Doctors and purses: lifting the lid on the relationship between the Treasury and the Department of Health

23 Sep 2015

With life and death in the balance, does the Department of Health have the Treasury over a barrel when it comes to spending negotiations? Sally Gainsbury takes the temperature of the debate

It eats up over a quarter of total departmental spending, is rarely out of the headlines and, as one former Treasury official put it, comes with “bleeding stumps”.

There are many in Whitehall who believe that, when it comes to spending negotiations with the Treasury, the Department of Health is in a special position.

“People will genuinely die if you don’t get things right,” one former senior Treasury official says. “And if relations become fractured, you can get the health secretary blaming the chancellor when hospitals go wrong.”

“The problem with Health,” says another, “is so often the government commits up front to a big number… So the Treasury is always fighting a rearguard action to ensure it gets that value.”

Even before the relatively recent “real terms protection” ring fence around the NHS, the political expediency of bleeding stumps has made it difficult for the Treasury to reign in health spending.

“The Treasury would ask us if we could implement x budget cut,” a DH insider recalls. “And we’d say ‘sure, if we switch off all the neonatal units one by one with the media in attendance’.

“I was accused of waving shrouds. But it’s true: We do have shrouds”.

Doubtless all departments believe they are special cases, and some Treasury officials dismiss Health’s stumps and shrouds as the usual Spending Review “noise”.

“If it’s not the generals in the Daily Telegraph, it’s the GPs and consultants somewhere else,” says one.

But that confidence is betrayed as something closer to bravado by the frequency with which Treasury insiders whisper about the danger of their own officials “going native” after too much exposure to the Department of Health and its intoxicatingly totemic NHS.

At first glance, the cultural distance between Richmond House and 1 Horse Guards’ Road is so vast it is hard to imagine how such assimilation could be considered a real risk.

The characterisations that trip from the mouths of Treasury and DH officials are stereotypes, but they are so commonly evoked that – real or imagined – they shape how officials from both sides interact.

“The Treasury is full of bright young people who have never done anything,” admits one of its more seasoned former staff.

“It’s 22-year-old people who are so clever you can’t keep up with them. But they know nothing about service delivery,” a former DH-er concurs.

And while the DH has its share of career civil servants, its senior management in recent years has also been staffed by a cadre of former NHS managers; somewhat steely men who talk in football analogies and who were running hospitals and health authorities before many of their Treasury adversaries were eating solid food.

They, by contrast, eat grandstanding members of the Public Accounts Committee for breakfast and rose to the top of their profession by steering their organisations through the last bruising NHS “deficit crisis” of 2005-7. Three of them in particular spring to the mind of a former DH colleague when the cultural clash between the two departments is summarised: “They [the Treasury] always think they are so clever and so smart… they would come across as slightly arrogant 20 year olds. Then you would put them in front of David Nicholson, David Flory or Bob Alexander, and they would shut up.”

But it is precisely the hinterland between the Treasury’s macro level big picture and the NHS’s myriad of operational detail where Treasury officials can lose their way and go native; getting caught up by the health service’s imperative to keep hospitals afloat, not the Treasury’s need to enforce the department’s control totals.

“The key thing for us is the net position” a Treasury official says – rather than the confusing fact that over the last 20 years the NHS has developed a financing system so distinct from the Treasury’s own that NHS foundation trusts are currently sat on around £4bn of cash available to spend which the Treasury technically wiped out of the Department’s balance sheet five years ago.

But Treasury officials argue they are not the only ones susceptible to the NHS’s beguiling operational trap. The DH’s submission to Spending Reviews is “always for the NHS, not for health,” claims one.

“The department is not a good champion for the wider public health and well-being agenda. It is a department in thrall to its arms-length body – the NHS”.

It is a criticism former DH officials acknowledge is a fair one – after all, it was only after the resignation of Sir Nigel Crisp in 2006 that the role of permanent secretary and chief executive of the NHS was split.

While the department’s effort is consumed with feeding the sickness service beast – building new hospitals and keeping existing ones going to treat ever growing numbers of patients – it has been left to the Treasury to push the economic case for more investment in public health, social care and for the NHS to play a more central role in joined-up public services.

The Treasury’s recent move to slash £200m from council public health budgets somewhat undermines this track record, but its general commitment to the well-being agenda is expressed over the last decade in the development of cross-departmental Public Service Agreements and initiatives such as Total Place. These have been hardwired into the DH’s Spending Review settlement as new commitments, which a Treasury insider admits also provided an otherwise rare opportunity to retrospectively “extract some value back out of Health”.

But such measures have rarely delivered all that was hoped for. “Health often humours the Treasury. The Treasury writes requirements into the settlement which the department then agrees to, but then little actually happens,” the insider remarks.

The Better Care Fund is arguably the latest example. When first announced as part of the 2013 Spending Review, the pooled fund between health and social care was expected to see around £1bn of NHS funding transferred to council-run adult social care services in its first year as local authorities and NHS organisations worked together to reduce the demand for – and cost of – hospital care.

