same procedure at an asset-poor hospital will necessarily have lower costs. That can happen within primary care trust areas, but it is at PCT level that the market forces factor applies.
Is it right that the hospital on land of a higher value makes a loss on each operation that it does, even if it is at least as good as other NHS providers? If a hospital finds itself in that position, will it be allowed to sink into deficit, ultimately seeming unviable, even if it provides excellent services? How would the Government react if a PCT were following all the Government guidelines and achieving the targets, but because of the costs in local hospitals could do so only by massively overspending? Would commissioners have to send their patients further afield? Is it right that a hospital on cheap land necessarily makes a profit on each operation because of that? Will the system definitely lead to the best use of NHS moneys and the best patient care for our constituents? Where is the incentive for efficient hospitals to stay efficient if they get more than they need for their procedures?
The cost of any procedure depends on what else is happening in a particular trust. It is good practice in busy hospitals to have an operating theatre reserved for emergency work only, so that other operations do not have to be cancelled. However, if that theatre is used only 50 per cent. of the time, theatre costs in the hospital would be spread over fewer operations than in a hospital that uses its resources 100 per cent. of the time. The national tariff will be calculated from averages across the NHS, which would probably imply a funding level at nearer the 100 per cent. usage of theatres rather than the ideal emergency theatre capacity level. The hospital that runs a quality service will make a loss on that aspect of its service. Is it right that it is penalised for running that quality service?
Many complex details affect the cost of treatment at each individual hospital. Those are best understood by the individual managers at a local level, and 64WH negotiations on price for clinical services should remain in the hands of those best suited to judging value for money—those commissioning the services. However, as I shall explain later, it is wasteful to draft each year's contracts at such a level of detail.
I have shown how we will not have a national tariff, and how hospital and commissioners may start talking about prices, but even if prices were not altered by hospitals doing deals with commissioners, commissioners would not necessarily ignore the difference in prices between different hospitals in the way that the Government intend. Prices will be different because of the different market-led factors that are reflected in prices, so it would be tempting for commissioners, if they could, to send their patients to areas where the market costs happened to be lower.
Let us consider a procedure costing £2,000 on the national tariff. That procedure will cost £2,029 in Swindon, £2,060 in Oxford and £1,968 in Bath. That is £100 cheaper in Bath than in Oxford. That could be a hip operation, of which our PCT in Swindon buys 400 per year, mostly from Swindon. If they could be bought from Oxford, and the PCT had the choice, it could be worth it trying to move 100 operations from Oxford to Bath, freeing up money to treat an additional nine patients. That looks like an efficiency improvement and a patient gain of 9 per cent., but the tariff price may not reflect the reality of NHS resources. In the example, Bath may employ expensive agency nurses to see the extra patients while Oxford nurses are underemployed. That would not be a good use of NHS resources.
I described earlier how hospitals would be able to offer deals to give PCTs different prices from the Government's set tariff. Even if the Government outlaw such deals, how can they stop commissioners and hospitals having effectively the same conversations as happened on prices in the internal market, and still happen to an extent today? Commissioners will be interested in how the prices they pay compare with actual costs in hospitals, so the talk will be about profits and losses made in each hospital on each procedure. If I were a commissioner and knew my local hospital was getting more money than it needed for a particular operation, I would say that the excess funding should go towards the first stage of its next investment plan. There is danger of the same complex internal market discussions on price occurring but in a different format.
That points to my major concern: the proposed financial flows will reintroduce competition and an internal market into the NHS. The Tories' internal market was a disaster. It promised money following the patient but did not deliver it. It used clinicians, managers, accountants and administrators in wasteful exercises of questionable benefit to patients. The costs of hospitals were divided into the individual procedure level to become prices, which were then added back together again with volumes to create a contract sum to argue about with each commissioner. That destroyed valuable co-operation in the NHS. The administration was like digging a hole and filling it up again—not the sort of job creation needed in the NHS.
