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Market Forces (NHS)

Volume 461: debated on Wednesday 6 June 2007

I am extremely pleased to be under your guidance and tutelage for the next half-hour, Mr. Bercow. This will be a rather techie debate—I am not sure whether you are as pleased as I am about that. Indeed, it is a debate of choice for anoraks, but it is very important. Let me set the scene.

The market forces factor has been around for quite some time, but the patient choice agenda and payment by results have made it an essential ingredient of the national health service’s finance, so it is very important. Patients have their choice, and the hospital that they choose to go to gets the payment from the appropriate primary care trust, but that hospital may have a different cost base from another hospital, and the PCT would not be able to afford it if everyone in their area chose to go to a higher-rated hospital, so it is important that things are levelled out, which explains the need for the market forces factor.

The market forces factor is made up of four elements: base costs, for which the figure is 27.3 per cent., land, which is 0.6 per cent., buildings, which is 4.6 per cent. and staffing, which is 67.6 per cent. Of the three variable elements, the staffing element is far and away the largest at more than 90 per cent., so it is extremely important that we get that right. Hospitals bearing additional costs through no fault of their own should be recompensed. I fully agree with that principle. I see a look of puzzlement going across your face, Mr. Bercow: if I agree with the principle, why on earth am I bothering to have the debate? The problem is not with the principle, but with its application.

As I pointed out, more than 90 per cent. of the variable element of the market forces factor relates to staffing costs. Those staffing costs do not necessarily relate to the NHS staffing costs. The NHS is, for want of a better expression, a closed economy. Because of the “Agenda for Change” system and the consultants’ contract, a nurse or a specialist consultant gets paid the same for the work that he does, be he in Westminster or in Wigan. An apprentice cleaner will receive the same rate of pay no matter where they work in the NHS. Of course, there is the London weighting allowance, but the rate of pay is the same. From Cumbria to Kent and from Durham to Devon, because of “Agenda for Change” and the consultants’ contract, people will be paid the same amount of money.

I asked the Department of Health some time ago what percentage of the labour costs that hospital trusts incurred were outside “Agenda for Change” and the contracts, and it said that it did not keep those figures. I understand that; it is not necessarily a central issue. Nevertheless, I took the matter further by going to my own local trust and asking it what its percentage was. It said that more than 90 per cent. of its costs were within the “Agenda for Change” element; in other words, it was paying the nationally negotiated wage rates. It went further and asked other hospital trusts in the North West strategic health authority area, and they confirmed that that sort of percentage was reasonable, so in relation to the labour costs, about 10 per cent. or less is variable.

As I said, the formula is based not on NHS labour costs, but on the costs of labour in the private sector. The effect is that the formula bears no relation to the real additional costs that a hospital incurs. Let us consider the Greater Manchester area and treatment in Wigan with, say, a base tariff of £1,000. In respect of the Wrightington, Wigan and Leigh NHS Trust, the amount will be £1,059. However, in central Manchester, the amount will be £1,150. In central London, Guy’s hospital will receive £1,322 and St. Mary’s £1,446.

Those differences arise not because of increases in the base cost within the NHS contract, but because we are using the private sector to calculate the figures. We get paid less in the private sector in the Wigan area because of the low-wage economy, whereas Guy’s and other central London hospitals get paid an awful lot more because of the large bonuses in the City. So the amount paid bears no relation to the real costs that are borne by hospitals.

The formula is extremely detailed—indeed, it goes to six decimal places at times—but when we try to resolve what PCTs should get, there is a variance of more than 10 per cent. between the base and what they get. I might get into another argument with my hon. Friend the Minister on that, as he represents the same borough as me. So, when we work with figures of six decimal places, we are into the particle physics of NHS financing—quarks, neutrinos, bosons and fermions.

It is an absolute nonsense that we are applying private sector costs to the NHS—indeed, it is intellectually unsustainable. If that were the only issue, we could argue about it very nicely in the pub and then all go home thinking what a nice debate we had had, but it is not the only issue. The amounts paid have a real impact on what happens to our health services and communities. A perverse incentive of the system is that it feather-beds hospital trusts in central areas, because it gives them no incentive to increase efficiency. They know that the City bonuses and the amount of money that flows into central Manchester will go up more than increases in other areas, and that they will therefore get more money for performing operations than we will in other places.

