The Commission Pages

2.1 How the NHS is run

2.1.1 The NHS has been organised since its foundation as a top-down central bureaucracy in Whitehall. Aneurin Bevan, its founding father, removed health-care from voluntary and local authority hospitals, doctors and others and rather than devolve its running to local authorities along with public housing, he established what was in effect a nationalised service under the direct control of health ministers_. Its district and regional boards were appointed, not elected; though he softened his refusal to offer a democratic course by offering positions on boards to local councillors and trade union officials. Bevan himself soon came to regret this 'defect', saying that 'election is a better principle than selection'.

2.1.2 But none of his successors has ever tried to remedy the defect: rather the reverse. In 1991, this limited local authority representation was removed from regional and local boards in a radical re-organisation of the NHS, which also established NHS trusts under strictly managerial boards, replacing representative Regional Health Authorities with Regional Offices of the National Health Service Executive. There was no longer any place for the tenuous links with local authorities which the involvement of council members had given the NHS; the trusts and health authoritiesdistricts lost their obligation to accept local councillors and trade unionists. Instead chairmen are appointed by the Ssecretary of sState, with the inevitable accompanying political and business bias.

2.1.3 Before the 1991 reorganisation District Health Authorities consisted entirely of non-executives who were all unpaid and independent. The 1991 reforms created new-style aAuthorities, half of the Board members were executives and half non-executives, the latter being paid an honorarium of £5,000 per annum. Before 1991 the structure and composition of the Boards had forced executives to convince the whole of the health authority of the rightness of their proposals - and this produced some lively public debates - but after 1991 the will of the executive went largely unchallenged.

2.1.4 With the abolition of the Regional Health Authorities, leaving only a Regional Chairman in theory to represent the public view in high places, the independent public input diminished to vanishing point at that level as well. The Secretary of State and her or his ministers are nominally in charge of all the major policy-making and decision-taking in the service. Below himthem inat the Department of Health Richmond House are two sets of important civil servants: the first set are the departmental bureaucrats who are responsible for policy; the other set work under the NHS chief executive for the NHS Executive and are responsible for the day-to-day running of the service. In practice, of course, these formally separate functions merge into one another.

2.1.5 It is argued that there is a significant filament of accountability in these arrangements. The regional offices, health authorities, trusts and (soon) Primary Care Groups (PCGs), as well as a host of other public bodies, advisory committees, task forces and the like, are all ultimately responsible to the Health Secretary, who is answerable to Parliament for all their activities. She or he is also in theory responsible for the actions and decisions of all the officials who serve in the NHS, the department and their other public authorities and bodies. The Health Secretary and others come under parliamentary scrutiny through individual MPs, select committees, Parliamentary Questions, the Parliamentary Commissioner for Health, and public audit. ( See Annex 3 for a description of the current NHS structure in England, Scotland, Wales and Northern Ireland)

2.1.6 For Bevan, this idea of parliamentary accountability was a robust check on himself and his successors. He famously declared that a bedpan should not fall within an NHS hospital without the minister hearing of it - and being responsible for it_.

2.1.7 But this is not how it has worked for health or any other ministers. Actual experience of a variety of political crises, ministerial blunders and outright scandals has shown that ministers are very rarely held responsible for their own or their officials' mistakes. Indeed, there is now an emerging doctrine that ministers cannot really be held responsible for the administrative actions or mistakes of their officials, who in their turn are not held publicly responsible as they act officially in the minister's name and not in their own right. Further, in the British system parliamentary scrutiny of the Health Secretary and other ministers is inevitably compromised by the fact that the majority of MPs will necessarily belong to the governing party, and they have a primary duty of loyalty to their government and ministers. The idea that it is practically possible for a huge and varied organisation like the NHS to be held responsible through such a narrow route of accountability strains belief and is naïve about the way British politics works in practice. As the Royal College of General Practitioners say in their evidence: " Governance of the health service can hardly be described as democratic… the assertion that the appointment of lay members to authorities mitigates against a democratic deficit seems to us somewhat spurious. Joint working between local [authorities] and health authorities will remain difficult while the former are democratically accountable and the latter remain immune."