After a year of wrangling, however, the terms attached to the pot shifted, as the NHS was concerned social care initiatives would do little, in practice, to reduce the demand on hospital care. By July 2014, only £300m was earmarked for transfer to council care services and NHS hospitals were on their way to racking up overspends of £1.5bn by the end of the financial year.

The NHS’s latest decline into the red – despite its ostensive protection from funding cuts – underscores the Treasury’s perennial concern about the DH’s inability to control its main ALB’s spending.

While there have been periodic concerns about individual procurements such as the stockpiling of swine flu vaccine, or particular private finance initiative deals, Treasury officials talk of the “big three” spending concerns: IT, workforce and localisation.

While the list leaves barely a pound of NHS expenditure unmarked, the Treasury has good reason to be concerned. The disastrous National Programme for IT – intended to introduce standardised IT systems across NHS providers – began life in 2002 with planned costs of around £2.3bn, but spiralled a decade later into an estimated £20bn, with the desired integrated IT system still a far off dream. Meanwhile contract negotiations, primarily with GPs and hospital consultants, are to blame for the Treasury’s perception that the department is incapable of “driving a hard enough deal” from its workers.

The third fear – localised spending – describes the fundamental principles underling the commissioner/provider split in the NHS since the early 2000s, whereby the vast majority of NHS spending – £68bn of the department’s £112bn in 2015-16 – is allocated to local commissioning organisations.

The Treasury is right to be concerned: Quite aside from the mixed track record of local NHS financial management, one former DH official described how the department would often seek to maximise and speed the pace of local allocations as a means to make it harder for the Treasury to later claw back funds, as it did in 2009 when it removed £2.3bn from the department’s settlement for 2010.

Perhaps unsurprisingly, the constant fear of a claw back – particularly in years following an NHS budget surplus – and of a generalised low settlement leads to the tendency for submissions to be “padded”.

“We would never lie,” recalls a former DH official. “But that still left a lot of grey areas – [forecasting increases in] the demand line, drug costs, inflation. Then afterwards we needed to unravel it and work out what we could give to the ministers to spend.”

The relationship is not always adversarial however.

“Every so often they would be useful if something barmy came over from Number 10,” a fromer DH insider recalls – citing as an example the Independent Sector Treatment Centres policy of the mid 2000s. Number 10 wanted to introduce a target, to see their numbers rise. But Treasury and DH officials shared the view that they offered poor value for money, particularly once NHS waiting lists had eased, leaving the centres with generous contractual income guarantees but little or no workload.

The relationship between Number 10, the department and Treasury is always critical, but even more so during the months of the Spending Review process.

“The triangle of Number 10, Number 11 and DH, and how that works, will very much shape the mood music to which officials have to relate,” says one former Treasury official. “It could either be very collaborative, or it could be one where the secretary of state has told their officials not to talk.”

The Brown-Blair era still acts as civil servants’ touchstone of inter-departmental awfulness, which was exacerbated further in the early 2000s when the crucial Spending Review role of chief secretary to the Treasury was filled by Paul Boateng, a Blairite who was seen as distinctly out of the chancellor’s loop.

“We would have one set of people from Treasury and another from Number 10,” recalls a DH official from that time. “We were there in the middle of two groups of people, at least 80 per cent of which were younger than our own children, trying to catch you out to score points off each other.”

Whether they are talking to each other or not, the role of senior civil servants during a Spending Review is to correctly guess what their respective ministers are thinking. In heated moments, this skill comes down to knowing when and where bluffs can be called.

“If the secretary of state and chancellor won’t agree on the numbers, who is going to get the prime minister out of bed?” one former senior civil servant recalls.

The mood music of the current Spending Review is viewed as comparatively smooth.

“This Spending Review, Number 10 and 11 share a very common agenda,” says a Treasury insider. “Sometimes the secretary of state sees their task as getting as much money as possible. But Jeremy Hunt wants to play his part in the government’s fiscal plans.”

That does not mean the DH is in for an easy ride.

Anyone lingering near the Treasury health team’s small cluster of desks in Horse Guards’ Road this summer would have been drawn to the single number scrawled on the whiteboard above: £22bn.

The sum represents the amount the NHS has pledged to make in efficiencies and productivity gains between now and 2020-21 in exchange for an extra £8bn in funding.

At around a fifth of the DH’s current expenditure, the sum comes on top of around £20bn the service was tasked with reducing from its spending in the preceding five years – entailing that most or all of the low hanging fruit has gone.

But the Treasury wants to know where the next £22bn is coming from: what it looks like – cash savings or efficiency gains – and when it will come – steadily over the period, or put off, as is the norm, until the last quarter of the period.

Will the answers make a difference to the settlement? That is something skilled civil servants will need to work out.