UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 28-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

health comMITTEE

PUBLIC EXPENDITURE ON HEALTH AND PERSONAL SOCIAL SERVICES 2008

Thursday 11 December 2008

MR DAVID NICHOLSON CBE, MR HUGH TAYLOR CB,
MR DAVID FLORY and MR RICHARD DOUGLAS

Evidence heard in Public Questions 1 - 175

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Health Committee

on Thursday 11 December 2008

Members present

Mr Kevin Barron, in the Chair

Sandra Gidley

Dr Doug Naysmith

Dr Howard Stoate

Dr Richard Taylor

________________

Witnesses: Mr David Nicholson CBE, NHS Chief Executive, Mr Hugh Taylor CB, Permanent Secretary, Mr David Flory, Director General NHS, Finance, Performance and Operations, and Mr Richard Douglas, Director General Finance and Chief Operating Officer, Department of Health, gave evidence.

Q1 Chairman: Good morning. Welcome to the only evidence session on the public expenditure questionnaire that we are doing this year. You will be aware that a lot of work has gone into the book that has been published but we may want to ask one or two questions about the effects of recent events in the economy as well. At the start, could I ask you to give us your name and the current position you hold.

Mr Douglas: Richard Douglas, Director General Finance and Chief Operating Officer, Department of Health.

Mr Taylor: Hugh Taylor, Permanent Secretary at the Department of Health.

Mr Nicholson: David Nicholson, currently the Chief Executive of the NHS.

Mr Flory: David Flory, Director General NHS, Finance, Performance, Operations.

Q2 Chairman: Thank you once again for coming along. The Institute for Fiscal Studies says the Pre-Budget Report has effectively cut somewhere in the region of £37 billion out of the Spending Review for the next three years, from 2011-12 through to 2013-14. Do you agree with their figure?

Mr Taylor: I do not think we can say that yet. Certainly as far as the implications for the Department of Health and for the NHS are concerned we know what we have to do over the next couple of years, and we will have to wait until decisions are made on the public expenditure grown in the SR period beyond that - although there are some clear signals in the PBR that growth is going to be slow.

Q3 Chairman: Clearly reducing expenditure is going to be on the agenda.

Mr Taylor: At the moment, what we are looking at over the next two years continues to be significant increases in planned growth in the NHS and in the other sectors for which we are responsible, but the implications of the PBR beyond that are that growth is at any rate going to slow. We will have to wait until we are clearer about what that is going to mean for the services for which we are responsible but, yes, one of the things we are all doing now is looking ahead, recognising that we have a pretty strong platform for the next two years on which to spend some time thinking about the implications of potentially lower levels of growth for the system, which in one sense is a more positive position than the Department has been in previous times of economic downturn.

Q4 Chairman: You are not looking at any particular areas for saving expenditure at this stage?

Mr Taylor: We will be looking at efficiency across the board. Clearly we will be expected to contribute to the planned cash efficiency savings which were announced as part of the PBR for 2010-11, and the big focus for us in the Department is going to be looking ahead to the SR period beyond that, which, reading the runes, means that we are going to have to look very hard at efficiency and productivity across the system.

Q5 Chairman: There is an estimated £5 billion of additional value for money savings planned in 2010-11. What is your share of that? How are you going to manage that?

Mr Taylor: That is still under discussion with the Treasury at the moment. We will, I am sure, be expected to make a decent contribution to that but it is not possible to say yet what that is going to be. The details of how that £5 billion is to be distributed across Department allocations will come out in the Budget.

Q6 Chairman: How descriptive will be your area of defence, as it were, in terms of that less should come from the health budget. Will you be talking about specific areas of health expenditure or just generally the national pot?

Mr Taylor: In one sense, we will be looking across the board. Obviously health received a bigger share of growth at the Budget 2008 in the previous SR, so we will be expecting the Government to come looking at us for greater efficiency. We have made allocations which we think are prudent in the circumstances while giving a very strong platform for growth in the NHS, and we will be looking to assess central budgets, for example, for 2010-11, but we are not at the stage yet where we are saying that we are targeting particular areas - although, as David and colleagues can explain, we have a very big programme aimed at efficiency across the NHS already. It is a question of intensifying and deepening that.

Q7 Chairman: Is the Department and/or the National Health Service looking at the possible impact of the recession in terms of health needs and health demands - areas around unemployment, falling incomes and things like that? There are correlations between unemployment and ill health and there have been for many decades. Are you looking at the areas of possible demand on the healthcare system that this could create?

Mr Taylor: Yes, we will be looking at that. Of course a lot depends on the depth and length of any economic downturn, if it is relatively short-lived. I do not think we necessarily expect the health impacts to be all that profound, but the evidence suggests that the most significant impact on health demand is in the area of mental health. That is associated potentially with unemployment but also particularly with indebtedness. There is a very interesting report which was produced recently, a Foresight report on mental capacity and wellbeing, which drew attention to the evidence relating to associations between levels of personal debt and mental disorders, to do with essentially having control over one's life. If anything, the evidence is stronger in relation to that than in relation to low levels of income. If we were to have a long period of downturn, then we would expect that to have some impact. Of course we are already making extra investment in areas like improving access to psychological therapies. We are increasing the number of therapists associated with that, we are increasing the level of investment, and we would expect that to have an impact over the period that we are talking about, but we will be looking at that and other areas of potential demand. It is very difficult to estimate what the impact on behaviours in relation to health (for example, abuse of alcohol, tobacco, and so on) would be in a period of long downturn. There are other potential impacts on demand.

Q8 Chairman: Mental health, wellbeing is important. The other area in terms of future impact on health budgets of course is that of the ageing population, and there are issues around immigration as well with which you will be familiar and which are geographical on occasions. Also, there rumours we are hearing on NICE guidance on new drugs, and that is a very fertile area for debate and movement at the moment. Are you making any assumptions about the impact it is going to have on future health service budgets?

Mr Taylor: We do make regular assessments of the impacts of ageing on health and, in particular, social care. Of course we have been running a significant engagement programme, leading up to a planned Green Paper next year, on the future funding of care and support systems, which in many ways is where the biggest impact of ageing may fall. We have been working with stakeholders and others in relation to a forward look in relation to services for people with dementia and the impact that would have on the NHS, and I am sure that will be published shortly. We are looking forward to try and do some thinking about future demands on the system. Unquestionably the impact of new drugs will be felt. We can look at that reasonably well because of the length of the pipeline in terms of new drugs coming onto the market, and it is important in that connection that we have just negotiated a new deal under PPRS, the pricing scheme, where we have effectively agreed to take out from 2010-11 to reduce prices so that we get a recurrent saving of around £450 million a year which will help us in that, and we have negotiated a new system under which pharmaceutical companies will be able to introduce new drugs to the market at a more flexible price and come back to NICE to get a reappraised price depending on effectiveness. We are introducing a number of measures which should help us to manage increased demand for new drugs over that period, but this is the sort of planning we would do in relation to any future SR period and of course this will be given added significance in point by the essentially more pessimistic outlook in terms of growth which the PBR, at the moment anyway, marks out for us.

Q9 Chairman: Where will the money come from for the increased funding for NICE for its new duties? I think it is going to increase one-third. £30 million I think is the figure.

Mr Taylor: That has already been programmed into our current -----

Q10 Chairman: Is that in addition to the current budgets? We are talking about current budgets of two years ago, when -----

Mr Taylor: We have planned an increase for NICE in relation to the new activities that they will be expected to undertake as a result of the Next Stage Review, and that is planned into the current SR period effectively.

Q11 Chairman: That has been in addition to what the Treasury were talking about NHS expenditure two years ago.

Mr Taylor: In the light of the Spending Review that we had last time, we have looked at our priorities across the board. One of the things that we anticipated to some extent was that we were running a Next Stage Review and that is one of the things that has fallen out of that, so there is a certain amount of pre-planning.

Chairman: Right. We will move on.

Q12 Sandra Gidley: Last year the Secretary of State told us that a surplus of around £2 billion was reasonable. I think we are probably predicting a similar surplus this year but that does not include the Foundation Trusts' surpluses which are heading for about £3 billion. If you add that together and you have a surplus of £5 billion, is that reasonable or unreasonable? What criteria would you use in making that judgment?

Mr Nicholson: We have tried all the way along, right from just over two and a half years ago, to think about the NHS finances in more like five-year than two-year or one-year elements so that we can get a proper financial plan and a proper financial going. When we started the process, we judged that it was very important, given the experience that we had had in the past, that the NHS produced a sustainable surplus - for a whole variety of reasons that I can go into if you want. Our assessment was that around about 1% might be a reasonable amount, or perhaps slightly more than that if you were going into a period of sustained lower growth. This year we have said to people that they have to think about their finances in five years. We think it would be prudent from our perspective to take a 1% surplus into next year - that is excluding the Foundation Trusts' surplus - and that is what we expect to happen. That is not plucked out of the air. We have done extensive work with the NHS to see how much of the surplus they would like to draw down in the next two years. The NHS have told us that they would like to draw down around about £400 million in year one. We have not got to the final figure for year two yet, although we are very flexible. If they want to draw down more than that, we would not see that necessarily as a problem. Therefore 1% broadly, which could be between £1.5 billion and £2 billion, for the NHS ----

Q13 Sandra Gidley: Is this drawing down a higher level version of the reallocating of funds between Trusts which used to go on locally?

Mr Nicholson: No. I think you have to understand that the surplus is not kept in a safe in Richmond House. It is not here, it is not with me: it is out there in the system. That £1.8 billion that we are delivering this year is out there in the system and it is for individual organisations to decide how they deal with that. It is there at the moment. It is not a matter of allocating it. We do not think it is either prudent or sensible to say to organisations, "Do what you like." I do not think that would help the financial planning of the NHS in any way at all. We have said that we want to do it in a planned way. David has been talking in particular to NHS organisations about what they would think would be a suitable planned draw down and that is the conclusion we have come to.

Q14 Sandra Gidley: Last year I believe you said that we needed some financial headroom in order to transform services.

Mr Nicholson: Yes.

Q15 Sandra Gidley: That is all very well but there is not much sign of some of those services being transformed on the ground. But given the financial crisis and that the Treasury has to find some money somewhere for something, is this money not all in danger of being clawed back?

Mr Nicholson: I think it is needed even more.

Q16 Sandra Gidley: Within the NHS?

Mr Nicholson: Yes, absolutely. Whilst I could point to areas where there has been service transformation, you are absolutely right it has not been wide enough or deep enough to make it happen. If you are trying to manage the major changes in service that, for example, we are trying to do in London, you will need financial headroom to do that. You will not be able to do it without it, so it is even, in my view, more vital than it has been in the past that we have it and we spend it over the next two years.

