To be published as HC 652 -i

House of COMMONS



Health Committee

annual accountability hearing with monitor

Tuesday 30 October 2012

Dr DAVid Bennett, stephen hay and adrian masters

Evidence heard in Public Questions 1 - 137



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Oral Evidence

Taken before the Health Committee

on Tuesday 30 October 2012

Members present:

Mr Stephen Dorrell (Chair)

Andrew George

Barbara Keeley

Grahame M. Morris

Mr Virendra Sharma

Chris Skidmore

David Tredinnick

Dr Sarah Wollaston


Examination of Witnesses

Witnesses: Dr David Bennett, Chair and Interim Chief Executive, Stephen Hay, Chief Operating Officer, and Adrian Masters, Director of Strategy, Monitor, gave evidence.

Q1 Chair: Good morning and welcome to the Committee. Perhaps I should say first of all on behalf of the Committee that we congratulate you, Dr Bennett, on being, I believe as of yesterday, appointed the fulltime chief executive-or "permanent" as I suspect you are already fulltime-chief executive of Monitor. Could you introduce yourself and your two colleagues to the Committee, in your new role?

Dr Bennett: My new role starts on 1 November, so for the moment, as for the last two and a half years, I am interim chief executive and for the last year and a half have been chair at Monitor. Stephen Hay currently runs our compliance and assessment activities, so assessing foundation trust applicants and running the oversight of the FTs, and will be focusing on a similar role in the new organisation. Adrian Masters is head of strategy and policy and has also been running the process of designing our new organisation and preparing us for our new role. He is very centrally involved in that and will continue to play a major role also in the new organisation.

Q2 Chair: Thank you very much. It would be very useful this morning, if we may, to refer back to the similar session we had last year, when I think it is fair to say that we asked a number of questions about what the role of Monitor was going to be following the passage of the Health and Social Care Act, to which you gave us the answer-though a more professional version, but the substance of the answer was-"We don’t know. You tell us." In the meantime, obviously, the Act has been passed and it would be very useful to the Committee to hear from you what you see as being your priorities, how, in particular, you envisage reconciling the role as market regulator, as sponsor of different forms of trust and as the price fixer in the system and how all of those responsibilities relate to each other.

Dr Bennett: Absolutely. Of course, a significant change is that we now have the Act, so we do know what it is that we are going to be asked to do. The core elements have not changed, though it is worth mentioning that a year ago it was unclear what our ongoing role with regard to foundation trusts would be. That legislation now requires that we do that on a sustained basis, not even in transitional mode as was being discussed before, but that we would continue to have oversight of FTs. An important development, just as the Bill was being passed-and it speaks exactly to this issue of conflict-was that our role in overseeing FTs has now been incorporated into our overall duty as sector regulator. That is the duty to protect and promote the interests of people who use services. It is by putting our role with regard to FTs within that overall duty that, in principle, the potential conflict between the roles has been dealt with, but I will come back to that because it is a bit more complicated, of course.

The other significant change, confirmed since we last spoke to you, is that the very original version of the Bill gave us a duty to promote competition and that has gone. Our duty is now just to promote the provision of services which are economic, effective and efficient. As a subsidiary duty, we have to prevent anti-competitive behaviour. It really has shifted the focus from promoting competition to preventing anti-competitive behaviour. That aside, the core responsibilities are very similar to before: we continue to assess FTs until they all become FTs; we continue with the governance role; we have pricing; we have the cooperation and competition role; we are also responsible for the continuity of service regime.

Turning to the issue of conflict, we now have our requirements in relation to FTs put under our general duty. In essence, the Act requires us to identify categories of providers that may need particular attention and is clearly orientated towards identifying those providers that are public sector, with the public sector governance arrangements that FTs have, and for those providers to have a regime which provides a sort of safety net, should the local governance arrangements fail, of the sort that we have now, but it is put in the context of a system where 95% of provision is by the public sector, all to be FTs in due course. Therefore, if we have serious failures of governance in those providers, that is clearly a problem for the users of the system and we have to take action to try and prevent failures or deal with them when they happen. In very practical terms, that means that, if we have an issue where there is a problem with an FT and we have to decide what to do about it, and taking action there may have implications for other aspects of our role-for example, we may take action that has some impact on competition-we have to work out what is in the best interests of patients: in the round, looking at the pros and cons of all the different options available to us, what is in the best interests of patients?

To illustrate this, the closest example I can use of something we have already done was where there was a proposed merger between Norfolk and Waveney Mental Health Trust, which was a foundation trust, and its neighbour Suffolk Mental Health Trust, which was not a foundation trust and was in serious difficulty. The view was taken that the best way of fixing Suffolk was to merge it with Norfolk. Norfolk had some benefits of being physically close but also happened to be very skilled in just the areas that Suffolk was not good at. So there was a clear patient benefit argument for allowing the two to merge because it should, the argument was, deal with the problems at Suffolk. On the other hand, it was clearly going to reduce the potential for competition in the provision of some of those services. We then had to weigh up what was the likely cost to patients of the loss of the potential benefits of competition versus the benefits of just fixing Suffolk. In thinking about that, we also had to think about whether there was another way of fixing Suffolk that maybe would have less of an impact on competition. We went through that process and concluded that the best interests of patients were served by allowing the merger to go ahead, which is what we did.

Q3 Chair: Can I ask you to enlarge on that a little bit so that we are revising for ourselves where we are in this process? It is still the case, is it not, that you are the sponsor of the Foundation Trust Network, or the foundation trust community, which is, roughly speaking, half NHS providers and the other half are still NHS trusts that, as of this moment, are not part of your bailiwick? Is it still your objective to secure the passage of all existing NHS trusts into your bailiwick-question 1?

Dr Bennett: Yes. To answer your question, there are 144 foundation trusts. There are some 100 nonfoundation trusts. The numbers are moving around because some of them are thinking about merging. That represents about 54% of all revenue, so a rather smaller proportion of revenue, which tells us that some very big ones have not come through yet. It is not our objective, as such, to see all of those NHS trusts become foundation trusts. It is our objective to continue to maintain a rigorous standard when we assess those trusts. It would be fair to say that we hope they will eventually all become foundation trusts, but it is the objective of the newly formed Trust Development Authority to get them to the point where they can become foundation trusts.

Q4 Chair: You are working with the Trust Development Authority to achieve that purpose.

Dr Bennett: We have done two things in particular. One, we have shared a lot of our experience of taking applicants through our process to help it understand how the process works and what typically are the problems that trusts face and, therefore, to help it anticipate what those problems might be, get them fixed before they come to us and generally help it prepare the trusts. We have done things like have members of its team shadow our team as we have assessed trusts and so on.

The second thing is we have done a complete review of its process and our process to try and make it as efficient and effective as possible. We are very clear that there has to be an absolutely unambiguous point at which it is handed over to us and then we will do an assessment. We will not look at individual trusts until that point because we do not want to mark our own homework, so to speak. But we have looked at ways of rationalising the process so that, for example, a trust does not do something immediately before handing over to us and we just do it again. We are trying to make it more efficient.

Q5 Chair: There is a whole series of conflicts, it seems to me, in this field, one of which is that it is the stated intention of the Government, as it was of their predecessor, that all trusts should become foundation trusts, but that is not an objective of Monitor. It cannot be because you have to enforce a test before a trust enters your category.

Dr Bennett: Yes.

Q6 Chair: The question is what happens in two years’ time in two sets of circumstances? One is where three quarters of the NHS trusts have become foundation trusts; what about the tail? Or is it a problem that you work with the Department on if progress is less encouraging than that?

Dr Bennett: By "work with the Department", do you mean lower our standards?

Q7 Chair: I am asking you.

Dr Bennett: The answer is no, we are not going to lower our standards. We have sought to set an objective standard such that if a trust does not meet that standard then it should not be given the independence or autonomy that goes with becoming a foundation trust. I happen to think that that is a standard that every trust should achieve anyway irrespective of whether you give it the label of foundation trust afterwards or not. It is essential that we do not change that standard. If the NTDA is struggling to get trusts over that hurdle, then, of course, we can sit down and say, "Look, here is our latest experience at looking at the trust." One of the things we will be talking to it about is that it is thinking, as I said, about mergers and acquisitions as a way of preparing trusts. We will talk to the NTDA about what it thinks that is going to achieve and whether it is likely to help those trusts meet our standards.

Chair: It is another illustration of the good bank/bad bank principle. I have a number of colleagues that want to come in. Can I go to Virendra first-he wants to get away-then Sarah and then Graham?

Q8 Mr Sharma: The Department of Health tells us that "in due course" Monitor and the Care Quality Commission will operate "a joint licensing process". How will you go about aligning your standards and processes to enable that, and how long will it take?

Dr Bennett: The important bit of the joint licensing is an administrative point. In essence, the CQC has its registration process and fundamentally that does not change, or at least, if it does, it is for its own reasons and nothing to do with us. Everyone we have to issue a licence to will be registered by the CQC. That means the CQC has information about these providers, so we will seek to use the CQC’s information and not go and ask for it again. In so far as the similar information that we both need is concerned, we are trying to make sure we want exactly the same information so that we are not asking for similar things where we could have asked for one thing once.

Once organisations are licensed, they may need access to ask questions and the like. The CQC runs a call centre because it has a huge number of bodies that it registers and organisations will use that call centre as a first point to ask questions about our licensing process as well. That is the longterm aim and we hope that that, from April 2014, is the way we will be. Our first group of licensees, we hope, will be the foundation trusts in April 2013, so for the first year it will only be foundation trusts that are licensed. Because the CQC is quite busy doing other things at this time and because we know the FTs very well-so we pretty well have all the information we need about them anyway and they are small in number-for the first year we will essentially run a system ourselves. But, by April 2014, we hope to have a fully integrated system so that as we bring the nonFTs into our licensing regime they will go through this jointly administered process run by the CQC.

Q9 Mr Sharma: When you said "by 201314", is there a particular time in that year, whether it is the early part or the later part of those two years?

Dr Bennett: It is 1 April in both cases. It is 1 April 2013 for FTs and 1 April 2014 for everyone else.

Q10 Chair: I have a supplementary. If, between 2013 and 2014, an existing foundation trust is reviewed by the CQC and it raises issues that you think should raise question marks over the performance of that trust from its perspective, does that mean that the FT’s licence from you is at risk?

Dr Bennett: That is ultimately so. The first thing to say is that, from 1 April next year, it should be the case that the new regime kicks in. The trusts will be operating under our licence, so whenever we deal with FTs from that date on we will deal with them through the licence rather than through the terms of authorisation. If an FT gets into difficulty, potentially its licence is at threat but in fact we have so many opportunities to step in and deal with the problems, including the ultimate problem of actual failure at the trust, that that is not the real issue. It is not that we are going to take the licence away. We might take the management away, for example, if we have a very serious problem that we think it cannot deal with.

