UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 833-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

health Committee

FOUNDATION TRUSTS AND MONITOR

THURSDAY 3 JULY 2008

DR MARK EXWORTHY, MR JOHN CARRIER and MR KEITH PALMER

MR RICHARD GREGORY, MR STEPHEN FIRN and DR WILLIAM MOYES

Evidence heard in Public Questions 1 - 126

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Health Committee

on Thursday 3 July 2008

Members present

Mr Kevin Barron, in the Chair

Mr Peter Bone

Sandra Gidley

Dr Doug Naysmith

Mr Lee Scott

Dr Howard Stoate

Mr Robert Syms

Dr Richard Taylor

________________

Witnesses: Dr Mark Exworthy, Senior Lecturer in Public Management and Policy, School of Management, Royal Holloway College, Mr John Carrier, Chairman, Camden PCT and Mr Keith Palmer, Chairman, Barts and the London NHS Trust, gave evidence.

Q1 Chairman: Good morning gentlemen. Can I welcome you to this one-off session that we are having looking at the issue of Foundation Trusts and Monitor. I wonder if I could ask you, for the sake of the record, if you could introduce yourselves and the current position that you hold.

Dr Exworthy: I am Mark Exworthy. I am a reader in Public Management and Policy in the School of Management at Royal Holloway, University of London.

Mr Palmer: I am Keith Palmer. My current position in the NHS is that I am Chairman of Barts and the London NHS Trust. Up to a year ago for six years I was a non-executive at Guys and St Thomas's, three years of them as an NHS Trust and three years as a Foundation Trust.

Mr Carrier: I am John Carrier. I am the Chairman of Camden Primary Care Trust. Formerly I was Vice-Chairman and then Chairman of the Royal Free Trust.

Q2 Chairman: As you can imagine with three witnesses we may have a tendency to all say the same thing, so what we would like to do is try to put our questions to individuals concerned. Obviously others may be asked an opinion about them but we will try to keep the session reasonably tight if that is at all possible. My first question is to you, Mark. You argue that the evidence suggests an unwillingness on the part of Foundation Trusts to exercise their autonomy fully and you also state that the Department of Health and the SHAs require a change in attitude and behaviour to reflect the changed landscapes of Foundation Trusts and their activities. In what ways is the Department of Health and SHA's behaviour compromising Foundation Trusts' autonomy?

Dr Exworthy: We have been looking at the issue in terms of local health economies and the ways in which the Department of Health's policy is being implemented at the local level. We have been observing changes from the centre right down to the locality and as part of our research - which we are part way through - we have been identifying issues at all levels. Part of that is the changed landscape both for Foundation Trusts at the local level but it also requires a change in mindset, in attitudes and approach from the centre as well. There are signs that that is changing but clearly there are examples where there might be a tendency to revert back to traditional patterns and there has been some discussion recently between David Nicholson and Bill Moyes about the degree to which the Department of Health is able to influence Foundation Trusts and I think generally Monitor and the Foundation Trusts have been resistant of that change. I think that gives you an illustration of the sort of change of mindset that is taking place but there is probably further work to go if autonomy is going to be fully realised at the local level.

Q3 Chairman: Is it the case that Foundation Trusts could exercise more autonomy but culturally they do not? Or is it the case that they are being effectively advised not to? Which is it? Are people in Foundation Trusts still looking to the Department or beyond for the answer?

Dr Exworthy: I think the balance between willingness and ability is quite crucial because certainly many of them are able. They were high performing trusts in the first place and many of them have very skilled managers and clinicians involved in the governance of these organisations. They are clearly able and Foundation Trusts require them to take another step forward to become more robust and much more independent. I think there is that ability and there are signs there. Their willingness in a way is being compromised not so much in the sense that they are being told what to do but there is a cultural change that is involved. In some ways many of these Foundation Trust organisations have grown up in an NHS that has traditionally been centralised so to some extent they have always been looking up, hence David Nicholson's advice to look outwards and not upwards, but clearly those traditional patterns still persist. Also I think the rules of the game are still a little unclear for Foundation Trusts in the sense that this is such a new departure and represents such a significant change in health policy that their willingness to extend into new areas - innovations, service developments, capital spending et cetera - exposes them in a much more visible way financially and publicly which you could say is a good thing but clearly, as you are exposed a little more, your willingness to do so leads to a certain caution or a certain carefulness which again might be a good thing but perhaps it starts to explain why, although they are very able and capable, they have not always been willing to exert that. Going back to my previous answer, I think there are still some elements of centralisation of being "told what to do".

Q4 Chairman: We may pick up on one or two of those things. Keith and John, does that tally with your experience?

Mr Palmer: My experience was three years getting into a position where Guys and St Thomas's became a Foundation Trust and then three years before I left the board when it was a Foundation Trust. I would say that Guys and St Thomas's was a first wave Foundation Trust so it is one of the very early up-takes. What it felt like on the board was that during the first 12 months all the Foundation Trusts were made Foundation Trusts as standalone entities, they need to remain financially viable but with no reserves in the balance sheet. The first thing that happened, during the first year or two, was a drive in performance to generate surpluses in part to provide a risk cushion in case things went haywire in the future and also to drive performance because before Guys and St Thomas's at least started to think about rather grander initiatives we felt we needed to get our act together and push for the very best quality of services in what we already provided. By the time I left the board in the third year of an Foundation Trust there were active programmes which I know are on-going to engage with the rest of Southeast London health economy to see if they can extend the excellence which Guys and St Thomas's now provides to its patients to a wider community. I would say that there have been uncertainties about how much authority there is to do new things; there is an emerging confidence that they are allowed and some of the trusts like Guys and St Thomas's are beginning to put their best foot forward.

Q5 Chairman: John, is that your experience?

Mr Carrier: Yes, I think I would agree with Keith rather than with Mark. I was in at the ground floor with University College Hospital who asked obviously under the Act for a Primary Care Trust representative to be on the Members' Council. My feeling was for the first few months there was some sorting out to do because we had a huge constituency of people coming along who had no experience of Foundation Trusts let alone a health service organisation. There was a lot of discussion about what their role was. The hospital was also moving from an old building to this brand new palace on the Euston Road - you may have seen it, this great giant green thing - but the concern that the executive had and the rather experienced chairman and NEBs was with financial stability, the commissioning position that the PCT would take as well as other targets the PCT were concerned about (delayed discharges, MRSA). There were always debates about the tariff and whether it should be unbundled and whether PbR was the right way of going forward. So all those things were being sorted out in the first year. I then left because the chief executive of the other local Primary Care Trust, Islington, came on board and I thought that my chief executive ought to be on instead of me to match her. One of the issues that was always raised was the accounts, the finance. Innovation, I think, would have been pushing it for the first couple of years. They were the first wave. I was then asked to go onto the Tavistock and Portman, a much smaller Foundation Trust with a budget of about £20 million a year in contrast with a budget of about £400 million or so. What I thought was interesting was the efforts both Trusts made before they were set up to involve the public by meetings et cetera.

Chairman: We may pick up on these matters later. Could we move on to Sandra?

Q6 Sandra Gidley: Innovation has been mentioned. Dr Exworthy, reports by the Foundation Trust Network and Monitor proved some examples of what they term innovative practice being employed by Foundation Trusts, but a recent HCC/Audit Commission report concluded that "On a national level ... FT status does not yet seem to be empowering organisations to deliver innovative models of patient care". Are there any practical examples or independent evidence that Foundation Trusts are actually delivering care more innovatively or efficiently?

Dr Exworthy: I think you are right to point out that there is relatively little evidence of this so a lot of it does rely on the sort of reports that you have mentioned which clearly have a "vested interest" in some of these issues so independent research or independent evaluations tend to be rather scarce. Having said that, innovation covers a wide range of activities so it would be difficult to categorise all the sorts of things that are going on. Probably there are two points to make, one is that these were high performing, largely innovative, dynamic organisations so, as it were, much of that has continued in the direction that you would expect it to, so what difference would Foundation Trust status over and above that bring? Some of the evidence seems to be a little bit weak in that regard. Whether they are actually offering over and above improvements, I am not too sure whether that exists so far, I am slightly dubious. I think a lot of the work that has gone on is making sure that they are a robust organisation in the sense of greater attention to costs and greater focus on improving the managerial skills, clinical involvement et cetera. I think there is a lot of work that is going on that might not yet have translated into, as you call it, innovative practice or service developments.

Q7 Sandra Gidley: Some of these trusts have been in existence for a number of years now so surely there should be some sign of changes in practice.

Dr Exworthy: We have to remember that all of these operate within a local health system which, to some extent, liberates them and to some extent constrains them. We are seeing some much more innovative practice in terms of developing clinical networks outside the organisation which I think is quite important - cancer surgery, for example, being quite significant there - but that is not necessarily to do with their Foundation Trust status.

Q8 Sandra Gidley: It might be helpful to ask somebody who is representative of a trust. Mr Palmer, you have been in since the beginning, are there any benefits conferred by Foundation Trust status? What have you been able to do that you would not otherwise have been able to do with regard to innovation? It seems that the best high performing trusts were the first off the blocks, as it were, and could have done this anyway. What difference has it made in practice?

Mr Palmer: I asked myself that question right the way through actually because I held great hopes for Foundation Trust status. I would identify two in particular. The first is the fact that that Foundation Trusts are allowed to keep the surplus that they generate through efficiency improvements is a really important driver of behaviour within the hospital trust.

Q9 Sandra Gidley: What do they do with it when they have got that money?

Mr Palmer: At Guys and St Thomas's the promise was that if we can generate the surpluses we can reinvest them in even better health care and that motivates clinicians - not just doctors but a whole community of people, the 8000 people who work over there - that the thought that you are slogging to get cost reductions because the Department tells you you have to is an entirely dynamic to: if you do this and do it well you can then do the things which have been on our planning horizon that we could not afford for a very long time. The question of what you do with it of course is a very important question. As I say, at Guys and St Thomas's the view initially was that we must generate surpluses to create some risk cushion because it is a very uncertain world out there; we do not know what the Darzi plan is going to be for our services; we need to be able to invest in the fabric of the building. The basic position was to get some surplus and then think about what to do with it. I have not been privy for the last 12 months, but there are some very interesting plans to change the models of care, to use language you use. However, as Mark said, you can only change models of care by interacting across the whole network. You have to deal with organisations which are not Foundation Trusts and who are subject to direction by the SHA. I think it has been slow but my observation would be that there is a degree of freedom now and the fact that Guys and St Thomas's plan to use those surpluses is really quite interesting. It would be a shame, I think, to stop the experiment now, but if you do not see some action over the next couple of years then you should be asking the question why. The other important difference is the membership and the engagement and the board of governors of a very wide range of stakeholders. We have a slightly absurd board of governors at Guys and St Thomas's in the sense that it has 40 people on it and you could say that no body of 40 people can do anything effective, but because it is so representative of all the interest groups - staff, patients, PCTs, local healthcare trusts - it really is a tremendously effective forum for sharing ideas and discussing things, not in a governance sense but simply sharing in a single forum the very different interests of everybody. I think that that has been very valuable.

