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Lansley: The future of health and public service regulation

Speech to the NHS Confederation

"May I begin by expressing my warm thanks to the NHS Confederation for arranging this series of speeches on the future of our public services and for inviting me to contribute? At the start of a Parliament, it is very good to take an opportunity to think about the direction and the objectives of reform and of policy, somewhat free of the partisan demands of electioneering. The NHS Confederation continues to be, under Gill's leadership, a strong advocate of reform and of high standards of leadership and management in the NHS. I have greatly valued our discussions over the last two years and even if we cross swords occasionally, I know we have shared aims in securing the opportunity for strong leadership and quality management to deliver high standards of healthcare in our NHS.

That said, I stand before you a disappointed man. My ambition was to be the incoming Secretary of State for Public Health in a re-elected Conservative administration. It did not happen. My disappointment is not only personal: it is that I and my team of colleagues worked hard to put in place a framework of policy which we believed would secure the combination of investment and reform which the NHS needs. Despite being often engaged in arguing over the length of time it takes to get a test result on MRSA, or access to GPs there lay behind the media exchanges at the election a body of Conservative policy geared to extending institutional freedoms within an NHS built on evidence-based standards of care, and a strong commissioning role for GPs alongside the extension of patient choice.

It is little comfort to me to see elements of our pre-election policies being implemented by a Labour Secretary of State - greater private sector involvement, a reduction of PCTs, the abolition of SHAs, and a return to GP fundholding - and I have no doubt the list will grow. It is even less comforting to see that these changes appear not to be driven by a coherent approach, that has a clear system design in mind. Not only is the NHS being required to cope with an unprecedented number of system changes in parallel, with an associated and ever-increasing number of cost pressures - but it is being required to cope with system changes which can be inconsistent. The structure of the Department of Health's procurement of private sector capacity for elective surgery, for example, is incompatible with the extension of patient choice; and the introduction of payment by results is leaving PCTs with bills for hospitals over which they have effectively no control. The recent proposal to remove provider functions from PCTs is unnecessary if there is to be a very substantial transfer of commissioning to GPs. Agenda for Change and the, 'Connecting for Health Programme' have both been implemented in ways that are far more centralised than should have been the case in an environment where hospitals are moving to Foundation Status and GPs are controlling their own budgets.

Many in the NHS recognise, as I do, that we share a view about the direction of travel - more patient choice, less central direction and control, more use of market-orientated mechanisms - but my problem is that not only do the NHS reforms require better planning and phasing, but the direction of travel needs to be towards a clear and well-understood destination.

Some aspects of healthcare delivery are unique, but the majority share characteristics with other public services. It has become obvious to me that Labour has engaged piecemeal in public service reform, and some Government departments (with the Department of Health the prime example) have failed to understand that they can and should draw on a developing consensus on how to move public services towards a more market-orientated but accountable structure.

In relation to the NHS I believe we can now identify the structure of the service for the longer term; and I believe it is very much in the interests of the NHS to do so. I believe it is also possible to place that within a clear overall structure for public service reform.

So that is my objective today. First, to describe how public services should be regulated; and, secondly, to relate it in particular to the NHS. I believe this is also highly relevant to the current debate within the Conservative Party, because we have not so far sufficiently provided leadership on public service reform; and because I believe we should reject the approach to opposition which is negative, opportunistic and geared only towards media opportunities and the election. I believe the Conservative Party's historical mission has been to provide good Government to the United Kingdom in order to improve the well-being of its people - and it is our responsibility to use Opposition to contribute to that objective, while becoming ready for Government.

So let me start with the question of overall structure for public service reform. Public Service Reform is an omnibus term. We should understand it to embrace economic services as well as social services - telecoms, water, rail and postal services as well as health, education and policing.

The Conservative Governments of the 1980s transformed our understanding of how public services of an economic character can be delivered. From the days when Tony Benn effectively ran the GPO, we have travelled an immense distance, to telecommunications markets open to competition. That itself has been highly instructive. I remember in 1984 when I was Norman Tebbit's private secretary, he was in negotiation with BT over the regulatory structure to be introduced and then BT said that anything more than RPI minus 1- would be unacceptable. Norman said he'd go to RPI minus 3 and they'd have to live with it. He did and they did. Subsequently, they lived with regulatory price determinations as dramatic as RPI minus 12.