Q11 Chair: That is interesting because your phrase "so many opportunities to step in" is a different piece of theology from, "You license them, they are off and they are then independent."

Dr Bennett: That reflects the fact that I think Parliament made it very clear during the passage of the Bill that it wanted us to be able to step in in the future, broadly as we can do today. Those opportunities in the future are broadly as they are today.

Chair: I must control myself. Sarah.

Q12 Dr Wollaston: Can I rewind to your statement earlier where you said the best way of fixing Suffolk was fixing Norfolk? In these kinds of decisions-because it really matters to people-how much clinical input will there be? You are a sector regulator, predominantly economists, and how much clinical input will you have in those decisions? Will you be appointing their senior medical advisers within your role?

Dr Bennett: Yes.

Q13 Dr Wollaston: So it is taken in the round. Could you elaborate?

Dr Bennett: Yes. Even in that case, the advice on the competition aspects was provided by the Cooperation and Competition Panel, which is to be integrated into Monitor. It has a panel of medical experts that it calls on. We also have a panel of medical experts that we called on and individuals as well who knew about the specific issues in that case. Going forward, we will continue to do that but more so. The most important change there is that I have decided that we should appoint a Chief Medical Officer to the senior executive in Monitor. There will be a senior clinician reporting to the chief executive whose job will be individually to provide input to all of the decisions we are making but also to be the conduit between us and the broader medical community so that we can access the right advice in the right way at the right time when we are making any of our decisions. But, of course, these would be particular examples.

Q14 Dr Wollaston: Would the medical panel be a local panel which understood the local situation or would that be a general national panel, and how would that be appointed?

Dr Bennett: It would depend on the circumstances. In the case of the NorfolkSuffolk merger, we called on individuals who had expertise in mental health. In that case, we did not particularly look at local people. We were looking for people of a national stature who could give us a definitive view on things. But it will depend on the circumstances as to whether it is local advice that we need. Sometimes, the local advice might even be conflicted and we would quite deliberately seek advice outside.

Q15 Dr Wollaston: Will that advice be in the public domain, so people can see it?

Dr Bennett: I think all of it will eventually. With all our decisions, we will explain why we have made them and publish all the evidence-apart from anything that is commercially confidential, I should think-that form their basis, yes.

Q16 Grahame M. Morris: Might you give some indication about the scope and size of Monitor? Having served on the Health and Social Care Bill, I well remember Part 3 of the Bill and the long debates we had in Committee about the original role for Monitor, which was as economic regulator driving forward competition in the NHS. Now that leviathan seems to have been transformed into an octopus with tentacles into care quality and sector regulation with FTs, social care and so on. What are the implications in terms of staffing and the skill mix, and what is the cost of the organisation now?

Dr Bennett: I should say that although technically we could have responsibility for social care-there is a clause in the Act which could be switched on to give us that responsibility-we do not have it at the moment. So we are not currently organising to take responsibility for that.

Before all this began, Monitor had about 100 to 110 people. That was to deal with around 127 foundation trusts, I think. We are obviously going to have a lot more foundation trusts, potentially nearly twice as many, to look after, and the additional responsibilities. Our estimate is that to do those two things, we will need a total of between 400 and 450 people. That is where we are aiming. Our budget, before it all started, was around £16 million or £17 million a year. For all those additional responsibilities we are thinking that it will probably be around £60 million to £80 million, but that is a wide range because we are still working out the details.

Q17 Grahame M. Morris: It is less than the estimate that was given during the passage of the Bill, which I think was £120 million, from memory, potentially.

Dr Bennett: Was it that much?

Adrian Masters: In the impact assessment it was about £82 million, or something like that.

Q18 Grahame M. Morris: What is the skill mix? For example, what proportion are competition lawyers, have expertise in that field?

Dr Bennett: We will be inheriting most of the competition lawyers we need from the Cooperation and Competition Panel, which I think has just under 40 people at the moment. That will probably grow a little, but those 40 people are roughly split equally between economists and competition lawyers. There may be a few more, but not a significant increase in the number. At the moment, accountancy is the predominant discipline and then we have a number of economists and lawyers already and a mix of skills beyond that. Probably economists and lawyers will be the single biggest group of additional people, but the mix will not look hugely different, I think, from today.

Q19 David Tredinnick: I was going to ask some of the questions that Mr Morris has asked about trying to work out who Monitor is and the reference to the octopus seems appropriate. I would like to pursue a line of questioning about conflict of interests because it seems that you have ownership-or part ownership, or independent ownership-and yet at the same time you are price fixers and then you have all these other addons. I was trying to work out where the core of the octopus is. I am thinking of the old Bond film now, "Octopussy", which is rather appropriate at this time, and I don’t think you are going to fall out of the water tank-isn’t that the fate of the octopus? It was blue, too-but what I am interested in is where the core delivery is. You have abandoned your original policy of maintaining a Chinese wall between the foundation trust regulator and sector regulator functions-and that is April 2013-but if the Chinese wall has gone, isn’t it a terrible muddle of conflicts of interests? You have all these tentacles to worry about. It seems that you are an organisation which is incredibly complex and with all sorts of internal conflicts.

Dr Bennett: I am not sure it is quite as complex as it sounds, although if you followed the passage of the Bill you would have got very confused, I suspect, as you went along and also the legislation itself is quite complicated. In essence, we have our ongoing FT role, a role in pricing, a role in competition and a role in continuity of services. It is those four things in essence. It is not too many different things. It is a bit difficult to explain overall what that is all about. In simple terms, it is about making sure that the right rules, incentives and information are in place to make the system work.

Our job is to try and make the system work. I often say to people that we are there to help others deliver better services. We are clearly not delivering any services ourselves. We are trying to make sure the system is working well. There are conflicts among those roles and not just between the FT governance role and others of our roles. You find that in other regulators similar to Monitor, too. They all have to go through this process, as transparently as possible, of describing the conflicts and explaining how they have reached a balanced decision. It is fair to say that we have a particular challenge around our FT governance role and our other roles and so, as I say, we have to go back to the fundamentals-what decision will be in the best interests of patients?-and explain as clearly as possible why it is that we think that that is the right decision in each individual case.

Q20 David Tredinnick: Thank you. How long do you expect your foundation trust regulator function to go on for? If it goes on indefinitely, how are you going to cope with that?

Dr Bennett: The core of the legislation has it going on in perpetuity.

Q21 David Tredinnick: You are satisfied you will be able to manage that with the limited numbers that you are bringing in?

Dr Bennett: I believe so, although, of course, just in terms of resourcing, there is nothing to stop us changing it.

Q22 David Tredinnick: We have had other organisations in front of us that are clearly underresourced or whose resources are misapplied.

Dr Bennett: Yes. We are watching that extremely closely. One of the things you will have heard me do back there is be a little cautious about 1 April 2013. We have said that is our target but we need to be absolutely ready for that. I have made it clear that if we are not ready-

Q23 David Tredinnick: It sounds like you are saying, "We need to be absolutely ready for us to miss it."

Dr Bennett: No, I am not saying that at all.

Q24 David Tredinnick: I think you are saying it because you are saying that it is a point that is worrying you. If it worries you, then you are likely to miss that target.

Dr Bennett: No, I did not say I was worried.

Q25 David Tredinnick: You are giving the appearance of being worried about that date.

Dr Bennett: Okay, there are some uncertainties and the biggest one is that we have just completed-on Tuesday last week we closed-our consultation on the licences. We did a lot of informal consultation in advance and we did a lot of work during the consultation in talking to stakeholders. We hope that there will not be any major problems or issues arising out of the consultation but, of course, it is there for a purpose. If major issues are raised and we need more time to deal with those issues, then we will take the time.

Q26 David Tredinnick: Major issues. The Foundation Trust Network says it is very worried that foundation trusts will face tougher licence conditions than other providers, which means it will be unable to compete effectively. What do you think about that?

Dr Bennett: There are two aspects to this. Some say they think that the new licence conditions are creating a tougher regime than the one that we currently have. That is absolutely not our intention. We want the regulatory burden essentially to stay the same.

Q27 David Tredinnick: You say that, but the Foundation Trust Network also suggests that the current licence proposal, by diminishing providers’ autonomy, "potentially goes beyond Monitor’s legal remit". What do you say about that?

Dr Bennett: We certainly do not believe it does. We will have to look at those specific points, of course. This is the whole point of the consultation. If the FTN has specific and legitimate points, we will have to deal with them. I do not think it goes beyond our legal remit or represents a greater burden than it has today. It looks more complex. The legislation is complex.

Q28 David Tredinnick: How is Monitor coping with the increased foundation trust, socalled, "pipeline" in the runup to the 2014 target for all remaining trusts to become foundation trusts at the same time as having to go through the octopus transformation as an organisation and map out your new role, get your tentacles in the right position?

Dr Bennett: I am not sure I like this analogy, but we have refined our process of assessing FTs and essentially it is a process we have been running for a number of years. The key thing for us is to make sure we resource up for the increased number of applicants we expect to come to us. We are in constant dialogue with the NHS Trust Development Authority about its expectation of when trusts will come to us and we are making sure that we are recruiting people ahead of that pipeline.

Q29 David Tredinnick: Turning to Mid Staffordshire, Monitor claims to have learned the lessons from the Mid Staffordshire Foundation Trust case. However, Morecambe Bay Foundation Trust recently also turned out to have major issues-quality and safety failings-after being monitored by Monitor.

Dr Bennett: Yes.

Q30 David Tredinnick: That is not much of a record, is it?

Dr Bennett: What is clear is that Mid Staffordshire was authorised as a foundation trust when it had issues that clearly should have meant that it was not authorised. Reviews were done and Monitor accepted all the recommendations of those reviews-independent reviews-in an attempt to make sure that did not happen again.

David Tredinnick: Thank you. With your indulgence, Chair, I have one further question.

Chair: Dr Bennett had not quite finished answering.

Dr Bennett: I was coming to Morecambe Bay. In that case, there was a trust in which-almost exactly a year after it was authorised-we discovered some problems in the maternity area. As we dug more deeply into them, it is fair to say that we had identified before authorisation that there were some problems in that area and it is fair to say that some of them were probably there when the trust was authorised. During our original assessment of the trust, we identified that there were a number of serious untoward incidents in the maternity area. We put our assessment on hold and asked the CQC to go in and check it out. We then had an interregnum of over a year while we waited for the CQC to look at the trust. During that period, the trust was registered by the CQC without conditions. Eventually, it came back to us and said, "We do not think there are issues in maternity." We continued on that basis with our authorisation process and authorised it in October 2010. As I say, a year later further problems emerged. I decided that we needed to get some real maternity experts in there, so we got a team from Central Manchester to go in and do a really deep dive in maternity and discovered underlying problems. We took immediate action. The senior leadership of the trust was replaced and I am pleased to say that a lot of progress is now being made.