Q10 Sandra Gidley: I would like to be reassured that it is not just tokenistic; can you give me one practical example of something the board has done to make a difference, something you would not have been able to do if you were not a Foundation Trust?

Mr Palmer: I think it is difficult to pick something out. The behaviour of the board of directors at Guys and St Thomas's has been different in the sense that they have felt free to take certain decisions which otherwise they would have been directed when they were an NHS Trust. Things like how to conclude negotiations with the commissioners, how to engage with the sector about the changing models of care, there is a sense of empowerment that there is a right to carry on those discussions which simply was not there before. I am absolutely sure in my mind, having been both an NHS Trust and a Foundation Trust, it feels very, very different on the board of an NHS Trust - which is where I am back again - because you really have to ask permission all the time. It is a different dynamic and it is quite difficult for me to give you a particular instance, but it is tangible and real.

Q11 Dr Taylor: Quality occurs four times in the titles of Darzi's report; four out of eight chapters have the word "quality" in them. When we did our report on Foundation Trusts right at the beginning some years ago one of the recommendations was: " the key argument in favour of the policy of Foundation Trusts is that it presents a genuine incentive for trusts to improve their performance. However, we are not clear that once Foundation Trust status is achieved there are adequate incentives in place to ensure that trusts improve or even maintain high levels of performance." Turning to Mark first, I think you say that "initial evidence suggests no significant improvements as a result of Foundation Trust status.

Dr Exworthy: Quality again can be defined in many different ways just like efficiency or any other concept by which you are wanting to measure these. I think the evidence is thin or weak at the moment; we do not have too much on which to base other than perhaps anecdotal or experiential evidence. However, I think there are signs of a greater sense of ownership, a greater sense of pride, a greater sense of empowerment through which you might hypothetically suggest that quality would improve. Some of the evidence on decentralisation generally suggests that people who have greater ownership tend to address things more carefully, more assiduously and as a result quality might improve. There is a hypothetical argument to say that that would happen and there are a few signs that that has happened I think so far.

Q12 Dr Taylor: As to one of the crudest measures, complaints, is there any evidence that complaints have either gone down or up since the Foundation Trust status?

Dr Exworthy: I do not have any information on that.

Q13 Dr Taylor: Moving to Keith and John, would there be any evidence on that side?

Mr Palmer: If the complaints records are kept and constitute part of the insurance framework which the Healthcare Commission expects. As you know, the majority of Foundation Trusts are good or excellent but quite a few of them were good or excellent before they were Foundation Trusts. I think there is evidence that the standard of care and the quality of care of the cohort of Foundation Trusts is very good. There is some evidence it has been improving because the weighted average of the scores of them has improved, but like Mark has said several times, it is difficult to say that because of Foundation Trust status it has happened. Certainly in my trust - which is not a Foundation Trust yet - we are improving the quality of care irrespective of an organisational status.

Q14 Dr Taylor: Do you have anything to add?

Mr Carrier: I think the first thing to say is that we are very conscious of sections 18 to 25 of the 1999 Act about that which lays a duty of quality on us all. That is an overriding issue. Whether Foundation Trusts have made a difference or not I do not have the data on the complaints but we do have data on serious or untoward incidents. However, I think it is wider than that. I think you can measure quality in a number of ways and Foundation Trusts may have made a difference here. There is the speed of care, the speed at which people get into the system. There is the location of care and I think Mark is right about that; networks have helped in that, for example, if you get cooperation between Foundation Trusts and non-Foundation Trusts like the Royal Free in our particular area there is no doubt that there has been an interchange of services where the location is best, so plastics move to the Royal Free, cardiac goes down to UC. Networks are the important issue; you can say it is coincidental but it may have been given a push. Liz Wise who is the Director of Contracts and Performance has passed me a note to remind me that one of the big issues is that Foundation Trusts have to respond to commissioners; they have no option to respond to commissioners on any service change or innovation. However, on the other hand, commissioners need to support innovation and what commissioners are interested in is not just efficiency and effectiveness; clearly we are under some obligation to make sure targets and standards are reached and that means relationships with the Foundation Trusts. We do call for regular quarterly data, financial data but also quality data. They come back to us and say that the tariff is constraining them and they need some more money if they are to meet the 18 week target, that relationship has been set up since the Foundation Trust so there is that interchange. My own feeling is that there is a paradox here and the paradox is that the centre wants more and more care out of hospitals and while we are trying to support centres of excellence which are these hospitals in the middle of London there is a real demand management question here which is quite tense I think. I think quality has been improving and I think you have to use proxy figures to demonstrate it, but you need the evidence to be properly discussed.

Q15 Dr Taylor: Keith, you are going through the phase of applying for Foundation Trust status at the moment.

Mr Palmer: That is correct, yes.

Q16 Dr Taylor: So you have to have quality at a pretty good level before you can get in. Once you have got in what are the incentives to go on improving?

Mr Palmer: They are various. Firstly, as John has said, the commissioners have a responsibility to make sure that standards are maintained at a certain level and of course the Healthcare Commission inspects everybody, Foundation Trust or not, and reports on the systems and processes in place to assure quality. You get a score and all trusts, whether you are a Foundation Trust or not, care mightily whether you are excellent, good, fair or poor. So there are some dynamics in the system. This is nothing whatsoever to do with Foundation Trust status but the dynamics to improve quality of care have not been very strong and I welcome the very recent announcements by Darzi et al for a renewed focus on quality but if that is to be achieved we need instruments that will drive it better than we currently have. I think those instruments should apply to everybody, not just to Foundation Trusts

Q17 Dr Taylor: Can you define what you mean by an instrument to drive it?

Mr Palmer: It has been proposed for quite some time that you should link in part the payment you make to a provider to the quality as well as the quantity of care. Payment by results is a payment per unit. You can develop quality metrics I think in some services quite easily and so the people will recognise quality by paying a bit more but equally we will punish you, as it were, for poor quality by paying you a little bit less. I am a great believer that a properly graduated incentive of that sort would put a renewed dynamic into the system.

Q18 Dr Naysmith: Can we move to the area of governance and democratic accountability? This is an area where, when the legislation was passing through Parliament to set up Foundation Trusts, there was a lot made of it by the Government. You may or may not be aware that there have been a couple of reports into how this has been working, one an Ipsos MORI poll for Monitor and a so far unpublished report by Mutuo for the Department of Health by Chris Ham and Peter Hunt. It is true to say that there is a bit of evidence in this area but both of these reports contain good things but they are also more than slightly ambivalent and suggest there is still a lot to be desired in this area. I wonder if I could start with you, Dr Exworthy. In your submission to the Committee you said that the new governance arrangements of Foundation Trusts are "seen as an important development but have yet to translate into meaningful change" and that "the relationships between the FT Governors and the Board still require further development." How do you see this development taking place and how can Foundation Trusts governance arrangements be improved? I would like specific suggestions if you can with evidence if possible.

Dr Exworthy: I will try to be as specific as possible. Like my colleagues on the panel who have already mentioned the significant changes in governance and public membership that Foundation Trusts give, having said that I think that the focus - or priority if you like - has not been on that so far, it has been about getting financial stability, robustness and making sure that their operation as a Trust (usually it is a hospital) is efficient and effective. There are signs that they are moving into developing better relationships with their memberships but I think there is a danger that initially at least these efforts have been focussed on people who might have been engaging with those Trusts anyway and extending it out to a broader membership is traditionally very difficult so Foundation Trusts would encounter similar problems. However, I think there are signs of much more outward focus; I mentioned that, rather than looking upwards, looking outwards. There are signs that they are taking that on board, entering into dialogue with all the various stakeholders that have been mentioned - local authorities, other NHS trusts, the public in all its dimensions.

Q19 Dr Naysmith: In both the studies that I mentioned there was evidence that there were members and even some governors who said they did not feel involved and they could not really make much of a communication with even their chairs on some occasions.

Dr Exworthy: Yes, and I think there is some evidence that the governors have failed to identify their role in a sufficiently well-defined sense. In a way that was my implication about this further development in that area. I think also there are areas to test between the board of governors and the executive team in the sense of on what occasions has that role been exercised in audits, appointments et cetera. Maybe they have not entered into that territory yet.

Q20 Dr Naysmith: Do you think there is still hope?

Dr Exworthy: I think so. I think it represents the form of membership and the form of organisation that Foundation Trusts have become, to represent an innovative dimension in this regard. Traditionally the NHS has had rhetoric in this but has not always delivered.

Q21 Dr Naysmith: When it went through Parliament it was described by one or two members as a fig leaf of democratic accountability; do you think it is more than that.

Dr Exworthy: Yes, and also I think it sets up an interesting tension particularly on behalf of the PCT as another constituent because they could claim equally that they have the needs of their resident population in mind. I note that the Darzi report earlier this week allowed PCTs to change their name to become NHS such-and-such a county or town to identify much more with the population on whose behalf they are commissioning. I think there is a tension that patients might well have a very strong affiliation to particular institutions and particular trusts but the PCT loyalty, on the other hand, could set up a tension and clearly there are not enough evenings in the week for people to attend all of these public meetings.

Q22 Dr Naysmith: Do you both have experience of the area we are talking about?

Mr Carrier: There is a tension but I think it is a tension between strategic and operational issues on the board in that the true members are lay people, intelligent and inquisitive and want questions which often are the questions that non-executive directors should be asking. There is this quite interesting way of handling those sorts of things because some of them are not for public discussion and that sets up concerns; others are. One way I have seen it work is by the board of directors through the chairman inviting members' councils to join committees, to form sub-committees and to reach into the organisation in a much greater way so our patients see what reception is like, what discharge policies are like and so on and so forth. There is a way of involving people in working which does not quite cross the operational line but gives people some identity. I am pretty sure there are hard to reach groups of people who have never made their voice known or engaged with a hospital; they take it for granted, it is there, they expect high quality services. I also know that the oversight and scrutiny committees are doing their job. We have just seen a very good example in London in Healthcare for London where all 31 of them got together as well as the 31 PCTs to comment on Darzi's Healthcare for London. They are also good at calling in both Foundation Trusts and non-Foundation Trusts for scrutiny and the public do turn up and the newspapers are interested.

Q23 Dr Naysmith: That is by-passing the governors in the membership of the Foundation Trusts. I am not saying that is a bad thing.