Q17 Sandra Gidley: Do the Treasury not have form on this? Have they not already taken some of the £4.2 billion capital underspend from last year back into the coffers? How can we be reassured that the money allocated to the NHS is safe?

Mr Nicholson: I tend to focus on the money we have got rather than on the money we may or may not have had. In terms of the money we have got and keeping that into a place, all I can say is that we have a financial strategy over the next five years to make it happen. That strategy is laid out in the operating framework. The last two secretaries of state have said publicly that the surpluses should stay where they lie and that it should up to the local organisations to follow them through. We agreed the operating framework and the financial allocations both with the Treasury and Number 10. I do not know what else I could do in those circumstances to make sure that we have control over our own affairs going forward.

Q18 Sandra Gidley: Are you saying that under the current circumstances there is no way the Treasury can say, "Well done lads for saving the money. Let's have some of it back"?

Mr Nicholson: I think we have done everything that we can to secure that position. You had better ask the Treasury.

Q19 Sandra Gidley: We might.

Mr Taylor: Just to be clear, the SR is the SR. 2009-10 is the position as was. But we are unquestionably, as I have said, going to have to make a contribution towards efficiency savings in 2010-11 and the NHS is absolutely up for that. That is open and out there. We are not trying to hide that away. Our job is to give as much certainty and planning to the NHS as we can, which is what we have done through the operating framework.

Q20 Sandra Gidley: Can I come back to Foundation Trusts, because they seem to be keeping quite a large chunk of money which, given your previous definition, would sound unreasonable. They would say that they are carrying some of the capital underspends because they do not have a clue what the PCTs are doing because commissioning is not coming together quite as quickly as some people would like. Is this the PCTs' fault or is this the Foundation Trusts making excuses?

Mr Flory: Undoubtedly we can see in the numbers that there is a surplus built up in the Foundation Trust sector and I do not think it is proper for us to generalise the reasons why that is generated or what is going to happen next with it. There are a number of instances that we are aware of - because the organisations are talking about it quite publicly - where they are formulating plans to refurbish or to redevelop some aspects of their infrastructure stock and I think that that is less to do with the PCTs declaring their intentions for service change and more about the Foundation Trust looking at its asset base, looking at where it can improve. It is what good businesses do. They generate surpluses and cash from their business, their operation, and reinvest it in the asset base of the organisation. I think there are a number of incidents where that is most clearly going to be the case, therefore. With regard to the primary care trusts ----

Q21 Sandra Gidley: I am sorry, you say that is what good businesses do, but I think the public, the taxpayer, the patients would actually expect this money to be spent on health. When Foundation Trusts are sitting on large amounts of money and somebody cannot get their cancer drugs, for example, this does not quite seem fair to the person on the ground.

Mr Flory: Redeveloping or improving hospital or other facilities is crucial.

Q22 Sandra Gidley: But it is not clear that is what is going to happen.

Mr Flory: But there are a whole lot of examples those Foundation Trusts are talking about where that is going to happen.

Q23 Sandra Gidley: And there are others where it is less clear.

Mr Flory: In a number that is what is going to take place. The whole patient experience, what patient surveys tell us, what patients tell us, is that the environment in which the care is delivered is a really important part of quality care. Improving modernising facilities in which health care is delivered I think is a really important part of that, and that is what a number of these organisations are planning to do.

Mr Nicholson: We have been going through the process around the Next Stage Review, which for me was the first time for a long time where we have what I would describe as a process that had delivered us what could be described as a set of compelling clinical visions for what the NHS is going to look like. We have been going through that process. Every region now has its vision, its direction, its strategy. The PCTs have now gone through their planning process to identify that. If there was an issue in the past about a lack of clarity about the future or whatever - and I think it is variable around the country - then there certainly is not now. We have absolute clarity. Whether you are talking about London or the East of England or South Central or wherever, we now have a clear vision, a clear set of directions, about what the NHS of the future might look like, and the PCTs have now gone through their processes, so there should be no excuse now, if you like, for one part of the system to say, "We are not clear what the other part is trying to do."

Q24 Dr Taylor: Moving on to productivity and information that we have had from the Office for National Statistics, the quantity of health care provided was 50% higher in 2006 than in 1995, however the volume of resources going into the NHS was 67% higher in 2006 than 1995. Does that mean productivity has fallen?

Mr Nicholson: If you look at the figures from the Office of National Statistics - and I think we have had this discussion before about how realistic they reflect increased productivity in the NHS - and you look at the figures across the developed world, you will see that by those criteria productivity is falling across the whole of the developed world in healthcare terms. That is the first thing. You also see in those figures, interestingly, whether it is the OECD or the Commonwealth Fund, that the NHS happens to be at least either the most productive or the second most productive healthcare system in the world. That aside, it is always difficult to deliver productivity gains when you are building capacity, and that is essentially what we have been doing. You will know better than me, but several years ago if you were a breast surgeon, you would have done your operations; now you have a multidisciplinary team of pathologists, radiologists, cancer nurses and all those sorts of people around you. They do not add to the number of patients that we treat but they significantly add to the quality of the service that we provide. Our view has been with the Office of National Statistics' results that they do not sufficiently reflect the improvement of quality. We are working with them in order to do it. Whether you will ever get to one number which will adequately reflect efficiency and productivity across the NHS, I doubt, but certainly we are trying to strive for that.

Q25 Dr Taylor: The Office for National Statistics say that "amenable mortality" is not falling faster, it has continued at the same rate of fall for many years. Is that another sign that we have not got any more efficient?

Mr Nicholson: No, I do not think so at all.

Q26 Dr Taylor: You would not agree with that.

Mr Nicholson: No, I would not agree at all. If you look at mortality in relation to cardiovascular disease or cancer or almost all of the areas, we are significantly improving, and in most cases the gaps between ourselves and the rest of the EU are reducing.

Q27 Dr Taylor: Can I come on to Better Care, Better Value Indicators. We talked about these at this same session last year. When they came out, I thought the Department had really hit on something brilliant because the initial indicators that came out implied that if we improved the way people worked to the top 70% of PCTs we would save £2 billion. I cannot help being terribly disappointed, possibly because I cannot understand these tables, but it does not seem that we are saving anything.

Mr Nicholson: Which page are you on?

Q28 Dr Taylor: Ev 153, Table 54. "Better Care, Better Value Indicators: overall national opportunity per quarter ..." This table is pretty similar to most of them, in that you need about ten degrees in statistics to get anywhere. What do the figures mean? If you take the £146 million at the end of the top column in heavy print, is that what might be saved if everybody worked at the efficiency of the best levels? It really leaves me very puzzled, and it is made worse if you go on to Ev 227. We asked if the Department could identify any savings occurring as a direct result, and the answer is, "It cannot be assumed that movement in the productivity opportunity translates directly into savings ..." The whole idea of this is to make savings. Then: "The Better Care Better Value metrics set out the productivity opportunity ... It will be as a result of that further action that real financial savings are generated, but these are not monitored centrally." So we are never going to know. I cannot help remembering when they first came out, when we had 303 primary care trusts, that it was absolutely noticeable with statin prescribing that the PCTs of three of the health ministers at that time were in the 290s out of the 303 for poor performance on generic statin prescribing. It seems absolutely obvious that if these examples of poor performance were publicised, possibly passed to MPs, something might be able to be done about it. With these really revolutionary and very good ideas for the economy, the publicity seems to have been nil. At least the Health Service Journal of 6 November this year did a brief article. It says that these indicators are sent to each hospital and Foundation Trust on a regular basis, but are they doing anything with them? We are questioning whatever have we been doing with these, why have they not raised this vast amount of money that they should do, and how do we make them work better?

Mr Nicholson: I will try to do my best to find my way through all of that.

Q29 Dr Taylor: Maybe somebody could explain the figures to us in the table.

Mr Nicholson: Every health organisation has to deliver a 3% cashable efficiency gain. That is identified and set out in the planning and all the rest of it. If a particular move towards the delivery of a particular Better Care Better Value upper quartile performance adds to that cashable efficiency gain, you can see what it is and it is transparent. But most of them do not. The reason they do not is because if you reduce your length of stay on a particular ward, you can either close the ward, take the three beds out or whatever, get the savings there, or you can put three more patients into them. What happens in those circumstances? The capacity you deliver by improving your performance on the Better Care Better Value, generally speaking, gets taken by capacity of other patients coming in, so you are improving your efficiency but you are not delivering cashable savings into the system. That, I think, is the heart of what you are saying. If you reduce your length of stay for a particular condition and you save three beds' worth of patients for that, you cannot close three beds on that ward and then reduce the savings. You will use the capacity to go further on your 18 weeks or whatever to reduce it, so in that way you drive the change, not in a way that necessarily drops out cashable savings. It is opportunity costs, I guess, that you are talking about. As we get better at this and as the measurement gets better and as all the rest of it goes forward, there should be and are more opportunities. As the best get better, where you compare them with the rest of performance, the rest can get even better. I think it is good news because it shows there is more to go at, so that when we get, as we are now, into the real productivity gains that we need to do there are more opportunities for us to take it forward.

Q30 Dr Taylor: I think you have chosen examples that do not raise money but there are other examples that do raise money, particularly the statin prescribing - which is the easiest one to understand. Reducing agency costs, reducing sickness absence rates, reducing staff turnover, all those should produce cash savings.

Mr Nicholson: Yes. They will. They do and are doing. What happens is we do not collect the information in that way that would identify what of the 3% cashable savings you would allocate to each of those Better Care Better Value processes. We do not collect it in that way.

Q31 Dr Taylor: Would it not be helpful to collect those sorts of figures? Would it not be possible, so that one could tell a PCT, "You are improving" or "You are not improving." And if you are not improving, "Why not?" and you have to do something about it.

Mr Nicholson: These are all inputs, are they not? We are trying to move away from defining the success of PCTs by input. It does not work like that. Why would you do it in those circumstances? It would not deliver the change that you wanted.

Q32 Dr Taylor: I am looking at it probably too simply but it was said that we could save £85 million on statins alone by better generic prescribing.

Mr Nicholson: Yes.

Q33 Dr Taylor: And some PCTs could have saved something like, from memory, £1.5 million.

Mr Nicholson: Yes.

Q34 Dr Taylor: Why have we not persuaded them to do that or pushed them to do it and followed them up and watched if they are doing it?

Mr Nicholson: Of course on statins and generic prescribing we have done.

Q35 Dr Taylor: Can you say that we have saved some of that £85 million?

Mr Nicholson: Yes.

Q36 Dr Taylor: How much?

Mr Nicholson: On generics we can. We have got the best generic prescribing rates in the world.

Q37 Dr Taylor: Is that in this table somewhere?

Mr Douglas: Yes.

Mr Nicholson: Richard has just said yes, so yes it is.