The lesson for us is that where we have a trust, in this case, being assessed and we identify that there are some issues, we-and I have discussed this with the CQC-are going to have to sit down with the CQC and very explicitly discuss what it is going to do to identify whether or not there are real problems and, more often than the CQC has done in the past, we need jointly to send in the sort of team we eventually sent in to dig in and find the details. That was not a lesson that had been identified in Mid Staffordshire, but I think it is clearly a lesson we need to learn.

Q31 David Tredinnick: Thank you. That neatly brings me on to my last question. If you are dissatisfied with a situation and want a reconfiguration, where is the money coming from to do it? Where is the capital?

Dr Bennett: If a trust needs to reconfigure, where does the money come from? In an ideal world, a wellrun trust able to, under the pricing arrangements, run at a surplus each year will build up a cumulative surplus and then it can spend that on restructuring itself. Some trusts are.

Q32 Chair: And what about in our world?

Dr Bennett: Some trusts are doing that. Not all trusts can do that and it is not necessarily bad management. It can be a combination of how revenue looks for an individual trust, which can be just an accident of the way the revenue structures work, possibly if they have commissioners that are themselves under significant financial pressure and possibly decisions on reconfiguration or restructuring that are being put off, which means that when eventually they need to be tackled they are more expensive. The result of all of that can be that a trust that is not badly run nevertheless needs funding to restructure itself.

One of the issues here is that it is not entirely clear that there is money in the tariff, for example, to pay for this restructuring. So it is not surprising that trusts have to look elsewhere for the money when they need it. Historically that has come in a rather opaque way from all sorts of sources, the PCTs, the SHAs and sometimes from the Department itself. In the future, it should be much more systematic and transparent. Essentially, only the Department can inject cash into a trust that needs restructuring. We are in the process of agreeing with the Department how this will work, but in essence we have agreed that it will only inject cash when we have agreed that there is a viable recovery plan at that trust.

David Tredinnick: We might be pursuing some of those points later.

Q33 Chair: Can I pursue that a step further now? It is a theme of this discussion so far this morning that your relationship with foundation trusts has moved on a long way from a relationship between a regulator and an independent entity. I observed in an answer to an earlier question that you said you had several different means of intervention. You said-accurately, I think-that that reflected the will of Parliament. But it seems to me that the service reconfiguration that David was asking about is a fact of life. We know it is a major issue in the health service and likely to be so going forward. Those kinds of reconfigurations typically require capital injections.

Dr Bennett: Yes.

Q34 Chair: Is it fair to characterise Monitor to some degree as a financial holding company with no finance?

Dr Bennett: No, I do not think so. I can see why you might say that. To some extent, you could say that the ultimate owner of these public assets is the Department, or the Secretary of State with the Department acting on his or her behalf. It injects cash, either in the form of new equity, public dividend capital, or in the form of loans. On a daytoday basis, we act as its representative and make sure that the trusts that are funded in this way are making good use of that capital, providing high quality services and are well governed. When they get into difficulty and need cash, that cash still has to come from the Department, but we advise the Department and say whether or not we think it is appropriate that trusts should get this injection of cash.

Q35 Chair: Does the Department have a capital budget reserved for this purpose, the restructuring that you are going to be advising it on?

Dr Bennett: It has a capital budget, but nevertheless I know we have to work out exactly how this capital regime in the new world is going to work. So I think it has the benefits of much greater transparency. But, perversely, I guarantee that, because you will see the money going in in a transparent way, it will look like we are spending more. I think we should be spending less, but it will be much more transparent.

Q36 Chris Skidmore: Returning to the line of questioning that David had about Mid Staffordshire and Morecambe Bay: you mentioned, Dr Bennett, right at the beginning of the evidence that the primary duty of Monitor is to protect and promote the interests of people who use healthcare services. I want to raise another particular trust that was brought up in the written evidence, the South West Whistleblowers Health Action Group regarding University Hospitals Trust Bristol. That was given foundation trust status by Monitor in June 2008. It was then a year later that Private Eye exposed misdiagnosis allegations in histopathology and there has been an inquiry. The inquiry stated: "Indeed, we formed the clear impression that this Inquiry was only established because of the articles in Private Eye and that, had it not been for them, the issues would have continued to be ineffectively addressed."

There is an issue particularly with the South West Whistleblowers’ evidence, in that Bristol University Hospitals Trust and North Bristol NHS Trust had a close relationship and members of the staffs would often work together on the key clinical issues. North Bristol is now going through the process of becoming a foundation trust and the particular organisation here feels, having been in contact with Monitor to raise issues-it has several clinical whistleblowers who worked on the case-that the issues of clinical governance have not been effectively addressed. It has said that, based on experience with Monitor, it sees no evidence of rigour in its assessment process and no evidence that requires high standards from FTs. You talked about interventions and it raises a wider issue about the quality metrics that you operate with the CQC. First, on this individual case, I wondered if you might be able to investigate the evidence that has been given to us by the South West Whistleblowers group and possibly write to the Committee.

Dr Bennett: Yes.

Q37 Chris Skidmore: I do not want to go into the individual detailed allegations it makes now, but it does raise a wider point. If you have trusts that have been working together and there have been problems and Monitor has not picked up issues with a trust that has been a foundation trust of a neighbouring trust and it is the same staff, the same governance structure, the same people involved, how do you ensure-as you say, to promote the interests of the people who use healthcare services-it has the confidence to believe that when Monitor is then looking at a neighbouring trust, a foundation trust, the process is being followed, having seen the failure of the actual regime in a previous case?

Dr Bennett: Yes. I would certainly be very happy to write to the Committee and I have exchanged quite a lot of correspondence with the whistleblowers group as well. One of the problems is that a number of its concerns fall outside our bailiwick. They are more the responsibility of the quality regulators or the professional regulators.

Q38 Chris Skidmore: When you say that, do you mean the CQC?

Dr Bennett: I mean the CQC in particular, yes.

Q39 Chris Skidmore: To pick up on that point, that is part of the frustration. You have people who obviously had horrific experiences within various trusts and are very emotionally upset by what has happened. Their concern is obviously that you say "That is outside our remit" and others say that is outside their remit and it falls through the cracks. It does seem to be a problem that you can pass the buck on to the CQC at the same time as saying you are absolutely determined to ensure that patients who use the services will be protected and you are going to promote their interests. They do not feel their interests are being promoted and you say, "Hang on a second. That is the CQC’s job." Is there not a case here for some kind of organised framework between you and the CQC? You were talking earlier about joint working and that sounds very welcome. The CQC has a memorandum of understanding with the GMC and the NMC but Monitor does not. Is there any way in which you will move the quality metrics-which, okay, admittedly were established by the CQC- and therefore people would have more confidence and faith in Monitor while you are pushing forward FT applications?

Dr Bennett: Yes, I think it is fair to say that people need, to some degree, to have more confidence in the system overall. Of course, we will be getting the results of Robert Francis’s second inquiry into what happened at Mid Staffordshire, which is very much focused on what happened on the regulatory front and we will have to learn whatever lessons come out of that.

One thing, however-and you are making an entirely valid point-is pretty clear to me, and it does come out of the Morecambe Bay experience and from reflecting on what is likely to come out of the second Mid Staffordshire Inquiry. Although I think, certainly since I have been at Monitor, we have had a very good relationship with the CQC, it has been a fairly handsoff relationship. If it is a quality issue we hand it over and wait for it to tell us what the answer is. As Morecambe Bay rather illustrates, if there is a problem, the buck lands on our doorstep. Therefore, we have to have a more proactive relationship with the CQC going forward. We need for that to deal with the point that you are making about things falling between the cracks because what is not acceptable is that we, however legitimately, say, "Nothing to do with us." The CQC maybe says the same, or whatever, and then, as you say, it falls between the cracks. We absolutely have to establish a relationship where there are no cracks. In part, that means us having a somewhat different relationship with the CQC.

The Parliamentary and Health Service Ombudsman has a role to play here as well and it will be interesting to see what Robert Francis has to say about all this. It seems to me that it is a rather complex setting, in which all of this quality is regulated. As you say, there are the professional regulators as well. We have to get better at joining all these bits up, I think.

Q40 Chris Skidmore: To pick up what you mentioned about the future Chief Medical Officer role within Monitor, has it been decided how that position and his or her relationship will operate with the CQC? Would it be possible that the CMO could sit on the board of both Monitor and the CQC?

Dr Bennett: They will not be on our board, simply because we have a small board. I am clear that they need to play a very significant role in our relationship with the CQC. We will have to work out exactly how to do that in practical terms. I do not think the answer, however, would be that they have a foot in both camps. At the end of the day-and this is partly my point about a different relationship with the CQC-we need to be able to satisfy ourselves that the CQC is doing for us what we need it to do.

Chris Skidmore: Thank you very much.

Q41 Chair: I was struck by the same point as Chris: that your solution in Morecambe Bay appeared to be that you needed, as an organisation, to get more into what are effectively the clinical quality issues, as Monitor. You are equipping yourselves to do that by appointing a Chief Medical Officer and that brings the risk that, in seeking to avoid gaps, what you are creating is duplication.

Dr Bennett: There is a risk of that, so one of the things I have said to the CQC is, whereas in Morecambe Bay we independently sent in this team from Central Manchester, in future those sorts of decisions would ideally be a joint decision, where we jointly say what needs to be done to understand the nature of the problems here. If the answer is an indepth review of the sort the CQC is not itself equipped to do, we jointly commission somebody like Central Manchester to go in and do it. That is the way we try not to create that overlap because, you are right, it is a risk.

Q42 Andrew George: Coming on to the Act itself and the role that Monitor will be playing, how would you say your perception of what you anticipate the role of Monitor to be had changed during the passage of the Bill itself? We worked ourselves up into lathers of argument and indignation in this place but in reality I imagine you anticipate your role to be much the same at the end of all our argumentation as it was at the beginning, do you not?

Dr Bennett: I certainly would not say that.

Andrew George: Oh, go on.

Chair: You wouldn’t be the first.

