Mr Chris Grayling (Epsom & Ewell, Conservative)

I welcome you back to our debate, Mr. Griffiths. I was midway through my remarks, and I have been scrabbling around in my notes to work out what I had asked the Minister, and he likewise. He plans to answer some of my questions in detail, so I shall not reiterate them now.

In concluding my remarks, I should like to touch on two issues to which I should be grateful for the Minster's response this afternoon. First, where will the allocation appear on the nation's accounts; both the new facility that he talked about this morning—which has been set up in his Department—and additional borrowing secured by foundation trusts from the private sector or other sources? Will it appear as part of the public sector borrowing requirement, or will it simply and only appear on the foundation trust's own balance sheets?

I touched on my second point as we were about to adjourn this morning. It concerns the impact of the national tariff's phased introduction on foundation and non-foundation trusts. Clearly, there is a risk. If a foundation trust can retain a surplus generated by producing its services at a lower cost than the national tariff, it will gain a specific benefit. It will be able to reinvest that money in additional services and improve its position relative to other trusts. Under the current rules, those trusts that are not entitled to foundation status must return any surplus generated in the same circumstances to the Treasury. Therefore, those trusts would be at a disadvantage. That highlights one of the reasons why my right hon. and hon. Friends and I had significant misgivings about the overall measure.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

My hon. Friend said that, currently, an NHS trust that generated a surplus on its activities would have to return the money to the Treasury. I am not sure that I understand the point in the way that he does. Would they not be able to carry over any surplus at the year end?

Mr Chris Grayling (Epsom & Ewell, Conservative)

Not under the national tariff. The Minister made the point this morning that once the tariff is introduced, foundation trusts that can carry out services for a lower cost than the national tariff rate will be able to retain that difference as a profit

margin and reinvest it. However, my understanding—the Minister can correct me if I am wrong—is that a non-foundation trust will not have the same right. Therefore, it will not have the same incentive to reduce costs and become more efficient. It will not be able to generate additional funds in that way to enable it to invest in more and better services.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

I did not understand the matter that way, but there is no point in debating it because the Minister will tell us in a minute. There will be other issues, but I did not see this as the source of a disparity. I saw all trusts possibility being lower-cost providers and therefore generating surpluses that would be available for investment elsewhere.

Mr Chris Grayling (Epsom & Ewell, Conservative)

I am sure that my hon. Friend will agree that if this were a general right for all trusts, it would not be something that would relate to foundation hospitals. It would be a matter of course for all trusts, regardless of their circumstances.

Dr Evan Harris (Oxford West & Abingdon, Liberal Democrat)

This is a fundamental question, and it is easily answered. In order that we can make progress, I invite the hon. Gentleman, in his interesting and well-thought-through address, to request the Minister to deal with the question now. We can then make progress on some of the substantive matters.

Mr Chris Grayling (Epsom & Ewell, Conservative)

I was about to conclude my remarks by saying that I hoped that the Minister could enlighten us on that. Our argument has always been that foundation status should be accorded to all hospitals. If foundation status is phased in, only a small number of hospitals will have foundation status at the start. Phasing in the national tariff will create distortions between hospital trusts. That cannot work to the advantage of patients. I should be grateful to the Minister for clarification on those points, and I hope that he will be able to enlighten us.

Sir George Young (North West Hampshire, Conservative)

I am sure that the entire Committee was grateful to the Minister for setting the framework for this part of the Bill this morning. That will save time when we are dealing with subsequent clauses, in the sense that we now have the template within which we are operating.

I want to return to clause 11 and the question of grants. I am sure that my hon. Friend the Member for South-West Devon (Mr. Streeter) was right when he said that although foundation trusts are interested in pioneering a new form of social ownership, they are much more interested in whether they can be free of the shackles of the Treasury, access more capital and help to deliver a better local health service.

The Minister's comments on the national tariff were interesting, albeit somewhat tangential. As my hon. Friend the Member for South Cambridgeshire said, the level at which the national tariff is pitched will decide the extent to which foundation trusts can borrow, because it will determine the margin between their income and their expenditure. There is also the related issue—touched on by hon. Friend the Member for Epsom and Ewell (Chris Grayling), which I know the Minister wants to address—of what happens to the surplus in the hands of non-foundation trusts.

Returning specifically to clause 11, I repeat my question from some time ago; how will the grant regime differ when a NHS trust becomes a NHS foundation trust? The Minister made the point that we must keep that in perspective, given that the capital allocations are relatively small compared with the revenue. North Hampshire hospital's capital allocation for the current year is £2 million, whereas its revenue expenditure is in the region of £100 million.

I think that I heard the Minister say that operational capital is allocated three years in advance and will not be clawed back if the trust becomes a foundation trust. He went on to say, however, that that only accounted for some 25 per cent. of the capital allocation, leaving unanswered the question, to which I will return in a moment, of the other 75 per cent.

The Minister said that a foundation trust would continue to be eligible for a range of grants from his Department. He mentioned national initiatives for the national service framework and touched on an IT strategy. However, I, and directors of finance up and down the country, assume that foundation trusts will not continue to receive from the Department all the capital that they would have got had they not become foundation trusts. It would be helpful if there were some body language from the Minister that confirmed or denied that assertion.

I assume that foundation trusts will not receive the total flow of capital from the Department that they used to get, but will be invited to use the facilities under clause 12 to borrow from alternative sources. I know that financial directors up and down the country are asking that question because they are trying to work out whether they would be better off going down the foundation trust route, which would mean forgoing an element of capital but receiving more from the facilities that I will come to in a moment.

Mr Chris Grayling (Epsom & Ewell, Conservative)

My right hon. Friend puts his finger on an important point. If foundation hospitals represent a genuine way to expand the capital available for foundation trusts, they will be able to enhance their services. If, however, the introduction of borrowing powers is simply an opportunity to replace money that currently comes from central Government, it will not generate improvements in patient care in the hospitals concerned.

