Has the NHS finally emerged from its financial quagmire? Patricia Hewitt argues the new post-RAB system has never been more fair and open. Nick Edwards talks to a buoyant health secretary

The NHS financial system is now fixed and gives managers the platform on which to take full responsibility for financial management, health secretary Patricia Hewitt claims in an exclusive interview with HSJ this week.

The Department of Health announced yesterday that the much-criticised resource accounting and budgeting system has been abolished. It also ruled out any future top-slicing and cash brokerage, replaced with a system of loans from strategic health authorities repaid over a period of up to five years.

Speaking in the run-up to the announcement, Ms Hewitt says that as a result of the abolition of RAB - under which trusts in deficit pay twice - each SHA will have a share of the contingency fund created by government to pay back individual organisations. 'It is RAB rebate - a 60th birthday present to the NHS one year early,' she says. 'The NHS now has a financial system that is fit for the future.' She believes it is 'more fair, more transparent and more responsible' than at any point in the service's history.

Ms Hewitt claims it is now 'absolutely clear' that the NHS would record a small surplus in 2006-07 and that there is evidence of a step change in financial rigour and sustainable control. The Department of Health had been concerned that abolishing RAB too early would be politically disastrous if the NHS did not show evidence of sustainable change. She says: 'What I am hearing all around the country is real confidence in that people understand their position much better than a year ago. There is a much higher level of confidence in the system.'

Prime minister Tony Blair is not the only politician investing in legacy politics in advance of the major shake-up expected when Gordon Brown takes over the premiership. The health secretary has staked her personal future on getting NHS finance back in line this year - and forging a system that will make it sustainable in the long run. Having taken the heat for the NHS this year, arguably, she will be keen to shift the focus onto quality and equity in 2007-08.

She was perhaps taken by surprise by the financial system she inherited in 2005, as well as by the historic debts driven to the surface by the start of its reform. Although she says 'it was quite clear RAB wasn't working', it was the culture of fudge and money transfers that evidently alarmed her most.

She says: 'The thing that most disturbed me in my first year as health secretary as I learned what was going on in NHS finances was the extent to which the minority of overspending organisations had always been bailed out by the majority who had lived within their budget. It was massively unfair, as money was transferred from the Midlands and the North into the South and East and in London from the east to the west.'

In the wake of HSJ's major survey of chief executives that criticised support from the centre, Ms Hewitt thanks NHS managers 'who have worked unbelievably hard in the past year to sort out their financial position. Although the deficits arose in a minority of organisations it has affected everyone.'

She explains: 'It has been a 12 months absolutely dominated with financial issues and the deficits that arose in the previous year. Being an NHS manager is always a uniquely difficult and uniquely rewarding job. But the particular financial problem that emerged has made the last 12 months particularly difficult. I know how tough it has been,' she says.

But Ms Hewitt believes that the 'pain has been worth it. The real prize that we have now put in place is for the NHS to have a financial system that is more fair, transparent and responsible than it ever has been before. Really, for the first time, every part of the NHS can say we know where we stand. Every organisation in every area is now in the position to take responsibility for getting the best from their budget and not expecting other parts of the NHS to bail them out.'

She condemns the culture of poorly delivered cost improvement programmes and last-minute rescues: 'What we couldn't have is what has happened in the past, where an organisation or whole health economy has had a bail-out on the promise of a recovery plan but then immediately started overspending again. Then four years later they have another so-called 'historic debt'. We could not risk that happening again.'

HSJ's survey found that three quarters of chief executives believe organisations with large historic debts are not viable in their present form. Ms Hewitt says: 'There will be a small number of organisations whose debt is so big that they will not be able to pay it back over any foreseeable length of time but you have to look at them individually as the problems and cures will be different.'

She volunteers that the proposed merger between Good Hope Hospital trust and Heart of England foundation trust, which is still out to consultation, was an 'interesting example', adding: 'Similar solutions might be available in some other situations where a foundation trust takes over services in financially failing organisations.'

HSJ's survey also criticised the pressure that chief executives felt themselves to be under to make short-term savings that, they said, affected patient care. Ms Hewitt concedes there was 'always a danger of making short-term financial decisions that won't make sense in the long term - and we have heard about that happening'.

However, she defends the decision to pack the pressure into a single financial year. 'If we said take a couple of years over this I don't think we would have got the necessary changes in overspending organisations, and it would have been grossly unfair to those delivering within their budgets and having to hold back because of others.'

The Commons public accounts committee report earlier this month again criticised the quality of NHS financial management, as well as the disjuncture with clinicians (news, page 9, 15 March). However, Ms Hewitt says the system was a more fundamental problem than skills: 'The financial framework was not one that made it easy for finance managers to do their job.

'Part of my absolute determination to change the framework was so that managers had the tools they need to do their best. It is simply not fair to expect them to work in a system that keeps them in the dark and doesn't reward responsible management.'

She says: 'I learned a lot from the Audit Commission reports, which showed the problems of a culture where finance is only controlled by the financial director, who magics up the money at the end of the year. It is very noticeable when you go to the best hospitals: you have managers and clinicians working together.'

Ms Hewitt says the focus for 2007-08 needed to move from 'cash value to patient value', and specifically variation in service quality between and within organisations. She accepts that there was evidence of consultants being prevented from working with primary care to rework patient pathways in an effort to protect trust income: '[NHS chief executive] David Nicholson and I have discussed this on several occasions because we regard this as totally unacceptable. But it is not an inevitable consequence of the new system and it is not in the interests of hospitals themselves in the long term.'

She says the draft contract principles currently being consulted on would help to discourage this behaviour 'but we will be doing more work in the next year about the values that bind together all members of the NHS family, diverse as it is becoming. This behaviour is only happening in a minority of organisations but it cuts across the core values of the NHS.'

Ms Hewitt's Fabian Society speech last week underlined the growing debates about personalisation and entitlements - what people can expect from the NHS and what is expected from them. Inevitably, discussion of what the NHS should do raises questions about where its limits might be set.

Ms Hewitt says: 'In terms of whether you can define exactly what the NHS will or won't do - that is something the policy review is looking at. But it's not about trying to restrict NHS services to a core offering. What the NHS does continues to grow. GPs will be able to use NHS money for things that would in the past have been seen as social care - [for example] temporary air conditioning in the summer for those with conditions affected by the heat.'

She also denies that the government has lost confidence in what the state can achieve in behavioural change: 'I'm not sure the state's role is smaller but it is different. When you look at the great public health movements of the 19th century, the state could transform people's health. In the 21st century the state has to help people improve their own health by changing the social infrastructure. The smoke-free legislation is an example of that.'

Last week Ms Hewitt announced a new phase in national procurement for new providers in primary care. It is the latest sortie in a policy that has barely spluttered into life in the past year, with delays and apparent lack of interest from both commissioners and providers.

Ms Hewitt argues that 'there are areas where it has worked very well', but admitted generally slow progress.

'What has slowed it down in the past year has been finances and there is no doubt that primary care trusts that wanted to participate much earlier simply couldn't do so because of top-slicing.'

She says the initial four pilots would be followed by a number of others in the coming months.