Public Accounts Committee 8th December 2003
(See Bottom Of Page Latest Update)
On Wednesday 26th November 2003 Sir Nigel Crisp gave evidence to the Public Accounts Committee under the heading of Hip Replacements An Update. During the course of the questioning Alan Williams MP asked Sir Nigel to explain the incredibly wide range of different costs being declared by different hospitals for carrying out a hip replacement:-
Q115 Mr Williams: Can we switch to page 28 and the cost of hip operations and the incredibly wide range of that. For primary hip operations we are given figures of £2,266 to £7,456. The dearest is three times dearer than the cheapest. We recognise that there must be variations in the nature of the operation, but how is it that the range is as wide as it is?
Sir Nigel Crisp: The point that the NAO make is the one that you have just made, but the second point is that when we have looked at what we believe is the hospital which is recording the lowest figure, £2,266, we think they are calculating their costs wrongly because the prosthesis, in other words the hip itself, is a very significant part of that cost, so I think the range is smaller but, even so, there is a range. What again I am sure you know is that we are moving towards a national tariff for all common procedures in the first place which would include primary hip replacement and each year, as we move towards that tariff, we are seeing the range of costs reported by trusts reducing.
Q116 Mr Williams: It refers here to a National Schedule to Reference Costs. That is what you mean, is it?
Sir Nigel Crisp: Yes, that is right.
Q117 Mr Williams: How long has that been in existence?
Sir Nigel Crisp: I cannot remember if this is the second or the third year. It is something like two or three years. I cannot remember the exact date. We will be producing the next one, I think, in the next month.
Mr Williams: Perhaps you could also give us a note on what it has achieved so far in terms of the narrowing of ranges and also in the work it has actually done. Let us know what it has been doing since it started and let us see what effect it has had, if any. A note will do for that.
The
proposal for funding NHS Trust's and Foundation Hospital's by means of linking
their income to a National Schedule of Reference Costs, relates directly to my
suspension and subsequent dismissal in July 2002 from my from my post as
Director of Finance at St George’s Healthcare NHS Trust. This reason for
this is because when the proposals for using a national tariff were first
discussed within the NHS I spoke out on Wednesday 17th July 2002 at a
presentation given by Richard Douglas the Finance
Director of the NHS at Church House Westminster, where at a closed meeting
of NHS Finance Directors he explained the proposed changes for funding NHS
Hospitals in general and in particular Foundation Hospitals.
The
meeting was not a public one and was attended only by NHS Finance Directors, but
my critical questioning of Richard Douglas,
after he had outlined the proposals for extending HRG's (the reference costs to
which Sir Nigel refers), from determining the cost savings targets that
hospitals had to achieve as had been the case since their inception, to
determining the funding that hospitals would receive, was reported back to St
George's by Jim McAulliffe the Director of Finance
of the South West London Strategic Health Authority, as me having embarrassed
a senior figure within the NHS. (Richard
Douglas later confirmed to me in writing that he had not been embarrassed)..
In essence what Richard Douglas said was that
in future hospitals would be funded on the basis of establishing the a national
tariff for all common procedures and diagnosis and then funding each hospital on
basis of giving them funding based on the number of specific
procedures/diagnosis they carried out, multiplied by the national average cost
of those procedures. The idea behind the system was that if hospitals were
funded for their clinical activity on the basis of average national average
costs, it would encourage the less efficient hospitals to reduce their costs and
become more efficient, because it they didn't they would find that they were not
receiving enough income to cover their higher than average costs. Equally
there would be an incentive for hospitals with average or below average costs to
drive efficiency still further, because they would be able to use the
surplus funds, generated by having costs lower than the national average costs
they were being funded at, on developing local services. In theory this
seems a neat and sensible way of funding the NHS, but unfortunately there are
least three major flaws in the proposed system of funding and after Richard
Douglas had finished his presentation and asked for questions, I pointed out
to him two of the three major flaws inherent in the proposal.