Sir George Young (North West Hampshire, Conservative)

The best way for the Minister to resolve the matter is to take the case of a typical hospital trust and tell us what would happen if it were to become a foundation trust, how much of its existing capital it would continue to receive and what proportion it would no longer receive but would be expected to get through the new route that is being opened up under this part of the Bill. If the Minister were able to do that, he would answer my hon. Friend's question and mine.

My final point is more fundamental. The original concept was that private borrowing in which the trust is engaged would not score against the departmental baseline, but would be incremental and increase the

total amount of capital invested in health. That battle was fought and lost. We now know that borrowing privately will score against the departmental total. I was slightly alarmed this morning when the Minister said that when the Bill is passed, he does not expect a huge amount to be lent from what I would term the ''private sector''; banks and the City. Instead, he described a new NHS financing facility. That would be the route down which trusts will go for capital.

The Minister explained that that would be kept at arm's length from the Department, and would be operated by independent credit specialists who would assess the loans using normal credit analysis. However, in response to my hon. Friend the Member for Epsom and Ewell, he then said that it would be funded by public expenditure; it would come from his Department. If that is the case, we have gone round in a complete circle.

As things stand, a non-foundation trust would get its capital from the Department. However, it seems that if such a trust went through the hoops to become a foundation trust, cleared the social ownership hurdle and the regulatory hurdle and was given a prudential borrowing limit, it would not go to the City for funding, which is what I thought would happen, but would go back to the Department. Having jumped all of those hurdles, the trust would get its money from the Minister. We seem to have travelled in a complete circle.

I hope that the Minister will disabuse me of that view, tell me that I have totally misunderstood what he said this morning and say that the situation is not as I described. However, if it were as I described, far from diminishing the regulatory burden, we would have substantially enhanced it. We must press the Minister a little more on how the new regime would work. There must be absolute clarity as to how that would benefit both the Department and the trust that goes round the course.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

The Minister gave a rather expansive response to the earlier stages of the debate, and I fear that in the course of doing so, some of my more detailed questions were lost, so I will return to them. They follow on directly from the point made by my right hon. Friend the Member for North-West Hampshire; in that context, we can apply the situation to a particular hospital. I know what the sources of capital are for Addenbrooke's NHS Trust by virtue of reading their board papers, which are public documents.

I want the Minister to help us, step by step, to understand the Exchequer contribution to NHS foundation trusts, because that is what clause 11 deals with. I referred to the contributions earlier, but I will go through those again to avoid any doubt.

First, I shall address the matter of operational capital. Again, to avoid doubt, I referred to the bids for capital inside the trust, compared with the capital available and was speaking about the operational capital. The bids for operational capital inside the trust are £22.5 million. The amount that is to be allocated—there is some overcommitment—is £7.5 million. The

block allocation to the trust for 2003–04 is around £6.9 million.

As the Minister told the Committee, those are three-year allocations. Therefore, we have allocations for 2003–04, 2004–05 and 2005–06, and we have heard that those would not be clawed back. However, what would happen after that? What would happen to the block allocation of operational capital after 2005–06? Would it continue to be made by the Department to an NHS foundation trust in the normal way, or would it become part of the trust's requirement for borrowing?

The Department has given certain approvals to the trust through its discretionary capital schemes, which are now called strategic capital schemes. I will not go through what those are, but there are several others in the pipeline. Would the discretionary capital schemes, or strategic capital schemes, continue? Would they continue to be funded directly by the Department, or would they become part of the capital investment for which the trust would need to secure support through the financing facility?

We know that there is a three-year access fund arrangement. The Minister might reasonably tell us that that is available for allocation by strategic health authorities. It might, or might not, follow the three-year programme, but presumably NHS foundation trusts would not be excluded from having the access fund made available to them during the three-year period. I hope that that is agreed. The same applies to modernisation funding. There are specific objectives—ministerial priorities, as it were—and if they apply across the NHS, foundation trusts will have access to those funds in the same way.

I asked a specific question about three-star trust status. In 2002–03, £1 million was delivered to the Addenbrooke's NHS trust because of its three-star status. We do not know if that status will give rise to another capital allocation of £1 million for 2003–04, or some different sum. We are now in the 2003–04 financial year, and we have to assume that the Addenbrooke's NHS trust's capital programme is not receiving such an allocation.

Mr Chris Grayling (Epsom & Ewell, Conservative)

Another capital element of the trust to which my hon. Friend, the Member for South Cambridgeshire referred, and others with which we will come in contact over the next two to three years, is the national IT programme. The Minister's clarification would be appreciated as to how that will be handled in capital terms for foundation trust hospitals as, clearly, it will impact upon the balances of the Addenbrooke's NHS trust over that time.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

Yes. We could go into detail on the matter, but it is likely to form part of the modernisation funding stream to which I referred previously. The relevant document for the Addenbrooke's NHS trust states that

''In addition, the Trust hopes to obtain funding from the national IM&T programme, although this is yet to be confirmed.''

My hon. Friend the Member for Epsom and Ewell asked the question, but we do not know yet. My assumption is—if I am wrong I hope the Minister will

let us know—that in so far as the foundation trusts participate in the programme and incur capital expenditure, they will receive modernisation funding from the Department in the same way as other NHS bodies. Those are the questions that relate to the sources of Exchequer funding.

We have discussed the link to the national tariff, and the question is to what extent are NHS bodies going to be treated on a like footing. My hon. Friend the Member for West Chelmsford also touched on the matter. If the national tariff and the price that is paid by commissioning bodies to all NHS bodies are to be on an equal basis, they will in all cases include not only the costs of the provision of a service, but all the associated capital costs.

Section 3.7 of ''Reforming NHS Financial Flows: Introducing payments by results'' of October 2002 states:

''This initial set of tariff rates will be derived from 2001/02 NHS reference costs.''

Simply put, what will the tariffs be, based on those reference costs? In economic terms, will they be short-run incremental costs, not reflecting, therefore, the long-term cost of capital associated with the provision of particular services; or are they going to be on a long-run incremental cost basis? We may get on to the argument later, but I will not disguise my feeling that the tariffs have to be based on long-run incremental cost for NHS foundation trusts if they are to sustain the costs of borrowing capital to put additional capacity in place.