Mr Carrier: It is another dimension; it covers columns of local newspapers which means that people are informed. The other thing I have noticed is that the staff members do speak out in these governing bodies. As you know, the big issue is the appointment of chairman, the appointment of the chief executive and the NEDs and that in the end a very big piece of knowledge that all members' councils have; it is not used in a threatening way but it is there. My observation is that they have attempted to involve them but there is this very strange operational strategic issue.

Q24 Dr Naysmith: Do you have anything to add?

Mr Palmer: I would just say that for me it is much better than what was there before. When I think about what was there before there were no local accountabilities at all and everything was directed by the Department of Health. I have always believe that it is not a perfect system and it works less or more well in different settings depending upon the communities you are dealing with, but I think it is the right thing to do to try to create some local accountability and some more effective channels to the local communities so that there is an outlet or an opportunity for them to express views and of course ultimately to get involved in governance. One hopes that that is never necessary because something has gone badly wrong, but the very fact that there is now a local solution mechanism if there are major disputes I think is a very helpful thing. The only other thing I would add is that although Barts and London is not yet a Foundation Trust we have decided to try to create some of these mechanisms anyway. We have created a membership, we have invited people to join and we are absolutely thrilled with the engagement we are getting. We have Medicine for Members events which are mostly about public health issues in East London and we get a tremendous turnout of people you would never imagine would ever go to a committee. I would say that it is not perfect but it is a good start and I think it is an approach which should be rapidly generalised across all trusts whether Foundation Trusts or non-Foundation Trusts.

Q25 Dr Naysmith: I find it fascinating what Mr Carrier said about the Overview and Scrutiny Committee. Did you experience that as well when you were involved?

Mr Palmer: The Overview and Scrutiny Committee is of course a statutory component of oversight. We have not found, at least in Guys and St Thomas's, that there is undue overlap between its role and the role of the board of governors of the Foundation Trust.

Chairman: We have a series of questions now on the impact of Foundation Trusts on the wider health economy.

Q26 Dr Stoate: John, I would like to start with you. We heard how Foundation Trusts might be able to improve efficiency and might be able to improve outcomes, but they do have a very, very significant impact on the wider health economy. We know, for example, that Foundation Trusts collectively have a surplus of £1.7 billion and Keith has told us he likes to have a surplus in the bank to make sure they can hedge against the future. However, this is tax payers' money. If it is being locked up in trust accounts does that have a big impact on PCT spending and thinking?

Mr Carrier: No. We think PbR is wrongly named; we do not think it is payment by results we think it is payment by activity. In a sense that surplus is a hidden iceberg and what we are constantly debating with them are issues like coding of procedures and whether the returns we get quarterly are accurate and validated and so on. So there is that very administrative financial detail and we tend not to look at that big issue of the surplus and tax payers' money. We are obviously very keen on effectiveness and efficiency and value for money and I think it is right that the big Foundation Trusts, University College in our particular PCT is £60 million and the Royal Free is about the same; Tavistock is very much less. We tend as a PCT not to think about the surpluses; we tend to argue about our bottom line and us coming in on budget. We look at it that way. We also view it as a health community rather than a health economy as well because obviously we are very keen to delay wherever possible entry into any hospital if primary care can do the job. Recently, because of the debate about polyclinics, we have certainly had discussions with the UC as a Foundation Trust and the Royal Free as a non-Foundation Trust about polyclinic issues and primary care. We are conscious of that but not the surplus that Keith has referred to.

Q27 Dr Stoate: I am worried about this now because that is evidence of real silo thinking; you are saying that you do not really care about those surpluses.

Mr Carrier: I am not saying that we do not care; I say that our main concern is to make sure that the 18 week target is met, that our chief executive meets the three financial targets he has to meet each year, that services are of a high quality. If you want me to put them in order of priority then high quality comes top. We are obviously interested in cost efficiency and clinical effectiveness - we would distinguish between those two - but all hospitals in our area have quite a good reputation.

Q28 Dr Stoate: Yes but that is not the point I am making. The point I am making is that we have a lot of tax payers' money; £1.7 billion collectively is locked up in trust coffers and surely as a PCT you must be very concerned to ensure that that money is all spent on patient care, or do PCTs not care whether that money is spent on patient care?

Mr Carrier: Again I think it is wrong to say that we do not care but I think you are also right to say that our interest is not directed to that; our interest is directed to the day to day making sure that patients get in when they need to get in as fast as possible and are given the highest quality treatment and there are no delayed discharges and the community will support them once they are out. That is our main concern. I am sure if we changed our direction and started to ask questions about the surplus and how it is being spent we would have a different debate. I do meet the chair of the Foundation Trust at regular intervals; our chief executive meets their chief executive, there is an interchange and the relationship is good. Every now and then it gets tense because we are asking for details and they are asking for money but you are correct in one sense that we do not concentrate on the surplus.

Q29 Dr Stoate: PCTs are always finding difficulties with their finances and under payment by results they do the work and you have to pay them; there are no ifs or buts or maybes. The more operations they can hoover up the more operations you have to pay for whether you like it or not.

Mr Carrier: No, it does not quite work like that. We have a demand management system in place.

Q30 Dr Stoate: How does that work?

Mr Carrier: It is known as CCAS which is the Camden Clinical Assessment Service where GPs, if they want to refer to a hospital, will refer to this group which is composed of GPs, unless it is an emergency.

Q31 Dr Stoate: They have to apply to you for every single referral they make to everybody; even under choose and book they have to apply to you first.

Mr Carrier: The CCAS does the choose and book unless it is an emergency. That is how that system works. It is based on what is known as the Kingston model which was introduced a few years ago and it is really asking whether the referral appropriate and obviously it is a cost effectiveness mechanism so we have been working that for about two years now and looking at the results.

Q32 Dr Stoate: So the GPs do use choose and book.

Mr Carrier: They do use choose and book, yes. We have about 42 practices in the PCT, about seven of them are still not using choose and book and discussions are on-going with them. It is about technology and cultural resistance.

Q33 Dr Stoate: The point is, when a patient comes to a doctor and the doctor says you need your hip replaced, the doctor has to say, "You can use choose and book but I have to check with the PCT first whether I am allowed to refer you".

Mr Carrier: The point is that our GPs do support this system; they use it and how it is developed is based upon their own thinking and ideas. They are paid and it works. It works for all referrals in our particular Primary Care Trust. The activities are monitored; there have been hiccups. I think if activity is out of line, in other words it is not meeting expectations - what we would have expected in terms of the patient flow - questions are asked, but it seems to be working.

Q34 Dr Stoate: That is slightly off the subject of Foundation Trusts but it is a question of how your PCT works. My main concern really is to ensure that PCTs take a close look at how the surplus is used. Do you think this is something Monitor should look at in terms of ensuring that surpluses are directed towards patient care or is it something that PCTs should keep out of altogether?

Mr Carrier: No, they both have a role in doing that, of course. We obviously expect Monitor to do that but we are very challenging in terms of the volumes of work that come to us and whether they have been properly coded, whether the statistics are validated and so on. We have a whole group of people who deal with the contracts. We are still on the first wave contract although we have given notice - we gave notice two years ago - and we will go onto the model contract that is being introduced. Even then I think our Foundation Trust - the big one, UC - takes patients from around 200 PCTs and whether they will want to have one contract for all of them or negotiate separately is another issue. We are the lead commissioner, that is the point, and that is a way of ensuring economies of scale, keeping an eye on the total picture.

Mr Palmer: Could I just add to that the reason that John is not all that concerned about the surplus is because it is not extra revenue that is being paid to the providers; it is the benefit of providing the same volume of care more efficiently. I think the right way to think about the surplus is as extra resources available.

Q35 Dr Stoate: Yes, but it is still tax payers' money being locked up in coffers and not being used for tax payers' benefit. If you are going making efficiencies surely that money must be recycled back into patient care.

Mr Palmer: That was going to be my next sentence. I think it is not a question for me about the commissioners being concerned; I think that what we lack at the moment is precisely what you have just described. At the moment Guys and St Thomas's, for very good reasons, is still planning on how it wants to spend that money. Whilst it is locked up it should be available to the NHS, recycled, and until it is needed it is available to be used.

Q36 Dr Stoate: There are things the PCT would like to do but cannot do, there is money in your bank that is not doing anything and those two things are not being put together. What I am saying is that this is silo thinking; it is not joined up thinking.

Mr Palmer: It is a question of policy. At the moment there is not the mechanism to recycle surpluses so they can be used elsewhere in the NHS.

Q37 Dr Stoate: That is exactly my point.

Mr Palmer: But on the basis that those who generated the surpluses can get access to them when they have plans to spend them. It is actually relatively straightforward to devise an internal banking system where you re-use those surpluses but you do not take them away from the providers so that when they have good plans for them then they can use them.

Dr Exworthy: Could I just make two quick points, one is that in a way this is the price of autonomy. We are giving Foundation Trusts the autonomy and they keep the surpluses; that is part of the rules. That is the name of the game, as it were. I think also there is a difference between long term and short term here. As Mr Palmer has just said, some of them have been a little unsure as to what to spend it on, but there is a difference between, as it were, short term improvements you might be able to make and say, capital expenditure which might take several years of surpluses to accrue. Building a new wing of a hospital or even a new hospital would clearly be on a different scale than, for example, I know from the Darzi report one of the Foundation Trusts in Gloucestershire paid £100 to each member of staff as a bonus. There is a short term/long term issue.

Mr Bone: I was going to come in but I disagreed with Dr Stoate and I thought that was dinosaur thinking of the NHS. The effect is that efficiency savings have been made which would not have come about if you did not have Foundation Trusts. That was the problem with the existing system, there was no incentive to make the savings then no savings go to the hospital which they could spend on long term projects. The Government is absolutely right on this, it is the dinosaur thinking that they are trying to get away from which I think actually Mr Palmer did explain.

Q38 Chairman: Let me pick up on one with John who is a commissioner effectively. Your health budgets have been growing, effectively 4% above inflation or something like that. Would your attitude to surpluses being held by your local hospital be different if your budgets were not growing in the way that they are now or indeed have done in the past, a lot less than they are currently? Would it change your attitude?

Mr Carrier: It might well do. We do see the surplus as a much broader issue. I will give you the point, but it is a broader issue and again we see our task as to make sure we commission services that are needed and the tariff and then to check what it is going on. It may sound like silo thinking but that is the accountability thing that we take very, very seriously and that is why we call for the data and statistics, and that is why we have these debates. I think that is a fair point.