Q38 Dr Taylor: What we asked was how much savings had been realised because of the Better Care Better Value Indicators.

Mr Nicholson: I think it is quite difficult to do it for the whole of them but there are some of them we can do it for.

Q39 Dr Taylor: Is somebody going to explain this table, which tells me where the savings are?

Mr Nicholson: Richard is much cleverer than me.

Q40 Dr Taylor: I was thinking we might come to him.

Mr Douglas: Thank you. I think the simplest answer you get - and I will follow this up for you as well - is in Ev 227, answer 3. The very last sentence says that when you take into account change in activity the productivity opportunity falls by £188 million. What that should mean, if I have interpreted this correctly, is that -----

Q41 Dr Taylor: Did you write it?

Mr Douglas: I did not write every answer personally. My interpretation of that and from when I worked on these before is that productivity opportunity falls by £188 million and effectively means you have realised that opportunity.

Q42 Dr Taylor: So we have saved £188 million.

Mr Douglas: You have realised that saving. I would like to check that with my colleagues, but that is the way it has worked in the past. That is saying that you have realised £188 million of savings in aggregate against these indicators.

Q43 Dr Taylor: Could you next year you put that it is saving, rather than "falling in the productivity opportunity"?

Mr Nicholson: I shall try to write the answer personally.

Mr Taylor: You need to be careful about the use of the word "saving" though because that does not necessarily mean that people have spent less money on drugs.

Q44 Dr Taylor: Absolutely.

Mr Taylor: It tends to be used rather loosely, as though money had actually been taken out of the system, whereas in fact overall the drugs bill has gone up. We can point to the increase in generic prescribing for statins, for example. That will have led to an efficiency saving.

Mr Douglas: In broad terms, if you look at the tables, a reduction in the productivity opportunity means a saving has been realised, so the opportunity to get the saving has gone down, so we have taken the saving out. An increase in productivity opportunity means it has gone in the other direction.

Q45 Dr Taylor: I am sorry to labour this, but to go back to Table 54 on Ev 153, so many of the figures seem to be absolutely identical in the top half and the bottom half, and yet when you get to the very bottom, the total productivity opportunity in the bottom right-hand corner is minus £188 million and the total productivity opportunity in the summary above is £135 million.

Mr Douglas: The difference is the extent to which you adjust for different activity levels. As activity has gone up, you need to adjust the figure. The bottom table, the bottom half of it, adjusts everything for changes in activity levels, and when you adjust for activity levels that is where you come to this bottom right-hand corner figure of minus £188 million productivity opportunity.

Q46 Dr Taylor: So that minus £188 million ----

Mr Douglas: Is the same as the £188 million fall -----

Q47 Dr Taylor: As the figure?

Mr Douglas: Yes.

Dr Taylor: Thank you. Was I being rather slow on this?

Dr Stoate: How can we tell?

Q48 Dr Taylor: Moving on, what impact has the NHS Institute for Innovation and Improvement had on some of these things like variations in length of stay, improvements in day-case surgery rates?

Mr Nicholson: They have two roles really in all of this. One of them is the publication of the information, bringing it to people's attention, the transmission of that information around the system, making sure that people know about it and all of that thing. The second thing is to help people go through the processes that they need to improve, so the service improvement stuff. They do the work with organisations to help them get at this sort of thing. If you need to increase your day case rate in a particular condition, they can help and support organisations who have to go through the change process in order to make that happen. That is their responsibility in relation to that.

Q49 Dr Taylor: Is there any way that you can plug these Better Care Better Value Indicators more to Trusts, to make them to take more notice of them?

Mr Nicholson: One of the central parts of the Next Stage Review is all about transparency of information. We will expect in the future, for example through things like policy accounts, for individual Trusts to both publish where they are in relation to those Better Care Better Value metrics and where their benchmarking group would be, so that they would be able to account to their local communities and their boards as to where they actually were. We think that is a better way of generating change. Having a big stick from the centre and telling them what to do will simply not deliver the kind of change you want. That kind of transparency and accountability is seen to us as a much better way of getting it, so publishing it and explaining it to their local populations and to their boards.

Q50 Dr Taylor: Is the Commission for Quality and Innovation (CQUIN) going to do any good?

Mr Nicholson: In terms of the particular things in Better Care Better Value, obviously the incentive is that they get a fixed tariff and if they are able to deliver it for less than the fixed tariff they can generate a surplus to use in whatever way they want. That is a big incentive for them. In terms of CQUIN, we have said this year that 0.5% of the tariff will be available for commissioning for quality and innovation. It is going to be agreed locally between the PCTs and the NHS Trusts. Our expectation is that in most cases that will be in the first year for delivering better data - because one of the issues we really have to get is the data - but there will be some improved service improvements in all of that and then we will build that 0.5% up over the years. I think in the Next Stage Review it talks about between 3% and 4% of the tariff. That will be a significant amount of money available to support those kinds of incentives. We think between 3% and 4% is the figure. Certainly the research that we have looked at internationally is that that is the kind of incentive that people will respond to. Anything bigger than that, it becomes too difficult to manage and people start to act and behave in negative ways. Any less than that, people do not take notice of it.

Q51 Dr Taylor: On the opposite, do you have any ideas for financial penalties for poor quality?

Mr Flory: One of the issues that came out of High Quality Care For All was this issue of not paying for never events. This is the work that is being developed now by the National Patients Safety Agency to define what those never events are. That will then move into contracts, so that where that takes place the provider of care will not be paid by the commissioner of care.

Q52 Dr Taylor: Is a never event something that should not ever happen?

Mr Flory: Yes.

Dr Taylor: Thank you.

Q53 Dr Stoate: What a concept! Reduction in total productivity opportunity. I am amazed that Tesco do not patent it: "This weekend only, come for your last reduction in total productivity opportunity". It is not surprising that we have difficulty with these papers. What you will have noticed from Richard's questioning is, first, that he needs to get out more and, second, that we do in this Committee really want information and evidence for information. We find week after week that assertions are made and evidence is lacking. I want to ask a pretty straightforward simple question: What evidence is there to demonstrate the value of money in the GP contract and the consultant contract?

Mr Nicholson: Silence! I am just trying to work out what you would describe as evidence in those circumstances.

Q54 Dr Stoate: What do you describe as evidence?

Mr Nicholson: If you look at the GP contract, for example, we can demonstrate, can we not, through the way in which the Quality and Outcomes Framework has moved and the points that people get, that significantly processed targets have been improved as far as patients are concerned across the whole of general practice? That is not a bad way of describing what value for money was.

Q55 Dr Stoate: It is, but on the other hand is there any evidence to show that doing something different might have produced a similar outcome or even a better outcome? Just because you put some money in and you have demonstrated an improvement does not necessarily amount to very much. Doing something slightly differently may have produced a much greater leverage effect and we simply do not know. What evidence have you collected and what evidence are you currently collecting to ensure that the money that has been invested in the GP contract is getting the best possible outcome?

Mr Nicholson: If you are asking me have I got an alternative to the GP contract which we are costing as to what the alternative benefit might have been, I do not have that. That is not what I am doing or planning to do. What I am doing is looking at how much money we are putting to the GP contract - and over the last three or four years, as you know, the amount that we have been putting in has either levelled out or gone up only slightly - and what we are getting out of it. What we are getting out of it is longer consultation times for patients. We are getting more patients seen, we are getting an improvement in the Quality and Outcomes Framework, and we are now getting better access for patients in terms of extended opening.

Q56 Dr Stoate: That is obviously very positive but what about the consultant contract? What evidence do you have that that has been beneficial?

Mr Nicholson: I think that is more potential than anything. The thing about the consultant contract of course is that before we had it there was no mechanism in which we could manage the time of NHS consultants. There was a whole series of notional arrangements around. The consultant contract put in a much better managed framework, which is one of the reasons, for example, we have been so successful in getting consultants to work on shifts, working out of hours to extend the amount of consultant cover we have in our hospitals in order to reduce junior doctors' hours, but also to increase the quality of service that we have. We are in a much better place, therefore, to be able to manage consultants and their time and I think that will be increasingly important as we go forward, when we talk about productivity and change. I cannot in the same way as I can with general practitioners point out the benefits that that had to patients in relation to it at the moment.

Q57 Dr Stoate: The problem is that in the coming squeeze, which obviously is going to affect everyone's budgets in some way or another, will you be able to continue to justify, for example, the consultant contract? If you have no productivity outcomes -----

Mr Nicholson: It is an important precondition to be able to manage those productivity improvements, because unless you have a real control over time consultants spend at work and the things you expect them to do through the appraisal process and all the rest of it, you cannot do the sorts of things that you need to in terms of managing the workforce better, so it is an absolute precondition to make it happen and we will have to do it in order to deliver the productivity gains that we need.

Q58 Dr Stoate: We want to pick up on Table 69b, which shows that in 2007 the NHS had approximately 185,000 administrative and clerical staff compared to just under 132,000 in 1997. What is that increase all about and what are the extra people doing?

Mr Nicholson: As I am sure you are well aware, one of the biggest drivers in extending the number of admin and clerical is clinical staff. You will see that there are similar rises in terms of doctors as there are in admin and clerical staff. I know myself, having run hospitals for many years, that every time you appoint a consultant you need to appoint the clerical staff to support them. As we drive forward, getting it so that professional and clinical staff spend more of their time on direct care with patients, often it is the admin and clerical staff supporting them that needs to increase. I think it is a perfectly rational and reasonable way of taking it forward and that has made a big difference in terms of the way in which that clinical staff work.

Q59 Dr Stoate: Certainly the anecdotal evidence is that an awful lot of duplication goes on in NHS clerical work. Is there any evidence for that or do you honestly think that al these people are genuinely necessary and producing improvements in the NHS?

Mr Nicholson: I am absolutely sure. Two things have been going off, of course, since 2005. As you know, we got ourselves into some financial difficulties during that period on the one hand and on the other hand we significantly reduced the number of organisations in the NHS through the merger of PCTs. During that period, you can see, as we have squeezed that, the numbers have started to come down. That reflects both in terms of a drive for efficiency. I am absolutely sure there is scope for efficiency in this area as we go forward, but also the reduction in the number of organisations.

Q60 Dr Stoate: As you have pointed out, there are an extra 29,800 medical graduates and only 14,000 or so leaving the NHS, which means that there is going to be a net increase in medical graduates. That is fine, but have you worked out what they are all going to do and will they all find jobs?

Mr Nicholson: One of the things that came out of the Next Stage Review of course is our need to get our staff planning much better organised. That is why we have set up Medical Education England, that is why we have set up the centre that is going to do lots of exciting manpower planning, staff planning. Anyway, all of that will enable us to get a much better handle on all of this. The issue we have at moment is that we need more doctors not less.