If they are all on the basis of long-run incremental costs, do they not, of necessity, involve a misallocation of resources, as, in some respects, commissioning bodies will be buying spare capacity? The Minister reminded us that we want to use up underused capacity; certainly not at the Addenbrooke's hospital, which has 98 per cent. occupancy levels, but we will leave that on one side. Surely underused capacity ought to be able to be offered by providers on the basis of their marginal cost, and should not be bought by commissioning bodies on a long-run incremental costs basis. The risk is that we will generate surpluses in less efficient and less popular locations in the NHS, using up their capacity and giving them surpluses that are unrelated to cost. Prices ought to be reflective of cost and there is a risk that, in this case, that will not be the case.

Dr Evan Harris (Oxford West & Abingdon, Liberal Democrat)

We have had an interesting debate today. I suppose we ought to be grateful to the Minister for his exposition of the new flows of resources within the national health service.

When we arrived today, we could have been forgiven for thinking that when we reached the stand part debate on clause 11, we would have a response from the Minister. The hon. Member for South Cambridgeshire asked many questions; he has asked them again, although he has added a few more, following the Minister's comments. I thought that we would have a response from the Minister to those issues, then a brief clause stand part debate, and then we would move on to the issue of capital in clause 12. I have tabled an amendment to clause 12 that must be

addressed, and other hon. Members have also tabled amendments to that clause.

I suppose we should be grateful to the Chairman for allowing a long discussion of the new approach to commissioning and the question of having a volume-led or activity-led approach, rather than a cost-based approach. However, if that was the plan, it would have been helpful had we realised how detailed the debate would be. As the Minister said, documents that many of us read last October are available on the web site, although he did not specify the web site address.

We would have benefited from knowing in advance that we might want to read—I see that some more documents have arrived on the Table since 2.30 pm—the 50-page document, ''Reforming NHS Financial Flows'' that was published in October 2002. It would have been helpful had that been provided for Members to re-read for this debate. We may also have wished to re-read the response document and the series of specific questions before this debate.

It is unfortunate that I was not alerted that we would have the opportunity—which I will certainly take—to address some of these interesting questions that the Minister has raised. In response to our debate this morning, a three-page document produced by the Department of Health was placed on the Table. It is entitled ''Information sheet No. XX'', which implies that it is very new. It gives us a little more information than we already have in these couple of hundred pages.

Nevertheless, the Minister has given us a valuable chance to question the Government about this matter. However, his contribution raised more questions than it answered. The first question is about the position of those who are able to retain the surplus. In my intervention on the hon. Member for Epsom and Ewell, I said that it might be possible to know the answer if the Minister clarified the position in a response to my intervention.

However, as hon. Members will be aware, in the document ''Specific Questions, Annexe C''—a response to the consultation produced last October, entitled ''Reforming NHS Financial Flows''—that is one of the key questions raised in the consultation. The answer is not entirely clear. Paragraph 20 on page 33 of annexe C of that document asks whether trusts will be allowed to keep a surplus as a reward for efficiency. Will there be rules governing how such surpluses should be split? What will be the rules governing retention of trust surpluses? If trusts are able to retain surpluses, will they be allowed to carry them over to the following year, or will they be received in the following year?

Those are interesting questions. In a debate on foundation trusts, one can double the number of questions by asking what is the case for foundation trusts and for non-foundation trusts. Since the Minister raised this question in the clause stand part debate, one would have thought an answer might be forthcoming. I am still hopeful.

However, the response given in the document is that the issues around how surpluses should be split, and

the mechanisms to be used in allowing trusts-PCTs to carry forward surpluses, are to be considered as part of a wider review of the trust financial regime and PCT financial framework. The trust will look at various things; break-even duties, brokerage, special assistance under the new financial flow system, risk management issues and possible medium-term roles for an NHS bank. It continues that the review was expected to report by September 2003.

That may give another place the opportunity to debate some of the questions that have been raised in our debate today, but before this Bill passes into law and becomes an Act.

I fear—unless the Minister is able to prejudge the response to that review—that that will not enable us to get answers today, nor will it enable us to consider how the establishment of foundation trusts relates to the answers given to those questions. Although we are grateful to the Minister for allowing us to question him and to hear his exposition, I suspect that he is being a little tantalising. I fear that he will be unable to answer some key questions, unless, for the first time in the recent history of the Department of Health, a review is able to report any time earlier than the indicated date. I fear, from the Minister's lack of response by way of intervention, that we are not going to get answers.

In that sense, it is hard to understand why we are having this debate on foundation trusts. Can the Minister say whether we will have an opportunity to come back to the matter in hand? I should have thought that that be addressed in his first comments on this section.

I have several specific questions to ask about the new financial flow. I was disappointed by the Minister's earlier response to one of my interventions. In his contribution, he said very little about how that would benefit patients directly, and very little about how quality would be levered up. It may come as a surprise to him to know that I believe there to be some merit in these new financial flows. It is important to allow the commissioning process to focus on something other than cost. Clearly, with the overwhelming focus on cost, there is no opportunity to consider some of the other things that are important, such as responsiveness, quality, getting capacity in quickly and flexibility for commissions.

I was trying to support the Minister when I said that I recognised that it was important that commissioning must be made more flexible and not just cost-driven. That was met with the response that it was well known that I supported the provider interest. I do not know where that came from; I question whether it was justified. It might have been good knockabout stuff, but I thought that we were having a serious, non-partisan debate about the potential benefits that might flow from the reforms to the commissioning process that the Government are proposing.

It was a bit of a cheek to answer what I thought was a reasonable question about equity with the rather partisan response that the approach that we have to commissioning, or to the health service, is

conservative, even with a small ''c''. I do not believe that to be the case, nor do I believe that this debate is an appropriate place for the Minister to make those allegations. If it were otherwise, I would be allowed to answer them.