The combination of the introduction of competition with a strong independent regulator delivered immense consumer value and economic benefits.

In subsequent years, where either the degree of competition diminished, or the rigour of the regulator declined, BT was able to maintain monopoly characteristics and we lost out, as was clearly the case in relation to local loop unbundling and the rate of broadband roll-out.

Even if the public never embraced privatisation as a philosophy, they understood it when it worked. And Governments across the world realised the benefits of adopting that approach. But I believe that the Conservative Party became confused itself about what the experience of privatisation told us. We interpreted the lessons of privatisation as, literally, that: the transfer of public sector activity into the private sector. With private sector ownership would come enterprise, innovation and, temptingly, private capital off the Treasury's balance sheet.

But if there is one thing worse than a public sector monopoly, it is a private sector monopoly.

Railtrack is the case in point. Not only did we create a private monopoly, we put it in a situation where the consequences of its decisions and its performance were unable to be distinguished sufficiently from those of train operating companies, and the structure of regulation was insufficiently effective to be able to counteract the effects of monopoly.

So the first guiding principle is this: maximise competition. There are, of course, potential benefits from privatisation in terms of access to capital, flexibility, and creating new markets; but private sector ownership is a secondary consideration to competition, which is the primary objective.

Likewise, the experience of PFI, for example, where funding of projects is transferred to the private sector in pursuit of those benefits of enterprise and flexibility, points to a second principle: when transforming public sector functions to the private sector, it is vital also to transfer risk.

There will be circumstances when public sector functions are transferred to the private sector but competition weak. For example, British Gas for a long time retained its monopoly provision. It took a determined regulator to face up to this, split off the network from the trading side and expose the gas markets to greater competition. Today, we see the same happening in postal services. So the third principle is this: appoint a strong, pro-competitive regulator.

The regulatory regime must be simple. We cannot again end up with three regulators, as happened with the railways. The regime must be transparent: clear about the standards which operators have to meet and geared to maximising competition or enforcing contestability where competition is absent or limited. The energy markets' problems with selling demonstrate the vigour of competition, but a minimum standard of service must be clear and enforced.

The experience in a range of utility privatisations demonstrates that there must also be a strong and independent voice for the consumer standing alongside, but distinct from the regulator. So the fourth principle is this: set out clearly the standards which have to be met and how operators will be held accountable for them.

Linked to this is the necessity to be clear about the responsibility for providing a service if no-one else will do so, or if a dominant operator fails the so-called universal service obligation. If a universal service is required - like providing pay-phones, or "last-mile" delivering of the post - then in a competitive market one must specify through legislation and regulation, who has this responsibility. It can be funded either by linking it to some monopoly element of the service, or it can be funded directly - but the fifth principle is: be clear about how and by whom universal service obligations are to be met.

To make markets work requires not only a plurality of competing suppliers, but willing and active customers. Markets fail where customers are captive or ignorant. So the sixth principle is: ensure high quality information for customers.

And the seventh principle is: more consumers rather than fewer. The NHS internal market of the early 90s secured some gains in incentivising hospitals, but the transaction costs were high and the benefits limited - except to the extent that GP fundholders were at the same time incentivised to innovate and negotiate benefits to them and their patients. Health authorities were, by contrast, captive to the extent that they were absorbed in the consequences of their purchasing decisions - rather than seeking the best deals. The fewer customers there are, the more likely they are to be part of a continuing monopolistic structure.

There is one further major issue of principle: who pays, and does equality override efficiency? In most economic services customers become active consumers because they are expected to meet the costs of their individual consumption. The issues of equality in access to these goods and services is responded to through redistributive mechanisms.

Some would argue we should do the same in health. For example, the evidence is clear that health inequalities are overwhelmingly correlated with standards of living, rather than correlated with relative ease of access to health services or health promotional advice. So if we want to reduce inequalities, we should be less concerned with distributing health funding allocations towards the areas of deprivation - except to the extent that there is existing morbidity and demand - and rather more concerned with the effectiveness of measures to raise people's general standards of living through, for example, helping them off benefits and into work.