Dr Bennett: There are three important changes, I think. There is an important aspect to this. The three changes are the fact that we have this inperpetuity role with respect to FTs and their governance. The second is that that is to be done under our single primary duty: seeking to deal with the conflict issue. The third change is the move from promoting competition to preventing anti-competitive behaviour. That is the one where I would say that I do not think we were going to do much of what people were concerned we would do. We were not going to be rushing around the NHS demanding that competition be introduced at every possible opportunity, but the change to the Bill means that we cannot. It means that when we think the use of competition would be an effective way of delivering better services to patients, there is a much higher burden of proof on us than there was in the original version of the Bill. I hope we would have demonstrated with a high burden of proof anyway that we were doing it for the right reasons. So there is that sense in which perhaps what we will actually do would not be that different, but what we can do is quite significantly changed.

Q43 Andrew George: In terms of how you saw your role-from what you are saying, if you do not mind me saying it back to you-you are saying that you see it in much the same way but recognise that the constraints are more apparent now than perhaps they were before had you been a different collection of personalities that made up Monitor at the time.

Dr Bennett: I think that is right. It is not just that the constraints are more apparent. They are real. We did have more freedom in the way we went about things previously. Freedoms have been much constrained. All I would say is that most of what they have been constrained to is what we would have done anyway.

Q44 Andrew George: Could you explain to me, though, with your wealth of experience-and me without that-and crystallise for my benefit, if not others’, how you would differentiate between what you have already described as the term "promoting competition" as a different from-

Dr Bennett: -preventing anti-competitive behaviour?

Andrew George: Yes.

Dr Bennett: When we had a duty to promote competition, we could assert, in a given transaction-one, for example, that is going on somewhere in the NHS-that this transaction happened on a competitive basis. So for a commissioner buying a service from, let us say, the local hospital and historically it has always bought the service from the local hospital and never looked at alternatives, under the original version of the Bill, we could have said, "No, we think it will be better for patients if you use competition and you must do so." We did not have to do a lot more than that because we had a duty to promote competition and here was somewhere where we felt promoting competition would be a good idea. Now the focus is much more on saying that we are not going to intervene with commissioners in that way. However, if, let us say, an alternative provider of that service were to talk to the commissioners and say, "We would like an opportunity to tell you what we could do for your patients," and the commissioner says, "No, I don’t want to talk to you. We are perfectly happy with our current provider. We are not going to enter into any conversation," and if that provider complains to us that there is anti-competitive behaviour going on, we could choose to investigate it. So it is a very different setting.

Q45 Grahame M. Morris: Can I ask a quick supplementary there? Briefly, what has primacy, integration or competition?

Dr Bennett: The benefits of patients.

Andrew George: In fact, in the-

Dr Bennett: I am sorry, but they are not necessarily in contradiction, though.

Q46 Grahame M. Morris: I can think of examples where they could be, such as the example you gave about purchasing a service from a local hospital and a private provider, or an alternative provider, arguing that that was anti-competitive. If by purchasing the service from the private provider, it undermined the integrated service provided at the local hospital, then there would be a conflict there.

Dr Bennett: I certainly accept that there could be. It is much less than people think, but there certainly could be. That is where you have to go back to the question: what is going to be in the best interests of the patients that are served by these providers? It is my Norfolk and Suffolk example. We had two competing things and we had to work out which was in the best interests of patients.

Chair: There was an interruption on Andrew.

Q47 Andrew George: That is fine and I welcome it. That is very helpful. I was going to go on, if you like, to contrast some of the language you were using in the early days of the Bill coming out, comparing yourself with sector regulators like Ofwat and Ofgem, to language used, for example, in Healthcare Finance in July in which you say: "Our starting point is"-as you were implying just a moment ago-"our new primary duty to protect and promote the interests of the users of the health service." So we are away from, if you like, a pure and rather standoff concern about process and now you see yourself as having a role which takes into account concern about patient safety and services. Is that a fair summary of the journey that you have gone through over the last couple of years?

Dr Bennett: It is a fair summary of where I finished up. Where I was reported to be in the first place was not an entirely fair representation of where I was, but this happens.

Q48 Andrew George: I think I was quoting you, actually.

Dr Bennett: No, you were quoting somebody claiming to quote me. It is not the same thing. To be fair, I was represented less than entirely fairly, but there you go. What is certainly true is that the Bill did change a lot and so itself has put this strong focus on best interests of patients being the starting point. A combination of the discussion that happened around the Bill, the changes to the Bill as it became an Act and probably me doing a better job of explaining myself, gets us to where we are now, but I hope at least I am clear as to where we are now.

Q49 Andrew George: That is helpful and reassuring, so we know, as you say, where you have ended up. Coming back to the point that Grahame was raising, if you are concerned about, at the end of the day, the interests of users of the Health Service and getting the balance right between taking and not taking appropriate action where there is clearly anti-competitive behaviour, would you not do so if-but you do not have a role here-there was anti-collaborative behaviour? Do you see that as being part of your role, to spot that if you see-

Dr Bennett: Yes.

Andrew George: -the fragmentation of the service as a result of the wish to separate issues on a pathway of care that you would end up with a less good service from the point of view of the patient?

Dr Bennett: We have three subduties. One is preventing anti-competitive behaviour. A second one is enabling the integration of care. We have been working on how best we can do that. Other bodies have a major role to play here, the Commissioning Board in particular. One of the things that we have put into our licence consultation is a proposal that there be a licence condition that requires providers not to partake in anticollaborative behaviour, if you like, which is likely to be to the detriment of patients, for example, because it gets in the way of providing integrated services. So, yes, we are proposing-I mean, this is a proposal and that specific thing is not in the Act, but we chose to interpret it in this way and that is what we put in our licence consultation-that there be a licence requirement on providers that they cooperate appropriately. Adrian, do you want to add to that?

Adrian Masters: The idea is that somebody could come to us and complain and say, "Here is a legitimate thing we want to do to the benefit of patients to do with integrating service and this particular provider is not cooperative, not providing the information we require." We would have the powers under this proposed licence condition to look at that and say, "We are going to instruct you to cooperate."

Q50 Andrew George: That would be in the case where a provider was not being co-operative.

Adrian Masters: Yes.

Q51 Andrew George: But what if a commissioner was seeking to maintain integration between a particular service and a particular provider company was arguing that that was anti-competitive? How would you manage a decision where a commissioner was absolutely insistent that you needed to maintain a good umbrella, for example, of acute emergency services under one roof and you had one company that wanted to provide one procedure saying, "Look, we want to take on this one procedure but they will not allow us"?

Dr Bennett: It comes back to the point that we would ask the commissioners to demonstrate to us that what they are doing is in the best interests of patients. If they were able to do that, then they would be able to get on and do as they choose.

Q52 Andrew George: Do you have the clinical skills to do that within your team?

Dr Bennett: Not necessarily inhouse. There are lots of clinical experts out there. The important thing is that we can access individuals with the right expertise at the point at which we need them.

Adrian Masters: I would just add this. You were asking earlier about how our thinking had developed during the passage of the Bill. Our thinking has moved, in terms of thinking of our functions, of separating the decision making and avoiding conflicts of interest, to saying we have an overall duty, which is: what’s in the best interests of patients? Where we do have different functions with different implications, we would look at the overall picture and decide what is in the best interests of patients. That has been a shift, resolving the conflicts rather than trying to separate the decision making.

Q53 Andrew George: But, if you fail to resolve those conflicts, what enforcement powers do you have?

Dr Bennett: Did you say, "Do we have"?

Andrew George: Yes.

Dr Bennett: There are two sorts of conflicts. There is the conflict on the ground, so if someone is doing something which seems not to be in the best interests of patients, what enforcement powers do we have over those?

Andrew George: That is right, yes.

Dr Bennett: We can do a range of things, from requiring them to stop doing what they should not be doing, because it is not in the interests of patients, to not do it again and even to undo it. It depends on exactly what they have done. For example, if they are tendering for a contract and they have done it in a way which we think is not serving the best interests of their patients, we could tell them to retender the contract; we could tell them to bring it to an early end and tender again. There are a whole variety of things we can do and, of course, we have to work out what is the best thing do in the given circumstances.

Q54 Andrew George: I notice that some clinical commissioning groups are reportedly writing into their constitutions that there are preferred providers and these preferred providers are, in the main, NHS bodies. Is the expression "preferred provider", which of course is not a term which is recognised in the Act, something which you would recognise and respect and how do you approach that if that is what CCGs are doing?

Dr Bennett: I would need to understand what they mean. If what they mean is-and I am guessing-"We are in an unthinking way always going to use a particular provider and not be open to the possibility of using an alternative provider, no matter how strongly it argued that it might be a better provider," then I think we would be quite worried about it.

Q55 Andrew George: Finally, were there any circumstances in which you ever believed that the expression "Any Willing Provider" ever implied that those providers were unqualified? In other words, has there been any change?

Dr Bennett: No. I think that is just an attempt to make it absolutely clear that of course they are qualified, not that that was a decision we made, but I imagine that is what it was about.

Chair: There is brief question from Barbara and then Sarah wants to come in on these themes as well.

Q56 Barbara Keeley: Indeed, and I think we have more questions about integration, but I am interested in this chopping and changing and being able to force a situation whereby you can say that you have to retender or have to look at this and that. It seems to me that integration is about building relationships. Where it has worked in the country, it has been about coappointments, shared appointments and that sort of thing. How on earth can it be in the interests of patients to chop and change and to say, "Well, that part of it"-and you may have built up working relationships or made coappointments over a number of years-"now has to be retendered." You cannot say that that body that is part of the integrated working relationship is now a preferred provider. There is an appallingly great tension there, isn’t there?

Dr Bennett: It may not be in the best interests of patients and we would not ask them to do it if it was not. You are absolutely right. This is exactly what we have to look at.

Q57 Barbara Keeley: Going back to skills, what skills do you have in assessing if an integrated setup or integrated working relationships are working and should be left alone? You talked about being able to call on clinical skills, but where is your expertise in this? There are not many parts of the country that have been successful in this. There are a number of places, and some really good examples, but how will you know?

Dr Bennett: We will have to learn. We have already done a fairly significant piece of work on what the provision of integrated care means and what one can do to promote it. We have published that and are working closely with the Commissioning Board on this very issue of trying to understand what it means and how we can promote it because, as I say, it is very much a joint endeavour between us and the Commissioning Board. We are going to have to learn, as I think are many of those commissioners. I do not think they know either.

Q58 Dr Wollaston: Can we develop that a bit further because a lot of people are interested to know how you are going to work with the Commissioning Board? You mentioned that you are appointing a clinical director and you are going to have panels of experts. How are you also going to work directly on integration with the Commissioning Board, commissioning groups and even with Health and Wellbeing Boards, with a lot of people who have, if you like, a duty to promote integration?