The question is; how will this help the patient, and what are the potential perverse incentives that may flow from some of the proposals? I do not know whether the Minister recognises, as I do, that in any change like this there are risks of perverse incentives. There are questions that must be answered about what this will do for equity, for quality and for genuine patient choice, particularly for those patients who do not have the flexibility to follow contracts or financial flows around the country, and who rely on being treated in their local hospital where they can be visited by their family and where they have had continuity of care throughout their illness from existing providers.

The Minister said that the tariff would be derived from 2001–02 reference costs and, in response to something that I said, told us that there would be adjustments for projected cost inflation and local market forces factors; he made specific reference to the south and the south-east. Clearly, labour costs are higher there, but I worry that that will not be sufficient to compensate for the actual costs of delivering the capacity required to meet the needs of the health service.

In the Oxford Radcliffe hospitals trust—one of many—it is not that NHS nurses have to be paid more in wages or extra living costs, or that the trust has to arrange additional investment in childcare facilities in order to compete with other employers that do that better than the NHS. Up to three times over the odds has to be spent on agency nurses. That sort of cost pressure is vastly more than what the Minister described—I hope that I am not misquoting him—as ''some adjustments for local market forces factors''.

In my trust, the percentage increase in the cost of providing services has been huge because there are simply no nurses available locally, which is part of the reason why the trust has such a huge deficit. An approach that does not adequately compensate for that state of affairs, regardless of who is to blame, would spell even further disaster for a trust in such a position. Such hospitals are kept afloat by local commissioners, who are pretty much bound—at least in the short to medium term—to purchase services from them. Sadly, they must try to meet, as far as they can, the additional costs that that implies.

I should like the Minister to give an assurance that the position of those trusts will be recognised. Perhaps it is a clause 11 matter; perhaps there will be direct financial assistance to such trusts. I know that an announcement was made a few weeks ago about a pot of money taken from the NHS to be allocated by the Government. Providing local commissioning and purchasing flexibility is a step forward, but the Minister must accept that too large a centralised structure is a step backwards. It may be necessary, but it is not the brave new world of uniform improvement

in the devolution and decentralisation of commissioning decisions that the Minister proclaims.

The NHS Confederation's response of November 2002 to the financial flows document contains a paragraph on quality, which was not properly addressed in the original consultation document of October 2002. Indeed, ''Frequently asked questions'' is the shortest section in the document. There is very little in it about patient issues and quality. The NHS Confederation, which is as enthusiastic for reform as we are, recognises the following:

''There is no reason why a fixed price system should by itself create improvements in quality except where improvements may reduce costs.''

It also states, although I find the view regrettable, that:

''Experience suggests that reliance on external inspection will also fail to make sufficient impact''

on quality. I will be grateful if the Minister told us whether anything in the new arrangements would persuade me or the NHS Confederation, which will be running the system, that there will be a direct impact on quality from the financial flows alone. Will the Government set up and fund properly a system of audit available for local commissioners that does not rely on annual reports from the Commission for Healthcare Audit and Inspection or on other, more long-distance, means of measurement?

There are concerns about how emergency care will be treated under the tariff system and how complex, chronic disease will be managed. The Government say that they will start with elective surgery, and the healthcare resources groups that they have set up are mainly in the field of elective surgery. Simply starting with the low-hanging fruit does not explain how the system will be translated into the management of chronic disease and emergency care treatments. That will be much more difficult to cost. I am not sure that experience in elective surgery will help to do that. We must work out whether it will be possible to do that without creating distortions. The NHS Confederation in its response, under ''Designing a meaningless system'', says:

''There is a danger that the new system will become an accountants' and information specialists' 'anorak-fest' of impenetrable rules and massively overspecified detail with little connection to clinical practice and no chance of engaging clinicians.''

The confederation says that the system must be driven by a desire to improve clinical practice and patient outcomes rather than by an obsessive search for the perfect system. The Minister must address that, as he said very little about a desire to improve patient outcomes and a great deal that was in danger of straying into that anorak-fest.

The Minister may say that that does not sound like a positive response to the document, but one of the duties of Opposition politicians is to point out potential drawbacks; the Minister did not suggest any in his exposition. The fact that there may be drawbacks, distortions or perverse incentives is not an argument for not moving forward, but it is an argument for clearly addressing those problems in advance. I hope that the Minister does not think that because I have concerns about the impact of the proposals that I am against reform; on the contrary, I

believe that the proposals may be of some benefit. I hope that when I mention some potential perverse incentives, he will not consider, as he tends to do, that I have taken a negative or conservative—with a small or large ''c''—approach to his suggestions.

The NHS Confederation states:

''Creating a system that incentivises admission for conditions can and should be managed on an ambulatory basis. Payments and activity targets for conditions such as asthma, heart failure, and so on will need to be capped and even have penalties for high rates of admissions or rewards to incentivise admission reduction.''

That is clearly a potential perverse incentive to generate activity and the need for capacity to attract contracts.

The confederation states:

''Since the HRG price is significantly determined by length of stay, providers that can treat patients in less than the average time can make a profit. Experience in other systems suggests that this gives incentives to discharge early.''

That is a concern because incentives to discharge early already exist in the form of fines for delayed discharges. That will go against patients' best interests.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

The hon. Gentleman is taking the trouble to explore the issues associated with the introduction of the full tariff. I do not want to underestimate the difficulties, but this measure would be introduced alongside patient choice. Therefore, although I will explore the financial impediments to commissioning on the basis not only of cost to volume, but to quality, it is important to recognise that the roll-out of patient choice will in itself offer an opportunity to deliver quality.

The hon. Gentleman mentioned problems. However, some trusts are tackling the level of accident and emergency care and so on. For example, the Addenbrooke's trust is entering into further risk-sharing agreements with primary care trusts so that the risk is not simply associated with extra activity on the part of the hospital. Equally, those costs do not necessarily flow back to the PCT if the hospital simply takes on board everybody who comes to it.

Mr Win Griffiths (Bridgend, Labour)

Order. Members must make short interventions.