Q39 Mr Scott: Maybe I am a dinosaur as well but I would quite like to see that if a PCT needs some money and that one has it that it could be used for the benefits of the patients, which is what I thought it was all about. Mark, you say that provisional evidence suggests that Foundation Trusts are picking and choosing the issues on which they are cooperating with other parts of the National Health Service, especially if it is in their own interest. Could you give us a little more detail, please?

Dr Exworthy: I think it is perhaps implicit in some of the things that we have been discussing already this morning. Clearly Foundation Trusts have been given a set of incentives in which they are much more responsible for their own activities and affairs and, as we have just heard, surpluses as well. So clearly there is a much greater focus on their internal processes and decision pathways if you like and that clearly sets up a self interest type model that they are responsible for the boundaries of their trust and outside that is an externality; it is beyond their responsibility. Clearly in terms of some of the activities that might be going on in the local health community they are deciding the degree to which they might cooperate. Clearly there are areas in the country where there has been a history of collaboration and Foundation Trust status does not immediately change that; there has been an on-going network, many people will have worked in similar organisations, their friends and colleagues work similarly. There is a level of trust often between Foundation Trusts and non-Foundation Trusts in the local health community in the development of HR policies or clinical networks et cetera. There might be some places where the Foundation Trust status sets up a difference of position, responsibility and interest such that there is - to use the term used earlier - more of a silo mentality. That has created not just the acquisition of their Foundation Trust status but some of the central rules and implementation of those rules that set up a degree of resentment between Foundation Trusts and non-Foundation Trusts. That might hinder future collaboration. Some of the specific examples where they might wish to collaborate, for example in some of the big service reconfigurations that have been going on and are likely to continue, in the sense that it is very much in their long term interests for Foundation Trusts to get involved in these decisions. Helping shape that debate locally within the county, city or whatever is part of their interest. As we have heard surpluses might be retained which might set up a kind of tension, the degree to which they are seen to be retaining the surpluses and/or hindering or hampering local service developments. I think it will be very different in different places depending on the history and culture of collaboration.

Q40 Mr Bone: Following on from Lee's question, is it more like internal politics within this very large organisation that Foundation Trusts see themselves as something above the rest and the others think they really do not want to cooperate with them; they are a grammar school and we are a secondary modern. Is it that sort of thing you are worried about?

Dr Exworthy: I probably would not put it like that. Foundation Trusts have a duty of partnership but that clearly gives them quite a wide latitude of how they interpret that. Many of the rules under which they are now operating are much more explicit, so legally binding contracts, payment by results. They are very much more of a higher profile, more explicit, more overt and so clearly they are thinking in terms of managing their risks accordingly.

Q41 Mr Bone: John, earlier on in your evidence you actually said that you thought it had encouraged better working between partners. Could you just say a bit more about that?

Mr Carrier: Since shifting the balance some years ago which emphasises the cultural change that would have to come about, there is no doubt that the large hospitals, especially teaching hospitals, could see that commissioners were going to be important because their income is going to come from commissioners. I think other things which are difficult to quantify are also important, which are relationships: knowing people, meeting at networks, meeting at the oversight scrutiny committees, exchanging ideas, being invited to seminars and goodbye parties; all those sorts of networking, gossipy things do help to get the feel. As Wellington once said, you look to the wit and spleen of the person to understand who they are. That does help collaboration and I think it also goes beyond that and gives you the idea that whether it is a Foundation Trust or a non-Foundation Trust there is complementarity here, they are both on the side of the patient. For the Foundation Trusts with very high reputations, with teaching responsibilities and medical students, there is another dimension here which is extremely important because they have an intellectual critical mass which they want to defend as well. We want that to get into the service. So there is a whole debate in London about academic health science centres and we have been invited to discuss those and that is interesting. The last president of the Royal College of Physicians but one, myself and the chief executive and the chairman of what is now the Camden and Islington Mental Health and Social Care Trust also had discussions with the Foundation Trusts about the easy and quick reception of people with mental illness who are brought in under section 135 and how that could be improved in the middle of London. That seems to be working. So there are changes but it does very much depend as much on relationships and understanding of each other and not simply on the economy issue. I think it is a health community as well as a health economy. We are not against the economic and financial issues but other things are just as important.

Q42 Mr Bone: Mr Palmer, I think you have seen this from both sides, Foundation Trust and non-Foundation Trust. Would you say that there is any evidence that Foundation Trust hospitals are better at collaborating with the private sector than non-Foundation Trust?

Mr Palmer: If I may I will answer that as well as whether they are any better at collaborating within the NHS because I have, as you say, seen it from both points of view. I do not think that the tensions in the system about service re-design and cross-organisations makes very much difference whether they are Foundation Trusts involved or not. I am now at Barts and the London; we are a high performing, financially in surplus major teaching hospital trying to do re-configuration with clinically less high-performing, financially very troubled DGHs. I think that situation creates enormous tensions in trying to do things that are good for patients that the losers will sign off on and losers will usually the district general hospitals. I see that exactly the same in the Northeast where we do not have Foundation Trusts as it was in the Southeast where they have the same issues. I think they are inherent in service re-design and the way that payment by results works more than whether you are engaging with a Foundation Trust or not. On the private sector, my answer would be exactly the same. There are inherent difficulties in the NHS dealing with the private sector; I do not think it makes very much difference except there are a few more legal powers to do it in Foundation Trusts but that does not make it any easier actually.

Q43 Dr Stoate: I am going to be the Committee Rottweiler for a moment or two and have a go at Mark now. We are talking in theory about primary care in the NHS and yet we are seeing Foundation Trusts which are gaining huge amounts of power and control over the local health economy. What evidence is there that Foundation Trusts have in any way facilitated the move of resources and services into the community away from themselves?

Dr Exworthy: Foundation Trusts were initially acute trusts and have been extended into mental health trusts and there is the potential to move into community foundation trusts so there is a pathway if you like in which that Foundation Trust status is moving. Given my earlier comments about their self interest, they have a clear interest in looking at acute care. Having said that, I think there are some areas where they are moving into primary care and that is either a function of other partners in the local health community - so re-configuration across organisational boundaries (clinical networks might be one example) - but there might be other areas, particularly outside the bigger cities, where the Foundation Trust as it were dominates the area so that in a sense they become the provider across many towns and villages that they encompass. There might be a degree of difference and ability of moving outside their traditional remit for Foundation Trusts to enter into those primary care pathways.

Q44 Dr Stoate: Is it not happening?

Dr Exworthy: Not at the moment. I think there are discussions and areas of debate in which they are thinking about that but have not actually moved in that direction.

Q45 Dr Stoate: Given that the Government's line is for a primary care led NHS do you think it was a wise move to set up Foundation Trusts in the first place? You are going to have Foundation and Primary Care Trusts.

Dr Exworthy: I think that is difficult if PCTs are commissioning on the basis of government allocations and financial allocations. There were some suggestions at the outset of Foundation Trusts that perhaps we should talk about a foundation community so rather than giving it to each individual organisation it would be given to a network of organisations. That obviously did not happen but that would be a very different model than setting it up with each individual, as it were, in competition with others.

Q46 Dr Stoate: You are saying there is no evidence whatsoever that we are moving from the current situation of hospital dominated care into a primary led care as a result of Foundation Trusts.

Dr Exworthy: I think a lot of the rhetoric about primary care led NHS is still to be realised, but I think there are steps in that direction. Clearly Foundation Trusts have been put in the position that they are going to try to shape that agenda in each health community.

Q47 Dr Stoate: Given their self interest are they helping or hindering that process?

Dr Exworthy: I think they are helping and they might be in a good position to do that because they might be able to coordinate many of these primary secondary care networks.

Q48 Dr Stoate: Why could the PCTs not have done that? Why are we leaving it to Foundation Trusts to do that with their self interest? Why did we not set it up in the way that PCTs lead that process?

Dr Exworthy: A lot of Primary Care Trusts are - and perhaps should be - leading that process. Clearly it makes a difference when one of your partner organisations - your providers - is a Foundation Trust because that sets up a potential tension and a potential resistance to shifting your money, especially under the PbR system which sets up different incentives for the PCT and the FTs.

Q49 Dr Stoate: I am still trying to get a straight answer; is that a hindrance or a help in that case?

Dr Exworthy: For shifting to the primary care led NHS? I would probably say it is a hindrance on balance but I think that balance might be shifting.

Q50 Chairman: Have you got a view on that, John?

Mr Carrier: I think it is shifting and I think it is shifting because the language now differs. The patient pathway/patient journey is an important idea; there is a pathway in and a pathway out. Some services are also clearly negotiated to come out of hospital and back into the Primary Care Trust (dermatology is an example and diabetes is an example). There is also quite a good discussion going on stimulated by the polyclinic, for example there is a discussion between the Camden Primary Care Trust and University College Hospital about the location of four GP practices on the ground floor alongside an urgent care centre, alongside an A&E department, alongside out-patient services. Whether this comes off depends on consultation and whether it is financially feasible, but there are four surgeries round about that are not DVA compliant and it would be very interesting to see if we can get an integrated centre out of that. The Foundation Trust is certainly interested in discussing this with us. I do not think that could have happened before although, to be fair, the Royal Free too is talking about collaboration with local integrated care centres and so on. Coming back for one second to something said earlier, I think one man's silo may be another man's professional division of labour and although you may want to defend a silo you may also want to defend your professional division of labour which is what you have been brought up on, what your skill is, what your competence is, what your knowledge is and what your values are. I think silo as a pejorative term does not really fit here. I think people will defend what they hold out to be good but I think there are gaps here which people are crossing and talking to each other. That is very, very important whether you are a Foundation Trust or not. I think Primary Care Trust is included now because commissioning is extremely important. We have shared our provider service; it is now an autonomous provider organisation and they will have to do what others do in that situation. We are purely commissioning. We have a budget of well over £400 million of which £60 million goes to UC, £60 to the Royal Free and we are financially in balance so we are not at the moment strapped for cash and we have taken advantage of the increase year on year.

Q51 Dr Stoate: I understand what you are saying, it is just that my philosophy has always been that we should look at a health community where we spend large amounts of public money hopefully to the public good and anything that causes artificial divisions and effectively barriers to that happening I like to examine. It seems to me, just to step back, that locking money up when that money could be used and freed up for patient care seems to be a barrier rather than a help. I am just trying to tease that issue out.

Mr Carrier: I see the point but my feeling also is that accountability is important, that the more pluralistic and the more multi-services there are, the more difficult it may be to see when things go wrong, who is accountable and where the money is actually being spent. I think there is a case for and against.

Q52 Dr Taylor: I welcome what John says because you are obviously beginning to bridge the purchase and provider split.

Mr Carrier: I hope so.

Q53 Dr Taylor: That is absolutely brilliant. Keith, I want to know about the costs of the Foundation Trust application process. I have to declare an interest because on Saturday I am going to a consultation meeting in my own Trust about doing it. What does it cost to apply?

