Fitter for purpose

9 Jun 09
Despite assurances to the contrary, the savings required of the NHS under the Treasury’s Operational Efficiency Programme amount to real-terms cuts. Noel Plumridge wonders where the surgical strikes will be made

29th May 2009

Despite assurances to the contrary, the savings required of the NHS under the Treasury’s Operational Efficiency Programme amount to real-terms cuts. Noel Plumridge wonders where the surgical strikes will be made

Asked what difference patients would notice after cuts in NHS funding growth, Health Secretary Alan Johnson was blunt. ‘None,’ he said: a forecast that shadow health secretary Andrew Lansley described equally bluntly as ‘not credible’.

Before the Budget announcement of reduced NHS funding from 2011 onwards, Johnson had also advised the Commons health select committee that it was ‘inconceivable’ the NHS would face real-terms spending cuts. The funding projections are now known and, for the health sector in England, the years of significant growth are over.

From April 2011, when the current three-year planning cycle comes to an end, the projected level of annual real-terms growth across the public sector is 0.7%. However, the Institute for Fiscal Studies calculates that this equates to a real-terms reduction of some 2.3% per year for the period to 2013/14 (IFS analysis allows for an 8.4% annual increase in debt interest costs and a 1.7% annual growth in social security spending). And even this projection has been challenged as over-optimistic.

The English NHS is now operating in surplus. A forecast £1.7bn net surplus in 2008/09 represents three successive years in the black. There are further accumulated surpluses in the foundation trust sector. Although there is no little pressure from politicians and the NHS to reinvest these growing balances into care provision, the Treasury is also eyeing them enviously. The reserves so carefully amassed might prove to be as inaccessible as an Icelandic bank account.

In the short term, the Department of Health will have to find £2.3bn in cuts from its significant central budgets – perhaps partly from the widely criticised ‘Connecting for health’ information systems programme, but primarily from centrally held medical, nursing and other training budgets that total some £4.5bn. In reality, training cutbacks represent a hidden cost pressure, especially in the large teaching hospitals where trainees retain a substantial role in hands-on care provision.

And then there are the increasingly heroic expectations of efficiency gains. For many years NHS organisations have been asked to achieve ‘cost improvement’ or ‘efficiency savings’ targets. Nowadays, the chosen mechanism for allocating the pain is a percentage reduction in payment by results tariff levels (3% in 2009/10). The headline level was certain to increase, and in 2010/11 the NHS will now be required to save 3.5%. To say this is challenging would be an understatement.

In times of plenty, savings targets were at least partly offset by slippage in the new investment that growth allows. But now the growth is gone. How is the health sector likely to cope with an efficiency target of 3.5% a year and the very real prospect of negative growth two years hence? Is the secretary of state right, or will patients notice the difference all too keenly?

Ministers have been understandably reluctant to spell out in detail the possible impact on the NHS. The government’s Operational Efficiency Programme report, published in advance of the Budget, identifies areas for savings away from frontline patient care. Back-office functions, procurement and asset management are targets across government.

In the case of the NHS:


  • consolidation of clinical support functions, particularly in pathology, taking advantage of new technology, could save up to £500m per year as well as improving the reliability of diagnostic processes (for, as with surgery, consolidation and specialisation tend to improve outcomes)


  • consolidation of back-office functions and ‘collaborative purchasing’, combining economies of scale with greater exploitation of the NHS’s undoubted procurement muscle, could provide more than £100m per year of the required savings


  • more aggressive use of the NHS estate could release a further £100m each year, and avoid the need for capital investment in new capacity (around £3bn) and the revenue charges it would bring in its wake.

There is also a belief that more effective commissioning (building on the World Class Commissioning initiative currently in progress), improved commissioning efficiency (perhaps using commercial support from insurance companies and consultancy firms), and exploiting planned changes in the payment by results system could together yield as much as £5bn by 2013/14.

Anticipated changes in payment by results include prices based on best practice, rather than average cost, for a group of high-cost and high-volume surgical procedures. They also include extending the scope of payment by results, thereby enhancing commissioners’ influence in mental health and community-based care.