Dr Evan Harris (Oxford West & Abingdon, Liberal Democrat)

It is difficult to contain the scope of this debate within short interventions, as has been shown by the hon. Gentleman. Some of the questions that he asked generate yet more debate. Since the Minister did not stray into patient choice, I will not either, except to say that patient choice based on proper information would be a welcome introduction. Patient choice is often used as another term for better access, but better access is better access; it is not the same as patient choice. That is an important point. When the Secretary of State talks of patients wanting the choice of a good local provider, he means patients having access to a good local provider, and not their choosing between good local providers.

When I first asked how equity would be preserved within these financial flows, the Minister started off on one about producer interest and so on. However, this

is not a producer interest issue. The Committee will know that it is difficult enough to preserve equity within the existing system without introducing new systems. At first sight, the new systems might appear to be more equitable because of any advantage that foundation trusts will have over non-foundation trusts or those providers, regardless of their foundation status, in terms of labour costs and other costs.

What provisions is the Minister making to explore the impact on equity for those patients who are not in a position to go with the flow? It would not be fair to patients if they were made scapegoats for so-called poor performers. What provisions are in place to ensure that trusts that are classed as poor performers—for reasons beyond their control or because of bad management—preserve the resources needed to provide a decent service for those patients who are not in a position to move? I am referring to patients with chronic diseases and patients who require emergency care. Such patients cannot travel from Oxfordshire to Skegness, even if there is extra capacity there and their PCTs can negotiate the tariff to treat more patients quicker.

There is also the question of how the arrangements will apply to people with complex mental health problems, who need the social support that is achieved locally. It may not be appropriate for the Minister to answer all those questions, but I ask that when they are raised, he does not see them as coming from an anti-reform point of view, but as a constructive approach to addressing problems in the introduction and piloting—I am glad that the scheme has been piloted in 15 areas—of the new financial arrangements in the NHS.

Mr Stephen Pound (Ealing North, Labour)

Although I am anxious to avoid giving the impression of being helpful, I should like to take issue with one of the points that the hon. Member for Oxford, West and Abingdon raised.

Mr Jim Dowd (Lewisham West, Labour)

Only one?

Mr Stephen Pound (Ealing North, Labour)

I will restrict myself to one.

There is a real danger in debates such as this of us assuming that, implicit and inherent in the starting structure of any national health service, is an increasing and stratified demand for agency nursing. Agency nurses are a significant factor in the cost of the NHS, and I entirely understand why the market forces factor contains in the index an element for the consideration of localised staff costs. However, I am desperately anxious to avoid us assuming that this will always be a problem in the national health service.

The problem is not that there are no nurses but that, in many cases, the hours available for those nurses to work did not suit the nurses, or adequate accommodation was not available, or the factors that the nurses took into consideration were not recognised.

I make no bones about admitting that I have a sentimental attachment to a health service run by Hattie Jacques and would be happy if that were the case now. On the other hand, I recognise that many aspects of the Bill are sensible and, given the Minister's reply, the idea of adjusted payments makes a lot of

sense to the untrained eye. It seems to be logical and sensible, as does the structure of the diagnosis-related groups and the various other mechanisms in this transparent method of payment.

Like all hon. Members, except possibly the hon. Member for Oxford, West and Abingdon, I have studied with great interest the research projects by La Trobe university, Melbourne, and the University of New South Wales, as well as the various analyses of experiences in Victoria and Denmark. In many ways, we are quite fortunate; the nasty work has been done for us. We know what the problems are.

I assure my right hon. Friend the Minister that even some of us on the troglodyte wing of the Labour party see a great deal of good in this method of payment. However, there are two issues that I want to raise. First, the mechanism is fine, but inevitably the argument will be about the amounts. The last major reorganisation of health care in my part of the world took place as long ago as April 2002, when the Ealing PCT was created.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

Clearly the hon. Gentleman has been following these matters carefully. Will he explain how he thinks the Department will deal with what is termed in Victoria as DRG creep, but for us might be termed HRG creep?

Mr Stephen Pound (Ealing North, Labour)

I should be delighted to. If the hon. Gentleman analyses the DRG creep to which he refers, he will see that the specific movement within the categories and the diagnosis-related groups was addressed in the first analysis. We now know how to structure the software to pick this up. If you look in the paper which was published in October last year, you will see, within the various categories, where that break took place and particularly in consultant related episodes, finished consultant episodes. All the work has been done for us, so we are now in the fortunate position of being able to say that this has been tried and tested and that we can now make use of them in a different context.

However, two specific issues arose with the last major organisation of health service provision in Ealing in April 2002. One of the problems with the establishment of the PCT—I should like the Minister to address this when he comes to reply—was the deficits that existed at the time. In the Ealing PCT we have a deficit of 3 per cent. based on 2003–04 figures, and that is about £8 million. All three PCTs in my area have a deficit. How can we avoid going into a foundation hospital system with an inherent deficit? That worries me, because if we are going to assume that there will be an element of deficit, as was the case with the PCTs, that could be extremely worrying.

Somebody mentioned certain areas of commissioning which would not be the province of the foundation trust, and I think IT was referred to, with those involved signing up to a national IT system. Can the Minister say whether this will be so or whether I misheard that? Will there, for example, be a national system for patient data storage and retrieval; maybe even for the analogue transmission of data such as x-rays? Will that be one for which money is given and

then retrieved, or will there be an element of local choice in IT?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

Mr. Griffiths, you were not with us earlier today when we had this discussion. It does seem to me—other hon. Members may feel the same—that we have had a clause 10 stand part debate for clauses 11, 12 and 13, and I hope that that is your view, too.

I have arranged for two documents to be available on the Committee Table, one of which is a copy of the financial flows paper. The hon. Gentleman for Oxford, West and Abingdon asked about the web site address; it is www.doh.gov.uk/nhsfinancialreforms/financialflowsdec02guidance.htm, and I am sure that he will want to refer to that, too. The other paper is one that I have asked the officials to prepare, and I am grateful to them for having done it so quickly. It sets out by scheme an overall view of the NHS financial reforms and results, and I hope that that will help us.

