The Health Secretary Is Determined to Press on with Easing Central Control over the NHS. but Is the Chancellor Onside. (Interview: Alan Milburn)

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Alan Milburn's office looks on to the Treasury, on the opposite side of Whitehall. It matters, because relations between the man in charge of our health and the man in charge of our money are decidedly scratchy. The latest contretemps has been triggered by a disagreement on a policy that both the Prime Minister and the Health Secretary regard as an integral part of the government's huge investment and reform programme.

Milburn wants to devolve power to our better-performing hospitals, turning them into what will be called "foundation hospitals". They will operate outside the clutches of Whitehall. Gordon Brown is said to be cool on the idea. Still, as he outlined the biggest spending spree in a generation, pouring billions of pounds into the education system and the health service, Brown chanted the mantra "investment and reform".

While education took the spotlight in the comprehensive spending review on 15 July, health is the biggest beneficiary overall. Brown had already announced a [pound sterling]40bn increase for the NHS in April's Budget. The pressure is on Milburn to deliver, perhaps more than on anyone else. He has to increase capacity, cut waiting times and take on the health service's vested interests.

Milburn's nostalgia for the founding principles of the NHS is selective. "Whatever great gains there were--and there were many -- in the 1948 settlement on health, what happened was that the local voice got lost and the national voice took over. Ours was a peculiarly British solution. You've got to change the way the service is organised. We live in a different world. Here is a straightforward choice for the centre left. Either we say what we need is a bit of tinkering around the edges but actually the big change will be brought by the money, or else we say what we've got to do is to fundamentally change the culture of the organisation. The best way passionately to support the NHS is to change it."

The buzz phrase among new Labour policy wonks is "earned autonomy". Plans for specialist schools and city academies, and now foundation hospitals, come under this heading. When, in May, Milburn announced plans for this new type of super hospital, he was criticised for "initiativitis". It was said that he had succumbed to another loopy scheme from those nerdy policy chaps who brought us the frogmarch to the cashpoints and the charge for emptying rubbish bins. Some say the project bears more than a passing resemblance to the internal market in healthcare introduced by Kenneth Clarke more than a decade ago. Even one of Tony Blair's "blue skies thinkers", Adair Turner, the former head of the CBI, expressed misgivings. He suggested that the crisis of capacity in the NHS should be sorted out before giving hospitals yet another new structure. His advice hasn't been taken.

The most potent fear expressed by some, including Milburn's predecessor Frank Dobson, is that the scheme would create a two-tier health service. The best doctors and nurses would inevitably gravitate towards hospitals that have freedom to manage their own affairs, to spend their own money, to reinvest proceeds from land sales and to give staff local pay incentives.

In a few days, Milburn will announce his latest review of hospital performance across the country. Those that get a three-star rating will be eligible to apply for foundation status. So far, only four have qualified, and there are likely to be only a few more. However, once up and running, the new "centres of excellence" would have an immense impact. "What we're looking at defining," says Milburn, "is a new legal body that will still be part of the NHS family, still subject to the principle of need and not ability to pay, but that will represent a redefinition of what the NHS is all about. It doesn't have to be a state-run, nationalised, monopoly organisation."

For Milburn, the dividing line is clear. …