Spending money you have earned is different from spending other people’s money.

My last two posts have been exploring the impact that having nearly all of its resources coming from money raised through general taxation has on the way in which NHS finances actually work. Beginning on Tuesday with an exploration of the current reality.

Since at the moment the economy is not really growing at all, there will likely be limitations to economic growth over the next decade (compared with the early 2000s) which, when combined with a public desire not to increase the tax burden (given it will be at a 70 year high), will have implications for an organization that derives nearly all of its resources from money raised through general taxation.

Yesterday I looked at the obscure method by which trusts get their money in block contracts, and at how different it is keeping track of spending, when you are spending other people’s money.

Today I want to explore the implications of returning to a system of paying those NHS trusts that do more work, more money for doing it.

I was working for the Government (following its suggestion in the NHS Pan of 2000) that introduced the idea (then called “payment by results” – but more accurately “payment by activity”).

I now want to revisit that 20-year-old memory lane for 2 reasons.

First, and most significantly, to remind us that all finance mechanisms are made by women and men – and can therefore be unmade by women and men if they so decide. I make this very obvious point because most of the people working in the NHS that I talk to see payment mechanisms as something that is just …well…there. It sort of came over with the Romans and must therefore always be a part of the furniture. It’s an obvious but important point – that it was created – and can be recreated.

And when I talk about its creation, I use myself as a teaching aid. I clearly remember talking with people in the winter of 2001/2 about what it was, and how we might actually do it.

The relevance of this point to 2023/4 is that given we created this financial mechanism in 2002, we can now make something different. By following the Hewitt report recommendation that we need to look at new financial flows to incentivise secondary and tertiary prevention. In 2002 the activity we were paying for was secondary care operations. My point is that it in 2023/4 we could decide to pay for a financial flow that keeps the frail elderly out of hospital.

This is a perfectly normal reform for the NHS to carry out. And over the next few months we will get on with the creating new financial flows.

My second point about the introduction of payment by results in 2002 is that at the time it was resisted by the higher echelons of the NHS being seen as a really odd thing to do. This puzzled me at the time, but I think I now have a handle on why that was the case. When I argued then that it was normal for all sorts of organisations to be paid more money for more work, I was told that it wouldn’t work in the NHS.

At the time – and ever since – it’s possible to argue that that part of the NHS that is most used by the public, – primary care – does not have deficits and gets paid for doing the work that it does. If it overspends it can go bust.

If the NHS cannot thrive with the incentive of getting more money for doing more work, how come this is how we currently work with primary care?

And we know the historical answers. Bevan, when creating the NHS, nationalised all the hospitals, but agreed to leave primary care in the hands of private sector partnerships. So, we had then (and still have) a hybrid model. For the purpose of my argument here all that we need to recognise is that for 75 years a part of the NHS has been working within a model where GPs who run practices are in the position of having to make the income expenditure relationship work. The money they earn has to cover the money they spend.

GP practices – like local authorities – can go bust. (Unlike NHS trusts – who get their deficits paid for).

In the winter of 2001/2, on most Fridays when Parliament was not sitting and the Secretary of State visiting his constituency, I would try and get out to talk with people in the service. In February 2002 I remember visiting a trust where, after a really instructive morning, the CEO asked me as I was leaving when he was going to get the trust’s supplementary cheque. Normally at that time of the year, provided they had been working well, they received a cheque to supplement the block grant they had received at the beginning of the year. I remember rather primly saying “No, we don’t do things like that anymore” (And what did I know? He got the cheque a couple of weeks later).

The relationship between the extra money and the extra work done was a very complex and hidden one.

Countering this with a transparent relationship between the amount of work trusts did and the money they received was a serious reform. And as a part of a wider suite of reforms it increased activity.

But the incentive to increase activity only worked if the organisation were allowed to keep the extra money they made for the extra work.

And here there is another crucial point to make. Increases in output, and especially increases in productivity take hard and detailed work. It is not a simple matter to change the way in which clinicians and others work. It’s hard, and that is why there is a need for some incentive to do it.

If you carry out the hard work of changing an organisation, then it receives more money for the harder work. So much, so normal, as an incentive

But IF subsequently three-quarters of the way through the year someone above you in the NHS decides that that money you worked hard for is to be taken off of you to pay off the deficit of another trust that has not done the hard work of change…

When that happens, well then you sort of stop.

If there is any likelihood that the resource, you gained through hard work will be taken off you there is no incentive to do the hard work of change in the first place.

This does seem rather an obvious point. But the NHS leadership does not seem to get it.

The reason New Labour created Foundation Trusts was partly to ensure that organisations that did more work were able to keep the extra money they received for doing it.

And it is exactly for this reason that over the last decade the powers of Foundation Trusts have been undermined.

If trusts keep the extra money they have earned that money is not available to NHS leadership to shift around to subsidise deficits.

When we incentivise trusts to do more work and give them more resources for that we are taking away some of the power of the overall NHS leadership to shift ‘their’ money around. It stops being ‘their money’ and becomes the trusts.

If the resources paid to a trust for carrying out the extra work belong to the trust, they are NOT then spending other people’s money, but they are spending money that they know they have earned through hard work.

There is a choice about the nature of NHS leadership here. Do we want all the power and money to be above the trusts in a board of a nationalised industry (at the moment with NHSE) or do want to incentivise the NHS organisations that actually deliver care, to get more resource for extra work?

The choice is between spending other people’s money or spending money you have earned.

When Parliament passed the Foundation Trust legislation in 2004, we knew this was a big shift in removing power from the very top.

How that autonomy works now and in the future is an important aspect of reform.