Many hon. Members have asked about how the new financial flows arrangements will apply specifically to NHS foundation trusts. I wish to tell Members that I have asked for further briefing papers to be available to them as soon as possible, and I hope that I will be able to send them to Members of the Committee in time for our resuming after the recess.

This has been a high quality and well-informed debate. The hon. Member for Epsom and Ewell asked me about classification, and whether NHS foundation trusts' borrowing would be on or off-balance sheet. That is not actually a decision for Ministers to make; that is entirely a decision for the Office of National Statistics. It is not something that I am in a position to answer.

Mr Chris Grayling (Epsom & Ewell, Conservative)

I accept that it is not the Minister's decision, but does he know the answer to the question? Has the decision been taken, or is it still to be taken by the Office of National Statistics?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

The decision is still to be taken, so I will not be offering my views on that now.

A very important discussion then took place about the use of surpluses. I did make it clear in my opening remarks on clause 11 that we want NHS foundation trusts to be able to retain any surpluses under the new national tariff system that we are introducing. That is an important result for NHS foundation trusts.

It has been made clear in the papers forwarded to the Committee and Ministers' remarks that the Department is reviewing the question of the retention of surpluses for non-NHS foundation trusts. That is happening as we speak. I hope that the Committee will understand that my position is difficult. In respect of those trusts that are becoming NHS foundation trusts, we have not yet decided how the system will operate during the interim period. We want to examine that very carefully. We do not want to hold back progress across the NHS as a result of any changes we make to the flow of finances. I am sure that that important issue will bear on Ministers' minds, and my right hon. Friend the Secretary of State will look at it very carefully.

A very important part of the speech of the hon. Member for Oxford, West and Abingdon concerned a perfect system of distributing money in a publicly funded health care system. There is no perfect system. There are better systems than the one we have. For the reasons I outlined this morning, our system is a blunt tool. It does not reward the efficient and the effective, and it does not incentivise the right kinds of innovation and development that we all, with common consent, want to see in the NHS. We have a crude instrument, and the reforms we outline will be a significant improvement.

However, I emphasise a point that will provide a context for some of my later remarks. In developing our policy on NHS foundation trusts, we have been motivated essentially by two important considerations. One is a belief that, if we want the NHS to continue to improve and provide better patient services—the financial flows reforms and our proposals on NHS foundation trusts will help in that—we must devolve responsibility and decision. That must include responsibility and decision-making in financial matters. We must move away from the current position, particularly in respect of capital, where the available pot of money is rationed and people queue for a share of it.

I hope that, over time, the system will become a more commercial model. Although there will be greater disciplines, the system will retain its public service ethos and principles, and that is important. The system of distributing capital resources across the NHS will be more rational and utilitarian. We do not have such a system at the moment. The issues are closely related.

The hon. Member for Oxford, West and Abingdon and others were concerned about whether these reforms—not in the Bill but in terms of financial flows—would improve patient services. I believe passionately that they will.

Mr Chris Grayling (Epsom & Ewell, Conservative)

Although I accept that the Minister cannot prejudge the work that is taking place in his Department, can he confirm that, under the current system, non-foundation trusts would have to return any surpluses they generated under the tariff system to the consolidated fund, to his Department or to the Treasury?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

Broadly, at the moment they cannot retain those surplus assets. That is partly because of the application of the accounting arrangements by the Department. We are looking at that. I am not in a position to tell the Committee what the outcome of the review will be, other than to say that, in making all of these reforms and in moving as quickly as possible to foundation trust status for all parts of the acute sector—specialist and trust—we do not inadvertently hold back parts of the service.

We want to reach a point where everyone can take advantage of these new freedoms, because I am confident that that is the best way to sustain the improvements that have taken place in the NHS. I believe strongly that, in devolving responsibility for

planning, developing and delivering health care to clinicians and local people, we can take a forward step in improved quality care. The corollary is that financial reforms are necessary. Responsibility and decision-making on the use of capital resources currently rests with my hon. Friend, and that must be handed over to local providers. Even with that greater sense of freedom, there must be a broad framework of financial discipline, because no organisation can operate without a proper, prudential financial system.

We are not legislating for anarchy, or for a free-for-all; we are not legislating to create a situation in which the NHS goes bust. That would be the daftest thing we could create. The Bill does not do that. The Opposition wants to remove the provisions about borrowing limits and so on, and we will debate that later. However, there is a case to be made for that sort of framework.

The hon. Member for Oxford, West and Abingdon and others asked how these financial reforms will improve patient care in foundation trusts. I have dealt with that point. In relation to the point that was made about whether moving to HRG costing and the national tariff will somehow undermine quality, as my hon. Friend the Member for Ealing, North (Mr. Pound) made clear, in a very effective and well-informed contribution, that is not the case in other countries that have moved towards developing a system like this. We are able to learn from the experience of others; for example, Germany, the Scandinavian countries and Australia. There is no evidence from those countries to suggest that HRG tariffs result in deteriorating quality; in fact the opposite is the case. They have seen improvements in both choice and speed of delivery of care. We are now out of step with others on these reforms, and we should not delay any further in moving down that road.

Dr Evan Harris (Oxford West & Abingdon, Liberal Democrat)

Surely the Minister must recognise that one of the broader questions, which may not be particularly detailed, is whether the creation of foundation trusts is creating not only a two-tier system, but a two-tier system that is more unfair than the sort of ''tierism'' that one gets from allowing different providers and a mixed market.

Will there be greater financial freedoms for foundation trusts than non-foundation trusts? That is particularly important, as the Government are not allowing any trust to have a financially free status—as we would—but are selecting them on the basis of the matters we have been talking about in the clauses to date. Does the Minister understand that it is extremely frustrating to my party—and, I would have thought, to some of Labour Members—not to know until the review is complete how great an advantage a foundation trust will have on retained surpluses compared with non-foundation trusts; at least in the interim period, until every hospital, as he sees it, is a foundation trust?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

The hon. Gentleman is putting the cart before the horse by announcing the outcome of the review that is currently taking place. We have not come to a decision about that, so he should not jump

on that issue. It is true in other respects that NHS foundation trusts will have greater financial freedoms, including the ability to borrow from a wider range of sources, including the private sector. That is an important freedom, and our case in this regard is that it is justified by their financial performance to date. They are institutions with a proven track record, and they have earned the autonomy and the freedom that goes with it.