A recent research study from Bristol showed that the internal market was, if anything, detrimental to health. It suggested that between 2,000 and 4,000 more people died from acute heart attacks in hospitals subject to competition between 1991 and 1999 than would have 65WH been the case without competition. How are the Government going to avoid a repeat of the wasteful Tory internal market?
Commissioners will have to negotiate their contract and look at the data for each service, so management time will be wasted number-crunching, rather than about examining particular services where changes can deliver better health for communities. The time of clinicians, accountants and administrators will be diverted into bureaucracy and away from analysing resources in the NHS. As with the internal market, that is likely to cause huge frustration for NHS staff.
Given that procedure costs are different in different hospitals, why are the Government proposing to pay hospitals the same procedure price? Does the evidence suggest health benefits from the new proposal? To take the Swindon example, our acute trust is looking forward to the new regime because its costs are below the national average, so it will be well rewarded by the new system. Conversely, the PCT is likely to be in an extremely difficult position because when the trust's prices are increased in line with the national tariff, it will have to pay more for the same level of activity that it currently buys at the cheaper local rates. The PCT had a serious deficit to start off with; the last thing that it needs is to have to pay more money for the same level of activity with no promised increase in quality of services. More funds will go into acute services when the real pressure is to develop mental health and community services. How will Ministers respond to such difficulties arising from Swindon and elsewhere?
Even if hospitals are not in competition with each other over prices, will they not compete over activity? If a clinician knows that 10 more patients can be squeezed in at £2,000 each, and fixed costs have already been covered, that will make a big impact on the budget. Similarly, a department losing those 10 patients will have a major hole in its budget, perhaps leading to cuts in its services. Once again, I ask whether that is the best use of resources.
To reduce transaction costs and disputes, the Government should adapt the block allocations that were used in the 1980s, which are partially in use now. The current system is too bureaucratic and needs to be simplified. That would mean not individually pricing everything, but concentrating commissioner and provider discussions on where changes could be made to services in order to focus money where it is needed most, which would encourage co-operation between providers who would not be in competition at all except at annual budget rounds. Having worked in the NHS when the system was like that, and having seen the difference between it and the internal market, I can testify that the advantages of co-operation are real and tangible. The Government are missing an opportunity by failing to develop such a system now.
Part of a new approach should be to encourage—or perhaps even insist on—more benchmarking exercises that provide a genuine comparison between similar services in different hospitals, in respect of staffing levels, clinical outcomes and patient satisfaction. That would help to achieve best practice across the NHS.
I agree with some parts of the plans for 2003–04, which are basically a sophisticated waiting list initiative. The proposals dictate the price at which additional 66WH waiting list cases will be paid for and, similarly, the sums that will be taken away if the initiative is not met. Given that that is above the standard block contract agreed for the previous year's activity, it should not lead to any long-term instability or unfairness in hospitals. It could mean some commissioners paying more than they need to for waiting list initiatives, which I regret, but it has the advantage of simplicity for a small portion of NHS budgets and will not create massive competition.
However, the price will also be used as the sum to take away at the full cost level if the normal level of activity has not been achieved, which could create real difficulties for hospitals. If a shortfall in activity has been caused because a hospital, despite doing all it could, was unable to recruit, and covered by using more expensive agency nursing, could we justify taking fixed costs, which represent far more than it costs to treat patients, away from that hospital? I imagine that the Government would describe that as penalising poor performance. However, if all reasonable attempts had been made to treat patients, would it be justified to penalise a hospital that was already under great pressure? A true partnership, which the Government want to develop, would understand such circumstances and negotiate a way forward with that hospital. The policy could lead to serious instability in hospitals.
Finally, the system again seems questionable when the national tariff is to be used with private sector providers. Many private hospitals are already doing well, and should be able to perform operations at not much more than marginal cost. To pay the full cost would give additional and unnecessary profit to the private sector, at the expense of public sector providers that would be able to put the extra funds to better use.