2.1.8 Accountability is not divisible and any system must aim to promote accountability to the whole population. Equality means that everyone's needs are assessed and met on an equitable basis, regardless of race, gender, disability, sexuality, age, class or other factors. In particular the Secretary of State for Health and the chief executive of the NHS have accepted that the health service both as an employer and service provider must provide a better deal for people from ethnic minority groups and are taking action to achieve this. Ethnic minorities are well represented in the commissioning and delivery structures of the NHS; for example London's 20 per cent ethnic population is matched by 19.6 per cent of health authority and trust members coming from ethnic minority groups. It is imperative that this balance is maintained by Primary Care Groups and Trusts.

2.2 NHS finance and budgeting procedures

2.2.1 Spending as a percentage of GDP has risen from 2.7%GDP in 1948 to around 6.5% today_. The British government's ability to contain the growth of health spending while appearing to provide universal health care coverage has been the envy of the Western world. Part of the reason for the success of the NHS has been the low transaction costs associated with centralised management, the ability as a monopoly buyer to buy services, especially salaries and wages, cheaply, together with pooling risk across the whole population.

2.2.2 But this changed with the introduction of the internal market in 1991 which inflated management costs and weakened the internal economies of scale. The NHS is now facing increasing financial problems; a third of health authorities and trusts are in serious financial difficulties and the cumulative deficit for 1998/9 is £541 million pounds._ NHS trusts have a financial duty to break even and so must clear these deficits and move towards break even over the next three years. How they do so is of critical importance to the public, patients and to clinical and non-clinical staff alike.

2.2.3 The problems inherent in the lack of accountability of the NHS are clearly seen in the context of the allocation of spending. Virtually all NHS expenditure (98% in 1999-2000) is funded out of general taxation and national insurance contributions; the only other important source of revenue is patient charges, yielding about 2% of the total budget in recent years. But these simple facts about the funding of the health service are routinely obscured by the government counting as extra NHS spending income produced from land sales, recycled NHS debt, the 'modernisation fund' and the Private Finance Initiative. Clearly the disposal of existing assets does not count as additional government expenditure. The 'modernisation fund' is top-sliced from the existing revenue settlement, although it is routinely presented as new money. The £2.5bn investment under the Private Finance Initiative is a long-term commitment of future NHS revenue, rather than capital expenditure on the part of the public sector. Repayments of debt by NHS trusts are effectively double counted as a source of revenue by government (NHS trusts can only get the money to repay debts to government from their current revenue allocation!).

2.2.4 There is thus a gap between government's presentation of expenditure plans and the actual flow of funding into the NHS from the taxpayer and charges. This leads to a crucial lack of transparency in the presentation of government spending plans. The Comprehensive Spending Review, for example, disguises the extent to which capital refunds (the recycling of internally generated resources) rather than new money contributes to the overall total NHS budget. In 1998/9 capital refunds amounted to £3.26 billion, equivalent to 8.7% of total NHS funding_.

2.2.5 The new capital charging system, apart from leading to the double counting of expenditure, introduces a distortion into the costing of NHS services, and thus into estimates of efficiency. We are told repeatedly by ministers that trusts should be obliged to meet 'the full cost of their capital', with no acknowledgement that the 'cost of capital', far from being an economic fact, is determined as a matter of policy by the Treasury.

2.2.6 The NHS budget is usually voted as separate capital and revenue instalments, but the government has changed the accounting rules and the methods of paying for capital. The introduction of capital charges in 1991, so that trusts now try to make 6 per cent return on their assets, perversely obscures the way in which capital is now paid for. The object is to force more economic use of assets, and generate productivity savings, but the consequence has more typically been deterioration in the financial position of the trusts. How different trusts choose to respond to these financial pressures has never been properly discussed or opened up for democratic discussion.

2.2.7 Throughout the 1980s and 1990s capital investment for hospital and community health services fell and has not yet since returned to the levels experienced in the early 1970s. The NHS now has a backlog in estate maintenance estimated at over £2.5 billion and many of its hospitals are over 100 years old. Although there is a major new hospital building programme worth cumulatively £2.1 billion, it is financed by the Private Finance Initiative, asset sales and unidentifiable redirections of cash to service private sector debt.