Mr Palmer: I think the major cost is difficult to put a money value on because it is a huge effort that the whole organisation has to go through to get itself prepared. There is a very structured process that Monitor runs; there are very high standards in terms of compliance with their requirements and I would say at Guys and St Thomas's it caused us at least 12 months to take our eye off the ball; not take our eye off the ball because actually you cannot do that because you cannot become a Foundation Trust if you slip from meeting all the targets. People had to work much, much harder simply to get through an additional major agenda which is the Foundation Trust application process. The monetary cost is mostly measured in terms of the recurrent costs of running the membership. You have a membership; it is not the elections, they are not very expensive, but you have to communicate with them, you have to produce publications quite properly and circulate them to potentially tens of thousands of people. Those sorts of running costs are material but they are measured in hundreds of thousands rather than millions. The front end cost is really measured in the time and energy that staff have to put in; the actual cash on the table is not that great.

Q54 Dr Taylor: Have there been any specific challenges for your trust particularly that you have had to face other than just getting the finances and the quality right?

Mr Palmer: In becoming a Foundation Trust?

Q55 Dr Taylor: Yes.

Mr Palmer: I think that with hindsight the first wavers have got a relatively easy ride. Some of the follow-on trusts - people like King's - were referred back three or four times and there were major costs in terms of doing extra work and re-submitting that were not immaterial. For my rust at that time we sailed through.

Q56 Dr Taylor: Do you think there are any major challenges to you at the moment?

Mr Palmer: The major challenge for Guys and St Thomas's is to use the surpluses effectively. There is a major push to contribute to service improvement in southeast London outside the narrow ambit of Lambeth and Southwark and the reason they have to spend their surpluses if because that is capital which will be needed to bring about service improvements which have yet to be both agreed and consulted on, so it is simply a timing problem. The challenge for Guys and St Thomas's is to become an academic health sciences centre of international repute and to contribute to service redesign across southeast London.

Q57 Dr Naysmith: This is a question for Mr Carrier because, as well as the acute Foundation Trust in your patch, you have a smaller mental health Foundation Trust as well. I just wondered what are the important management issues this has generated.

Mr Carrier: There is a much smaller commissioning budget - just over £40 million a year - and it is much more difficult in a way because that trust has very deep relationships with two particular boroughs in London, Camden and Islington, with two local authorities and some very challenging users who are well organised into user groups and put a lot of pressure on that trust. I meet the chairman often - in fact I am meeting with him this Friday - and he is a very near neighbour, but we do not have half as much contact even though we are in the same building as we do with University College Hospital or the Royal Free or the Whittington. We do have regular meetings and mental health issues often come up on our agenda but it is not an issue in the same way that our relationship with University College is.

Q58 Dr Naysmith: What about relationships with the local authority because of mental health issues?

Mr Carrier: We have joint commissioning under section 31 of the act. We share senior managers between local authority and our trust. A lot of it has to do with mental health and obviously children and families, but the relationship is a good relationship and we often come into criticism because the local authority - as it has done - wishes to close the day centre and turn it into what they call a recovery centre. My trust then gets the flack in a sense and we have to explain that we are not responsible; we fund it but we would support what is going on having examined the case because we obviously jointly employ the senior managers.

Q59 Dr Naysmith: Would that cause a problem between you and the council if they were proposing to close something?

Mr Carrier: It is not a problem; it is a question of asking them to account for the policy and to make sure that my board agrees with it. The joint commissioner sits on my board and the senior officers from the local authority are members of our partnership board and attend our board and have papers on it. There is a good partnership working with the local authority. We find some of the scrutiny committees rather tense and difficult but they are doing a job.

Q60 Dr Naysmith: Are they more difficult as far as mental health issues are concerned?

Mr Carrier: Every now and then an issue arises, particularly with a closure where people become attached to buildings rather than services. We will pick up that and we will either support or discuss with them. So we are in the middle of all this; it is a bit of a cock pit really.

Dr Naysmith: I am tempted to ask you about commissioning dental services but we will leave it there.

Chairman: Could I thank all three of you very much indeed for coming along and giving evidence to us this morning. It has been a very interesting session, thank you.

Witnesses: Mr Richard Gregory, Chairman, Chesterfield Royal NHS Foundation Trust, Mr Stephen Firn, Chief Executive, Oxleas NHS Foundation Trust and Dr William Moyes, Executive Chairman, Monitor, gave evidence.

Q61 Chairman: Gentlemen, could I welcome you to the second half of our evidence session in relation to Foundation Trusts and Monitor. Could you introduce yourselves and the position you currently hold?

Mr Firn: My name is Stephen Firn; I am Chief Executive of Oxleas NHS Foundation Trust. For those who might not know, we are a mental health and learning disability trust in southeast London so we cover the boroughs of Bexley, Bromley, Greenwich, Lewisham and also into Belmarsh Prison. I have been Chief Executive for six years; we were one of the first mental health FTs and that occurred about two years ago.

Dr Moyes: Good morning. I am Bill Moyes; I am the Executive Chairman of Monitor.

Mr Gregory: Good morning. I am Richard Gregory, Chairman at Chesterfield Royal; I have been Chairman there since March 2006.

Q62 Chairman: I know Richard very well although I have never met him in his capacity as Chairman of Chesterfield Royal Foundation Trust; I have met him on many other occasions with difference hats on. My first question really is to all of you. The Healthcare Commission and the Audit Commission have recently recommended that Foundation Trusts should not retain large cash balances over prolonged periods and should set out clearly how they intend to use these balances. Do you agree? If you do, what do you intend to do about it?

Dr Moyes: I entirely agree that we expect Foundation Trusts to use the cash they build up to develop services for patients and that undoubtedly is what we expect to see happen. I think the Committee has to recognise that Foundation Trusts need their commissioners to be clear about what investment they want to see made: investment in buildings, investment in equipment, investing in some new staff to deliver new services. As commissioning becomes a stronger function with a greater degree of clarity about what they want to see - Lord Darzi's report obviously them a platform to do that - then we will see Foundation Trusts respond to that. My sense of Foundation Trusts is that they are anxious to make investments; they recognise the issue that you are putting to me and they are anxious to respond. However, what they do not want to do is to make investments that do not meet the needs of their commissioners. That would be my response to it.

Mr Gregory: We have submitted evidence that shows that we have nearly tripled out capital expenditure since being a Foundation Trust. To be able to plan for that and prioritise for that you need to build up surpluses. We use the phrase to explain this to our local community that it is surplus with a purpose; it is not surplus just to put into a cash account and carry interest forward and not to be used. It is all going to be used on improving patient services. It is a question of timing, it is a question of planning and it is a question of prioritisation. The wonderful thing about Foundation Trusts is that in principle they are enabled by their very status to be able to plan and prioritise and actually shape their own future, their own destiny. You need to create surpluses to do that and you need to hold cash balances to do that. By simply holding a cash balance it does not mean that it is not prioritised. Virtually all our cash is actually committed on a three year capital investment strategy that has been agreed with our governors, agreed with our board and prioritised. That may be re-prioritised according to the demands upon the service; we have flexibility. The surplus and the cash balance give us flexibility to be able to react, whether it is a short term issue or a long term issue. For me it absolutely underpins the principle of Foundation Trusts.

Mr Firn: To answer your question straight away, yes I do agree with that premise and to some extent we have been doing that. Each of the two years we have been a Foundation Trust we have made a surplus which we have carried over of around a couple of million each year. We have invested that both in new services which have been agreed with governors and with commissioners and in improving quality simply focussed around certain things around the patient survey and setting up an opportunity fund. We have £1 million which clinicians can bid towards to set up new services or new innovations and get access to within a month. I could give examples of those sorts of things if it would help. We do have cash balances of about £25 million which is a significant amount of money, but to put that in context if our commissioners decided to stop paying us for whatever reason we would run out of money within two months; it is less than two months' operating money so it is not a huge amount in that sense. However, we also realise that it is NHS money and it should be used for the benefit of the patients and carers. We do not have any major estate and capital issues ourselves; we have been through all that so there is nothing obvious we could and should be doing with it. There are new buildings that I would like to build and new services I would like to set up. For example, I was in Belmarsh Prison on Tuesday and there were ten prisoners there waiting transfers to the NHS. We know the policy is that they should be transferred within 14 days; some of them had been waiting months. We have a medium secure unit about five miles away with planning permission already secure; we could build a unit there. The problem in mental health is that money does not follow the patient so we could build a new service that is semi-psychological therapy - I could open a new for that - but without a tariff, without money following the patient, we would not have the revenue streams to be able to fund that. As Bill says, there is an uncertainty about how best to use it and clearly we are also holding back to see the outcome of polyclinics in London because we would be very keen to invest and be involved in those. There are also other things like community services provider arms which we would be very interested in running ourselves as well. That cash, therefore, is ready and waiting for use when safe and secure investments can be identified.

Q63 Chairman: The Healthcare Commission and the Audit Commission have said that Monitor should have a role in making sure that a proper balance is kept in relation to that. Is that how you see it? Do you think it is the role of Monitor?

Dr Moyes: I would be apprehensive. I would not necessarily rule it out completely but I think the first instance we are looking to commissioners to be clear about what they need to see by way of investment by Foundation Trusts. My hope and my expectation is that when the operating framework is published in the autumn, after Lord Darzi, we will start to see in that a clearer description of what the Department of Health is looking to commissioners to create and that will flow into their own local commissioning plans. If, in a few years' time - I think it would be within that timescale - we were to conclude that even given greater clarity of commissioning intentions and the Foundation Trusts were building up greater surpluses than they needed for their own investment purposes, that does raise a question then about the tariff. I think that is where I would go next before I tried to position Monitor as the owner, if you like, of Foundation Trusts, requiring them to invest or to give up cash. I am quite apprehensive about doing that.

Q64 Chairman: You would use a tariff on a particular Foundation Trust to take money off them. Is that what you are saying?

Dr Moyes: No, I am not saying that. What I am saying is that if the suppliers are building up a lot of cash, despite investing at the level that is needed, then that does raise questions about whether the commissioners are paying too much for the services.

Mr Gregory: I think one of the problems with the NHS from my perspective - although I am a relative newcomer really - is the lack of being able to plan the refurbishment and the re-building of large hospitals in particular. You cannot wait for a hospital to fall over after 25 or 30 years and then have a problem. If you do that then it is bad public sector planning. Chesterfield is 25 years old - it is not a very old hospital - but it actually does need re-building so we are going through all the wards, we are refurbishing all the wards, we are building a new children's department, we are putting in great new equipment in technology. If all these things did not happen under our stewardship they would have to be bid into central pots whether they are held by Primary Care Trusts, the Strategic Health Authority or the Department of Health. Being able to own that opportunity to actually keep your hospital absolutely up to scratch, then the interesting and exciting agenda is where you go forward - I hope we can assess that post-Darzi - and that is really the financial strength that Foundation Trusts have been given.