The system takes money out of deprived areas, and that will have an effect on the amenities that hospitals in those areas can provide. If those hospitals have less money, they will not be able to redecorate their wards and make them more attractive, which will affect people’s choices about which hospital to go to, so there will be a reduction in clients. That lowered throughput will cause a loss of income, which will mean that wards and services, such as the walk-in centre in Leigh, will have to be closed. All that has a real impact on the services that are being provided, so this issue is not entirely techie.

Has the hon. Gentleman looked into whether there is any correlation between the trusts that operate on a deficit and how the market forces factor operates in those areas?

I knew that the hon. Lady was going to intervene on me, but I thought that she was going to ask something else. So, no, I have no idea what the impact of the market forces factor is in that regard, or whether it correlates to a lower or higher rate of deficit.

It is interesting that in 2005-06, the Royal Cornwall hospitals trust received £484,000 and my authority received just under £2.5 million, whereas the three central trusts—University College London Hospitals Trust, Guy’s and St. Thomas’s Hospital Trust and Barts and the London NHS Trust—received almost £20 million. When I looked at the figures more closely, I found that the London weighting for Barts was nearly £2,694,000, but it received a market forces factor increase of nearly £21 million. That illustrates just how far removed the market forces factor is from the real NHS costs that are borne by hospitals.

The Minister is both a colleague and a friend, in more ways than one. He is also a Member of Parliament for Wigan borough, so he will have seen the “Mapping Poverty in Wigan” document that I have here, which I got from the local authority. The document shows a clear correlation between poverty and ill-health throughout, and I am sure that that is the same right across the country. It shows that where there is a low employment blackspot, there is a high disability blackspot; where there is a low skills blackspot, there is a high coronary disease blackspot; and where there are high numbers of children on free school meals, there are high cancer rates. Such correlations are shown throughout the document when one looks at the super output areas. The same will be clear wherever one goes in the country. The overlay is almost exact. If the maps showing those incidences were placed on top of each other, the blackspots of deprivation and low health would match almost exactly.

All that gives the Government excellent targets for reducing health inequalities. That is what I came into politics for—to reduce inequalities throughout the country, particularly in relation to health. However, the market forces factor system reinforces those inequalities, because it takes money away from areas such as mine with low incomes, rather than putting money into them. Because those areas have low incomes, their hospitals receive less money with which to tackle the health issues in the communities. We need to break the link between low income and poor health by providing a funding regime that properly compensates hospitals for the unavoidable additional costs that they incur. As I said at the beginning of my speech, I have no difficulty in supporting that principle—it is the right thing to do—but when hospitals get significantly more than those costs, the impact on authorities such as mine is extremely deleterious.

The system has another impact, because it is based on private sector wages that can vary unexpectedly. In the Wrightington, Wigan and Leigh hospitals area, the market forces factor was reduced by 3.04 per cent. between 2004-05 and 2005-06, and by a further 0.01 per cent. between 2005-06 and 2007-08. In comparison, the market forces factor for the Christie hospital in the centre of Manchester went up by 1.29 and 4.38 per cent. respectively in those periods. Those rises were not because of extra costs incurred, but because private sector wages in central Manchester rose faster than those in Wigan.

The Wrightington, Wigan and Leigh NHS Trust is seeking foundation status. Its last application was turned down because it was estimated that last-minute changes to the market forces factor would cost the trust £18 million over five years. Although it is a four-star authority and has an extremely good record of saving money—£12 million the year before last and £7 million—the trust fears that it will not be given the foundation status that will give it the freedom that it wants because of the reduced income that it will receive through the market forces factor system.

I understand that although the Department of Health is consulting on payment by results, it is not consulting on the market forces factor. As I said earlier, they are both absolutely integral if we are to have a financial system that puts trusts on a level playing field. The Government should therefore consult on the market forces factor.

In summary, I believe that the market forces factor is right in principle, but that the labour cost element should be based on actual unavoidable costs to hospital trusts rather than fictional private sector costs. The current system provides a disincentive to high-wage trusts to reduce inefficiency; reinforces, rather than tackles, the link between economic deprivation and health inequalities; and introduces uncertainty into the medium to long-term financial planning of hospital trusts. I hope that the Minister will have a root-and-branch review to eliminate those inequities within the system.

I congratulate my good friend and neighbour, my hon. Friend the Member for Wigan (Mr. Turner), on securing this important debate. He and I have spent many a Friday afternoon sitting in the Wigan borough health services offices discussing these issues, so I can vouch that he is well-versed in them. He is one of a select group of MPs who take an interest in the allocation of resources within the NHS and local government. Indeed, he not only takes an interest in them, but understands them, which is why he strikes fear into Ministers and civil servants in our Department.