Dr Bennett: That is right. The truth is that we have more to do to work this out. Of course, the Commissioning Board itself is still in the very early stages of coming together as a body, but we are already working with it in a number of these areas. For example, we are working on a piece of research that we will publish very shortly on the whole issue of competition and choice. It will have many components, but one of them will be guidance that we can issue to commissioners to help them understand these questions about what the tradeoffs are between integration and anything that you need to trade off against it. Where can competition and choice play a role, how do you make sure it is effective and really does benefit patients, and so on? But, as part of that programme of work, I am sure we will be looking further at things like what specifically we should be doing on competition. Over time, we will have to work out exactly what the mechanisms are, but we already have a joint team working on this topic and I expect we will have lots of joint teams. We have a joint team working on pricing at the moment.

Q59 Dr Wollaston: On that point, one issue that has been raised is whether or not the burden of proof for integration will be higher than the burden of proof for competition, if you like. Where do you see that balance being struck?

Dr Bennett: I should say that the burden of proof is on what is best for the patient.

Q60 Dr Wollaston: So you are saying neither really. It is purely patient focused.

Dr Bennett: I think that is what I want to say, yes.

Q61 Dr Wollaston: That is something you would reassure people on because people care about that point.

Dr Bennett: Absolutely.

Q62 Dr Wollaston: Another issue that has been raised by the Foundation Trust Network is that where competition is curtailed in the interests of integration, Monitor will have to develop a clear public interest test. I know that you have said before, as an organisation, that you are there to avoid the need for people to go to the European Court, but do you see that it is inevitable at some point that somebody will take this further on to the European Court and are you yourself going to set out that clear public interest test? Is there going to be a test as to which people can say, "As long as we have passed that test, we will be okay and it will steer us away from the courts eventually"?

Dr Bennett: This public interest test gets to the issue of what is in the overall best interest of the public or of patients. Essentially, they are the same group in this case. This is where we need to issue guidance. People can choose to disagree with our guidance. They can choose to disagree with our decisions. They can appeal our decisions and they may want to do so. Can they, technically, go up to the European Court?

Adrian Masters: They can always go to the courts, yes.

Q63 Dr Wollaston: So they could go to the European Court, but your view is that if they follow your guidance-and you will be issuing, as clear as it is possible to do so, a public interest test-that will-

Dr Bennett: It will be as clear as we can make it and consistent with European law so that it is not challengeable.

Adrian Masters: We would like to build a regime that people have confidence in so they feel they do not need to go anywhere else.

Q64 Dr Wollaston: So the commissioners are clear and feel confident that they can set out.

Adrian Masters: Yes.

Q65 Dr Wollaston: Thank you for that. Finally, to ask a question closer to where I come from, Torbay. As you will know, it has had to abandon its plans to be a stand-alone trust because it was deemed unviable. How closely was Monitor involved in that decision?

Dr Bennett: I will turn to Stephen.

Stephen Hay: It is a nonFT so we would not have been involved in that at all.

Dr Wollaston: You were not involved at all. Thank you for clarifying that.

Q66 Barbara Keeley: Moving on to the issue of-I suppose we could call it-foundation trusts in distress and taking the situation of the South London Healthcare NHS Trust case, how does the special administration process, the new process, compare to the process currently under way in the South London Healthcare NHS Trust in respect of foundation trusts? So we have the oneoff case in South London and then the broader process.

Dr Bennett: Yes. The legal framework that underpins what is being done in South London is very similar to the legal framework which will now apply to foundation trusts because, of course, South London is not a foundation trust. The notion of having a special administrator and the powers that it has, and so on, are fundamentally the same. What it does with those powers is very much something that needs to be determined partly on a casebycase basis and partly on the basis of what we learn as we go along. We are watching what is going on in South London quite closely and we will seek to understand what lessons we can learn from it, but there is no requirement as to the specifics of the process. For example, a fairly extensive markettesting exercise has been done to see whether the services currently provided in South London could be provided by the private sector. The extent to which we go through something like that will partly be determined by what we feel is the best approach in general and, secondly, by what is required in a given specific circumstance.

Q67 Barbara Keeley: On the question of writing off historic debts, obviously the special administrator is recommending the writeoff of £207 million for the successors of the South London Healthcare NHS Trust. Will Monitor have that option?

Dr Bennett: You would never become a foundation trust if you had a legacy debt of that sort. We would have got involved long before it got to that magnitude. But it is true to say-and we touched on this earlier-that a trust that is in difficulty may need funding. Typically, it will need funding for two reasons: one, it needs to have its ongoing deficits funded while we sort a problem out; and then it may need capital injection to restructure or reconfigure services to get itself in good order for the longer term. That funding will come, in the future, from a mixture of the Department of Health, as a sort of FT bank, and a risk pool that we have to set up, which will pay for what goes on in special administration.

Q68 Barbara Keeley: You say obviously it is not of the same scale, but the Public Accounts Committee says that there are 34 trusts with a combined debt of £356 million and that 42 have needed to receive help from the Department of Health. Clearly, we are in a situation where we have an NHS in surplus and parts of it facing what some people have described as bankruptcy. How will you handle that? Those numbers, the 34 trusts with those debts and 42 needing support from the Department of Health, are a substantial financial problem, yet overall you have a system that is in surplus and which handed money back to the Treasury last year.

Dr Bennett: Yes. All of that debt will be in the NHS trusts, not in the foundation trusts.

Stephen Hay: Yes. There were four foundation trusts that received public dividend capital last year that totalled £70 million.

Dr Bennett: Yes, but they do not have a debt problem.

Stephen Hay: No.

Dr Bennett: So the debt problem that the PAC is talking about is in the NHS trusts, not in the foundation trusts.

Q69 Barbara Keeley: How many foundation trusts face the problems of PFI affordability, that other situation in South London, and how are you going to address that? That is a core issue.

Dr Bennett: If I may I will give you a fuller answer in two parts. First, as Stephen said, last year four trusts in 201112 needed cash to be injected. They will need cash this year and two or three others will need cash as well, I expect. Two of those, one last year and a second one for this year, need that cash because of PFI projects. We have six foundation trusts that have PFI unitary payments which are in excess of the 12.5% of revenue that the Department of Health is currently using as its rule of thumb as to whether or not a PFI is affordable. Right now, only two of those are in financial difficulty. One is Peterborough, which got rapidly into significant difficulty, and the second is Sherwood Forest, which we have just put in significant breach because it is heading for difficulty, although it does not need a cash injection as yet.

Q70 Barbara Keeley: You have talked about cash injection, but if you see this as the issue of scale that it is, surely it needs addressing so that it will not carry on being an issue.

Dr Bennett: The problem with PFIs is that they are there. Once they are signed, there is an annual unitary payment for, typically, 25 to 30 years. It has to be paid. We can ask questions in some of these, as to whether they should have been signed or about the scale on which they were signed in the first place, but once they are there then, one way or another, they have to be funded.

Q71 Barbara Keeley: But you need to address it, don’t you, so should there be a pool to fund it? It does not seem sensible to be addressing these individually if you can see that, across the piece, there is an issue.

Dr Bennett: Absolutely, that is right.

Q72 Barbara Keeley: You know what the contracts are. They last for 25 or 30 years. You have talked about, in some places, it being of a scale which is going to be a problem. Clearly, it needs to be addressed. What is happening is that this move to foundation trusts segments what was a national service and the moving about of money has been happening for years. The system overall is in surplus. There is no real issue with a national service in some parts moving money about to others, but it is when you segment it down into individual trusts that you start to have an issue.

Dr Bennett: What segmenting it down to individual trusts does is make it transparent. The money is still there. The surpluses can still be used to deal with the problem trusts, but by dealing with them individually and making the financial transactions much more transparent, you can see where the problems are. The problem with doing it in an opaque way, moving money around in a way that it seems few people really understand, is that you do not know where the problems are and therefore you do not fix them. There is absolute merit in doing it transparently but you are right, if the system overall is in surplus it does mean the cash is there to fix the problems and this is where the cash injection would come from.

As to your point about looking at the PFIs in particular overall, the Department has been doing this. The majority of the problematic PFIs are not with the foundation trusts, they are with the NHS trusts. The Department has looked across all of those to try to identify which ones it thinks are likely to be in difficulty and it is setting aside money to fund those otherwise unaffordable PFIs. We have to regard this as work in progress, though. The world is changing.

Q73 Chair: Can I pick you up on one phrase you used? You said that you are operating a risk pool within, presumably, the foundation trust community.

Dr Bennett: Yes.

Q74 Chair: That was a new concept to me as one of the functions of Monitor. How is that being collected? How is it being funded? How big is it? What are the economic impacts of your risk pool?

Dr Bennett: The risk pool is seeking to do transparently something that is done today.

Q75 Chair: It does not sound transparent, or it easily could be less than transparent.

Dr Bennett: Yes. I did not say "simply".

Stephen Hay: It is not just FTs.

Adrian Masters: We should be clear what is meant by the "risk pool", David. This is not a pool to support FTs in deficits. It is a pool of money which is going to apply to all providers for the purpose of funding the costs of special administration if a provider gets into special administration. It is not established yet. It needs to be established by April 2014 and its purpose is to fund trusts in special administration.

Q76 Chair: Across all providers.

Adrian Masters: All providers.

Dr Bennett: Not NHS trusts.

Adrian Masters: Please, yes, go on.

Dr Bennett: We are at risk of confusing you and it isn’t simple to start with.

Q77 Chair: Yes-I think quite serious risk, at the moment.

Dr Bennett: The reason Adrian is saying "for all providers" is that it is foundation trusts and any other private or voluntary sector provider that is providing essential NHS services that we license. The one bit that is not covered is the NHS trusts, which actually, of course, is a rather important bit that it does not cover.

Q78 Dr Wollaston: Why does it not cover them?

Dr Bennett: Because the NHS trusts are directly managed by-owned by, if you like-the Department. So the Department, through the NTDA, takes care of the NHS trusts.

Q79 Chair: Is it managing or setting up a risk pool?

Dr Bennett: I do not know. It is going to need something. That is separate from us. That is the NTDA. Once a public sector provider becomes a foundation trust and we are looking after it, then, if it fails, becomes insolvent or is not able to pay its bills, it falls into this new failure regime, where we would send in a special administrator. The cost of the special administration, including restructuring in whatever way is necessary, to get the provision of services back on to a financially stable footing, as well as, of course, at an appropriate quality level-the funding for that comes from this risk pool. It is quite like the pension protection fund. It is a pool of money that providers and commissioners probably-but the details are to be worked out-will pay into as an insurance premium so that if they get into severe financial difficulty, the money is there to pay to sort them out. It is, as I say, making transparent what happens today. If a provider gets into difficulty, money is found to sort it out. It is just not very transparent. If a provider is running high risks in the way it manages itself, it faces no penalty until the day it gets into trouble.