Q65 Chairman: How can policy incentivise greater efficiency in Foundation Trusts once they have achieved a surplus? Are cost improvement targets sufficiently ambitious?

Dr Moyes: What we have seen in every year since Foundation Trusts came into existence is that their cost improvements are greater than the assumptions in the tariff about the level of cost improvements. In 2005/06 the tariff issue was something like 13/4% and Foundation Trusts delivered a bit more than 2%. The same pattern was true in the two subsequent years. I think again the answer to the question is that Foundation Trusts do feel under pressure - and our compliance regime contributes to this - to make sure that their finances are very strong. However, if that alone was not delivering a high enough level of efficiency then again it comes back to the tariff. The Government can use the tariff to signal a level of efficiency it wants the suppliers to generate and at the moment the figure they are using is 21/2 to 3%. It is up to the Government, I think, to take a view on whether that is the right figure or not.

Q66 Chairman: Do either of you have anything to add about that?

Mr Firn: No.

Q67 Dr Stoate: Starting with you, Bill, about the surpluses, obviously I appreciate that you have to have surpluses, just as the others have said, in order to make sure that these trusts are viable, but £1.7 billion of surpluses is enough to put everybody in the country on statins and still leave money for a fish supper on the way home. It is a lot of money. Do you think that is a reasonable amount to have locked up effectively in Foundation Trust surpluses?

Dr Moyes: That is not actually the surpluses they are making. They are making surpluses of about £500 million before exceptional items. What you are describing is the cash they have on the balance sheet. Some of that cash is a one-off effect. Sometimes they get public dividend capital before they actually spend it on capital expenditure so some of that will be drawn down. One of the things that happens when trusts become Foundation Trusts is that they become much more focussed on cash; they manage their cash better. They are much more careful about when they pay bills and when they get paid and that alone is probably creating £100 million of cash that we did not expect to see on the balance sheet because we did not realise that this is what would happen. Again that will be spent on time on service development and capital expenditure when we are clearer about what the commissioners need. I do not think you should regard £1.7 billion as the profits, if you like, or the surpluses; that is the cash on the balance sheet. The figure of surplus is £500 million.

Q68 Dr Stoate: Certainly the assertions you have made do seem reasonable, but our evidence is that they are very lacking in evidence. Research, for example, at the University of York has pointed out that actually the Foundation Trust policy has not made a significant difference to financial management. We are very lacking in evidence; we have a lot of anecdotes and lots of feel good factors but not much hard evidence.

Dr Moyes: I am a little inhibited in talking about the University of York's research with Professor Maynard listening in; I hope you will forgive me if I make one or two comments on it. As I recall that research focussed purely on 2004/05 which was the first year we had Foundation Trusts. That was the year when we had two or three financial problems beginning to emerge; Bradford was beginning to emerge and UCLH was beginning to emerge. I am pretty confident that we can give you very good evidence that financial management is much sharper in Foundation Trusts than in non-Foundation Trusts.

Q69 Dr Stoate: If you have any actual evidence we would love to see it because one of the whole problems with this inquiry is that we are very long on anecdotes and very short on hard facts. If you have any actual evidence we would very much like to see it.

Dr Moyes: I can quote UCLH, for example, where financial problems were turned around. A financial deficit of £36 million which, at its worse, became £50 million, was turned into a surplus in two years while at the same time the trust delivered the targets and standards required of it. We can give you a number of other examples; there are some in our annual report. I am happy to provide the Committee with a note on this if it would be useful.

Q70 Dr Stoate: That would be useful. What we have is that the Foundation Trusts were picked as being the very best of the best before they were allowed to be Foundation Trusts anyway and it is often said that these were long term trends that would have happened anyway, and it is not specifically due to Foundation Trust status that these trusts which were already exceptionally have got simply better. What we are looking for is evidence that the actual Foundation Trust status itself has made the difference or would they simply have done what they were doing anyway?

Dr Moyes: One might say that about the early applicants, but we now have 100 Foundation Trusts which is about half the hospital system. A third of applicants do not get authorised at first attempt and yet the only things we look for are strong finances and good governance. I slightly resist the proposition that we are dealing with just the best of the hospital sector. We have some very good hospitals but we also have some hospitals that were definitely in the middle of the pack. I think that there is good evidence that the responsibility and the accountability for the finances that rests at board level, the financial regime within which they operate and the ability to see a purpose in managing the finances well to build up surplus and then invest, those things taken together I think are producing much sharper financial management and I genuinely do not believe that this would have happened if there had been no change in the status.

Q71 Dr Taylor: Turning to borrowing, Bill, how much can Foundation Trusts borrow collectively?

Dr Moyes: Collectively they can borrow today about £3.2 billion.

Q72 Dr Taylor: How has that figure been fixed?

Dr Moyes: The legislation provides for Monitor to control the borrowing of Foundation Trusts. We published about three years ago a prudential borrowing code where the level of borrowing permitted is determined by a number of tests including the financial strength of the Foundation Trust, so the higher your financial risk rating the more you can borrow. Again, if you want an explanation, we can provide that to you quite easily.

Q73 Dr Taylor: We have been told by the Audit Commission's report that when the limit was £2.5 billion only about £100 million of that was actually accessed.

Dr Moyes: Yes, that is correct.

Q74 Dr Taylor: Why was that?

Dr Moyes: As at the end of March the borrowing capacity was £3.2 billion and the total actually borrowed was £172 million. There are a number of reasons for that. One is what we have been discussing. The trusts are not clear where investment is needed. The second reason is that a lot of them are now planning investment in a piecemeal fashion; they are not looking to re-build the whole hospital but hospitals like Bradford, for example, in the heart of England are publishing ten year investment plans that can be done in chunks and they can largely raise the finance to do that from their own resources, from the surpluses they are generating. I think the need for borrowing is less in the system at the moment than could be allowed.

Q75 Dr Taylor: How does somebody like Richard cope, who has told us his hospital is 25 years old and he is going to need a new one? PFIs have gone by the board, so how are you going to do it? Are you going to save up surpluses all the time? What collateral do you have to borrow on?

Mr Gregory: We do not need to borrow; we are using our surplus generation in a staged way to actually hit the capital investment needs that we can identify. At the moment I am quite comfortable. The only problem we would have would be if the nature of the tariff changed to disadvantage district generals. If that happened and reduced our surplus then it may not be completely affordable out of our service generation. At the moment on our present timeline horizons I am pretty comfortable that we do not need to borrow. In fact I would not want to go anywhere near borrowing on the refurbishment of the estate. I would be interested in using the borrowing facility if it was an agreed new interesting initiative for the benefit of the local health community with the Primary Care Trusts that we could actually help finance. I would be interested in using our financial powers that way but not actually in terms of going to borrow for the estate.

Q76 Dr Taylor: To be absolutely clear, out of your accumulated surpluses you are confident that you can do all you need to do to keep your hospital.

Mr Gregory: At present, depending upon the changes in the tariff later on this year.

Q77 Dr Taylor: Do you have anything to add?

Mr Firn: I would give a similar story that at the moment we do not feel the need to borrow because we have the cash that I have already mentioned and because there is still uncertainty about where that could be best invested in the interests of the local health economy. It is not that we are not doing anything around this. Howard knows the local health economy around area very clearly and there are some very large deficits in the local acute trusts and the local health economy. We are meeting with the Acute Trust and the Family Care Trust on a fortnightly basis, discussing with them what might be the future of that acute hospital site, whether that would have new services on there, whether there will be a polyclinic; there are GP-led clinical round tables that our commissioners are sitting on looking at improved pathways of care around things like strokes and where we may go into that. We are absolutely clear that that cash that we are holding and our potential borrowing limit could be utilised if it is in the interests of the health economy but also enables us to continue as a viable concern.

Dr Moyes: Dr Turner, you referred to PFI; that is the other thing that we should not forget. In the last ten years a huge amount of capital investment has been transferred into revenue so hospitals like Newcastle Sherwood Forest Foundation Trust will not borrow because they are re-building themselves but they are doing it through PFI.

Q78 Dr Taylor: Remembering the first inquiry we did in 2002/03 into Foundation Trusts, I think I remember that the ability to borrow was going to be one of the most important features of Foundation Trusts and yet you are not using it much.

Dr Moyes: It is not being used because it is not required. I think I would really caution the Committee that we are at a very early stage in the development of Foundation Trusts. If one looks to much longer term, having the ability to borrow from the commercial markets and being exposed to the discipline of the commercial market I think will be a good thing for Foundation Trusts and I think it will happen.

Q79 Chairman: Bill, you said that the Trusts were not sure where investment was needed. Could you just explain that a bit further and tell me why?

Dr Moyes: It comes back to all the work that has been done in the last 12 to 18 months or so to try to clarify commissioning, the work that Lord Darzi led initially in London and now nationally. Stephen mentioned earlier on polyclinics; we had the concept of polyclinics advanced by Lord Darzi but what we do not know today is exactly how many, exactly where, what scale, what type of services and all those types of things. Lord Darzi, in his London work, identified a need to concentrate certain services, stroke and cardiac in particular. Again, I think there is a lot of good work being done in London and around the country to start to refine that and to start to work out where we want stroke services to be, how do we resource stroke services, what kind of scanning equipment, diagnostic equipment and so on. I do not think many Foundation Trusts today - even those like University College Hospital London that does have surpluses and is ready and keen to invest - could say to you, "We are absolutely confident that we can make an investment of this nature and be absolutely sure that that this what our commissioner would want". I think that is a key requirement, to get to the stage now where commissioning can describe the pattern of services that they think is required to deliver the services the population needs.

Q80 Chairman: Would it be fair to say in the past that they would have built the unit and then looked for the patients to go into it?

Dr Moyes: I would not want to generalise.

Q81 Chairman: No, I do not want to either, but I am too tempted not to ask you the question.

Dr Moyes: When we had our financial problems with Bradford in 2004 that was part of the reason. They built a modular theatre and, if I remember rightly, they took on something like 300 staff, but there was no commitment from the commissioners to transfer patients to the hospital to use those facilities. That was part of the underlying reason why Bradford got itself into real financial difficulty and in getting itself out of that difficulty it had, if I remember correctly, to rationalise services, move in-patient facilities from St Luke onto the main Bradford Royal Infirmary to use those facilities they had created. Personally, having been there, I think it is a better service to patients so I am relatively relaxed about the outcome of that, but you are absolutely right, that was a good example of creating a facility and expecting the commissioners to send the patients.