Q61 Dr Stoate: Yes, but if you look at, for example, what is planned for GP numbers, there is a planned increase of 30% in GP numbers over the next couple of years and yet if you look for GP vacancies in things like the BMA they are simply not there. I am being told by my colleagues who still take part in GP training that they are producing an awful lot of highly qualified and highly trained GPs who are not going to have practices to work in.

Mr Nicholson: We had the other problem some time ago, did we not? We had a shortage and vacancy rates and all the rest of it. It seems to me that for employers it is a good thing to have more choice over who you employ and more competition. That seems to me a good thing. Certainly over the next two years I would expect an expansion both of consultant numbers and general practitioner numbers as we make sure we invest the 5.5% growth over the next two years in the best possible way.

Q62 Dr Stoate: It is quite expensive to train these doctors and, as I say, there is good evidence now that they are finding it increasingly difficult to find practices, so are we doing the right thing?

Mr Nicholson: I do not think that tightening the labour market is necessarily a bad thing. As an employer, we want to get the best doctors we possibly can for our patients, and employers having choice over who they get, so that they get the right staff, seems to me to be a good thing.

Q63 Dr Stoate: Table 75b shows that between 2003-04 and 2007-08 administrators got a 27% pay rise, whereas nurses got 19% and ambulance staff got 18%. Has Agenda for Change not simply put more money towards the pen pushers and less to the clinical frontline staff?

Mr Nicholson: No, I do not think that is true at all. As you know, admin and clerical staff are amongst some of the lowest paid people in the NHS.

Q64 Dr Stoate: So are nurses and ambulance drivers to some extent.

Mr Nicholson: Even lower paid than ambulance drivers and nurses. If you look at the long-term position you can see that there has been much more equity in the way that has worked.

Q65 Dr Stoate: But 27% versus 18% does seem to some people to be pushing money towards bureaucracy and away from frontline staff.

Mr Nicholson: I do not think that is the case. If you look at the amount of money that we spend on clinical staff as opposed to the background infrastructure of the NHS, you can see that there has been a massive shift over the last few years.

Q66 Dr Stoate: Table 64a shows that management costs in the NHS are only 3% of the budget but a study commissioned from the University of York 2005 showed that total management and administration costs more like 13.5% of NHS spending. Do you agree with the 13.5% as opposed to the 3%?

Mr Nicholson: It was a calculation that the University of York did. It was all very interesting but it is a set of researchers doing ----

Q67 Dr Stoate: Could it be wrong?

Mr Nicholson: I am not saying it is wrong. If you are asking me does it reflect the amount of resource that we put into managing the NHS, then, no, it does not. I think it is significantly less than 13% in terms of the resource that we have that manages the NHS on a day-to-day basis.

Q68 Dr Stoate: Where did the University of York go so far wrong as to produce a figure four times the size of yours?

Mr Nicholson: I did not say the University of York have got it wrong, I am just saying that when we have looked at the management overheads for the NHS over the last few years, 3% and 4% has been consistently the number that has come out of that process when you compare one year with another. If you want to invent a brand new definition which covers a whole series of other issues, that is a matter for the University of York. I am sticking with the definitions that we have consistently used, so you compare one year with another.

Q69 Dr Stoate: You are sticking to your 3%.

Mr Nicholson: Yes.

Q70 Dr Stoate: How much money are you spending on external management consultancy at the moment? I could not find that in any of the tables. Do you have any figures?

Mr Nicholson: No. We have not so far collected that information centrally. We have started to think about how we might do it but I think the numbers we have got are so unreliable at the moment that we are not satisfied that we have got that number right.

Q71 Dr Stoate: Is that not a cause for concern, because they are rather expensive.

Mr Nicholson: That is why I think we need to get the numbers right. Absolutely.

Q72 Dr Stoate: If you have not collected them, it is difficult to know if they are right or wrong.

Mr Nicholson: Yes. We think we need to know how much money the NHS is spending on management consultancy and we have started the process of collecting the information. I agree with you, we should have collected it in the past, but we did not.

Dr Stoate: Thank you.

Q73 Dr Taylor: I was rather stung by Howard's comments that I ought to get out and about more because I do get out and about quite a lot, and what bothers me particularly is that in certain hospital wards when the nurses talk to you they are under a tremendous amount of stress and strain from staffing levels. Qualified nursing staff increased dramatically from 1997 to 2005 and then from 2005 onwards they have pretty well stuck. Would you accept that there are particularly some wards that seem to do quite well from the staffing levels - intensive care units, high dependency units - and some of the more mundane wards, particularly geriatrics and some medical assessment wards, are relatively deprived of nursing staff. Is this something that you get a picture of?

Mr Nicholson: I do get out and about quite a lot as well.

Q74 Dr Taylor: I am sure you do.

Mr Nicholson: I do not think that. I would not say that there was that pattern. There is no doubt that there has been significant investment in intensive care and those sorts of areas and numbers of beds and the staffing levels that we have within them. We have always said that particular levels of staffing are a matter for local determination rather than national norms or whatever. We think that is the best way of doing it. What I would say, though - and it comes back to your point on the National Institute - is that there is a fantastic programme being rolled out across the NHS at the moment called Time to Care or The Productive Ward which I think is extraordinary. Every hospital that I go in you see it. It is interesting, it was not mandated nationally to do but suddenly everyone is doing it and it has a massive impact on the kinds of ward particularly that you describe there. By simple organisation and simple management and involving the staff in the way in which the ward is managed, it can increase by up to 15% to 20% more direct patient time for nurses because it takes a whole lot of things off them. It is a very powerful way of doing this. I think the more wards take that on, particularly in the kinds of areas you describe, the better it will be.

Q75 Dr Taylor: Yes. The RCN Dignity in Care paper has been a tremendous help.

Mr Nicholson: Absolutely. Yes.

Dr Taylor: Thank you.

Q76 Chairman: My local hospital has a far better choice of doctors than they had ten, 15 or 20 years ago to be quite frank. That is a good thing because they can choose who is going to be the best for that position. If you ended up in surgery and the surgeon said to you, "I'll be doing the operation this morning but I've been unemployed for the last three years," where do we get the balance in relation to that?

Mr Nicholson: I was not suggesting that unemployed doctors are a good thing.

Q77 Chairman: There is an issue of skills and competencies on an ongoing basis. If we have a market-place of doctors - and this may be my crude analysis - how do we accept that somebody might be bumped out of the market-place for a while and then come back in, potentially lacking in skills? Where would the responsibility be to make sure that that doctor was competent to do something that they had been doing but maybe had not been doing for a short period?

Mr Nicholson: First of all, it is the responsibility of the doctor to keep their skills up to speed and up to the standards that you would require. I am not suggesting that unemployed doctors are a good thing. They are not a good thing. It is very important that we get the workforce planning as right as we can. That is why we have set up our Centre for Excellence as part of the Next Stage Review to get that connection much more closely aligned. It will never be absolutely right, but I think we can get it better. We know there are more doctors coming out of the medical schools over the next few years but we also know that we have to deliver shorter hours for junior doctors; we know we have to provide a much more consultant delivered service in the future. I do not anticipate that in the time horizons we are talking about here we will get to a place where we have unemployed UK graduates. I do think that is what we want to do but we do need to be flexible. At the moment we have to deliver the European Working Time Directive by August on junior doctors' hours and we have a big issue around paediatrics, obstetrics, and anaesthetics, and so we are looking at a whole range of things that we need to do to make sure that we can produce people for those particular areas. Part of that is retraining, skilling people up, giving people new opportunities in our hospitals to refresh their skills, which is exactly what you have said.

Q78 Sandra Gidley: Moving on to the 18-week referral-to-treatment waiting target, what have been the health benefits of introducing targets?

Mr Flory: I think there are a number of ways in which you can look at this. We have been measuring the referral-to-treatment times now since March 2007. For the last two months we have set the level that we set out for patients who unless they choose otherwise where it is absolutely appropriate would receive their treatment within 18 weeks. There is a whole number of dimensions to it, of course. Previously we have measured and recorded separately the time people wait for their operation at hospital. If they are on an inpatient list, that has come down significantly as part of 18 weeks and, likewise, the wait for the outpatient appointment. The piece in the middle of that which we have never measured in quite the same way previously for a diagnostic procedure, where people need that as part of their pathway of care, has fallen significantly. Whereas if we go back two years there were 200,000 people waiting more than six weeks for their diagnostic test, their scan or whatever, now it is a very small number of people waiting more than six weeks and the median time for wait for the diagnostic procedure is significantly less than six weeks. I think that is one part of the patient experience that has improved unrecognisably by the 18-week drive. Clearly the reduced waiting at all those stages reduces the period in which people are in pain, reduces the period of anxiety. It speeds up for many people the time taken and they can get back to work and resume their lives.

Q79 Sandra Gidley: Has there been no attempt to quantify the health benefits? When NICE looks at a drug, there is always a financial case made for giving this drug. What was the financial case with regard to health benefit for introducing this particular target? I am sure patients love it, but what is the financial benefit and the health benefit?

Mr Flory: We have not done a structured cost-benefit evaluation yet of the 18 week programme. Clearly the concentration of effort across the National Health Service as been to achieve this and it has required genuine transformational change in the way that services are delivered, in the way that support systems for booking and so on behind it work. The date that was set for the achievement of this was the end of this calendar year. It has been achieved in aggregate early. We are now concentrating effort on those places that have not yet achieved it to get them up to the standards of the best. Once we get past there into the next calendar year and it embeds in the system in the way it works, then we need to consider how we would do the more formal evaluation that you have described.

Q80 Sandra Gidley: How are you about to do that if you did not baseline what was happening before?

Mr Flory: At the very start of the 18-week programme, when the policy came into place, the overwhelming and overriding concern of the public, of patients, and prospective patients, was the length of time that they were waiting for treatment. There was an absolutely compelling case, we would have to say, for us to deal with reducing waits in the way that we had not before, so the need to do it was there and obvious. The pull to do it from patients was obvious. It was not a case of a cost-benefit analysis looking at fine margins, "Should we or shouldn't we?"

Q81 Sandra Gidley: Effectively this was a political imperative rather than an evidence-based health intervention. I am just trying to clarify. I am not saying it is good or bad.

Mr Nicholson: One of the things that the 18-week programme has done is to increase significantly the amount of diagnostic capacity in the system. One of the things that is very marked about our system is the lack of diagnostic capacity: the number of MRI scans per head of population and all the rest of it. It has brought us much better into a place around the rest of Europe and there is good evidence to show that access to diagnostics has an impact on health gain generally. I think that is a really positive thing and it has been a big part of the 18 weeks. One of the things about the Next Stage Review is that it talked about quality as the organising principle and it talked about a definition of quality and it talked about quality as being safety, effectiveness, and patient experience. One of the things about the NHS has sometimes been that the experience has been traded out, in a sense. I think a big, powerful benefit of this is the improvement in patient experience. We can show that by the way in which patient satisfaction has gone up and we can see that particularly by the way in which public support for what we are doing and satisfaction in the NHS has gone up over the last couple of years or so. I think they are really important things for us in the NHS.