Q80 Chair: You drew a comparison between this and the pension protection fund.

Dr Bennett: Yes.

Q81 Chair: As to the point you were making about some trusts being high risk and some being low risk, are you planning to raise different rates of premium on different trusts to reflect the risk factor?

Dr Bennett: That was certainly the thinking behind the legislation. It was the idea that we could use the risk pool in part to incentivise providers, and indeed commissioners, to behave in a way that reduces this risk, which is a good thing.

Q82 Chair: But it also increases the risk of a trust that is at risk.

Dr Bennett: Exactly. It is a classic insurance problem, isn’t it, that you impose the highest cost on those who can least afford it? At its worst, you propel those who are in difficulty into failure. We clearly do not want to design a system that does that. The principles are not that complex, but the detail is.

Q83 Dr Wollaston: Can you explain that model again so that I am clear?

Dr Bennett: We are certainly going to try to do it in a way that does not just propel those in difficulty straight into failure.

Q84 Dr Wollaston: So it is going to be a flat rate.

Dr Bennett: No, I am not saying that. I am saying we are working out how to do it, aware of that risk.

Q85 Chair: Can we have some sense of the scale? This is effectively Monitor creating a back pocket against a rainy day.

Dr Bennett: Exactly.

Q86 Chair: The question is how much do you envisage keeping in the back pocket? Presumably this is a proportion of revenue, that is how it is funded.

Dr Bennett: As it is today, indeed, except this is setting it aside in advance-although I suppose they sort of set it aside in advance but it is just not very obvious.

Q87 Chris Skidmore: A sort of censorship, is it?

Dr Bennett: No, I don’t think we have said-

Adrian Masters: We are still working on the numbers, is the truth.

Dr Bennett: In order to work out what this number should be you have to ask how many trusts you think are going to get into difficulty each year and how much it is going to cost to fix them. We are working on trying to get the best possible handle on those numbers.

Q88 Chair: But that is the answer to the question we were discussing half an hour ago of where the resource comes from to fix a trust that is in difficulty. Your answer was that it came from the Department. The Department had a capital budget available for this that it would make available to you on your advice.

Dr Bennett: Yes.

Q89 Chair: In addition to that fund within the Department, Monitor will have its own fund in this risk pool.

Dr Bennett: That is right. I was trying to simplify it a bit. There were two ways you could restructure a foundation trust that is in difficulty. One way is to do it before it becomes insolvent, before it is in a position where it cannot afford to pay its bills. First of all you try and intervene before it is losing money, when you can see there is a problem coming. Often we have done that, and we have helped the trust sort itself out with no external help needed. However, if things progress further, particularly, of course, if it happens very quickly, you may be in a position where a trust is starting to run up deficits that need to be funded, particularly if it needs cash funding. At that point, you could either let it get to a point where it cannot pay its bills and it goes into special administration and then all the costs of sorting it out come from the risk pool, or we could say to the Department, "We think this is a case where the trust’s deficit should be funded for a limited period while it develops a plan to recover itself. If that is a credible plan, then we may support its application to you for funding to fund its restructuring." So you have a choice between a solvent restructuring funded by the Department and an insolvent restructuring funded by the risk pool. Which of those you go with will depend on quite a number of factors. This is where we and the Department have to work closely together to work out what seems to be the best answer to deliver the best services for the local patients.

Q90 David Tredinnick: Dr Bennett, I am interested in listening to you on this point, but can I put it to you that there is a huge amount of effort going into salvaging situations which are completely out of control-maybe that is little unkind, so I should say "severe problems"-such as the South London Trust, which we are talking about? If you look at a big private sector company, it knows-like Tesco, for example, a massive company-on a daytoday basis exactly its financial position. I would like to suggest to you that part of the problem is the inability of this system to anticipate correctly the problems, with insufficient structure, systems or legislation in place even to enable people who could identify the problems and act on them earlier to do so. Do you think that is fair?

Dr Bennett: I certainly think, overall, the system is not as a good as it needs to be at identifying problems in advance and dealing with them. In the foundation trusts sector, the responsibility for doing that lies very firmly with the board of the trust, the leadership of the foundation trust. They are not all doing it as well, I feel, as they need to be. One of the questions we are asking ourselves as we put together the new version of our compliance framework-the way we are going to oversee the governance of the foundation trusts-is where we should do more to encourage them to be planning in advance to spot problems and deal with them. This gets to the heart of one of our big challenges because the more we do in that way, the more regulatory burden we will impose on these trusts, the more we will be taking away some of their freedoms, some of their independence.

One of our big challenges right now is finding the right balance between the extent to which we reduce risk in the system by getting the foundation trusts to do things and monitoring them more closely versus not having an excessive burden on them, which is both costly and removes their freedoms.

Q91 David Tredinnick: I do not accept what you have said, with all due respect, because I do not think you would need to have a regulatory burden. What you need is a better flow of information. This could almost be done automatically with computer programs or better reporting. This certainly happens, I know, in the New York Police Department which knows exactly what is happening in any its precincts because it is getting a proper flow of information. The technology is there, it is just not being used. I find it absolutely extraordinary that the South London Trust-I know it has a slightly different status-should have been able to spiral down into this situation with £207 million of debts before anything took place, but we had better not pursue that as I was only allowed one and a half questions.

Dr Bennett: But, as I said, we would have intervened long before it got to £207 million.

Q92 David Tredinnick: You would have done.

Dr Bennett: Absolutely.

Q93 David Tredinnick: You will do in the future.

Dr Bennett: Were it a foundation trust, we would have done and it would have been a lot more transparent. It is already a lot more transparent for foundation trusts. Frankly, we are going to do some things to try and force providers to get a much clearer understanding of their costs and mechanism. We need to understand costs much better to do a better job of pricing. One of the sideeffects of forcing the trusts to understand their costs more clearly so that we can price better is that they will understand them better for all sorts of other reasons. But still, what you need-and I think even with better information you still need-is a leadership that is looking at the situation of a provider in the context of what is going on in its local health economy, what is likely to be happening over the next three to five years, thinking about what are the sorts of challenges they face and anticipating how they can deal with them. I do not think-

David Tredinnick: Mr Hay was looking very excited about saying something there.

Dr Bennett: Do you want to say something?

Stephen Hay: No.

Q94 Grahame M. Morris: That brings us on to another area, if I could go back to the situation-and not just in the NHS-where there are other examples of providers who walk away from contracts that are failing. I can think of rail franchises and examples in primary care in the NHS, one in my area and one in north London. Mr Hay said a little earlier that he thought these new powers of trust, special administration, would be rarely used. I wonder, is there any conflict between what is happening now in the South London Trust and the trusts you mentioned, those six FTs that have particular problems with PFIs, and your intention to use the special administration route?

Dr Bennett: The essence of your question is-

Q95 Grahame M. Morris: Mr Hay said in evidence to the Committee that he thought these powers would be used sparingly.

Dr Bennett: And yet I have said there are six with challenges.

Q96 Grahame M. Morris: Yes. I have read your article "Mean Machine", and I presume that means the organisation, not the chief executive, but are you going to be a little bit more muscular in terms of how you use these powers?

Dr Bennett: I think we will. Whether or not you look at some of the situations where, in retrospect, we should have done more on the quality front-and we have talked about Mid Staffordshire and Morecambe Bay-there are lessons for us to learn and you could characterise those lessons as being a bit more muscular. On the financial front, we are likely to want to be a little more muscular, possibly trying to force trusts to anticipate their problems and plan better and trying to think of ways of doing that, but also stepping in quickly where there are problems. How often is this going to happen? As I said, there are six trusts with PFI unitary payments above the benchmark of 12.5%, but that is a very crude rule of thumb. As I said, there are only two at the moment that are clearly in difficulty. But we are going to have to watch this because there are so many things going on in the system that are keeping revenues down at trusts. This is, I think, the big problem with PFIs, and more broadly, that they may have made an apparently perfectly sensible decision to invest in this PFI five years ago, but against 30year revenue predictions which are just not going to materialise. That is what we have to watch out for.

Q97 Grahame M. Morris: We have had evidence presented to the Committee individually from FTs that the big problem they face is reductions in the tariff and limits on their activity. Obviously, they have planned on the basis of sweating their asset, operating theatres and so on, and are having to revise that. That is the big impact, although, obviously, for a small proportion PFIs with a significant cost.

I want to move on and ask you about the issues around provider failure and protected services. During the passage of the Health and Social Care Bill, we had a big debate around designated services and the Health Minister got into a bit of hot water because he was asked to give examples and then kind of said "I didn’t really mean that." What are the implications for Monitor in terms of protected services that are identified by the commissioners?

Dr Bennett: The phrase "protected services" is a bit unfortunate because it implies that everything else is not protected and that is not true. If you get a trust-an FT, let us say-that gets into serious difficulty, a question has to be asked about which of the services it is providing need to be provided. The answer is going to be pretty well all of them. I do not think we have FTs providing services that are not needed at the moment. Then the question is how do they get provided in the future if the current provider is in serious financial difficulty? The legislation differentiates those services which could be provided by another neighbouring provider. That obviously means it has to provide the service, be able to provide it with enough capacity and that the journey time-the access-is adequate. But no doubt, especially in the metropolitan areas, it will be the case that sometimes some services could be provided by a neighbouring provider. The residual services are the ones that have to be provided essentially on the same site. Whatever you do in the way of restructuring the provider that is in severe difficulty, you have to be able to continue to provide those services on that site. That is what is called protected services. As I say, the problem is that it implies the others are not protected when they are. It is just that they could be provided from somewhere else. That is how we will think of it. In a sense, it is more straightforward to think about the ones can that be provided elsewhere. The challenge will be to work out how to provide the ones that must be provided locally in a safe and sustainable way.

Q98 Grahame M. Morris: I have one final question in this group. You had originally proposed provider credit ratings-and I do not know if that is linked to the risk pool that you talked about a little earlier-as a condition for having a provider licence, but now you are talking about bespoke methodologies. What is the difference?

Dr Bennett: Yes. When we had an informal consultation before the Act was finally passed, to speed things up, we did suggest that in order for us to monitor whether any provider, not just in the public sector but in the independent sector, is at risk of getting into financial difficulty, we would want it to have some sort of credit rating and then an independent body would look at its finances and determine whether or not it was heading for difficulty.

Q99 Grahame M. Morris: What would happen in relation to the PIP implants scandal, for example? How would you have approached that? Would you think it would have the degree of financial credibility to be a suitably creditworthy and qualified provider of that service, particularly the private sector who-

Dr Bennett: Yes. If that had been designated by commissioners as an essential service, then we would have been worried.