Q82 Chairman: I meant that in general terms about what has happened in the National Health Service for the last 60 years.

Dr Moyes: You will forgive me if I confine my response to the last four years.

Q83 Chairman: The other thing of course is that there are very low levels of borrowing at the moment but if things were different and if income going into the health service budget was less than now, it might not be the case at all and those barriers that you want for borrowing might be a bit nearer. Would you have access to capital markets under those circumstances? If you needed major investment or a new hospital in Chesterfield or whatever, would you have access to capital markets and what would be any restrictions that you may or may not have in accessing capital markets?

Dr Moyes: I think from our contacts with the commercial banks there is undoubtedly appetite in the commercial banks to lend to the sector, but of course at the moment the Department still provides loan funding and other dividend capital at well below the prices the commercial markets would set. I think there is a question of working out what is the capital regime for the future. I think the banks are very keen and I do not think from our contacts with them that the banks would be looking for any particularly onerous conditions or anything novel. But why would a Foundation Trust go to the commercial markets when they can get cheaper money from Richmond House?

Q84 Chairman: Of course there would be the issue as you have described with Bradford, the actually commissioners decide on what the income is likely to be over time. Would that in any way, do you think - talking about the future here - restrict people in terms of loaning money into the building new hospital sector? Could it do?

Dr Moyes: I think the banks will have to work out how they assess the credit of different types of Foundation Trusts and depending on the state of the world economy at the time that this happens they might be more or less adventurous. I would expect them to start by exploring very carefully the long term future of the hospitals they are lending to. Our contacts with them suggest that they would want to understand in some detail how Monitor would behave if a Foundation Trust that was a borrower got itself into financial trouble. Yes, I think they would take a very, very detailed view of the hospital's prospects but I think that is to be welcomed.

Q85 Dr Naysmith: Good morning, Bill. I want to ask you about the private income cap for Trusts which, as you know, varies quite considerably. I want to know if that is a problem and if there is any rationale behind it and, if it is a problem, what should be done about it?

Dr Moyes: It does vary considerably and it does because that is the way the legislation is structured. The 2003 legislation defined the cap and in essence what it does is that it fixes the proportion of private income to the level that it was in 2002/03. Therefore those trusts in 2002/03 who had a high proportion of private income can retain that and those that did not cannot. I feel slightly inhibited in talking about whether that is a problem or not because, as you may know, Monitor has started consulting on the private patient cap. The way the legislation is framed, Parliament has expressed a principle that private income should not grow unless NHS funding income grows, but it has largely left it to Monitor to sort out what the rules are. We thought we had done that but Unison has challenged us and is now pursuing judicial review of our process which, of course, they are entitled to do. That led us to think that we ought to set out the complexity of this issue in a consultation document and seek views from a wide range of not just Foundation Trusts but all sorts of people. We published that two or three weeks ago and the consultation closes in early September. If you do not mind, I would rather not speculate on the outcome of that consultation.

Q86 Dr Naysmith: Could I just ask you a specific question, do you think there is a demand from some of the Foundation Trusts which have a historical low base to increase it, or is that too difficult to answer in the circumstances?

Dr Moyes: What I can say is that I do not believe that Foundation Trusts find the rules that we have written out of the private patient cap to be restrictions, but they might find restrictive some other interpretations of the rules. That is what I think I can say.

Mr Firn: It is a specific problem for Mental Health Trusts because, I think I am right in saying, everyone who has been authorised so far has had the private patient cap set at zero because that was the position in 2002. It is something of an absurdity because if we were not a Foundation Trust we could set up services that have private patient income, but because we are a Foundation Trust we cannot. I have worked in the NHS for 27 years and I agree with all the principles about care being free at the point of delivery, but I know from all the work we have recently been doing with employers, that the support we could provide to employers about getting people back into work and retaining people in work and getting income from them would meet some of the Government's policies around keeping people in work and recovery, we cannot take forward because it would count as private income at the moment. There are other things around psychological therapies where we could set up units with free access for people on the NHS but we could part fund it by having private patients; we are not in a position to do that. I think it is actually inhibiting us from taking forward some key policies but also getting income to improve other NHS care.

Q87 Dr Naysmith: You have raised a very interesting point there which is not really a part of this inquiry but can I just ask you about it? There are known to be, all over the country, long waiting lists or longer lists than there should be for psychological therapy. If this problem you are describing could be solved would it help to make psychology more available?

Mr Firn: I think it would be one part of the jigsaw, yes.

Q88 Dr Naysmith: Bill, returning to joint ventures with the private sector is something that is suggested will increase NHS efficiency (and it probably will). Will Foundation Trusts' capacity to enter such arrangements be restricted by some of the things we have been talking about and would this not be a failure to ensure a level playing field for the National Health Service and for Foundation Trusts and for private providers?

Dr Moyes: Depending on the consultation and depending on whether the judicial review proceeds to a hearing, and depending on whether or not the outcome of that is that our roles are supported or overturned in the court, we could find that there are circumstances in which joint ventures and other types of cooperation between the Foundation Trusts and the private sector are inhibited. It is very hard to answer the question at the moment, I am afraid, until we get to the point where either the judicial review has come to a conclusion or something else has happened. I am speculating really.

Q89 Dr Naysmith: Richard, much has been made of the new autonomy that is granted to Foundation Trusts. What is different now you are a Foundation Trust? There are obviously quite a few difference, but what are the main ones?

Mr Gregory: I think, as I said earlier, the ability to try to shape your own future, to prioritise and the speed of decision making.

Q90 Dr Naysmith: Some people would argue that that could have happened before, prioritisation and speed of decision making.

Mr Gregory: When I joined back in 2006 one of the first major items on the board agenda was the business plan for the new children's development that we are building in Chesterfield, bringing services that are currently delivered in rather dilapidated buildings in the town centre onto the site of the Royal (which is a large site) and having an integrated set of services and an improvement to those services. We had the board meeting and I noticed after we gave the business plan approval the chief executive and the financial director and a few others were smiling at each other. I asked what I was missing and they said, "You don't realise, Richard, but what we have just done in two months would have taken at least two years to achieve before".

Q91 Dr Naysmith: What was it specifically about the Foundation Trust that enabled that to happen?

Mr Gregory: We could make the decisions. We did not need to bid into a central pot. We had the resource, we put forward a proper analysis on clinical and financial criteria and we debated it rigorously and we decided to approve it. We did that within our own boardroom; it took as long as the process took which was probably less than two months actually. Apparently these things took an awful lot longer before.

Q92 Dr Naysmith: Stephen, what have you done that you could not have done before?

Mr Firn: I think there are a couple of examples, first around money and then around the work with governors. We are a Mental Health Trust, as I alluded to before and do not have a tariff, we just have block contracts. Prior to being a Foundation Trust there was no incentive to make or declare a surplus because we were essentially given a block of money on the first of April and you were expected to have spent it all by 31 March otherwise the risk - and often the reality - was that any left over was used to cover problems elsewhere in the health economy. Now that there is a recognition that if we work with commissioners and work with our commissioners to generate a surplus and we can carry that over and invest it in ways that are agreed with governors and commissioners that has made a huge difference. This year, as I have alluded to, we have put part of it into developing a personality disorder day hospital which is part funded by commissioners but part funded out of our surplus. That would not have happened; we would not have been able to do that. We have increased the level of psychological therapies through funding through our surplus because this is what governors said was the highest priority amongst local people. That has been a big difference and, as I said before, we have set up something called an opportunity fund where any of our clinicians can now say, "I can see a good service that we could develop; if you can give us non-recurrent funding we can demonstrate that it works to commissioners and then hopefully they will pick up the funding". We can get that approved within a month. The example last month were some commissioners from our child and adolescent mental health service who wanted to develop a service in a number of schools providing advice and education and counselling to young people. We were able to fund that. Already one of the schools has said that they will pick up the funding in the future. In that sense we are much more able to look at the money we have, work with clinicians and work with commissioners to re-invest it in a way that we were not able to before. The other big difference is the governors. As a Mental Health Trust we have often been used to involving users in care and having things like user councils that we have had for many years, but actually the Council of Governors which has 12 elected members of the public, 12 elected patients and six elected members of staff really are now holding us to account and making us focus much more on patient quality, sitting in on serious incident investigations and being part of those panels, and they are coming to our board strategy days to help us plan the future and approve our plans. That really has shifted our focus onto what are the local needs, to look outwards rather than look upwards. If I give one further example around the governors, we appointed onto the Council of Governors people from partner organisations who had not really been involved with us before, so representatives say from JobCentre Plus, from the Chamber of Commerce and through those new links we have been able to do things like set up employment schemes where we have been able to get our service users into jobs and supported, we have a lot of events with local employers showing how we can support them to employ our staff, and we have set up a partnership with Charlton Athletics where they have had us on the pitch giving messages about mental health. I could go on, but I think those are the two big things: the flexibility around the money and being able to invest it locally, and the work with the Council of Governors.

Q93 Dr Naysmith: Playing the devil's advocate, an awful lot of what you have said about the governors helping you to make contacts in the local community could have been done before through things like Community Health Councils and the new Links organisation. Or is that just not feasible?

Mr Firn: I do not think we would have been able to do all this within the last two years. I think the fact that if you ask somebody to be a governor you are asking them to give up a certain amount of time but you are also asking them to carry out a very important job (appointing non-executive directors, approving annual plans, holding me and the organisation accountable for our performance) and when people come onto that Council of Governors it gives them an investment that they want to see something coming out of and being involved. It does open up those new links and opportunities. For Charlton Athletic, for example, one of their footballers was the first member; he signed on the football pitch and that was the kick start to a lot of other things we have done. That would not have happened if we had just gone and knocked on the door and said, "We're your local Mental Health Trust; we would like to work with you". It gives you levers that you do not have otherwise.

Q94 Dr Naysmith: You are obviously very enthusiastic about this?

Mr Firn: Yes.

Q95 Dr Naysmith: Finally, Bill, on this autonomy section you have had a rather well-publicised discussion about autonomy, particularly over MRSA. Is this an area that you think has now been solved and resolved or is it still lingering around?