Q82 Sandra Gidley: You mentioned Darzi, and some SHA areas have set even lower targets.

Mr Nicholson: Yes.

Q83 Sandra Gidley: So that is a patient experience benefit rather than an evidence-based health impact.

Mr Nicholson: Patient experience is part of it, is it not? You cannot say that there is a health benefit if the patients have a miserable experience.

Q84 Sandra Gidley: No, there is the outcome and there is how you get to that outcome. They are two completely different things.

Mr Nicholson: Yes.

Q85 Sandra Gidley: Everybody wants a good experience in hospital but given that some work by York University ----

Mr Nicholson: Them again.

Q86 Sandra Gidley: Yes -- has shown that the health impacts of reducing waiting times are very small, is that where we should be focusing?

Mr Nicholson: It is a very narrow definition about what is a health benefit, is it not? Bruce Keogh, the Medical Director of the NHS, tells a very interesting story. Seven or eight years ago, when he was in Birmingham, he was a cardiac surgeon. The patient, normally a man, would come and sit in front of him and their partner would be there. He would say, "Yes, you need cardiac surgery. These are the risks of having the treatment and these are the big risks of not having it," and the patient would say, "Yes, okay, I'll have it," and then normally the partner would ask, "Okay, so when can it be done?" and he would say "18 months." That would have a massive impact on somebody, would it not? When he was at UCLH, before he came to work for us, after the same conversation his answer was "When would you like to come in?" That may not have been picked up in your research project on this - it may not have been - but that seems to me a massive step forward in health and patient satisfaction and quality of service.

Q87 Sandra Gidley: I will accept that from a quality of service point of view patients will be happy. What about those patients who are disadvantaged by this target? I am talking about those for whom the gap between repeat, routine appointments is being lengthened and there are now some health consequences being picked up. I have constituency casework on this; my own mother has suffered from this. There is a whole cohort of patients out there who are not getting a better experience if they do not have an acute problem. How are you going to tackle that? Is tackling that next not more important than reducing from 18 weeks to 17 or 16 weeks?

Mr Nicholson: I cannot comment on the individual cases that you make but one of the issues that comes out of the Better Care Better Value initiatives is that the amount of repeat attendances people have in this country is way beyond what other health systems might have had and generally there is an issue about whether they add much value at all. You might come back every six months or three months or whatever and see a different junior doctor and have a different arrangement and that does not add much to anyone at all. I have not picked up this issue that you have just described.

Q88 Sandra Gidley: I thought it had been fairly well documented. I have read about it in some of the medical press.

Mr Nicholson: Okay.

Sandra Gidley: Thank you.

Q89 Dr Stoate: The latest PCT allocations give PCTs an average of 5.5% per annum cash increase in 2009-10 and 2010-11 and yet the overall NHS budget is going up by 6.7% in each of those years. Why is there the discrepancy?

Mr Taylor: In practice, for 2009-10 we still have to make the central budgets. The total allocation, of course, is composed of allocations from central budgets and other things and we have yet to make the central budget allocations for 2009-10, although we expect to do that shortly. At the moment a certain amount of money has been held back which will get out to the system on a non recurrent basis. We have got the full amount of money for 2009-10, we expect to play it out to the NHS in due course, but it has not all gone out in the form of allocations. Between central budgets and a certain amount of potential for targeting investment, there remains money to be put out which will go out to the NHS over the next period.

Q90 Dr Stoate: That will go the PCTs. Where will it go? Will it be extra funding for PCTs or capital projects?

Mr Taylor: That is for decision, but it would effectively go down through the PCTs. It is quite a complex picture this, because you have the central budgets as well, some of which have been going up at a slightly higher rate of growth than others. On dentistry, for example, which is one of the budgets at the moment, we continue to manage their budgets through a central fund. So it is not a like-for-like comparison but the potential is there within the 2009‑10 allocation for some extra investment going out to the NHS and the form in which we do that has yet to be decided.

Q91 Dr Stoate: So you have got your money but you are not sure how to spend it. That is unusual.

Mr Douglas: I would just add that the overall growth for revenue is not 6.7% over those years, it is 6.3% and 6.4% in those two years.

Mr Nicholson: I do not think that it is we are not sure what to spend it on. There are lots and lots of things to spend it on. Perhaps I could give you an example. The big central budgets that are held are research and development, of which most is already committed and in fact is ring-fenced as part of it and which is a massive, massive amount; dental, which is several billion pounds and which needs to go out as well; ophthalmology; and pharmacy. There are still some big budges to go out.

Mr Flory: The total money we have which is allocated to primary care trusts is now over 80% of the total, which is higher than at any stage before in these allocations, so there is more and more going into the baseline allocations and less proportionately being kept back.

Q92 Chairman: Some PCTs are over target - and I understand that, it is historical - and some are under target and have been traditionally for a long time - including my own - and we are not there with the baseline we said they should have. Are we likely to see that in 2010-11?

Mr Flory: No. It is unlikely. The decision that we make of course is within the total amount available for primary care trusts, the extent to which those primary care trusts who are below their fair-share target can have more than those who are at or above the target, and that effectively is what we have done in the allocation formula and policy for 2009-10 and for 2010-11. It is a fine balance this.

Chairman: When do we get there, then? This has been ongoing for years now.

Q93 Dr Stoate: About 20 years.

Mr Flory: The answer to that, I am afraid, is that there is no definite date when we do, because of course it depends on levels of growth in future years and the extent to which we can therefore have space to make sure that every PCT, irrespective of where they are vis-à-vis target, gets more money to deal with some of the known cost increases and pressure it has to face, so that every part of the country can do that, but at the same time those that are below target get an even bigger share.

Q94 Dr Stoate: Whilst we are looking at percentages, the hospital tariff is going up by 1.7%, how are hospitals going to cope with that small increase in tariff, particularly given the extra pressure that you are bringing to bear on them, such as screening for MRSA and introducing NICE recommendations and so on, all of which will significantly add to their cost pressures, and yet you are expecting them to do it on a 1.7% uplift on their tariff.

Mr Flory: Yes. The numbers of course are a net uplift after taking into account a 3% efficiency requirement that is there across all parts of the service, so the gross uplift is 4.7%. that builds in with what we now know about the agreed pay awards, it builds in an uplift in line with GDP for non pay pressures. It does recognise the increase in costs that will be borne because of drug costs and through NICE and so on. It recognises various other particular cost increases that the service will face. For example, David referred earlier to the European Working time Directive, so there is now some money that is being put into tariff to enable providers of care to meet some of those increased costs.

Q95 Dr Stoate: Is it realistic or practical to expect a 3% efficiency saving whilst they also have significant pressures, as I have said, on some new initiatives they have to introduce?

Mr Flory: Yes.

Q96 Dr Stoate: You think they can still do that.

Mr Flory: Yes. The 3% per year for each year of the CSR, they have all known about it right from the beginning, we have worked through it with them, it is perfectly possible for them to make.

Dr Stoate: I will have another go at my GP and hospital doctor contracts. Are there measurable health gains in paying doctors more money?

Sandra Gidley: Declare your interest.

Q97 Dr Stoate: I declare an interest on this, of course.

Mr Nicholson: To the doctors?

Q98 Dr Stoate: To the NHS. It is a very simple question. You have told me that that the GP contract is producing good results, and I accept that. You are telling me that the consultant contract is potentially going to produce good results.

Mr Nicholson: Yes.

Q99 Dr Stoate: But much of the money has in fact gone into increased wages. I am asking where is the health gain from simply putting more money into increased wages?

Mr Nicholson: I am sure the University of York will do a research project on this, but it seems to me that there is a whole range of issues here. If you take the GP contract, to go back to that, when we launched the GP contract we could not recruit GPs. There were big vacancies around GPs, so the health disbenefit of not being able to get a GP was quite big, particularly in those areas which are under-doctored. I think there are health gains in relation to the amount of time a GP can spend with their patient - which has, as you know, gone up significantly - and by improving access. I think there are health gains in all of those things, as well as the process things in the Quality and Outcomes Framework.

Q100 Dr Stoate: The programme budgeting table on Table 24 tells us an awful lot about expenditure on services and individual services but it does not tell us anything about the relative benefits of those expenditures, which was another point I was trying to raise earlier, but this phrases it rather better. What I want to know is when we are going to get data which shows actual outcomes achieved by particular services so that we can in some way compare services to see if we are getting best value?

Mr Douglas: All the programme budget information tells you in this form is how much you have spent - you are absolutely right; that is all there is - but at a local level as well people can access information linking outcomes. So they can look at the outcomes of each those disease areas, they can look at those against the level of spend, they can look at them against the level of spend and the outcomes in other areas. The whole idea of having programme budgeting is to produce both the cost base that is there and then at a local level people can use the outcome data and compare costs with outcomes, look at what the balance with investment is, but that is done very much at a local level. This is something for PCTs to do themselves.

Q101 Dr Stoate: It is also something I believe the Government should be doing, or certainly departments should be doing, to make sure that the money you are allocating to particular services does show a benefit that might possibly be a greater benefit elsewhere if the money was allocated differently. If you do not collect that data, we cannot know the answer.

Mr Nicholson: No. In a sense that is what the revolution underneath the Next Stage Review is all about, and that is why myself, the Medical Director and the Nurse Director have recently written the whole system around metrics about collecting information that reflects properly the quality of care that clinicians and front-line staff produce. One of the dangers in the past that we have had is that if at the centre decide what are the important things to measure, we have got no ownership. You know, the NHS collects more data than almost any other health system around, but it is not owned by people, it is often not accurate, people do not think it that really reflects the quality of service they provide: so what we have started to do, as you know, is to go out to the system and say to people what are the things that truly reflect the quality of service that you provide, and out of that process will come a whole set of things that we need to collect across the system. So we will get to a place where we have a really good set of metrics which do reflect the quality of service to our patients so that we can then benchmark it and describe it, but what we have decided to do is to do that from the bottom up, which will take longer, I know, but I think will give us a much better idea about the quality of service, and people will produce those as part of the quality accounts and all the rest of it.

Q102 Dr Stoate: If you are going to do that at local level, is there not a case to base PCT allocations on public debate and public discussion at individual PCT level? Should not the public effectively decide what allocation their PCT gets?

Mr Nicholson: How would that work?