Q100 Grahame M. Morris: If it was cosmetic, it wouldn’t be, would it?

Dr Bennett: I suspect it wouldn’t have been designated as an essential service in practice and, of course, it was a clinical issue fundamentally, wasn’t it? It was not a financial issue. To complete my answer to your earlier question, we proposed the idea of an external credit rating agency to assess the creditworthiness and determine whether or not providers were getting into difficulty. We received many representations saying, effectively, that that was not realistic. We accepted it and decided, therefore, the better way to do it was for us to do it inhouse and then we could do it on a bespoke basis, tailored to the specific needs of healthcare providers.

Chair: We have spent an hour and a half on ownership and relationships with foundation trusts and so forth. It is time to move on to the pricing angle of your work.

Q101 Dr Wollaston: Can I open up on the subject of tariff reform by asking you to set out what the respective roles of yourselves-Monitor-and the NHS Commissioning Board will be in designing and setting tariffs?

Dr Bennett: In simple terms, the Commissioning Board’s job is to decide what it is we put a tariff on. For example, if it decides that it wants to price a whole care pathway, that is fundamentally its decision. But we have to agree with what it is proposing in terms of the socalled currencies-this is the technical term-the things that get priced, the services that get priced.

Q102 Dr Wollaston: It will give you instructions and you will negotiate.

Dr Bennett: It will be making a set of proposals, but we will work on it together. It will not go off to a darkened room and then come back and say, "Look at what we have decided to do." Then we have to put the price on those services. Again, it has to agree this time with what we are proposing. That is, in essence, the split. In practice, we will work closely together on both of those. Rather than, as I say, it going off, doing its own stuff and then coming back and we just decide whether we like it or not, we will do a lot of it jointly.

Q103 Dr Wollaston: It will be a seamless negotiation.

Dr Bennett: That will be the objective.

Q104 Dr Wollaston: Currently, within the system there are losers. If you take, for example, people passing from a hospital through to a community hospital, the tariffs cannot be split. Would you be giving advice about how that kind of situation could be dealt with? Will you be saying that you would recommend a whole year of care or will you really be-

Dr Bennett: These are exactly the issues we need to look at. As a very first step towards this, we commissioned and published a report earlier this year on how the reimbursement system is working today, with a view to identifying opportunities to improve it. I think the answer is that there is quite a lot of opportunity to improve it. The problem is that it is very complex and, at the end of the day, total revenues and costs more or less add up, which is quite useful. So we have to be careful that, as we start to change things, we do not upset this balance. I am sure that is possible, but it does mean that we need to take a measured approach.

The other thing that means that this is likely to take a while to happen is that it is quite a lengthy process. The first thing we have identified we must do is get better cost data. I mentioned that earlier. If prices are supposed to be cost reflective-and they are-but you do not have good costs, then how on earth can you have good prices? We are now starting to publish proposals for how we might do a much better job on collecting the costs data. That is the first step we will take. Then you will have to define what you want, take a year to collect the data, analyse the data and turn that into a tariff. It takes quite a few years to go from deciding what you want to do to actually being able to do it.

Q105 Dr Wollaston: A very topical issue is complexity, and particularly the issue of cherry-picking.

Dr Bennett: Yes.

Q106 Dr Wollaston: The Department of Health has said that it is not going to be able to do this for 201314. Are you confident that you will succeed where it has failed once you have a better idea of all the costs?

Dr Bennett: I will ask Adrian to pick up on that. I think in principle, yes, but it will take a while to work it all out.

Adrian Masters: There are a bunch of different things that have been done on the cherrypicking area. One of the issues which people call cherry-picking is, within a particular HRG, a definition of a particular service. There is always a spread of patients, some of them with a more difficult-

Q107 Dr Wollaston: What are HRGs?

Dr Bennett: That is this currency.

Adrian Masters: It is a current list of currencies that we use for hospitals. It is called Health Resource Groups.

Q108 Chair: Based on clinical coding.

Dr Bennett: Yes.

Adrian Masters: It is based on clinical coding, so there is a system we already have for paying hospitals-and we have about 1,300 of them-and they put what the hospital produces into these definitions of service. Within each of these services, there is a price that is charged in the national tariff and you have a range of patients with slightly different complications and at slightly different cost but close enough together that you can, say, for a normal mix, work out at about the average you would expect and therefore you can pay them the average price. Some providers who provide, let us say, knee operations might say, "We are only going to take the really simple versions within the HRG" so they do not get the full range of patients. That is called cherry-picking because they are going to be paid as if they were getting a normal mix of patients but in fact they are just taking the simple ones. We will require them to publish what their acceptance criteria are. We will make it very transparent. We put a licence condition in saying, "If you are going to put restrictions on the kind of patients you would accept, you have to publish what your criteria are for doing so." That is step 1.

The second thing, which the Department is already doing, is that we do allow the commissioners some flexibility. We say, "If you know that your provider is not taking the full mix of patients in the HRG, then you can negotiate a lower local price." That is flexibility that is already allowed and therefore we would encourage them to do that. You can see that they have specific criteria and you give them the room to do the flexibility.

Q109 Dr Wollaston: Will they be able to do that retrospectively after the contract has started if they see it?

Adrian Masters: No, they should do it-

Dr Wollaston: If they see a provider is actually-

Adrian Masters: It does depend on the details of the contract, so it will develop over time, but what they should be doing is this. If they have a different mix of patients to the ones implied in the national price, they have flexibility to negotiate a lower price, which is already an agreed flexibility.

Another thing that people mean when they say cherry-picking is that, in fact, some of the prices, when you look at them as a bunch of prices, are too high and do not really reflect the underlying cost. So you tend to make a surplus on those. Other prices are too low and we tend to make losses. A normal provider cross-subsidises because they do a range of different services. Some people use the term cherry-picking to mean if a provider came in and just did the ones which make a surplus. So, over time, we have to understand the costs better and get the prices to reflect the underlying costs. I have mentioned two different meanings of the words cherry-picking now, I think.

Q110 Dr Wollaston: What I mean is that when people set a contract that will be flexible with time, it will be open to review.

Adrian Masters: I do not know what contracts they are doing locally. It is not our job to set the terms of contracts. It is a question for the commissioners as to how they do it, but what I am expecting that they are going to be doing in the contracts is making sure that they have room to renegotiate if the pattern of service that is being provided is not the pattern they thought they were originally contracted for.

Q111 Dr Wollaston: The Foundation Trust Network has suggested that the Commissioning Board would try to drive down prices. Does Monitor feel that you have a role and what is your responsibility in protecting a trust from becoming financially unviable?

Adrian Masters: I have a couple of observations. My first and most important one is we are in this process together with the Commissioning Board. The pricing is only going to work if we work well together. However, we do have slightly different duties. We have a duty to look at what is to the benefit of patients-and that is both current and future patients-and they have a particular responsibility to balance the books in that particular year. So we will have, I think, conversations with the Commissioning Board occasionally which say, "You may want to put lower prices so you can balance the books but we think a slightly higher price is better," so they can maintain their assets and it is better for the patients in the long run. Then we are going to have to discuss what is best for patients, which is always going to be the deciding factor.

Q112 Dr Wollaston: This is a huge role, isn’t it? Do you feel you have enough staff to carry this out in the time frame that you need to do it?

Adrian Masters: At the moment, we have not yet formally picked up the pricing role, so we need to build a pricing team and a pricing function. As to the size of it, I am talking about something in the order of 50 people with the information systems underneath to support that kind of process. At the moment, I do not have those 50 people. I have some interim people to help me think about it, but I do not have the team because it is new. We have not had it before.

In order to help us have time to develop that capability, the responsibility for pricing is being phased in. This year, the pricing is still being done by the Secretary of State with the existing processes and teams. Next year is going to be a transition year, so the Commissioning Board and ourselves plan to have the governance at the top of the system and make the key decisions, but the process and the team will be the existing team and process. Therefore, the first year we need to have the 50 people and the new process in place is for the process that sets the prices for 201415. So I have some time to put a team together is what I am saying.

Q113 Dr Wollaston: You have a bit of time. Why do you think that clinical commissioning groups will be able effectively to police a more complex tariff when they will have limited resources and a cap on their administrative spending?

Adrian Masters: Sorry, what do you mean by "police"?

Dr Wollaston: How will local clinical commissioning groups be able to monitor what is happening with regard to tariffs?

Adrian Masters: In terms of the way the roles are split, there is a question of them negotiating their contracts: what quality of care do they want for the money that they are providing? For that they are going to get support from the Commissioning Board. It is going to provide them with guidance and tools and they will have a development team that is going to help the commissioners develop. Then there is the question of them monitoring what is happening, tracking what activities have been incurred and what money they are paying out. That is where these support organisations have been put in place because you need analytical ability to do that. The scale of most CCGs is probably too small, but they are putting in place these support organisations on the commissioning side, again led out of the Commissioning Board, that is going to have enough scale basically to provide the analysis and data to the CCGs.

A third question is the system as whole: are the providers following the rules? That is our responsibility.

Dr Wollaston: Thank you.

Q114 Chair: Can I ask you a more "in principle" question? It is often said that the tariff creates perverse incentives to activity rather than outcome. Do you accept that proposition?

Dr Bennett: In certain areas. Actually, we probably have differences of view because we are working on this. Give your answer, Adrian.

Adrian Masters: It is a complicated question, unfortunately.

Chair: It is quite a simple question.

Adrian Masters: It is a complicated answer. First, there is no payment system which is perfect because you are always trading off various incentive effects and effects of the system. There are things about an activitybased payment system which are very strong and valuable and I would hate to throw them all out. However, it is also the case that some segments of healthcare have characteristics which are not that suited to a straight "You do more work, you get paid more" approach. Some kind of different or mixed incentive system is better.

My general point is on the advantages of a system where you pay for activity. The problem with the block contract is that it does not give you a good incentive to become more efficient. The thing about paying a price, "If you do more work, you get more," so-

Q115 Chair: A block contract transfers some of the risk management function to the provider, doesn’t it?

Dr Bennett: That is right, yes.

Adrian Masters: It does on the volume, but if you look at an individual piece of work you are doing, like a knee operation, the value of having a specific price for that is a straight incentive effect for efficiency improvement on the individual doing a knee operation.

Q116 Chair: There are numerous anecdotes round the system of acute sector trusts that are encouraging activity within the acute sector trusts rather than relationships with community services in order to generate revenue, in order to ensure that they satisfy your financial tests.