Success, however, is less certain. The impetus towards consolidation collides with a political tension between market ‘freedoms’ and a vision of independent, competing foundation trusts on the one hand, and the target culture and management by Department of Health diktat on the other. This has led, for example, to Monitor, the regulator of foundation trusts, clashing with the government over the Health Bill’s plans to make trusts submit their accounts to the health secretary.

The OEP report requires all NHS organisations to sign up to the audit agencies’ value for money indicators to benchmark themselves and identify scope for improvement, including through the use of NHS Shared Business Services. These indicators cover human resources and information technology as well as finance. However, it remains to be seen whether (and how) foundation trusts will be coerced into using a national agency for core corporate functions. The culture of foundation trust ‘freedoms’ runs deep.

Better use of the NHS estate is hardly a new theme, and there are two significant reasons why more rapid progress might prove unreliable. One is the moribund state of the UK property market and construction industry – it’s a good time to build but a poor time to dispose of surplus land and buildings.

The other is a growing apparent willingness within the Treasury to use NHS capital spending to promote economic recovery in the wider economy, with the narrow interests of the local health economy taking second place. Health care, after all, represents about 9% of gross domestic product.

And belief in the efficacy of payment by results as a commissioning tool is tempered by awareness that acute trusts, faced with a loss of tariff income but with fixed costs to meet, could simply perform more procedures (or shift the mix of their clinical activity) to try to make good their income shortfall. For payment by results remains effective at what it was originally intended to do: stimulate hospital productivity.

Although ministers are coy about the impact of negative growth and tough efficiency targets on direct patient care, it’s nevertheless reasonable to identify some possible broad paths to financial savings in the years ahead.

Addressing significant variations in the care pathway for common causes of hospital admission will certainly be prominent. The introduction of best practice tariffs for certain procedures is a financial tool to encourage consistency but, whatever the treatment, an extra day’s length of stay or a pre-operative night in hospital costs a hospital dear. An unnecessary weekend in hospital is not an improvement in quality, it is waste. So we can expect to see a renewed attack on variations from optimum care pathways (and attempts to define what constitutes the optimum).

We can certainly expect renewed pressure on NHS pay. Many NHS staff did very well out of three major changes – the new GPs’ contract, the consultants’ contract and Agenda for Change, which transformed a pay structure dating from the 1940s. But now the economy is in recession, the labour market has been flooded with trainees and even junior doctors are no longer guaranteed jobs. NHS national terms and conditions are a more than adequate recruitment bait, especially outside London and the Southeast.

We might also see a toughening of employer behaviour. According to the think-tank Reform, the NHS average sickness rate of 4.5% is half as much again than that in the private sector. And the NHS spends around two-thirds of its budget on staff.

If consolidation is seen as beneficial in back-office functions, why not in the provision of direct clinical care? There is already a discernable trend towards mergers of foundation trust hospitals, and the forthcoming demise of primary care trust provider arms might offer scope for further aggregation. Such mergers offer plenty of scope for service rationalisation.

Despite the popularity of cottage hospitals and personal primary care services, it is hard to imagine any proliferation of ‘small is beautiful’ community-based services in the current environment. Bigger throughput-oriented hospitals are more suited to the times, and consistent with a renewed focus on improving clinical quality. The price might be the government’s Patient Choice and personalisation plans, which were notably absent from the Budget rhetoric.

Tony Wright, who chairs the Commons public administration select committee, recently observed in Public Finance that: ‘Choice, personalisation, empowerment… are the expression of a very well endowed public sector – and we’re not going to have a very well endowed public sector.’ (‘Choice could be victim of the squeeze’, News, May 1–7)

These paths to efficiency lie largely within the remit of the Department of Health (pay) and foundation trusts themselves. So finally, what of commissioning? The truth is that it’s hard to picture an incoming government resisting the temptation to ‘de-layer’ NHS bureaucracy, and without their provider functions that’s how commissioning bodies might well be portrayed. The current structure of 152 separate PCTs in England must be vulnerable; Wales and Northern Ireland have seen similar culls. Even Alan Johnson’s moratorium on NHS restructuring has started to crumble in London, where 32 PCTs are being quietly consolidated into groups that broadly resemble the former London strategic health authorities.

For NHS commissioners, too, small might not be beautiful for much longer.

Noel Plumridge is a former NHS finance director and author of CIPFA’s Payment by results

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