The two major flaws (the third is how you deal with the impact of the Special Increment For Teaching Hospitals) in the system and which still remain relevant to the present, are not that the basic funding concept is wrong, but there is currently no accurate system for establishing national average costs. When Richard Douglas spoke at the conference he said it was the government's intention to use the an existing system called Health Care Resource Groups (HRG's) to establish the National Average Costs that will form the basis of funding hospitals in the future. As I pointed out to Richard Douglas at the conference, the first major flaw with this is that HRG's work on the basis of taking all the costs associated with a particular procedure or diagnosis and then establishing an average cost by dividing the total costs by what are called Finished Patient Episodes. Finished Patient Episodes actually relate to the number of Consultants (senior doctors) who have taken responsibility for a patients care while they have been in hospital. Therefore if a patient goes into hospital X and is there for eight days, the hospital spending £16,000 and the patient during the stay is treated by two Consultants’, the average cost is calculated by dividing £16,000 by two, which gives a figure of £8,000. Now suppose a patient with exactly the same clinical condition goes to hospital Y. Here the patient is only in hospital for six days and the hospital only spends £10,000 in obtaining the same clinical result and the patient is only seen by one consultant. The average cost in this hospital is £10,000 as the total costs incurred of £10,000 are this time only divided by one. Therefore under the system outlined by Richard Douglas, although in reality hospital Y is much more efficient in treating the patient than Hospital X, it would receive less funding because it's average costs appear to be higher. The impact of this false logic can be seen only too clearly up and down the country where hospitals develop huge financial deficits through no fault of their own and you see Chief Executives and management teams removed because of this, when the true reason has nothing to do with their management performance, but in reality is caused entirely by a flawed funding system. Why was I concerned to speak out about this, because the hospital of which I was Finance Director was suffering from the application of this system and continues to suffer from this system as the Wandsworth Borough News reported on the 5th December 2003:-
"The news also follows revelations that the hospital faces financial problems, with a potential budget deficit of 8million this year a situation described as serious by Mr Homa, who pointed to a range of cost reduction programmes being put in place.
The figure was announced at a meeting of the trust board last week, where it was also revealed the trust is still having problems meeting A&E and inpatient waiting targets".
As
I pointed out to Richard Douglas the obvious solution to this problem would be
to measure activity not in terms of how many doctors see you when you are in
hospital, but instead to measure it by what are called, "Patient
Spells" i.e. the number of days that patients are actually in hospital
rather than the number of doctors that they see. It is in my opinion
that this change needs to be brought in as quickly as possible, there is never
going to be a perfectly fair system for funding individual hospitals, but the
Government's current proposals could see the system having the exact opposite
effect to that intended with inefficient hospitals being rewarded and efficient
hospitals being penalised.
The other major flaw, which I pointed out to Richard Douglas, was that in calculating HRG's a market forces factor is applied once the cost of procedures and diagnosis are arrived at. This market forces factor is calculated from statistics provided by the Department of Employment and is related to the labour costs of executives in particular local employment areas. It is not calculated directly from the cost of employing those types of staff that hospitals need such as Doctor's, Nurses and Physiotherapists and it is this that causes the problem. A Hospital in a run down inner city area may well be situated in a local employment are where the index of executive labour is cheap, but the local cheap labour costs will have no bearing at all on what that hospital has to pay to attract nurses to work for them particularly in big city conurbations where there will be a number of hospitals competing for the scarce clinical skills not readily in the local job market. In fact a Hospital in a run down inner city area may well have to pay more to attract specialist healthcare staff to an unattractive economically run down area, yet under the current Government proposals for funding hospitals, these inner city hospitals could be at a serious disadvantage as the costs of hospitals in the better parts of the same city are artificially lowered to put them in a more advantageous financial position. Again it is an issue that needs seriously addressing if the inequities in the proposed funding system are to be eliminated before it is imposed on the whole NHS with the disastrous consequences that this would have.
I have brought these issues to the attention of the members of the Public Accounts Committee and you can click here to see a copy of my letter to the Chairman Edward Leigh MP. Similar letters have been sent to the other members of the Committee and to Sir Nigel Crisp.
The view of the difficulties inherent in the NHS funding system are not just shared by myself, Wandsworth Council's Health Overview and Scrutiny Chairman, James Cousins, is writing to warn Health Secretary John Reid that changes need to be made. Click here if you would like to read the South London Press Report concerning this issue.
On the 23rd January I received an e-mail from James Robertson of the National Audit Office in response to the letter I had sent to Edward Leigh MP and copied to Sir John Bourne Comptroller & Auditor General. His reply to me confirmed that it was helpful that I had set out the issues so clearly and stated that of the two issues I had raised at the meeting with Richard Douglas in July 2002 and which in part had led to me losing my job the following action was being taken. The first was that from the financial year 2005/06 that HRG's would be based exactly as I had suggested on patient spells and on the second issue of the market forces factor being incorrectly applied, that further work was being undertaken to ensure that this was an appropriate mechanism to apply to HRG's. Compare this e-mail with Sir Nigel's answers that he gave to the Public Accounts Committee and the fact that he did not mention these issues at all and consider whether this is a man who even knows what is going on or is he trying to deliberately mislead the PAC?