I have outlined only some of the potential problems. The Government know of the experience of Victoria, Australia, where a system led to what is called DRG creep—the coding of diagnosis-related groups of procedures to more expensive bands. That is a further worry for Swindon's PCT, and additional administrative audits would be required to counter it. Is that the best use of NHS resources?
I hope that the Government will look again at their plans for 2004–05, to encourage more co-operation between hospitals and commissioners. Commissioners should be allowed to concentrate on the few areas that they can change in a year, rather than trying to consider every service all the time. Administrators, accountants and managers should not be used on number-crunching exercises or on trying to come up with clever deals; instead they should be considering whether the real resources of the NHS make the best use of funds in the interests of the health of the community.
The proposals set out in "Reforming NHS Financial Flows" need to be revisited and revised. I am not convinced that a national tariff would work; it fails to take account of the various complexities that I have laid out. It could work if it were used to fund only out-of-area flows of patients. However, used for all activities, the plans are bureaucratic and likely to introduce competition between hospitals.
The Government may point to countries that have developed similar systems, and say that the system led to a better use of hospitals, but our starting points are not the same. Fixed costs for a procedure would of course be 67WH a better replacement for the US system of specified feefor-service agreements. However, there is no evidence to show that that system has been tried or that it has improved English health services.
The proposals are too close to the failed Tory internal market to give the public confidence that they will work in the interests of patients. I hope to see a parliamentary and NHS-wide debate on the proposals, and a consideration of alternative systems of funding hospitals—systems that encourage co-operation, not competition.

§ The Parliamentary Under-Secretary of State for Health (Mr. David Lammy)
I congratulate my hon. Friend the Member for South Swindon (Ms Drown) on securing a debate that is important to all our constituents. My hon. Friend mentioned a great deal and it is unlikely that I will be able to respond in full. I therefore undertake to write to her to follow up points that I cannot answer now.
The way that money moves around health care systems has always been and still is an important area of policy, both in this country and elsewhere, which is why the debate is so important. In the NHS of tomorrow, patients will have greater choice. That is fundamental to the debate. There will be a greater plurality and diversity of services, and NHS organisations will have greater freedom. As my right hon. Friend the Secretary of State put it, we cannot run the NHS solely from Whitehall.
The NHS has received and will continue to receive a substantial growth in funding. The budget in 2002 set out an annual average increase of funding for the NHS in England of 7.4 per cent. in real terms over the five years 2003–04 to 2007–08. To get the best out of those extra NHS resources, we are establishing a system of payment by results. My hon. Friend knows that in April we increased taxes, in large part to fund the reform that we want in the NHS. Those tax increases must bear results.
I want to consider how things work now and why we need to change the way in which money moves around the NHS. The current system has no inbuilt direct financial incentives to improve access, deliver efficiency or reduce costs. In fact, areas that are not meeting targets are often given additional funding to help meet those targets. There are no financial mechanisms to support the movement of patients between providers. In fact, hospitals that are doing well are often prevented from using spare capacity by budget ceilings. We want to create a system that facilitates sustainable reductions in waiting times and helps to match capacity to demand. We need to be able to support patient choice by ensuring that funding can follow patients. We want to reward providers who provide services efficiently, and above all we want a new system that is both fair and transparent to all. I make it clear that financial flows in themselves will not achieve that, but all hon. Members know about a plethora of Government policies aimed especially at national standards that also go along that path.

§ Ms Drown
My hon. Friend says that there are no incentives and currently no way in which money can 68WH follow the movement of patients, but will he confirm that it is in the hands of commissioners to reward that performance, to place contracts with the more efficient hospitals and to give incentives to organisations to change health practice if that is what the commissioners want to achieve? There is nothing to stop them from doing that, and some very good commissioners do so.

§ Mr. Lammy
My hon. Friend makes a good point, but that has not been the case—it is not the everyday, every week or every month practice of the overwhelming majority of commissioners currently in the NHS.