In relation to the use of surpluses, which was the recurrent theme of several hon. Members' questions, we have not come to a decision about what to do about non-NHS foundation trusts. That work is being done.

I was asked to provide more details about the new financial facility for lending to NHS foundation trusts and what, if any, were the limits to that capital financing. There will not be a finite pot determined by a fixed sum. The finance facility will have access to an amount equivalent to the total limit of NHS foundation trusts' aggregate borrowing, which will be determined by the regulator as he develops the prudential borrowing code. NHS foundation trusts will have access to the capital resources that are needed to allow them to borrow in accordance with the authorisation and the upper limit of borrowing set by the regulator.

Mr Chris Grayling (Epsom & Ewell, Conservative)

If the Department is, as I assume, providing a financial facility that amounts to the total aggregated borrowing rights of the foundation trusts, is the Minister saying that there is a possibility that there will be no new money coming in from the private sector at all, and that this is basically just a different vehicle to provide public sector lending to the foundation hospitals?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

I want to talk about the source of funding in a minute, because the hon. Gentleman's right hon. Friend the Member for North-West Hampshire (Sir George Young) asked me about the future source of strategic and other forms of capital available to NHS foundation trusts. Maybe I should combine both of those points now. We have made capital allocations for the next three years, including strategic capital allocations, to all NHS trusts, including those that have applied for NHS foundation trust status, and we will honour those strategic capital allocations.

There will be no clawback in relation to the capital allocations that have been announced. The Government will honour the commitments that those allocations reflect. However, in a time beyond the spending review settlement the new arrangements will mean that public money will be allocated on an ability-to-repay basis from either the financing facility to which I have just referred, or from the private sector, which has expressed an interest in financing foundation trusts. The Government expect that interest to grow over time.

This morning, I clearly stated that in the short-term the financing facility will provide most of the additional capital borrowing to meet the capital requirements of foundation trusts. However, we think that that position will change over time.

Sir George Young (North West Hampshire, Conservative)

I think that the Minister said that the sum that could be bid for by the foundation trusts would be capped at the limit set by the regulator. Does that mean that the regulator—by using the criteria that we will come to—might be free to fix a sum that could be beyond what the Chancellor of the Exchequer or the Secretary of State felt that it was reasonable to spend on health, and would there be no constraint on the regulator in arriving at the figure that he felt was the prudential borrowing limit for the foundation trusts?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

That is an important question. I could deal with it later when we come to the clause dealing with prudential borrowing, but it would be fairer to the right hon. Gentleman if I dealt with it now. Under clause 3, the Committee considered the regulator's duties. Clause 3 makes it clear that the regulator must take into account and apply his powers and functions in a way that is consistent with the Secretary of State's duties under sections 1 and 3 of the 1977 Act. That means that the regulator must have regard to the effect on the overall allocation of resources across the NHS of his drawing up of the prudential borrowing code. Therefore he will have to have regard to the overall amount of capital financing available in the NHS. The freedoms that we are giving to foundation trusts are a significant step forward. This is a different approach; it will be a more commercial approach to capital financing in the NHS. Ultimately, that will be a good discipline for the NHS.

Mr Chris Grayling (Epsom & Ewell, Conservative)

We may be trespassing on the later stages. The Minister should think about this from the current time frame where the initial facility from the public sector will match up to the total gross borrowing powers of all the foundation trusts, and that total facility has to bear relation to the overall amount of capital financing available to the NHS. It does not take into account the extra ability of the private sector to provide additional resources to the NHS, nor does it take into account future investments against which borrowing might be secured. It would therefore appear to place a cap on the ability of the foundation hospitals to develop linked to the ability of the NHS to pay and not to the private sector to lend to them.

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

I am sure that the hon. Gentleman is aware of the agreement and the position that we have reached on capital borrowing and how it scores against the Department's capital budgets—and that includes private sector borrowing. All that has to be taken into account because that is how we intend to operate the prudential limit. It does not matter if the capital is from the private sector or public sector. It scores against the Department's balance sheet. That is also a factor that the regulator will have to consider.

My hon. Friend the Member for Ealing, North asked about deficits. That is an important point. We have asked applicant trusts to make a case where they believe historical deficits should be written off before they achieve foundation trust status. We will look at that on a case-by-case basis, but we are alert to the issue that he has raised. My right hon. Friend the Secretary of State is also considering whether there is

the possibility of a PCT deficit write-off as part of the application process.

The hon. Member for South Cambridgeshire asked about long or short-run average costings as part of the move to the new national tariff system. He probably knows what I am going to say because he has been carefully pursuing this with some of my officials. The tariff will cover all the costs of delivering a high quality service. Those costs will include the costs of staff, drugs, medical supplies and the running and maintaining of NHS buildings.

The assumptions underpinning the tariff will be the same as those reflected in allocations to primary care trusts. The inflation assumptions applied to the tariff will be the same as those that informed PCT allocations. We are trying to calculate the national tariff on a fair, open and transparent basis, attempting to reflect the costs of providing those services.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

To return to a point that was touched on briefly on Tuesday evening, will the Minister acknowledge that the national tariff system, with the costs constructed in that way, does not permit a trust with spare capacity to price it at marginal cost in order to use up that capacity, as distinct from having to charge their long-line average cost?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

That may be true, but I do not know. I may need to come back to the hon. Gentleman on that matter.

Dr Evan Harris (Oxford West & Abingdon, Liberal Democrat)

The Minister has not mentioned the way in which the independent sector will behave within the tariff arrangement. What is to stop that sector from charging less than the tariff, particularly for easy cases, leaving the NHS with the difficult cases. Some purchasers, desperate to find ways of obtaining capacity so that they are not labelled a failing commissioner by the Government, may be willing to pay that sector over national tariff for the NHS, allowing it to use the extra resources to compete in a way that the NHS is unable to respond to because it is constrained by the tariff? At some point, the Minister will have to clarify how there will be fairness in a market between the independent sector and the NHS with an NHS tariff arrangement.