Dr Bennett: I would make a couple of points. There are, I think, some perverse incentives. I am not sure they are fundamental to the pricing system, but the way it is being run at the moment they do create perverse incentives. So we definitely need to look at that and see how we can change it. If we want to move activity, let us say, out of hospitals and into a community setting, one of the things we have to think about is that there are some real transition costs that have to be paid one way or another. I do not entirely blame a trust that has a broadly fixed cost that needs to cover that cost. The way today to cover that cost is to do stuff because you get paid for doing stuff.

Q117 Chair: I am sorry to interrupt, but you may not blame the trust-I agree with that-but you might blame the commissioner that is willing to pay the cheque to allow it to go on that way.

Dr Bennett: Yes, but I think it is even more fundamental than that. The tariff structures do not allow them to do what either the commissioner or the provider needs. We need to look at the tariff structure so that it allows them to do what they want to do, but we also have to recognise that there needs to be some way of paying for these transition costs. If you want to move from one setting to another, you need some payment for making the move, including the point that you will probably get some double running for a while. We have to think about how you are going to pay for that.

Q118 Chair: Aren’t we back to the Department’s capital fund to facilitate, on your advice, a service reconfiguration?

Dr Bennett: I think we are.

Q119 Chair: That is precisely what it is all about, isn’t it?

Dr Bennett: Yes, absolutely.

Q120 Chair: But you cannot have that fund if you have still in place a tariff system that is encouraging the old school, the perverse acute sector activity.

Dr Bennett: There two separate problems. You certainly want to deal with the perverse incentives, but you do, at the same time, need to find another way-or a way-of covering the costs of transition and you cannot escape that.

Q121 Chair: Can I ask a question of fact across the foundation trust system? Do you know how much activity is funded currently through tariff and how much is off tariff?

Dr Bennett: That is interesting. The formal figure in acute is that between 60% and 70% is on tariff, but, when we did our research work to find out how the system is working at the moment, what we discovered is that an awful lot of people are bypassing the tariffs because it is not working for the providers and it is not working for the commissioners either. Just the other day, I had an example of a foundation trust which has agreed a block contract for its accident and emergency services, basically, as I say, because the current split tariff arrangement was a huge problem for the provider and was not particularly helpful for the commissioners either. So this is what is happening. Because, frankly, it is not terribly fit for purpose at the moment, people are finding ways of working around it.

Q122 Chair: The figure I was quoted recently was that one major London teaching hospital says that 20% of its revenue comes from tariff, and guess which proportion of its revenue is the one that is more subject to inflation?

Dr Bennett: Yes. This illustrates that the system is not working as it is meant to.

Q123 Chair: I am in favour of a tariffbased system but not one that creates perverse incentives. The tariff has to be fixed around the care you want to deliver.

Adrian Masters: Yes.

Dr Bennett: Exactly.

Q124 Dr Wollaston: How much do you estimate that the tariffbased system drives up transaction costs as well? Certainly what I am hearing is that the sheer amount of administration that goes into chasing up individual sums of money creates a lot of waste.

Dr Bennett: There certainly is an administrative cost. We have not yet looked at how large that is. I am not aware of anyone else having looked at it. You need to take it into account. We are proposing to go back to first principles.

Q125 Dr Wollaston: So you are going to go right back to the drawing board and start again.

Dr Bennett: You have to find a mechanism of payment between commissioners and providers, define what you want it to do and then work out how best to do it. You might conclude that you do not want tariffs everywhere that you thought you did, that the answer is not a tariff in some places. One of the things you might want to take into account is that if we put a tariff in there we will have a hugely complex administrative process for very little benefit and maybe, even worse, for perverse incentives. At its heart, this is what we are proposing to do. What we are currently in discussion with the Commissioning Board about is whether our strategy should go back to first principles and look at-

Q126 Chair: Are you saying you are going back to first principles or you are considering going back to first principles?

Dr Bennett: We are considering it. Our feeling is that we should but we want to do this in collaboration with the Commissioning Board, so we need to talk to it about its feelings too.

Adrian Masters: A lot of the local information collection is about the providers understanding their own costs. I think that is a good-

Q127 Chair: That was my next question: does this not all rely on the quality of clinical coding from providers and how confident are you of that?

Dr Bennett: Absolutely. Before the clinical coding you have, "Do they understand their costs?", which we have already touched on, and the answer is no, so we are going to take action to try and force them to do a much better job which will be for their benefit, irrespective of the pricing system. In terms of coding, there are issues. It is audited at the moment. The Audit Commission has been auditing coding. Some form of audit is going to be needed in the future. As Adrian said, it has benefits beyond just a mechanism for providers to be paid by commissioners. It does, along with a better understanding of costs, help the management of a hospital do a better job of the management. So I think it has benefits.

Q128 Andrew George: You say you have to be clear, to understand the costs, but the very nature of health is that you cannot predict how unwell you are going to be in future. In other words, with a lot of those things you cannot entirely predict how many procedures you will take on. In those circumstances, the costs per procedure may be significantly different if what you anticipate to be the case does not happen. Do you allow for that, particularly at the emergency end of services, or those areas of healthcare which are, by their very nature, less predictable?

Dr Bennett: There are two almost countervailing forces here. One answer is that you are trying to cost each different type of procedure, so you do not need to anticipate what an individual patient will need. You just report afterwards what you did for them and then add up the costs of all the different bits, which is where the coding comes in. So you get an ever more complex system with ever more refined definitions of what it is you have done and differentiating between doing it in a simple way and a more complex way, with and without comorbidities and so on. The specialist hospitals in particular are very keen for us to go down that route because they feel they are not rewarded for the more complex cases they have to deal with.

A completely different way of dealing with this is to say, "Why don’t we pay for the treatment of a whole population for a period of time, leave the clinicians to make the decisions about what is the best form of treatment-they probably still ought to have a pretty good understanding of the costs of doing different things-but then we will pay them for the population overall?" Then essentially they are taking the population risk. But if the population is large enough, they will have an average mix of complex cases and simple cases and so on and you just have to pay for an average. So you have these two countervailing forces and this is one of the things we have to work out, which is where is the right place to go from where we are now?

Q129 Andrew George: Isn’t the latter of those two options going back to the way things were in the past, you know, the NHS?

Dr Bennett: Isn’t the-what did you say?

Andrew George: Isn’t the latter of those two options going back to how the NHS was originally before all these market mechanisms were put in place?

Dr Bennett: In some ways it is and there are examples in other places. The US is a good example. There are parts of the US where this is the way they operate. They have private companies responsible for whole populations and then they run insurance schemes and everyone essentially pays in an average price and gets the care they need, in theory.

Q130 Chair: But it is not an either/or choice, is it?

Dr Bennett: No.

Q131 Chair: You can have within populations different structures for managing the risk.

Dr Bennett: Exactly.

Adrian Masters: The best pricing system depends upon the nature of the individual service. What you do is try to match the characteristics of how you are doing the pricing to the service.

Dr Bennett: This is part of what we are doing now, in going back to first principles. We are segmenting the services into different types of service, which has not really been done.

Q132 Andrew George: Surely, wouldn’t the latter of those two options-the countervailing forces, as you describe them-end up with fewer bureaucrats, accountants and pen pushers and more clinicians?

Dr Bennett: A benefit would be lower transaction costs and you have to take that into account, absolutely.

Adrian Masters: But there would be less understanding of individual costs, which is a tradeoff.

Andrew George: There is a risk.

Q133 Barbara Keeley: Wouldn’t you have to build in, though, considerations that, for instance, certain areas with health inequalities have substantially more in the way of particular illnesses and diseases? My local authority of Salford has some very high peaks of certain illnesses and longterm conditions. The second part is that surely there are sometimes things that are totally unexpected. This year, this Committee has heard about the issue of the PIP implants, which affected 40,000 women. Presumably the NHS was not expecting this year to have a big influx of people with potentially shoddily made implants. That could happen with knees or with hips. There might be some other defective product somewhere that has been given to a lot of people and all of a sudden you get an issue that you were not expecting, potentially in very large numbers.

Dr Bennett: Yes.

Q134 Barbara Keeley: So there is no such thing as an average population because in certain inner-city areas there are very substantial health inequalities and the population will have more of certain conditions compared to more rural areas, for instance.

Dr Bennett: In simple terms, if you are going down the route of paying for individual elements of activity, then you have to address the characteristics of different populations in the way you fund commissioners. If they have to provide for a deprived community, then they will need more funding. If you go down the route of paying the providers directly for the population, then you are quite right: what you pay the provider has to reflect the nature of the population they are serving. It is the same issue in principle.

Q135 Barbara Keeley: How do you fund the capacity for the implant situation? How do you fund a situation whereby you suddenly hear of, and find you have on your hands, 40,000 people all with a need, potentially, for surgery and scans and so on?

Dr Bennett: Of course, probably an even stronger example would be if we had a flu pandemic. That would drive up that year’s costs in the NHS to an enormous degree. Fundamentally, that is going to be an issue for the Commissioning Board because it is paying for all these services. It is going to have to work out how it insures them against this risk. I presume-to be honest, I do not know how the DH does it: whether it has a call on the Treasury or what-it will have some contingency arrangements. This is a Commissioning Board issue.

Q136 Chair: But your message to the Committee around the broader issue of tariff reform in healthcare is that you are effectively going back to first principles-that, although you take responsibility for it in April next year, it will be a progressive transfer from the old system to a new one yet to be designed. Is that a fair summary?

Dr Bennett: That is correct. I would like to add one thing. I would not like to sow alarm among the NHS out there that we are going to change everything from day one, at all. As I mentioned earlier, it is a very complex system which somehow hangs together. We have to be very careful about describing where we want to finish up and then having a proper transition from here to there.

Q137 Chair: I have one final brief question. You said earlier on in this hearing that there was no plan for Monitor to take on a licensing function in social care. The reason that came up in the Committee was that DH officials at a conference last week specifically canvassed this possibility. Have you been asked whether you wanted it; was there a process; or was this just speculation?

Dr Bennett: What I said earlier was that that bit of the Act has not been turned on. As to if and when it will be turned on, we have had discussions off and on-I will confess, not recently-with the Department. I know that it is working on this and I am presuming it is going to come back and tell us where it has got to. What I have said in principle is that if it wants to regulate the social care sector in a similar way, or aspects of it in a similar way to the way we are being asked to regulate the health sector, it makes perfect sense for us to do it, but that does not mean to say we have to do everything in social care that we are currently doing in health. I would be very mindful that we have an awful lot on our plate at the moment and therefore we should be taking on the minimum necessary to achieve whatever objectives we have in social care.

Chair: It would be quite helpful if every other regulator in the sector started from the same point of view. Unless any other member of the Committee wants to pursue this subject, thank you very much. It has been a full and informative session.

Prepared 6th November 2012