Q103 Dr Stoate: Because if you are suggesting that people have got access to all of these outcome data, they can see for themselves what they are getting, should they not then have a say in whether they think their money is being spent in the best way?

Mr Nicholson: No, that is a different thing. I think the allocations should be based on a formula, it should be based on need as far as possible, rather that clamour of individuals in a local area, but how money should be spent within the particular local area, I think the public should have much more of a say in all of that. PCTs should be much more accountable in the way that they work with their local population; absolutely.

Q104 Dr Taylor: We are coming on to the private finance initiative, please. First, a general question. How has financing for planned PFI project been affected by the credit crunch? We gather that the Government is bailing out three of the banks that are major funders of PFI schemes. Does this not give a risk that the Treasury might be lending itself the money?

Mr Taylor: Quite possibly.

Mr Flory: In the current climate, currently the capital for PFI projects is less available and is, indeed, more expensive, and it does raise questions and issues about how---

Q105 Dr Taylor: That means for further new PFI projects?

Mr Flory: Yes.

Q106 Dr Taylor: But the existing ones: is the cost of those not going up?

Mr Flory: The cost of those, in terms of the existing schemes and the new unitary payment target, is fixed.

Q107 Dr Taylor: It is the proposed ones that are going up?

Mr Flory: Yes.

Q108 Dr Taylor: So how is that going to be coped with? Does that mean the numbers of beds will be cut?

Mr Flory: For the forthcoming period within the next year, there is only one scheme that we expect to come to financial close. It is the scheme in North Bristol, South Gloucester. We cannot say how the credit markets will be at the time that that comes to financial close, we will have to simply deal with that when we get there, but that is the only scheme in the next year.

Q109 Dr Taylor: Going back to the tables, these are 9A to 9E, evidence 17 to 19, the first one, 9A, which is the regional summary, I can understand that, but if we move on to the one for the West Midlands, which I thought I understood, if you look at the Worcestershire acute ( this is 9F) payment apparently stopped in 2001?

Mr Flory: I presume that is when the scheme opened.

Q110 Dr Taylor: Yes, but we are going on paying, so why does the figure---

Mr Flory: These are the capital spend profiles. When the scheme completes the period of capital spend ends. Clearly, the unitary payment goes on beyond that.

Q111 Dr Taylor: That is the mortgage and the service charge?

Mr Flory: But that is not classified as capital spend.

Q112 Dr Taylor: Right. So why on the SHA scheme, which is the 9A, do the things go on increasing all the time? That, again, is just capital spend?

Mr Flory: Yes, it is. Obviously, for the years ahead, it is projected spend on schemes that are not yet at close.

Q113 Dr Taylor: So do we have somewhere the total cost including the unitary charges?

Mr Flory: We have got the---

Q114 Dr Taylor: Have I just not found those in this huge tome?

Mr Flory: I think Table 12 and 13 deal with unitary payments. On that table what we see for schemes that are now operational is what the unitary payment is in year eight or nine. They are now quite separate things, of course, but the term of the contracts on each of these will be slightly different and, therefore, we cannot include in here a total. We do not include in here a total estimated unitary payment for the remaining term of that contract; we highlight it as one year.

Q115 Dr Taylor: Taking, again, evidence 37, the Worcestershire group, the unitary fee at the completion was 19,399 - that is millions - going up to 24 million. Is that fairly typical of the increases across the board?

Mr Flory: I do not think that it is possible to say what is typical across the board on these. There are different reasons in different schemes for changes in the unitary payment. One of the benefits that we have experienced in these PFI schemes is a flexibility to adjust specification or to adjust component parts, and different schemes have taken that forward in different ways.

Q116 Dr Taylor: Going on to keeping NHS capital stock up-to-date, are we going to be able to manage that for the next five years or so? That is not talking about just PFI; that is talking about all the NHS capital stock. There must be a vast amount that needs spending just to keep things up-to-date.

Mr Flory: Yes, the regime now that applies for NHS trusts, where the majority of the asset base will sit, is one whereby, according to the strength of the trust's balance sheet, it will be able to raise cash through loans to be able to refurbish its capital stock. Clearly, the acid test in that is that the revenue that the trust can generate is able to service those loans, and as long as it can do that and keeps its borrowing within its borrowing limit, then it is free for the trust to make those decisions.

Q117 Dr Taylor: So you are reasonably confident that the stock will be able to be kept up-to-date?

Mr Flory: Yes.

Q118 Dr Taylor: We understand from April next year PFI can no longer hide debt off balance sheet. What difference will that make?

Mr Flory: It will make a difference for the trusts that have PFIs, and we are clear in the Operating Framework that we have just published for next year that whilst the capital costs of that, the value coming onto the balance sheet, in itself will not impact upon the trust, it will not need to raise capital resource to cover it, that will be dealt with by us, but then for the trust when it comes onto the balance sheet, of course, there are revenue consequences in terms of you need to depreciate for replacement and the trust will need to build that into their own funds.

Q119 Dr Taylor: Was there any truth in the Heath Service Journal or report that some NHS organisations are setting up charities to take over their PFI contracts?

Mr Flory: I am not aware of any specific instances where that is the case.

Mr Douglas: Let us be clear on the PFI. We have an agreement with Treasury that Treasury cover the impact of any classification changes of PFI schemes coming onto our balance sheets. So that does not affect either the department's capital resources in this spending period or the NHS.

Q120 Dr Taylor: So you think things are fairly safe from that point of view?

Mr Douglas: We have an agreement with Treasury that the impact of that will be neutral in our budget in terms; so any change in classification is treated as neutral during the spending review.

Q121 Dr Taylor: Are there changes coming up in NHS capital charges? Are PFI buildings going to be regarded as capital assets on which capital charges have to be paid?

Mr Douglas: Effectively you are create an assets, there will be a capital charge, but the way the accountant will work, you will effectively be offsetting that against the unitary charge you are already paying to the private sector. So you are not doubling up and suddenly paying a double charge.

Q122 Dr Taylor: So it will not be charge on top of the unitary charge?

Mr Douglas: It will not be a charge on top of it; the two of them have to effectively work together. It may lead to some slight increase in the early years of the scheme and some slight reduction in the charge in the later years of the scheme based on almost how the mortgage effect of it works, but you do not get hit twice. You do not get: here is a unitary charge payment and here is a massive capital charges as well.

Q123 Dr Taylor: That it not just an accounting dodge to obscure it?

Mr Douglas: We do not do accounting dodges.

Q124 Dr Taylor: You do not.

Mr Douglas: No.

Chairman: Not any more!

Q125 Dr Naysmith: Can I, first of all, apologise for being late. I was at a meeting elsewhere and I underestimated the time that I needed get here. It was in Senegal! This is one of the most interesting meetings of the year for me. It has been very productive in the past, as Mr Douglas will know, so could I just continue with something along the lines that often come up here. You mentioned, Mr Flory, the North Bristol and South Gloucestershire PFI, the North Bristol Trust. Last year in the 2007 Memorandum it was valued at 382 million and in 2006, Table 9K, it shows it as now valued at 475 million. What could be the reason for that increase? Is that to do with the credit crunch?

Mr Flory: As the scheme goes through the later stages of its planning phase, and so on, then these numbers can move.

Q126 Dr Naysmith: It is at the outline business case stage at the moment. So the figures are still going up, are they?

Mr Flory: I do not know the detail of exactly where those figures are now and what might happen in the short term, but the change that you refer to year to year simply reflects the updated planning position on the scheme.

Q127 Dr Naysmith: I really want to talk about independent sector treatment centres. I apologise if some questions have already been asked on that while I have been away. It is a subject that comes up regularly in this committee when we have you before us, and the Secretary of State, but the data in Table 17A of the first wave of ISTC's performance shows that most of them are still failing to do a large part of the work for which they were guaranteed payment when the contracts were agreed. It varies from 9%, 25%, up to 110% in one instance, and one of the best performing ones, of course, is the one at Shepton Mallett, so Sir Ian will be very pleased about that. Why is there such a variation and why are so many of them still failing to do the work that they are still being contracted to do?

Mr Nicholson: The reason the independent sector treatment centres were set up was not just one of capacity - it was not just that we needed more capacity, it was that we needed a different kind of capacity as well - and they are all absolutely dependent on patients making choices and GPs advising and helping them to make those kind of choices. That is absolutely what they are dependent on. We took a judgment, as you know, in order to increase the variety of organisations that were providing these kinds of services, that we would provide some certainty in all of that. Hence the extra tariff and hence the arrangements that are in place to make sure that they get guaranteed income. In some places, you are absolutely right, they have not delivered in the way that we would have hoped that they would deliver, and we are absolutely, with the strategic health authorities and the PCTs, working with them to see how we can best make sure we maximise the benefits of those systems, but it is often difficult. The people that are expressing choices, individual patients, are saying they would rather go to their local hospital, or they would rather go to hospital X. It is very difficult in those circumstances, I think, for us to override that choice. There are general practitioners who have particular connections with other hospitals that they want to continue with, and, again, it is very difficult to override all of that.

Q128 Dr Naysmith: Could not some of this have been foreseen when these contracts were made. You mention flexibility for the inflow recently.

Mr Nicholson: Yes.

Q129 Dr Naysmith: But there was no flexibility in some of these areas.

Mr Nicholson: No, I am sure it was foreseen and the judgment was taken. How do you both, on the one hand, increase the choice and plurality in the system and, on the other hand, get the best value for taxpayers? The judgment was taken that it was worth spending some money in order to create that market. That is essentially the judgment that was made.

Q130 Dr Naysmith: Some people say that these contracts have given the taxpayer a very bad deal. You would say that is purely in financial terms. If you look at it purely in financial terms, there may be case for that, but you are saying there were other the reasons for doing it: choice, competition?

Mr Nicholson: Yes, choice and competition.

Q131 Dr Naysmith: That is the real underlying one.

Mr Nicholson: The idea behind it, of course, was that by providing more choice and competition in the system, not only would you give individual patients that choice but that the NHS would respond to improve the quality and access of the services that it provides as well, and that demonstrably has happened around those places.

Q132 Dr Naysmith: Everyone is very confident over that.

Mr Nicholson: Absolutely not. I want those independent treatment centres to be working all the time - all of those patients, all those slots to be filled and us to get the maximum benefit out of the money that we are spending - and that is why we are working with PCTs and strategic health authorities to see how we can boost the use of the independent treatment centres.

Q133 Dr Naysmith: The Healthcare Commission said in July that the quality of the data provided by ISTCs on what they are doing continues to be poor. Do you agree with that and, if so, what are you doing about it?