However, unpaid water bills disclose a clear problem; what if people can't pay or won't pay? We have to consider at the outset what degree of equality of access to service we expect and, if we do not wish access to be related to the ability to pay then we will need to limit or even eliminate the need to contribute directly.

Co-payment clearly has attractions. If you engage people financially in buying goods or services they will use information and be more demanding customers. But the equitable consequences can be unacceptable. We don't expect equal ability to make telephone calls. While we expect people to be able to access services, we do expect them to pay directly for that service, even is there is some degree of cross-subsidy between consumers, or a taxpayer subsidy to reduce costs overall. Public transport is a good example of co-payment, where public subsidy supports access and provides some cross-subsidy, but customers still pay. We do not demand equality of access to transport. But we do demand a high degree of equality in access to health and education, or policing.

Although we recognise that individuals can and will purchase additional or enhanced services for themselves, we look for a society which is equitable, because everyone should have access to a high standard of services by virtue of their contribution through taxes.

Hence, our shared commitment to the founding principle of the NHS: of access for everyone to the NHS; and of treatment free at the point of use and based on need and not ability to pay.

This is a principle which concerns equitable access, not equality of outcome. Freedom to purchase private health, schooling or security must be available in a free society. Even in the NHS, outcomes will vary. Demanding uniformity will negate the benefits of competition. How can competition work, whether on prices or quality, if it does not lead to variation and divergent outcomes? Some will gain. But do others lose? No, the evidence is that in effective competition the response of other producers of good and services is to raise their game, so that even those who are less fortunate or successful purchasers will gain by this. As the saying goes, "competition is a tide which lifts every boat".

So - as I see it there is a framework, clear in its principles and already being applied in many services of an economic character, which demonstrates how public services can be delivered more efficiently.

1. maximise competition;

2. transfer risk to the private sector

3. ensure strong and independent regulation

4. set out standards and accountability clearly;

5. specify universal service objectives and how they are to be funded;

6. provide quality information for customers, and maximise the number of providers; and

7. ensure equitable access, without sacrificing efficiency for equality.

I said it is a developing consensus. Much of what I have described is like the EU's developing framework for services of a general economic interest.

I recognise this and I welcome it. A vital aspect of our relationship with Europe should be to encourage the EU to be concerned with promoting competitive markets. Although we don't want the EU to intervene directly into domestic legislation, I see no difficulty with encouraging EU trade in services, by ensuring that a strong market orientated regulatory framework is in place in each Member State. And it will come, I dare say, for the education and health in the future - as it did for Telecoms in the recent past. I see good reason to plan positively for it, rather than ignore it.

The Labour Government have failed some of these tests in recent years. Although Gordon Brown talked about the central test of productivity, and EU competition legislation has been taken into UK legislation, they didn't take the opportunity to maximise competition in water services, they ducked the question of competition in supply of public service broadcasting funded by the licence fee, the University funding changes turned into a money making exercise rather than creating a competitive environment, and the NHS reform in the Health Social Care Act 2003 failed to incorporate best regulatory principles.

Across the public services, as Labour's top-down approach has led to declining productivity and rising costs, the opportunities for pro-competitive reforms to deliver benefits directly to service users, and whole-economy benefits through higher productivity, have been squandered.

The time has come for pro-competitive reforms in public services including health and education.

You have been patient while I explain the structures in general. Let me therefore turn to the particular application of these reforms to the NHS.

First, to what extent can we create genuine competition within the NHS?

Government proposals envisage limited competition in supply of elective surgical operations from the end of 2005 and, by 2008, in theory, full competition for those services. However, it is not full competition. There is no right to supply for new and independent providers. The competition is on the basis of quality but not price. Between now and 2008, pressure on price will be exerted through the introduction of, and transition to, tariff-based funding. And after 2008, there is no clear forward path. There are two choices: a regulated price, or opening up progressively to price competition, at least in terms of providers offering a discount to the tariff. If - and it does depend on this coming first - if the standards required to be met and the quality of information to purchasers and patients is established, then I believe it will be right and secure to permit price competition. That will enable realistic benchmarking to inform future tariff changes. It will enable GPs, if they are budget-holders, to be able to purchase actively, including negotiating offers on quality or price that help them better to utilise their budget for their patients.

