By Ollie Stone-Lee
BBC News political reporter
Moves to farm out NHS work to private firms must be watched to prevent damage to other hospital services, a public spending watchdog has said.
Mr Strachan: Stepping down
The warning comes from James Strachan, who is stepping down as chairman of the Audit Commission later in January.
He says outsourcing significant slices of NHS work will have implications for the remaining services.
Somebody within the health service must take responsibility for checking the bigger picture, argues Mr Strachan.
He also suggests the pace of reorganisation in the NHS should slow down and says it is "nonsense" to say the public sector cannot be as cost effective as private firms.
Born 10 November 1953
Educated: King's School, Canterbury; Christ's College, Cambridge; London College of Printing; London Business School
1976-77: Chase Manhattan bank
1977 joins Merrill Lynch, made a managing director in 1986
1989-1997Works as writer and photographer
1997-present: Chief executive then chairman of the Royal National Institute for the Deaf
2002-present: Chairman of the Audit Commission
Since the interview, Mr Strachan has said he will not take up the offer of a second term in the post.
But newspaper reports have suggested some of his commission had lost confidence in him after a row with the Local Government Association over a press release criticising councils' performance.
Mr Strachan says his departure to pursue other work in the private and voluntary sector is "totally unrelated" to any supposed row.
One Audit Commission source denied there had been a row within the commission but some commissioners had planned to raise the councils issue at their next meeting.
Impact of choice?
Private companies are increasingly being used in state-paid healthcare.
From this month, patients are able choose from at least four hospitals for elective operations. Ministers expect one of these to be a private treatment centre operating at NHS costs.
In a BBC News website interview, Mr Strachan does not wade into the political arguments.
The NHS will use more private treatment centres
But he says there is a danger in politics that ideas are "expressed very polemically".
From a private sector point of view there is not a choice between being "totally centralist" or "almost wash your hands abdication of responsibility", he says.
Instead, firms realise there must be a hierarchy with strong middle levels of control between the top and the bottom.
The same "cascading down" of decision making is needed for running health services or 26,000 state schools, he argues.
In health, the middle management levels must look at how the system is working as a whole when there are independent treatment centres or outsourcing.
Mr Strachan says there is little issue when the private sector only makes up 5% of NHS work but when it starts to be 15% or 20% "it clearly starts to have implications for the remaining 80%".
He wants a small group of strategic health authorities or a commissioner - not a regulator from outside the NHS - to keep sight of that larger picture.
"Somebody, if those changes are made, should really assume responsibility for making that mixed economy work effectively without in any way, for example, just standing back and watching key parts of a hospital being farmed out such that it makes it very difficult for its A&E department to run itself because it's lost some of the underpinning surgical divisions which it needs to function."
Mr Strachan says it is one thing to move a specialist service 10 miles down the road and quite another to move it 200 miles away.
He says there is "not a shadow of doubt" that NHS services have improved substantially.
But he points to the fact in two years' time health spending will have risen from £35bn to £100bn.
There are clearly questions about whether the improvements have been in direct proportion to the extra money, he says, arguing that it is difficult to give a precise answer.
Mr Strachan says he sympathises with the frustration of NHS workers with "I'm the lucky one syndrome" - where patients praise their treatment but do not think the health service overall has improved.
"Clearly there has been very, very dramatic improvement. Could there be more? Absolutely. Would it be a good idea to subtle down the pace of reorganisation? Probably."
Payment by results
The emphasis of reforms must be as much on changing behaviour - such as ensuring patients are met by a smiling receptionist - as on changing structures so they mimic the mechanisms of the marketplace, he says.
Payment by results - where money follows patients around rather than hospitals being paid lump sums - is one of those market mechanisms.
The Audit Commission loves the idea in principle but says it is too early to gauge its success. It argues it is not a panacea to performance problems.
Mr Strachan says the policy is an important first step but says the Department of Health are looking at its potential consequences - what happens when hospitals' budget deficits rise; are new managers brought in, are services closed, are hospitals closed?
"Somebody needs to think through once you have injected some quasi market mechanisms what then happens in the case of this dreaded word 'failure'," he argues, saying solutions are possible.
The government is forecasting a £620m deficit for the NHS in England for this financial year and surgeons in some hospitals have been told to delay operations to cut their debts.
So is the payment by results policy the reason for these cash shortfalls?
"It is part but not whole cause but it is almost totally the reason why we are seeing the deficits so clearly," says Mr Strachan.
What he means is that there are other causes of the deficits, including poor financial management.
But also the new system prevents health trusts from smoothing over individual deficits by moving around contracts and debts at the end of the year as has happened in the past.
Public vs private?
All this is the nitty gritty of the work of a public spending watchdog - a life Mr Strachan is now leaving.
Before doing so he delivers a strong defence of the need for regulators, saying they must find ways of replacing the pressure produced in private firms by consumers and shareholders who can take their business and money elsewhere.
In both public sectors there are some people who "can knock the socks off the private sector".
"The problem is it's not everybody," he says. "It's arguable that in the public sector compared to the private sector you can have over time the perpetuation of some quite poor performance if you are not careful.
"The reason for that obviously is in the private sector you would have long ago have gone to the wall if you provide that service."
Local councils are among those who complain about the burden of regulation but Mr Strachan proudly says the amount of Audit Commission-controlled inspection has fallen 70%.
"We have actually just shown a burning desire to shrink ourselves," he says.
Now he leaves fanning the flames of that bonfire of regulation to somebody else.