My hon. Friend began by describing himself as an anorak, but I could not possibly comment on that observation, save to say that most people in Leigh would choose far worse descriptions of our neighbours in Wigan than that rather polite one.

I shall address directly my hon. Friend’s questions about the market forces factor, and I am pleased to see the hon. Member for Falmouth and Camborne (Julia Goldsworthy) present, because those issues are alive in her part of the country, too. I hope that in addressing my hon. Friend’s concerns, what I say will be of interest to her, too.

I shall put the matter into context. Earlier today, my right hon. Friend the Secretary of State announced provisional financial out-turn results for the national health service in 2006-07. They showed that the NHS has delivered a net surplus of £510 million, which is a big improvement on the £547 million net deficit that was recorded in the 2005-06 accounts. The success of that effort is down to NHS staff throughout the country, often operating in different circumstances and often on the receiving end of difficult decisions. Nevertheless, the entire NHS will benefit from the actions that have been taken, and we have a position of stability from which the NHS can move forward.

I shall tell my hon. Friend what that means for the Ashton, Leigh and Wigan primary care trust. Like others in Greater Manchester, its resource allocation was top-sliced in the year just ended—by 1.7 per cent. in its case, which amounted to some £6.9 million, or almost £7 million. The PCT made a contribution to the writing off of some historical debt in the north-west, so that and other costs that had to be paid were taken into account, and the PCT was notified that its allocation for 2007-08 will increase by some £5.7 million, returning the top-slicing from 1 April this year. I hope he agrees that that is excellent news.

People are commenting today on the terrible effect of putting the NHS in financial order, but I hope that my hon. Friend agrees that, because such action has been taken, money can be released to Ashton, Leigh and Wigan primary care trust, which covers, as he rightly said, an area with some of the most entrenched health inequalities in the country. I am sure that he, like me, is encouraged by the PCT’s new scheme called “find and treat”, on which we have both been briefed. It is a real, concerted effort to get underneath the under-reported ill health that is still so evident and prevalent in our borough. Interestingly, the scheme’s value is roughly equivalent to the return of the top-slice to our PCT, with some £6 million being spent on it.

That is the real, practical effect of getting the NHS back into financial balance. It enables PCTs in areas where the health need is greatest to get on with the job of spending money to tackle the root causes of ill health in boroughs such as ours. That is why so much effort was put into delivering the financial results.

Several issues relate to the market forces factor and they create the overall financial context that my hon. Friend mentioned. They are the pieces in the jigsaw that will make up the further resource allocations to the national health service later in the year. In the previous allocation round, he lobbied strongly for a faster pace of change policy to ensure that PCTs were brought up to their target allocation as recognised by the national funding formula. In 2003-04, the most under-target PCT was some 22 per cent. under its fair share of available resources, but because of that emphasis on moving PCTs quickly towards their fair share of funding, by the end of 2007-08 no PCT in England will be more than 3.5 per cent. under target.

The Ashton, Leigh and Wigan PCT received resource allocations of £410 million in 2006-07 and £449 million in 2007-08, an increase of £74 million—19.7 per cent.—over the two years, compared with the national average of 19.5 per cent. Progress has been made in our PCT area, and as a result, at the end of this financial year, the trust will be 2.4 per cent. under its weighted capitation target. We are now considering the right pace of change policy to apply to the resource allocation round that comes out of the spending review. My hon. Friend knows that I, too, take a close interest in such matters, and we will consider the right next step in due course. His comments today will be heard during that process.

I am grateful to the Minister for giving way and to the hon. Member for Wigan (Mr. Turner) for his insight into the issue. While the Minister is on resources, the market forces factor is not about the size of the cake, but about the way in which it is then sliced. I understood that the Department had commissioned a report on the market forces factor specifically, and the group of MPs in Cornwall were informed at Christmas that the report was on the desk of the then Minister, Lord Warner. Is the Department considering the report? Will the Department respond to the report and perhaps even publish it so that we can understand the Department’s considerations? Although the spending review is important, the discussion is about the way in which the cake is divided, not about the size of the cake itself.

The hon. Lady makes a well-informed and timely intervention. The issue is linked to the spending review, because that is the cake, and then we cut it. The report to which she just referred has been the work of the Advisory Committee on Resource Allocation, ACRA, which is independent. If I may, I shall answer her question directly when I describe ACRA’s work in the run-up to the next funding allocation.

