Why Clarke took a handbagging for the NHS

The reforms that revolutionised the NHS nearly didn't happen. In 1990 they were the subject of a bitter confrontation between Margaret Thatcher and Kenneth Clarke, then her health secretary. Nicholas Timmins, in an extract from his forthcoming book, 'The Five Giants' , tells the story

In June 1990, just nine months before the NHS reforms were to take effect, Margaret Thatcher summoned to Downing Street her Secretary of State for Health, Kenneth Clarke, and his top NHS management team: Duncan Nichol, the NHS chief executive; Peter Griffiths, his deputy; and Sheila Masters, a private sector financial wizard who had been brought in to help implement the most dramatic changes that the NHS had seen since 1948.

Clarke and his colleagues had been called in for a Spanish inquisition. For in the previous weeks, Mrs Thatcher had dispatched around the NHS three of her most trusted advisers: Sir David Wolfson, the businessman from Great Universal Stores who had headed her political office from 1979 to 1985; Lord Rayner, the Marks & Spencer chairman who had been her political adviser; and Sir Robin Ibbs, his successor and by then deputy chairman of Lloyds Bank. Their task was to judge whether the NHS reforms would work. Their conclusion was that they would not.

In Clarke's words, Mrs Thatcher "wanted to scrap the health reforms - put them off, postpone them until after the election - taking much longer over them and spending much more time on costing systems and management techniques". What followed was to be among the most turbulent couple of hours that Clarke and Thatcher spent together.

Getting there had already been a rocky road. Mrs Thatcher had no great love for the NHS. It was, she believed, wonderful for car crashes, disasters and devastating illness: in her own words for the "great accidents" and "terrible diseases". But otherwise she believed people should pay for themselves. "She thought it disgraceful that people who could afford it relied on the taxpayer," Kenneth Clarke recalls. "She was positively proud of the fact that she looked after her own health and made no claims on it ... she was quite happy that the vulnerable, the poor, should have the taxpayer do it for them. But people like you and me should take responsibility for our own lives and insure for these things."

Or, in the words of Sir Roy Griffiths, her personal adviser on health management whose twin reports transformed NHS management and restructured community care, "she would have liked to have got away from it. If it hadn't been there, she would never have invented it."

She had, it turned out, little choice. In the summer of 1981, a Central Policy Review Staff report on how to cut the future costs of the welfare state had leaked. Among the proposals had been the replacement of the NHS by private insurance. Reaction to the leak was so volcanic that at that year's party conference it forced from the Prime Minister the pledge that the NHS "is safe with us" - famously misquoted as "safe in our hands".

By 1988, that no longer seemed so. A relatively small miscalculation in the NHS budget for that financial year had produced a massive financial crisis. Since 1982, health authorities had used two stratagems to cope with a growing efficiency squeeze on their budgets: they had closed beds towards the end of the financial year as the money ran out, and they had delayed paying bills to their suppliers. Slowly but surely, the level of debt the NHS carried had been rising.

The NHS settlement for the financial year 1987-88 was, as usual, tight. Early in 1987, it became plain that a general election was likely and Norman Fowler, the Secretary of State, sent out the word to health authorities to "keep the lid on". Bed closures, managers were told, would not be welcome. They complied. But they did so by taking the only other action open to them - many simply ceased paying their bills.

The June election brought John Moore to the Department of Health as Fowler's replacement. The blonde, blue-eyed former American Democrat with the Kennedy smile was seen at the time as a potential successor to Thatcher. On being appointed, he asked Mrs Thatcher if he could undertake a review of the NHS. But he was warned off. For the Prime Minister, reform of an institution as sensitive as the NHS was a fourth-, not a third-term project.

But greeting Moore were those unpaid bills - what he was later to call Fowler's "blank cheques". By July, it became clear that some districts owed their suppliers as much as a quarter of their total non-pay budgets. Ian Mills, director of financial management on the NHS management board, warned ministers that, technically speaking, the NHS was "bankrupt".

Moore, however, failed to act. Anxious not to mar his right-wing reputation by starting his new job with a plea for extra cash, he hoped instead to bail the NHS out through that year's spending round. But from September on, health authorities, faced with the problem of balancing their books, began to close beds in ominous numbers. Bed closures in February and March were routine. In September and October, they were not. In the spending round, Moore failed to win extra resources - a task far more difficult immediately after an election than just before one - and when his civil servants heard that Nigel Lawson, the Chancellor, had congratulated him in Cabinet for settling so reasonably, they knew, in the words of one, that "that was the death sentence [for Moore]. He thought it his duty to help. He had been a Treasury minister. But he didn't help the Government, he didn't help the Treasury, he didn't help himself, and he certainly didn't help the NHS."