Mr Nicholson: There undoubtedly has been an issue about all of that. We are working with both the independent treatment centres, the organisations that run them and the PCTs to make sure that we significantly improve the quality of data that they are getting, and it is already improving; I think you can see that. The other thing is that the introduction of quality accounts, which will be absolutely crucial, I think, over the next year, is equally applicable to independent treatment centres as it is to NHS organisations as well. So they will have to produce annually a report on the quality of service that they provide.

Q134 Chairman: How long is this going to take? This committee pointed this out, I think, in 2006. It was one of the earliest reports we did following the last General Election. How long does it take before we are able to look in a quantifiable way at what is happening inside these health centres?

Mr Nicholson: We have got a quantifiable way of doing it at the moment. The issue is whether the data is comparative to what we collect in the rest of the system. We will have to do this for 2009 in order to deliver the quality accounts in the way that we need to do.

Q135 Dr Naysmith: We have also mentioned before that by their nature ISTCs take the easier cases and leave the difficult ones for the National Health Service. In general that is true. They are set up to do, as you know, lots and lots of similar procedures and that sort of thing. How is this going to be taken into account in determining the payments that you have just been talking about under quality incentive schemes like CQUIN and the Payment by Results tariff?

Mr Nicholson: Because the first wave of the independent treatment centres are not on tariff, CQUIN, as it stands at the moment, would not be applicable to that. We would expect them to deliver the highest possible quality through the existing payment arrangements. However, as we develop independent treatment centres - and, of course, as you know, over the last 12 months or so we have implemented what is described as free choice, so there are now another 127 different private hospitals around the country that are offering NHS services at tariff - like all the rest of the NHS, 0.5% of the uplifted tariff will be available to them if they can get an agreement with their local PCT about how they can demonstrate the improvement of quality of service and get the data right.

Q136 Dr Naysmith: So it is going to happen, is it?

Mr Nicholson: Yes.

Q137 Dr Naysmith: Okay. Let us turn to the future role of the private sector in the National Health Service. There are all sorts of other "for profit" healthcare providers in the NHS - ISTCs, APMS contracts, walk-in centres, the extended choice network and the free choice network, and there are one or two others as well. What do you think the impact of the credit crunch will be on this experiment with its increasing volume of "for profit"?

Mr Nicholson: There are some really big issues for us, I think, as we go forward in relation to this, not least of all because, if you take the first wave ISTC contacts, they will all come up for renewal in the next couple of years or so, right at the time when we have delivered 18 weeks and right at the time when, as you say, the economic circumstances will change significantly. What we have consistently said is that once those contracts have ended, essentially they get their money driven through patient choice, there will be no extra arrangements put around them, which I think is obviously going to create for them some difficulties; and we will have to think about how we can manage those difficulties going forward if we want to keep choice and contestability in the system, which I think we do, and it is certainly something that our patients tell us that they want.

Mr Taylor: We are also looking at the impact of the downturn on third sector organisations, which are key providers of many services to the NHS. So it is not right to just think of it in terms of the impact on the private sector, but we need to look at the third sector as well.

Q138 Dr Naysmith: What is the evidence that any of these initiatives have been really good value for money? We have just been talking about it with ISTCs but a lot of these organisations are not really rigorously tested against NHS provision. They might provide the competition, but how do you know that they are providing good value for money?

Mr Nicholson: If you take the second wave of ISTCs, of course, they all have to provide a tariff. In fact, some of them are providing it below tariff, so we can demonstrate better value for money on a considerable number of the second wave ones. As far as the first wave ones are concerned, you are absolutely right, an element of the money that we are spending is in a sense a payment for providing choice and contestability.

Q139 Chairman: The first phase of ISTC contracts is going to end. What happens if they are not renewed? You have got this building there, the potential to do work for NHS patients. Could you foresee a situation where maybe a foundation trust or two or three foundation trusts would say, "We will buy it and use it"?

Mr Nicholson: There is a whole variety of deals that were dumped on us, there is a whole variety of agreements that were made at the time around the capital. Some of them revert to the NHS, some of them revert to the private sector, for some of them there are special arrangements in relation to them, but I can absolutely see a case where a foundation trust or another health organisation might take one over.

Q140 Dr Taylor: Dentistry. You will be aware that we did a fairly scathing report on the dental contract, and we have now got some up-to-date figures since the big green book, and the figures we have been given are that in the two years ending 31 March 2006, 28.1 million patients were seen by dentists, in the two years ending 31 March 2008 it had dropped 26.9. What does that tell us about the effect of the contract?

Mr Nicholson: It is taking time to see the benefits of it. I think that is what it says. That is what it tells you.

Q141 Dr Taylor: That is the most optimistic statement I think I have ever heard!

Mr Nicholson: Thank you. I take that as a compliment. I not am going to sit here and say everything is absolutely fantastic as far as dentistry is concerned, but I have no doubt that we will see the benefits in the next two quarters in relation to those figures and we will see an improvement, but there is no doubt that we need to do something in order to improve it and we have taken note of the conclusion you came to. All I can say about that is the Secretary of State is going to make an announcement tomorrow about dentistry, so I would leave it to him.

Q142 Dr Taylor: Tomorrow?

Mr Nicholson: It is tomorrow, is it not? Tell me it is tomorrow.

Q143 Chairman: Could you just clarify that, because normally they make statements when we debate our reports, which is due next Tuesday.

Mr Nicholson: Oh, well, it might be next Tuesday. The Secretary of State is about to make an announcement on dentistry, and so I would like to leave it to the Secretary of State to tell you.

Q144 Dr Taylor: But you are confident that in the two years from now on we will see that figures are picking up?

Mr Nicholson: Yes; absolutely.

Q145 Dr Taylor: If we are still here in two years we will hold you to that?

Mr Nicholson: And if I am! I thought it would say that before anybody else does.

Q146 Dr Taylor: Have we any idea of the number of people in each area who still cannot find an NHS dentist? I am aware that many PCTs have set up new services, but are there still appreciable numbers who really cannot find an NHS dentist?

Mr Nicholson: Yes, in 30% of our PCTs it is getting much better and they are opening new capacity and it is working well. In about 60-70% of our PCTs we have not seen that level of progress, and that is one of the reasons that the Secretary of State will be making the announcements that he will be over the next couple of days to improve that position across the board.

Q147 Dr Taylor: So there is going to be pressure on PCTs to improve it?

Mr Nicholson: Yes.

Q148 Dr Stoate: I want to move on to the National Programme for IT. The NAO, as you know, of course, found that the Care Records Service is now four years behind schedule?

Mr Nicholson: Yes.

Q149 Dr Stoate: Are you confident is not going to slip any further and we will actually have a workable system by 2015?

Mr Nicholson: Yes, I am confident that we will have a workable system by 2015. The thing about the National Programme for IT, I am sure you will be aware, is that it has had some difficulties delivering part of it but there have been significant improvements as well. The PAX systems, the CUMAS systems, the Spine, the electronic prescribing which is starting to be rolled out, the GP systems of choice. All of these things are either moving forward or have moved forward, some of them ahead of time, but there this bit you have just described where we have had some difficulties, and part of the difficulty has been that there are not the products available to do the things that we want them to do. Nowhere else in the world do they provide services quite in the way that we do. If you take, for example, the Cerner system, which is being deployed in London and the South, functionality is fantastic clinically but it is also based on billing, it has been developed in America and is based on billing and does not take into account a whole series of issues around 18 weeks and patient tracking that we need, so we are having to change all of those. That has been part of the issue, getting the product absolutely right, and we are still not absolutely there.

Q150 Dr Stoate: Should we not have been more realistic in the first place then? Surely these things should have been foreseeable. To have slipped by four years so far is not a very good result, is it?

Mr Nicholson: It is not a good result. I would have hoped that we would have removed it even before that. On the other side, of course, is that the benefits of the way in which we contracted for the National Programme for IT did save several billion pounds in procurement costs, and that has been independently evaluated, but we do not pay until we get - it is based on Payment by Results. So, as you will know, in the past when there have been IT problems, scandals in government and all the rest of it, government have ended up paying a lot of money for something they have not delivered, we do not pay for it. We have only spent, I think, about 28% of the money available to us for the National Programme for IT. I wish we had spent more, but it has proved a very effective way of taking things forward. We have got to think about how we take it forward because, you are absolutely right, we cannot go on and on for this. There is good evidence now that the Lorenzo system, which will be available for the North Midlands and East of England, is just very tentatively being tested in Morcambe Bay and good results are coming out of that, but we need to be very careful about that. We have got some serious issues around the Cerner system, particularly in London at the Royal Free, and what we have said to Cerner and BT is they have got to solve that problem at the Royal Free before we will think about rolling it out across the rest of the NHS. So I think we are at a quite pivotal position in terms of the programme for IT. If we do not make progress relatively soon on this, I think we are going to have to rethink it through.

Q151 Dr Stoate: You have now introduced, apparently, an information management technology survey, in which you are going to introduce firmer measures. When are we going to see some results from that and when are we going to be confident that costs are not simply to going on escalating in the next five years?

Mr Nicholson: They are not escalating. That is the whole point.

Q152 Dr Stoate: That is what you said before. We keep hearing of slippage; we keep hearing of cost overruns. Are you now saying you have not a guaranteed figure that you are not going to exceed?

Mr Nicholson: First of all, I do not know where you have heard about these cost overruns, because we have not had cost overruns in terms of the National Programme for IT. Where we have spent more money it is because we have asked for more functionality or wanted new things. The basic contracts with the local service providers are fixed for the whole period, and so we are confident we can hold on to that as we take it forward. At the end of the day, as you know, Wanless in his work talks about 4% of the revenue of the NHS being spent on IT as a waste. We have still to get there. But, as I say, we have got some really difficult issues to tackle in the National Programme right at this very moment.

Q153 Dr Stoate: One of which is to replace Fujitsu. Have you got any plans to replace Fujitsu, particularly for the southern cluster?

Mr Nicholson: I was involved in the discussions with Fujitsu around all of that, and we terminated the contract because we did not believe that they would be able to deliver what they said they would, and it is now subject to a whole set of legal discussions at the moment. There are a number of options available to us as far as the south is concerned, and we are working our way through them. The first option is that one of the existing LSPs take them over, so BT or CSC or a combination of both, and we are we are working through that with them, or there is an alternative in going for another local service provider outside of those, and we are currently working through that. We will be making a decision in February, I think, around what to do with that.

Q154 Dr Stoate: Finally, what plans are there to have workable connectivity for pharmacy with the NHS? At the moment pharmacists are pretty much out on a limb and it makes it extremely difficult for them to provide the care which we are asking them to deliver? How can we get connectivity with them?

Mr Nicholson: We are working through that at the moment. As part of the electronic prescribing, we are working with the pharmacists at the moment to find out what the best---. We have got the technological solutions to it, it is how we finance that arrangement we are getting in place, but I would hope we have made progress over the last 12 months in relation to that.