Dr Moyes: I am not going to say that it will never happen again in the sense that the issue will never come up again. We underestimate the scale of change moving to Foundation Trusts. The Department, for 60 years, has seen itself in essence as corporate headquarters of a corporate hospital system and with Foundation Trusts they are no longer in that position, whereas they are the headquarters of a commissioning system. The issue that David and I were debating - I think it is a debate amongst people who are trying to make this happen rather than a personal difficulty between us - was: how can the Government express absolutely legitimate points of view from ministers saying that they are worried about cleanliness in hospitals and what is being done about it? But how can ministers convey the desire to see something done through commissioning rather than through issuing operational instructions to hospitals? That is the issue I was really opening up with David, that we have to try to find a way to use commissioning, the power of commissioning and the language of commissioning to convey legitimate political aspirations rather than revert to saying that the secretary of state wishes this to be done. That is a huge change and I suspect we will still uncover examples in the future where we have to round that territory again and work out how we could have done it better. It is not in any sense a running dispute; it is something that he and the permanent secretary and I have talked about and I think we are pretty clear that this is an important issue that has to be tackled.

Q96 Dr Naysmith: Have you managed to get the MRSA issue into commissioning to your satisfaction?

Dr Moyes: No, I do not think I do see it as being in commissioning to my satisfaction. It still remains in the Foundation Trusts an issue that was largely being dealt with through regulation, through our compliance system rather than through discussions between commissioners and suppliers. My aspiration for the future for C.difficile, for example, would be that much of the discussion about whether C.difficile performance has been delivered or not will be between the commissioners and the Foundation Trusts and that we will only get involved in the most extreme cases of difficulty.

Q97 Sandra Gidley: Going back to innovation, the recent HCC/Audit Commission report concluded that "On a national level ... Foundation Trust status does not yet seem to be empowering organisations to deliver innovative models of patient care". I have to say that in the submissions received there did not seem to be any specific examples of improvements in patient care, so I just wondered whether Richard or Stephen might be able to put some meat on the bones really.

Mr Gregory: I think we are now at the point in time after the Darzi report and the discussions about how Foundation Trusts can engage with their commissioners not simply in terms of negotiating the traditional bones of the activity and payment structure, but in actual fact trying to reshape services to improve them for the benefit of the patients in the local community. Those challenges that were laid out a few days ago will enable Foundation Trusts and commissioners, hopefully, to engage in some innovation. At the moment our innovative capability and capacity from where I sit is constrained by the quality of the contract and by the quality of the dialogue between the commissioner and the provider. That needs to be opened up and one of my personal concerns and priorities is that we need to escape our organisational barriers here and engage intelligently over and above the contract negotiation in terms of delivering change to the benefit of the patient.

Q98 Sandra Gidley: Surely you did not have to wait for Darzi.

Mr Gregory: I have not seen much evidence of an enabling framework for us to be able to do that from my perspective.

Q99 Sandra Gidley: So this sentence in your submission when it says that this is what you have achieved, "an altering vehicle model, goes everywhere, does everything, unrestricted by the usual boundaries" is not true because you have just mentioned boundaries that are in place.

Mr Gregory: I think there is a boundary. Yes, it is an exaggeration if you take that literally. I think that we have got the ability to deliver that; I think we have got the ability to be very flexible and innovative in the future, but we do need the right conditions. It is not simply about the contract, it is about the key individuals, it is the relationships. For example, yesterday we had a Council of Governors meeting at Chesterfield and we had the chairman, the chief executive and the director of corporate strategy from our PCT - Derbyshire County PCT - to actually present the Derbyshire vision following the Darzi work streams. We asked and they agreed for the implementation issues and the questions in those implementation issues to be consulted upon by 12,000 public members. We are beginning now to see evidence of like minded individuals in both camps actually putting their heads together to try to achieve this. The real trick is to enable the clinicians and the patients through their public elected members, the governors, to exert some leverage on that process. I am not unhopeful that we can deliver innovation; I would like to deliver innovation and I think we are at an interesting moment in time now.

Q100 Sandra Gidley: Stephen, have you managed to do any better?

Mr Firn: I cannot comment in relation to Richard, obviously. I mentioned a few of the initiatives earlier. What I think I can confidently say we have been able to do - I am sure if all my clinicians were here they would back this up - is innovate locally to do the types of services that we were providing better, to increase access and to improve quality. I think we can show we have done that from our patient survey; we can show we have done that around expanding psychological therapies and indeed our governors said that in their submissions. As we said before, we are hindered by two things, one is having this block contract so that there are no means for a Mental Health Trust to do something really exciting and innovating with the money following the patient; it has to be a commissioning decision and the commissioners have to say "Yes, we will fund that". At the moment we are still in this position where we have a lack of clarity around how Darzi will actually play out in the way that services are delivered in local areas and it will be different in local areas. In terms of innovating into major service change, not yet. However, I think that the fact that we have Foundation Trusts and the fact that Foundation Trusts have the surpluses or the cash balances that we talked about will be a critical element of making things like Darzi happen. As I have said, we are already engaged in discussions around things like polyclinics et cetera. We are not quite there yet in terms of major service change.

Q101 Sandra Gidley: Dr Moyes, from Monitor's perspective do you have any mechanisms to identify innovation? If so, how would you evaluate what is going on and maybe spread best practice which is something the health service does not do well in any area?

Dr Moyes: I do not see that as Monitor's role. I think the Healthcare Commission and the Care Quality Commission are the bodies that ought to be interested in how clinical care is delivered and how it might be improved. We do try to keep Monitor focussed on particular areas and I have not so far seen Monitor as having a role in analysing innovative models of care and spreading best practice.

Q102 Sandra Gidley: So it is not something you even have any desire to do.

Dr Moyes: I think if we started to do that we would be easily open to the criticism that we were allowing our mission to creep and regulations were coming overburdensome. I am always very conscious of those things and I do try to keep Monitor focussed on the things that I think we were set up to do.

Q103 Sandra Gidley: Moving on, in your draft annual report you state that "as the financial stability and strength of the sector has grown, increasingly the issues are different kinds of service failures - breaches of national waiting time targets and more recently failures to secure sustained reductions in the rate of MRSA infections". Is it perhaps possible that improved financial performance is being gained at the expense of quality?

Dr Moyes: I do not think there is any evidence to demonstrate that. I think in the early days of Foundation Trusts the focus was very much on the financial performance but more recently, as deadlines for targets have come up - things like 18 weeks, MRSA - inevitably Foundation Trusts and our own focus has switched to ask questions about whether these things are or are not going to be delivered. As we list in the draft annual report that you have we have tackled this year a number of financial issues in Foundation Trusts but I think we have spent more time on non-financial issues than we have one financial issues, reflecting the kinds of problems that are emerging.

Q104 Sandra Gidley: You have the flexibility in-built to do that, it is just the way the systems work.

Dr Moyes: Yes.

Mr Gregory: To give you an example, without any pressure from Monitor or anybody else we were concerned back at the beginning of 2007 about our C.diff rates and as a board and as a Council of Governors we were determined to do something about it. We spent half a million pounds of hard earned revenue gain so directly impacting our bottom line on a whole range of measures that achieved over the next 12 months a very dramatic reduction in our C.diff rates, 53% down. We did not need to do that; we were absolutely determined to get hold of that issue and I have always said that it is the quality of what we do that is the most important thing. Finance enables you to make decisions; it is not going to be the key determinant and driver at Chesterfield Royal, it is about the quality of what we do and that has to be the priority. Going forward I think we all need to focus on the opportunities that we have just been talking about recently about how we can carry on doing that.

Q105 Dr Taylor: I am just wondering if it is coincidence that we have two of the very best Foundation Trusts here because looking at the glorious technicolour diagrams at the back Chesterfield is green all the way across for governance risk ratings and number five all the way across for financial risk. Oxleas is likewise green all the way across and steady fours for financial risk. I wonder if that was coincidence or by design. There are 25 trusts who governance risk ratings have remained for the last year at either amber or red and when we did our first report on Foundation Trusts we were worried that there were going to be adequate incentives in place to ensure that trusts improve or even maintain high levels of performance. Are there incentives to improve or maintain when we are talking about quality particularly?

Dr Moyes: I think there are, Dr Taylor. I cannot really speak for Primary Care Trusts and how they monitor performance against the contract, but I think Monitor's compliance system and its focus not just on finance but also on governance does provide very real pressures on the Foundation Trusts to first of all recognise that they have problems, so go and find the problem in the trust; the board has to self-certify to us when they provide their annual plan and then every quarter whether or not they are delivering national standards and targets. That means that we expect the board to know what their performance is and to forecast their performance so there is a pressure to look ahead as well as just to tell us what is happening today. Foundation Trusts know that if they have a persistent problem and it is obvious that they are not tackling it, that Monitor will intervene, initially informally but if that does not produce a result then we will use our formal powers. I think Foundation Trusts are extremely conscious that we do have very, very tough powers and we can use them.

Q106 Dr Taylor: What happens if a trust remains on red for a long time?

Dr Moyes: If a trust remains on red for more than two quarters we would certainly call in the board. By that stage we probably would have concluded that they were in significant breach of their authorisation. We would try to establish whether the board understood the nature of the problem or not. If we had any doubts about that we would commission advisors to work with the organisation to make sure that we were tackling the right problem. We are very unwilling to go for quick fixes; we try to find out what is the real nature of this problem: is it the quality of the board? Is it the quality of the management? It is something about clinical quality? We try to get an advisory team in depending on the nature of the problem to describe to us the true nature of the problem. We have done that with five organisations in relation to MRSA. Having done that we make a judgment as to whether we think the hospital can or cannot, with the existing board and the existing team, solve its problems. If we think that they can then we make sure there is an action plan in place. We meet them monthly; we tend to want monthly reports against the action plan to try to make sure that they are delivering. If we came to the conclusion that the board or the management team or a combination of the two simply could not solve this problem then we would use our powers, if necessary to remove the board or the chief executive or the clinical director and find people who could solve the problems. That is an option we try not to use very often.

Q107 Dr Taylor: So you would remove the board before banishing them from the elite of Foundation Trusts.

Dr Moyes: We cannot do that. Once they are Foundation Trusts they are authorised forever; that is the legislation. The idea of withdrawing the authorisation and handing them back to the secretary of state is not an option.

Q108 Dr Taylor: One of our witnesses in the first session did say that he thought there were financial instruments to drive quality, for example that the commissioners could pay more for high quality services than for lower quality. I think one of you said you could use the power of commissioning to improve services.

Dr Moyes: Lord Darzi has recommended a system of paying for performance and a pilot scheme has been run in the Northwest using a model developed in America by Premier Healthcare to have a very small pot of money - it is not an enormous amount of money - and to use that small pot of money to reward trusts (not just Foundation Trusts, but all trusts) for delivering above and beyond the minimum contracted levels. I think the pilot in the Northwest has been held to be a successful pilot and Lord Darzi has recommended that it is adopted as a feature of the tariff going forward, which we would certainly support; we think it is a good idea.

Q109 Dr Taylor: Did you approve of Cheltenham giving all their staff a bonus of £100 for their achievements?

Dr Moyes: It is not for me to approv