Health authorities realised, in Ian Mills's words, that "there was no light at the end of the tunnel". Bed closures began to mount, first by the score, then by the hundred and finally by the thousand as the crisis was compounded by the death of David Barber, a hole-in-the-heart child whose operation in Birmingham was cancelled five times in six weeks because of a shortage of intensive care nurses. As the roof began to come in on the NHS, nurses marched, doctors petitioned Downing Street and the presidents of the three senior Royal Colleges emerged to issue an unprecedented call that the Government act "to save our NHS, once the envy of the world".

Beleaguered and battered by the crisis, Margaret Thatcher, without warning and during a Panorama interview in January 1988, announced that an NHS review was already under way.

It began with a determined attempt to get away from the NHS. A financial crisis had caused the review, and new ways to finance health care was the first item examined. John Moore floated the idea of a health stamp from which those who took private cover could opt out - an idea that John Redwood, the former head of Mrs Thatcher's policy unit, had endorsed. The Prime Minister herself favoured tax breaks of all kinds for private health insurance. Nigel Lawson wanted a big extension of health charges.

But Lawson vigorously opposed tax breaks, arguing that they would produce "not so much a growth in private health care, but higher prices". Mrs Thatcher opposed charges, believing new ones "would have ditched the review". And John Moore failed to persuade anyone that allowing people to opt out would not simply mean that the healthy and wealthy would take their money out of the NHS in return for private cover at low premiums, while the NHS would still be left with all its most expensive business - the treatment of children, the elderly and the chronically sick who stood no chance of acquiring cheap private cover. In other words, the NHS would lose income, but next to no business.

Deadlock over finance resulted, and the review turned to structures. The only new idea turned out to be the purchaser/provider split - the concept that the purchase or commissioning of health care should be managed separately from its provision by hospitals and other units: the NHS internal market. It had first been advocated in 1985 in a little-noticed pamphlet by a visiting American academic.

Six months in, however, the review began to drift. In July, Moore was sacked, his place taken by Kenneth Clarke, a vigorous defender of the NHS with a mass of background knowledge from his spell as Minister of Health. His arrival rescued the review.

It was Clarke who realised that if health authorities did all the purchasing then it would be managers, not doctors, who would do the buying. Rather than money following the patient, as the Government hoped, patients would have to follow the contracts, at least in the early stages - not very impressive for a government that claimed the customer was king.

The review had looked at giving GPs money with which to buy health care but had not seen clearly how to make that work. It was Clarke who gave that idea shape, later recalling that he had carried on thinking about it while disappearing to Spain on holiday and that it was "on a headland near Pontevedra in Galicia [that] I came up with GP fundholding".

Much remained to be settle, including how to make hospitals self-governing, allowing them to opt out from direct health authority control: the idea that became NHS Trusts. And there were some famously "blasting rows" between Thatcher and Clarke over how it would all work - rows marked off on the Richter scale by the Cabinet Office as they reported back to the Department of Health on the review meetings.

When the outcome was finally published in January 1989, it produced the biggest battle between the Government and the British Medical Association since Bevan's war with the doctors over the founding of the NHS, Clarke becoming the Tories own Bevan in his refusal to give way. But it was Mrs Thatcher, not the BMA, who came closest to stopping the reforms. Controversy over them had helped lose the Vale of Glamorgan by-election, and after the Trafalgar Square riot over the poll tax in March 1990, Mrs Thatcher began to worry whether there were other unexploded bombs in her locker. It was then that she sent her three wise men into the NHS to see if the reforms would work.

At the Downing Street meeting which followed, the NHS management team performed poorly. Clarke recalled: "They were good people ... but if you sit them down in Downing Street in front of Margaret Thatcher in full and glorious flight, doing her handbagging and surrounded by captains of industry saying 'you are talking rubbish and that what you are planning won't work', people do get nervous. They didn't do well."

Peter Griffiths, one of the NHS executives at the meeting, recalled: "We really felt we'd let Clarke down. She delivered this great tirade with Ken sitting there and refusing to give ground as we failed to provide adequate answers to her questions." Finally, the Prime Minister had to leave to go to another meeting. As she left she jabbed her finger at Clarke and told him: "It's you I'm holding responsible if my NHS reforms don't work."

In the end, the reforms went ahead, chiefly because of Clarke's adamantine refusal to postpone. It would, he says, "have been political disaster to stop them so close to the election". The casualty was the new system of community care, originally due to start in April 1991 on the same day as the NHS reforms. It was postponed for two years, while the NHS reforms survived.

'The Five Giants: A Biography of the Welfare State', is published by HarperCollins on 27 July