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

I am not quite sure whether the hon. Gentleman is saying that the national tariff should not apply to private or independent sector providers, but that seems to be the logic of what he is saying. I am not sure if that would guarantee fairness in the context of a plurality of providers that we expect to provide services to NHS patients. The national tariff is the way to guarantee fairness across the system. I do not see how the introduction of the national tariff would introduce unfairness or give an unfair advantage to the private sector. It is certainly not how the private sector sees the introduction of the national tariff.

The hon. Gentleman makes a point in his intervention, but it is a very odd point for someone from his political wing to make. I am not sure what political wing he belongs to—he was on the centre left a moment ago, but that intervention would seem to indicate that he is on the centre right.

Mr Win Griffiths (Bridgend, Labour)

Order. We are going down a path that is far beyond clause 11. There are later clauses where that particular nicety could be tackled. Therefore, we will carry on with the main debate.

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

I am grateful to you, Mr. Griffiths, for rescuing me from that divergence.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

We will not have another opportunity to examine the structure of the national tariff, which is part of the whole question of Exchequer funding of the NHS as a whole. The implication of the Minister's response to the hon. Member for Oxford, West and Abingdon was that the standard tariff would be applied to purchasing from the independent health sector.

Mr Win Griffiths (Bridgend, Labour)

Order. Is the hon. Member asking this question in relation to the expenditure of an NHS foundation trust or in relation to grants being given by the NHS centrally? His reply will determine whether I shall rule him in order.

Mr Andrew Lansley (South Cambridgeshire, Conservative)

My submission is that this relates to the financial assistance given by the Secretary of State to NHS foundation trusts. In this instance, the NHS foundation trust in question might be an independent provider who has become a public benefit corporation in order to become an NHS foundation trust.

Mr Win Griffiths (Bridgend, Labour)

Does the hon. Member wish to pursue this matter in that circumstance?

Mr Andrew Lansley (South Cambridgeshire, Conservative)

In that circumstance, the question is whether independent providers, who have, presumably, come into the NHS system to sell additional capacity that they are unable to sell privately, would be able to sell it at a marginal cost. The perversity of that system is that the NHS would insist on paying independent providers at a standard tariff, even though independent providers would be willing to charge marginal costs that may be below the standard tariff. Is the Minister seriously asserting that principle?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

Clause 11 concerns grants and loans—the capital revenue side of the funding for NHS foundation trusts. However, the national tariff is not financial assistance. That question relates to revenue resourcing of the NHS.

The hon. Gentleman has raised the question of price competition several times, not only with regard to clause 11, but other clauses as well. That is essentially what he is arguing for: giving independent or NHS providers the opportunity to offer prices at a marginal cost. We will not do that. That is precisely what the national tariff prevents. The Opposition want to reintroduce price competition into the NHS. That is transparent from what the hon. Gentleman says, to which the hon. Member for Epsom and Ewell nodded in agreement. Fine. They are entitled to put that policy before the British people. However, we have been there before, and we know exactly what that leads to. It leads to the beggar-my-neighbour, dog-eat-dog culture that did so much damage to the NHS in the 1980s and 1990s.

There is a different way to promote productivity and efficiency in the NHS, and it is through the financial flows arrangements, coupled with the

national tariff, which I have suggested. There are incentives for providers to provide more efficient and productive services, and to use the surplus to re-invest in the provision of services. That is a powerful incentive to improve efficiency that does not exist at present.

Mr Chris Grayling (Epsom & Ewell, Conservative)

Will the Minister give way?

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

I do not intend to give way again on those points. All of those questions on the national tariff go significantly wider than the terms of clause 11. I have tried to deal fully with the points that hon. Members have made.

However, I want to deal with one other question on clause 11 concerning the Secretary of State's ability to provide financial assistance through capital and grants to NHS foundation trusts for the national information management technology strategy. We are putting considerable investment into that strategy. Primary care trusts will ensure that any contractual arrangements that they enter into with NHS foundation trusts require the use of the national strategy. Therefore, capital will be provided to sustain the strategy.

Mr Chris Grayling (Epsom & Ewell, Conservative)

The Minster will be aware that the Government recently announced that they plan to shelve the shared financial services programme, particularly the accounting and purchasing systems, which I understood would be a bolt-on to the national programme. I gather that, due to the need to allow foundation hospitals independence in decision-making, the Minister can confirm that there will be no further extension of such a step, and that foundation hospitals will be required to take on all other aspects of the national information management technology programme that are not being developed at present.

Mr John Hutton (Minister of State, Department of Health; Barrow & Furness, Labour)

The hon. Gentleman is wrong. Ministers have not made any such announcement about shelving the shared financial services initiative. We made that clear when that false report appeared in newspapers. The hon. Gentleman follows ministerial announcements closely on our website, so I am surprised that he asked me that particular question. That story was false.

The debate has been interesting and wide-ranging, and I have nothing further to add to the issues that have been raised. I chastised myself after this morning's sitting for being so open in my opening remarks, and paving the way for what turned out to be a thorough scrutiny and investigation of the Government's financial plans. It is not often at the end of a debate that I can say that I feel thoroughly probed and scrutinised, but I feel that way at this moment. In the spirit of friendship across the divide, I should say that I am grateful to Conservative Members, and to my hon. Friend the Member for Ealing North, for exposing me to that invigorating cross-examination. I hope that I have provided at least some information that will throw some light on future proceedings. However, it is apparent that there is a substantial division of opinion between Labour and Conservative Members on how the distribution of resources through the NHS should be arranged.

Conservative Members clearly want to return to the time of open competition based on providing the lowest possible price for NHS services. We should not go down that road.

Question put and agreed to.

Clause 11 ordered to stand part of the Bill.