Milburn and Brown feud over reforms for NHS hospitals

Tony Blair has been forced to intervene in an increasingly bitter dispute between Alan Milburn and Gordon Brown over plans to create a network of prestige hospitals free from Whitehall control.

A summit involving the three men is to be convened at which the Health Secretary will warn Mr Blair that the Chancellor of the Exchequer's objections could scupper his plan for the first group of high-performing trusts to be chosen this autumn.

The disagreement has led to a souring of relations between Mr Milburn, a former Chief Secretary to the Treasury, and Mr Brown. The two men have had their difficulties in the past but appeared to patch things up following the Budget in which the Chancellor announced a £40bn boost for the NHS. But sources say their relationship has nosedived again because of the dispute over hospitals.

Mr Milburn wants the elite hospitals to be allowed to borrow money on the financial markets. But the Treasury is blocking the idea, warning that the scheme could result in an increase in public spending and that the Government would have to bail out any hospital which ran out of cash.

The Health Secretary regards his scheme as a test of New Labour's commitment to finding ground-breaking ways of modernising the public sector. "It is not enough to talk about being radical; we have got to have the courage of our convictions too," one ally said.

It is thought the Prime Minister supports Mr Milburn's plan. At a briefing he told the heads of 28 strategic health authorities that nothing had been ruled out in the Government's search for fresh thinking.

"He made clear that all bets were off, that if it worked the Government would go for it," said one of those present.

The Chancellor's allies insist his motive is to safeguard the Government's rules on spending and borrowing. "This would set a precedent for jacking up spending through the back door," said one. The official view in Whitehall is that no decision has been taken. One source said: "The stalemate will have to be resolved as soon as possible."

Other Cabinet ministers, including Estelle Morris, the Education Secretary, the Home Secretary, David Blunkett and Patricia Hewitt, the Trade and Industry Secretary are watching the dispute because they have similar plans for services to be provided by not-for-profit companies.

Under the Milburn plan, the new hospitals would decide what they could afford to borrow for capital investment instead of receiving an allocation from Whitehall. They would keep proceeds from land sales to plough into new services and have greater flexibility over pay levels than other hospitals.

Four NHS trusts – Northumbria Healthcare; Peterborough Hospitals; Norfolk and Norwich University Hospital and Addenbrooke's in Cambridge - have applied for foundation status. The Health Secretary wants them to start operating as shadow foundation trusts next April and to be operational before the end of 2003.