Other areas of NHS activity will also be subject to competition to varying degrees. Commissioning of unscheduled care, including for example, cancer services, CHD, stroke services, and the emergency care network, should I believe, be in commissioning networks independent of the providers themselves, so that the contracts can at least be tested. Given the lack of scope for competition here, there needs to be a mechanism for testing the contract prices of service providers and the Independent Regulator should be a means of being able to do that.

GPs, of course, if they hold budgets, should be able to choose between competing providers of primary care services. I do not believe this should exclude Primary Care Trusts. They will be best placed as a strategic body, to pump prime services by self-provision. As long as there are no barriers to entry for other providers or for GPs cooperatively to establish competing services, then there is limited scope for PCTs to establish local monopolies. It is, of course, important that the delegation of budgets to GPs extends across the whole range of planned care and primary care, and the commissioning role of PCTs is limited to strategic or temporary interventions and specialised services. Competition in supply of services will develop over time. As with other public services opened up to competition, it will be an evolving process which has to be governed by a pro-competitive regular, charged with statutory responsibilities to secure the provision of efficient, competitive supply of healthcare to nationally-defined standards.

In order to secure this statutory objective of competition and quality, the Independent Regulator will need progressively to be a competition authority, with the normal application of competition rules to healthcare providers, limiting, for example, the extent of mergers which would restrict competition, or of vertical integration not justified by patient benefits.

The role of an independent regulator, established by statute, is central to this process. Monitor and the Healthcare Commission were both established under the Health and Social Care Act 2003. This legislation needs to be amended, to provide the far more substantial role, which Monitor should undertake. It should be the pro-competitive regulator, with powers not only to authorise Foundation Hospital Trusts, but also to license healthcare providers, in primary and hospital services. It should have concurrent competition powers with the OFT in the healthcare field. It should have the power to determine the progress of the national tariff based on HRG defined by NICE. It should have the power to apply conditions through licences to give force to requirements for standards of care and supply of information, and requirements for competition. It should have the power to intervene where there is a risk of failure. It should define the service obligations of providers, including the "provider of last resort" obligation and how they are funded. Providers will not be able to cease to provide services without the regulators' agreement. This aspect links to the transfer of risk. Healthcare providers will need to demonstrate to the regulator that they can discharge their continuing obligations or, if they are at risk of failure, that the assets necessary to sustain the service will be retained for NHS use. This means a substantial transfer of risk out of the NHS into independent hands.

Given the current rising problem for hospitals and trusts of financial deficits, and the increasing risks of failure as Payment by Results is extended, these would be desirable new arrangements which will reduce the risk of hospitals deliberately running into deficits, believing they have to be bailed out.

As I said, essential components of reform are the setting of standards required to be met by healthcare providers, a new structure of public involvement and accountability, and high-quality information to support choice and accountability. The National Institute for Health and Clinical Excellence, far from cutting back on its ability to progress the preparation of clinical guidelines, should accelerate its work, to define the standards of care, which the NHS should deliver, based on an assessment of clinical and cost-effectiveness, allied to a resource implementation assessment, and, where appropriate, defining the HRG to develop the tariff.

This is a new direction for the NHS: clear entitlements for patients. Clear standards based on evidence, which provide a framework for clinical practice. No arbitrary targets, no selective measures. Patient pathway-based clinical guidance.

The role of Ministers should then be focused on three tasks: establishing the legislative and regulatory framework; determining resources for the NHS and the implied standard of care and service which will be taxpayer-funded; and, thirdly, to be a Department for Public Health leading the cross-Governmental effort to deliver much more effective public health agenda, both in promoting healthy living positively, and combating threats.

So far as accountability is concerned, it must be clear to an observer that the NHS needs a major new mechanism for public and patient involvement. The establishment of an independent 'Health Watch', as a voice for health concerns, is an essential counterpart to the role of the independent regulator.

The Healthcare Commission in this structure would not be responsible for defining service standards, but for inspecting, verifying information and ensuring value for money and propriety of public expenditure.

It has been surprising and disappointing to see that the quality of information needed to support patient choice is simply not defined, not available and unlikely to be there to back up choice. Ask the public what they believe is most likely to improve their health services and they will say more information about what they can expect, what will happen to them, how they will be treated and how they can influence their treatment.