2.2.8 Intriguingly by 1998/9 the NHS's capital account was not merely self-financing through land, asset sales and capital returns; it was yielding a cash surplus. Thus the money to fund capital comes from internally generated savings from the NHS budget and not new capital. Capital projects are no longer explicitly related to earmarked funding streams so it is impossible to see the extent to which NHS funds are being allocated between revenue and capital expenditure and it is difficult to describe the effect on the operating budgets - another major shortfall of accountability.

2.2.9 From the same revenue stream that is being used to fund capital investment under the PFI the NHS is having to fund pay awards ahead of inflation and meet other financial pressures including new technologies, drugs and equipment. They must also clear their cumulative deficits. It is not possible to gauge the extent to which the planned increase in the revenue budget will meet these competing demands. 2.3 Spending and resource allocation within the NHS

2.3 Spending and resource allocation in the NHS

2.3.1 The allocation of resources and budgets within the NHS is of critical concern since it is the basis of equity. The Resource Allocation Working Party (RAWP) in the1970s was responsible for the introduction of a funding formula based on needs. Controls over the workforce had attempted to ensure fairer distribution of clinical labour. Over the years the formulae have been refined in attempts to reflect the health care needs of individual areas and attempts have been made to level up or down spending accordingly. In 1991, RAWP was replaced by a new formula based on what was technically called weighted capitation i.e. the population of given health districts adjusted for socio-demographic measures of need.

2.3.2 Funding to regions and health authorities are allocated through various capital and revenue budgets. Health authorities and in Scotland Health Boards currently administer three main revenue budgets: the largest, a budget for hospital and community health services (calculated from a partial population needs- based formula see above); a budget for community prescribing (partially derived from a needs based formula); and a general medical services budget to pay for health services (other than prescribing) supplied by general practitioners.

2.3.3 It is not always transparent how budgets are set and allocated and there is considerable flexibility both within and outside the resource allocation formulae. Health authorities have considerable autonomy over how they spend resources - but this autonomy is of course constrained and shaped by current demands on the budget, as well as national and local priorities.

2.3.4 Under the NHS and Community Care Act 1990 GP fundholders received their budgets on the size of the patient lists, unlike health authorities which receive their budgets on the strength of serving the population within an entire geographic area. The inflation and deflation of patient numbers on GP lists proved to be a problem in allocating resources; another major difficulty was brokering a relationship between health authorities and GPs whose funding jurisdictions did not overlap but who shared the same patients. Moreover GP fundholding broke up the principle of risk pooling and risk sharing across the population. In the early stages some health authorities did not have enough left over after meeting their commitments to GP fundholders to meet the needs of their remaining population or even to provide emergency services. The inequities in provision and access and the perverse incentives perpetuated by the system became legend.

2.3.5 The Health Bill currently before Parliament which seeks to address the problem only partially reverses the process. Its central initiative is the introduction of Primary Care Groups (PCGs) and Primary Care Trusts (PCTs). Their operations will involve budgets and spending determined by two very different systems of funding and accountability - those of independently contracted general practitioners and the health authority-commissioned hospital and community health services_. The 481 PCGS will hold a unified but cash limited budget covering the three previously separately identified budgets we outlined above. With this they will plan for the health needs of practice lists of around 100,000 (ranging from a low of 50,000 to a high of 250,000) and decide how the funding is to be allocated between community health services, the acute hospital sector, primary care and public health priorities.

2.3.6 The difficulties the Commission is identifying in allocating resources transparently will be compounded. PCTs and PFI services, unlike NHS trusts, will have commercial freedom to manage their budgets and as commercial entities they will also have the freedom to restrict access to key commercial information. Although each PCG will have to publish an 'accountability agreement' which will be open for public scrutiny it is not known what it will contain. Moreover government guidance says public reporting of PCG finance should not be in any detail_. PCGs initially will try to manage budgets by controlling clinicians' referral and prescribing and treatment practice. Cash limited budgets will mean that PCGs will come under pressure to control referrals to hospitals and prescribing even where they are appropriate. GPs for the first time will come up against the same sorts of constraints that the hospital and community sector are facing. It is likely, just as now in the acute and community health trusts, that Primary Care Trusts' managerial efficiency will thus be ranked more highly as a NHS priority than equity or patient need.