Q155 Dr Taylor: I am going to test your optimism a little bit more. Coming to back to the European Working Time Directive, you have already touched on it and you have told us that paediatrics, obstetrics and anaesthetics are going to be the difficult ones. The Royal College of Surgeons, I gather, recently has suggested that over half the trusts are not really ready to do this. Does that mean they have not got down to the 56 hours, if that was the previous requirement?

Mr Nicholson: No, it is the requirements for August of this year.

Q156 Dr Taylor: It is to get down to the 48?

Mr Nicholson: Yes.

Q157 Dr Taylor: What is going to be the cost of this?

Mr Nicholson: First of all, it is perfectly possible to do. The North West region of the country has delivered the 48 hours 12 months early for 97% of their doctors, so it is perfectly possible, with planning and organisation, to make it happen. We have an issue at the moment about how we are doing. Our figures show us that over 60% of organisations have got plans in place and have got a process in place to deliver everything by August. Both the Royal College of Surgeons and the Royal College of Physicians are worried about those figures - they think they are overstated - so what we have agreed to do, jointly with the Royal College of Physicians, is do a proper analysis and survey, a quick one, over the next few weeks to see where we actually are in practice. We have got until the end of January if anyone needs, I think, derogation is the right word, for them to talk to the department about it to see whether they simply cannot deliver it so we need to go to the European Commission to ask for derogation. I would expect there to be none, or very few, that we would let through, because our expectation is it can be done given what the North West have said. Our calculation of the cost of it all is just over 300 million. We put 100 million in the tariff for last year to enable them to take it forward, we put 150 million in the tariff uplift for next year, to put it in place and we are allocating 50 million across the strategic health authorities. We have done that in conjunction with the Royal College of Paediatrics, Obstetrics and Anaesthetics, so that we have a 50 million pot particularly to help in paediatrics, obstetrics and anaesthetics. So it comes to just over £300 million altogether.

Q158 Dr Taylor: What have you said to the criticisms, particularly coming from some of the junior surgeons, that although they approve of certainly a cut in hours, this cut to 48 is going too far and really reducing their actual experience and the actual training that they get?

Mr Nicholson: That is part of a discussion that we are having with the surgeons at the moment. There, are as you know, all sorts of ideas about perhaps extending training or doing it in slightly different ways. All we do know is that 80% of surgeons say that the training is excellent.

Q159 Dr Taylor: As the Government have shown that it can tell Europe where to go over the Post Office card account, where it actually pulled out of the tendering exercise completely unilaterally, you do not think we should be a bit like some of other continental countries that are taking less notice of the 48-hour absolutely strict directive?

Mr Nicholson: I start on the premise: do we really want our junior doctors to be working more than 48 hours a week?

Dr Stoate: We did, did we not, Richard? It did not do us any harm?

Q160 Dr Taylor: We certainly did far too much, but do you not think from the training purposes that 48 hours is going just a bit too far?

Mr Nicholson: No, we do not believe that is the case at all. As I say, whilst we have opened the door, the door is ajar for people to say they need derogation because some things are so complicated therefore they cannot be done in time, I would be reluctant to take any of those forward. We needed an expectation that our junior doctors work reasonable hours.

Q161 Dr Taylor: But if you absolutely had to, you would tell Europe to get lost?

Mr Nicholson: We would not tell them to get lost, no, somebody else would. We would seek derogation.

Q162 Dr Naysmith: Before you leave that topic, I wonder if I can quickly ask: do we have any reliable figures as to how much it is going to cost the NHS to introduce the Working Time Directive in full?

Mr Nicholson: Right back from when we first did it.

Q163 Dr Naysmith: How much a year is it costing to do it?

Mr Nicholson: I have not got those figures to hand. I am happy to give them to you if I can find them.

Q164 Dr Taylor: Coming back to foundation trusts. Can you give us any idea of the number of trusts that really do not have much hope of making foundation trust status?

Mr Flory: Clearly, there are 112 foundation trusts now. We are trying to bring a bit more discipline into the process by which potential foundation trusts are assessed and the time-line in which it might be happen, with a view to completing the programme during calendar year 2011, and we will know in 2010 how everybody was going to go forward. There are clearly some organisations over which there is a doubt as to whether they could progress to foundation trust status, particularly in that timescale, because of some longstanding financial problems that they have experienced in the past. So we have not taken the view, and certainly SHAs have not taken the view yet, that there are some that definitely are not going to make it, but over the course of the next six to 12 months I think we are going to have to bring certainty to that one way or another so that we can begin to develop alternative ways forward for any trusts that are not going to make it.

Q165 Dr Taylor: So in the next 12 months you will have a better idea?

Mr Flory: Yes.

Q166 Dr Taylor: I think Monitor have told us that they only take two things into consideration: one is finances and the other is the state of governance, as those are the really crucial things. So if there are some that are just not going to make it, they are obviously not going to be attractive to other foundation trusts to take over because they could drag them down, so what is going to happen?

Mr Flory: One of the things that we have developed in the course of the past six months is proposals round a performance and failure regime which we have done some consultation on; and our expectation in bringing this regime into place is that in itself it will be a lever to improved performance and that it will be a disincentive for people to fall into this situation. We have recently completed a consultation on a specific piece of that, which we call the "unsustainable provider regime", and a trust which is clinically and financially unviable and we just cannot see a way forward for it - and those two things, clinical viability and financial viability, ultimately tend to sit pretty close together - then options in there that we spell out would be to look for an option to franchise the management to see if things could be improved, to look at whether some of the services could be taken over by other organisations, such as foundation trusts (they would have to be a next-door neighbour foundation trust) could be undertaken; but if, ultimately, a trust is not viable, then the question of whether it should be dissolved in a way in which the assets are looked after first and foremost to protect services for patients and the staff would be looked after to transition into a different organisational model. We have consulted on the principle; we are still reflecting on what the next steps to take are.

Q167 Dr Taylor: Is failure always going to be due to poor management?

Mr Flory: Not always.

Mr Nicholson: No, a good example: an organisation which has declared that it does not believe it can become a foundation trusts was the Nuffield Orthopaedic Centre in Oxford. The tariff does not work for it. The way in which they do the specialist work, the way they can spread their costs and the clinical connections they need to make with other hospitals, it seems to them that they will be never be in the place where they can take that forward, so they are looking at alternatives of different partners they might work with to make that happen.

Q168 Dr Taylor: Certainly tariffs do not help the specialists hospitals, do they? So they have got a real reason. Are there enough really good managers to move around to take on others that do not have that sort of reason for failing?

Mr Nicholson: In a sense it is one of the reasons that we are doing the work we are as part of the Next Stage Review on leadership, because there are not either the quality or the quantity of people across the system as a whole to do everything that we need to do. So we need to bring more people in from outside; we need to get more clinicians engaged in management and leadership; we need to really up our game as far as management is concerned, because simply staying as we are will not be able to deliver the quality people that we need to do this sort of work.

Q169 Dr Stoate: I want to move on to Payment by Results. Is there any evidence (and again I come back to evidence because we are very, very keen on evidence) that Payment by Results is actually changing behaviour at a local level?

Mr Flory: Yes, there is, and there has been some evaluation work undertaken. You are probably familiar with the work that was undertaken by the Audit Commission and also the work that has been independently commissioned from a collection of universities, led by the University of Aberdeen, which recognises that the introduction of Payment by Results is changing behaviour, is having organisations and service managers within it more focused on the costs of the service they provide and more thinking about the way in which they can be more efficient.

Q170 Dr Stoate: That is obviously a change of behaviour, but is there any evidence that it is reducing costs or improving efficiency?

Mr Flory: I think, as we have observed over time, the reference costs system, which is the foundation upon which the Payment by Results system works and tariffs are set, shows that in a number of areas we can see improving efficiency on a year-on-year basis. As we have said earlier, the requirement to generate efficiency savings is very much part of the spending review period. There is 3% required to be achieved this year, another 3% required to be achieved next year. So in the way that we uplift the tariff, which is central to the Payment by Results system each year, builds in that efficiency requirement.

Q171 Dr Stoate: We hear a lot of evidence, anecdotally I have to admit, from many GP colleagues of mine who feel that what Payment by Results actually does is to Hoover money up into large hospitals, leaving PCTs and, therefore, GP budgets picking up the bill. That might be very good news from the hospital point of view, might even be quite good news in some ways for efficiency, but certainly is not good news for a primary care led NHS?

Mr Flory: I think that where we tend to hear some of those anecdotes, and in some cases we would have to treat the conclusions that we draw from them with caution, is that the increasing bill to the primary care trust is more about increasing volume and less about increasing price. What we have observed in some places is that as the discipline of payment by results has got in, trusts have become much smarter at the way in which they count and record activity. That, to be fair, has always been there but has not always been counted in the past, and under the Payment by Results system that then triggers additional payments.

Q172 Dr Stoate: Except, of course, that the incentive for hospitals is effectively to do more and more rather than handing a patient back to the primary care, which might actually be in the patient's best interests?

Mr Flory: Absolutely. This is not just for the hospital trust to decide in those instances. The strength of commissioning, the strength of the contract between the PCT and the trust is important in making sure that that potential unintended consequence, which could work against the patient's best interests, does not happen. It needs to be managed by the primary care trust.

Q173 Dr Stoate: Have you any research going on that does look at that? Because, as I say, if a patient goes to A&E, there is a very strong incentive for the hospital to do as much as possible for that patient rather than simply saying: "You should be seeing your GP or your pharmacist tomorrow"?

Mr Flory: Yes, and one of the things that we have done in developing the tariff system, particularly around A&E emergency, is to break down the component parts of that so it reduces the way in which hospitals could potentially make more money than was due to them having patients presenting in that way.

Q174 Dr Stoate: The problem is, because the information takes such a long time to get back to the GP, it is far too late for any meaningful change in behaviour on anybody's part.

Mr Flory: There are timing issues in that, but I do think we are getting much better now, and there are some really good examples that we can see across the country in the ways in which hospital and primary care trust commissioners are sharing information and agreeing information and projecting what that means for the future and building it into the contract.

Q175 Dr Stoate: Yet what the Healthcare Commission's report yesterday showed was that there is something like a 30% increase in A&E attendances. Now that cannot be seen seriously as an efficiency measure.

Mr Flory: No, the evidence is there of what is happening to people presenting at A&E. Certainly I would agree with you. You cannot just tick that off as an efficiency gain; there is a whole factor of reasons which come together to determine why the numbers of people turning up at A&E is going up.

Chairman: Gentlemen, could I thank you all very much indeed for coming. We have had just over two hours for what is our annual marathon session in relation to where money goes within the system. Thank you very much indeed for coming along and helping with this inquiry.