It is obvious that the reason the public don't get the information they want about health services - e.g. waiting times, infection rates, mortality rates (apart from St. George's Tooting), access arrangements, readmission rates, cancellations, patient experience surveys - is because they can't exercise choice. With choice must come information, and with it empowerment.

Choice, and the question of where consumer power is exercised, is the remaining key question in the application of reform to the NHS. Patients should choose GPs or other primary care providers. They should choose where and from whom to have elective surgery. If they are suffering chronic diseases, they should directly choose providers and, in some cases, the structure of treatment. Those with long-term conditions and needs should have access, where possible, to direct payments, enabling them to choose their care providers, as well as influence choices made by GPs using their practice budgets. The statutory formula should make clear that choice should be exercised by patients, or as close to the patient as possible, thereby maximising the number of purchasers and enhancing the prospects of competition, innovation and responsiveness to patients.

I have no time for the argument that patients don't want choice because they want their local hospital to be good. They need choice in order to help ensure that their local hospital is good and, if it isn't, they want the freedom to go elsewhere. And, if they have complex needs, or if parents have a child requiring major treatment, in my experience they will seek out the best treatment available, wherever it is. Patient choice pilots in the UK have shown a high proportion of patients respond to choice. Because patients will be provided with meaningful information about services, hospitals will be focused on these rather than centrally imposed targets.

Patients will not have to consider price in the choice they have to make, but GPs will need to be able to factor in price, or there is a risk that the average cost basis for treatments will rise to reflect competitive pressures on quality with no countervailing incentives to control costs. U.S. evidence suggests that not-for-profit hospitals respond to competition in ways very similar to profit-based organisations. The experience of the U.S. suggests that to avoid the inflationary effects of competing on quality alone, purchasers developed managed care organisations enabling the budget-holders to negotiate discounts whilst maintaining quality and integrating care for patients. There is no doubt that GPs, as budget holders, should develop in this direction, either through locality-based co-operatives, or by contracting with managed care organizations.

Should choice be able to be exercised in combination with privately financed care? Where capacity in the NHS is constrained, and could not cope with a high proportion of the 10% of referrals currently going to the private sector becoming redirected to the NHS, then there is a practical case.

But the reforms I describe are designed to stimulate a significant capacity response. And these reforms are also in a wider context. The context is that we need to establish if the NHS, if exposed to competition, if responding to choice, is able to meet high standards of service delivery on the basis of limited, taxpayer-funded resources. Diversion of resources to subsidy of private care, if the NHS has the capacity to deliver, could frustrate this. To offer such a subsidy, then to withdraw it, would be very difficult. It is most important to engage the public positively with choice and competition extended to everyone, than to be directed into a benefit for a minority.

What I have described today is not inconsistent with the system reforms under way within the NHS today, but it is, I hope, not just a direction, but a framework within which to progress reform. It exposes the need to get rid of central targets and top-down performance management, the need for practice-based commissioning to be extended, for new commissioning structures to be created for unscheduled care and for public health, and for staff across the NHS, especially managers, to stop worrying about, and waiting for, the next initiative from the Department of Health, and instead start creating potentially successful providers in a competitive environment.

Competition and choice are not just slogans. They are a policy whose time has come. The structure for health is complex and demanding. The same will be true for education.

Policy is hard work. Making these principles work in practical service delivery is hard work. The rewards are immense: to create public services which, like the nationalised industries in the 1970s, escape from deficits and declining productivity and become world leaders.

I don't want to be disappointed again. I want to be a part of the next Conservative Cabinet. I want us not to be inheritors of an NHS damaged by partial or abortive reform, or one which with unprecedented resources has delivered inadequate results. I want us to be able to build on an NHS capable of living up to its founding principles in a world of demanding needs and technological advances, and complex health challenges

I want the NHS to succeed. I want it to succeed in this Parliament, so that it can do even better in the next. I do not want to be one of those who says it doesn't work and we must look to a different model, based on private contributions and widening disparities in care.

I want to see an NHS which demonstrates that competition and choice can be harnessed successfully to deliver quality care. And I want to have the opportunity now and in the future to help that happen."

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