My hon. Friend the Member for Wigan made a point about taking money out of deprived areas, and obviously the formula has to do two things: allocate money towards need, while respecting the different costs of providing health care in different parts of the country. That said, the priority is to ensure that NHS funding reaches those parts of the country where it is needed most. We believe that we have achieved that objective through a fair funding structure, but it is continually overseen by ACRA, which is an independent committee of experts.

ACRA’s role is to ensure that there is equity in funding, and it is overseeing an overall funding formula review that will examine the make-up of the market forces factor. The review is being undertaken, it will be published before the allocations are made, and it will in some way address colleagues’ questions about the application of the NHS funding formula. However, the hon. Member for Falmouth and Camborne referred to a specific review of the technical aspects of the MFF, which is different from the general funding formula review that ACRA has undertaken.

That takes me directly to the point that my hon. Friend the Member for Wigan made about the Department consulting on payment by results, which is absolutely true. However, an interrogation of and consultation on the market forces factor is being undertaken––it is just that it is being carried out by ACRA. It is not a wide, public consultation, but a review of the make-up of the MFF. The two none the less sit together; they are complementary pieces of work.

Just to give a little background, the market forces factor has a long history. It is an important element of the weighted capitation formula and its purpose is to adjust for unavoidable differences in cost between the different regions of the country. The need for an MMF was identified by the resource allocation working party in 1976, which recognised that the costs of care may vary from place to place, depending on local variations in market forces. The development of the MFF has been overseen by ACRA, and is the result of many years of analysis by academics. Since it was introduced, the MFF has always been based on private sector wages, even where national wage rates limit the flexibility of local organisations to pay higher wages. Higher costs are experienced, which are caused by such factors as higher staff turnover, lower productivity, higher recruitment and higher agency costs.

We believe that the MFF is the best mechanism available to reflect unavoidable differences in the costs of providing services. However, to ensure that the development of the MFF continues, ACRA is reviewing it again, before the next round of resource allocations, and has submitted its findings to Ministers. In answer to the hon. Lady, that review will not be published in advance of the allocation process, but at, or around, the same time. The recommendations that ACRA makes to Ministers on the MFF will therefore inform the allocation policy and it will be clear how they have done so. I repeat that the points that my hon. Friend raised have certainly been heard by me and will be borne in mind by the Department of Health in making those judgments.

The MFF is, of course, linked to payment by results, which we would argue is transforming NHS funding, by paying hospitals according to the number of patients treated and the complexity of treatment, based on a national tariff. The tariff is calculated from information supplied by NHS trusts about the costs of their services. The cost of treating similar groups of patients varies among providers, owing in part to unavoidable differences in the cost of land, buildings and staff. That is an important reason why the national tariff is adjusted using the market forces factor and ensures that our approach to paying providers is consistent with our approach to resource allocation.

For providers, payment by results encourages clinically effective and cost-effective models of care, such as day surgery. That benefits patients by reducing the amount of time that people have to spend in hospital and helps to reduce waiting times. Payment by results also offers commissioners of health care incentives, such as to redirect resources to providing diagnostics or minor surgery in primary care. That enables people to be cared for closer to home and avoids unnecessary waiting for people who would otherwise be referred to hospital.

I raise payment by results because, although my hon. Friend did not mention this a great deal today, I know that he remains deeply concerned about the effect of the tariff, as it applies to our local trust and to Wrightington hospital, the specialist orthopaedic hospital. However, although he might not yet have all the answers that he seeks, I reassure him that there is a recognition in the Department of how the pieces fit together and a process under way that will eventually result in a fairer outcome for all. Before closing, I should also say to him that the effect of the pace of change policy, of bringing the NHS back into financial balance, put our PCT in an extremely strong position as it entered this financial year—a financial year in which the NHS will receive its largest ever increase in funding in one year, of some £8 billion. That is a position of strength that our PCT can build from.

I heard my hon. Friend’s rather provocative comments about the MFF perhaps resulting in the closure of the Leigh walk-in centre. People in Wigan always want to close things in Leigh. I will not rise to the bait on this occasion, but I am pretty confident about the future not only of the Leigh walk-in centre, but of the other excellent services in our borough. Indeed, only a couple of weeks ago, he and I were in a new local improvement finance trust centre, which has an excellent renal dialysis unit, run by Hope hospital. That is a great facility for people who previously had to travel to Salford three times a week. Through the new LIFT centres, some cutting-edge care is being introduced in our borough, into the heart of communities that need the best of modern health care. We are now in a position where we can see further improvements in that quality of care in the coming year.

Question put and agreed to.

Adjourned accordingly at fourteen minutes past Five o’clock.