My hon. Friend made some very valid statements about the previous regime and the purchaser-provider split. That split occurred not only in this country, but in other western democracies such as New Zealand and the United States of America. However, we now need to go one step further, embed that, and see that choice and access as a key part of the NHS, so that my hon. Friend's constituents, if they cannot get an operation in a particular trust, have the choice to go somewhere else, and so that financial flows assist that process.
Our commitments from this year are to introduce a regime under which all providers are contracted for a minimum volume of cases to achieve waiting time reductions for key waiting list procedures. Providers will lose money on a cost-per-case basis for failure to deliver the volume of services they are commissioned to provide, and they will earn extra resources on a cost-percase basis for additional patients that move to them. In the medium term, we will move to a system in which all activity that takes place in acute hospitals is commissioned against a standard tariff, using either health care resource groups or other appropriate measures.
Those changes will mean that instead of providers being paid according to block agreements, as sometimes happens now, they will all be paid for the activity that they actually deliver according to a national tariff. My hon. Friend expresses concern that the tariff is not truly national. I want to assure her that there is a national tariff, but that it rightly reflects the differences in purchasing power across the country. In time, the national tariff will apply to all providers of NHS treatment. Local commissioning will focus on volume and quality, not price. That is vital—not price. Through the market forces factor, it will take into account unavoidable cost differences across the country, including variations in the cost of land and wages.

§ Ms Drown
Is my hon. Friend saying that the Government will outlaw the sort of deals that I referred to, whereby a hospital could offer a local commissioner 10 per cent. more operations for free?

§ Mr. Lammy
My hon. Friend makes a specific point. However, I cannot stand here today and outlaw all the various scenarios that could arise. It is important that the policy beds down. This is a complex matter that has preoccupied the minds of great health economists throughout the world. It is likely that as the national tariff develops it will need adjustments and tweaking. Providers who operate more efficiently will be able to retain most or all of the surplus that they generate for deployment in their trusts for the benefit of patients and 69WH staff. However, we will support less efficient providers to help them to improve, and, where necessary, we will bring in new management through franchising.
We recognise that the transition to the new system may be challenging for some parts of the NHS. My hon. Friend and others expressed concerns at the implications in the changes for trusts with particularly high or low costs. To facilitate this, we will introduce the standard tariff in a very limited way from this year. In the first year, it will not apply to baseline levels of activity; thus it accounts for only 0.5 per cent. of hospital spending. This first stage will allow the service time to learn to use the new tools effectively and will incentivise additional activity in key areas without causing financial destabilisation. That is one reason that I do not want to get into the business of giving undertakings at this point. We will handle the transition path for trusts by introducing the national tariff carefully. We are developing proposals to ensure that primary care trusts and other health care trusts can manage the transition without causing significant financial instability.
In the three minutes available to me, I want to emphasise that this is not a return to the internal market. The new financial system sets out to avoid the mistakes of the old internal market, under which, as the Secretary of State pointed out, purchasers dictated through administrative contracts where patients could be treated and the NHS undertook prolonged negotiations over the price of each service provided by each hospital. Every purchaser had to keep and update a complex list 70WH of all the prices for every hospital with which they dealt. The internal market was unfair; it had a two-tier system of GP fundholders and others, and it lacked openness and co-operation. The new system of payment by results will be different. Patients will, in time, be able to choose the hospital in which they wish to be treated and the time of their referral.
That choice is important. I witnessed the exercise of that choice last week, in St. Anne's hospital in my constituency. Patients from all over north-east London and parts of Essex are exercising the choice to have their cataract operation done at St. Anne's if there is a waiting list at their local hospital, and ambulance transport to St. Anne's is available to them. Patient choice will be vital to future developments. PCTs and other commissioners will know precisely what the cost of treatment will be and that it will be the same treatment wherever the patient is treated. Prices will be set and regulated nationally. Hospitals will not be able to offer special deals or prices to attract work or to keep it; they will compete on quality, access, waiting times and standards.
Those changes are not happening in isolation—payment by result is just one tool available to PCTs—nor are they just about acute elective work and sucking activity into secondary care. We will continue to develop and to refine the system as we progress.