What the doctor ordered?

17 Jun 10
The coalition has promised to protect NHS spending and strengthen primary care. But a £20bn funding gap and contradictory pressures are already bearing down on the new team at the Department of Health. Noel Plumridge reports
By Noel Plumridge

18 June 2010

The coalition has promised to protect NHS spending and strengthen primary care. But a £20bn funding gap and contradictory pressures are already bearing down on the new team at the Department of Health. Noel Plumridge reports

The coalition’s Programme for ­government, published in May, features no fewer than 30 specific pledges for the future of the NHS. Arguably the most significant is the overarching financial commitment to continued growth, however small that might be. It says: ‘We will guarantee that health spending increases in real terms in each year of the Parliament.’

Once again, local government is left looking at the health sector with envy.  But what is the reality?  Pessimism sits as easily on NHS managers’ shoulders as on the shoulders of a farmer watching a weather forecast, but is it merited?  A month into the unfamiliar world of ­coalition government, where does the NHS appear to be heading?

As with the rest of the public sector, more detailed financial projections will emerge from the emergency Budget on June 22 and from this autumn’s Spending Review.

And the detail is crucial. At first glance, the chancellor’s May schedule of £6.2bn additional cuts in 2010/11 leaves the NHS in England unscathed. However, NHS budgets in Northern Ireland, Scotland and Wales are not ring-fenced, and ­although they benefit from the Barnett Formula they might prove more ­vulnerable to short-term economies.

In practice, however, taking a ­pan-Whitehall scythe through consultancy, travel, advertising, quangos and IT programmes will affect the Department of Health as much as other spending departments.  And curtailing the spending plans of the NHS’s social care partners will also increase demand in the health sector.

Meanwhile, the new ministerial team is already visibly changing the way the NHS works. New Health Secretary Andrew Lansley announced earlier this month that hospital trusts are to be responsible for patients for 30 days after discharge. This is an attempt to trim a rising trend of emergency readmissions and, perhaps more significantly, to force hospitals into closer liaison with community and ­primary care services.

At a strategic level, the coalition lost no time pledging that it would ‘stop the ­centrally dictated closure of accident and emergency departments and maternity wards, so that people have better access to local services’. Proposed hospital ­closures and cuts in the number of A&E departments proved a particularly ­sensitive issue on the ­doorstep during the election campaign. Local authorities have also been given the right to challenge ­closure proposals and refer them to an independent ­reconfiguration panel. 

And, as if to show actions speak louder than words, Lansley visited Chase Farm Hospital in Enfield and halted ‘top down’ planned service closures in favour of local consultation. He also called an immediate halt to reconfiguration plans in London that would have centralised acute hospital care, introduced 100 polyclinics… and were expected to save around £3.3bn of a £5.1bn projected London-wide shortfall.

The plans were closely associated with the ancien régime, and in particular former health minister Lord Darzi. Cue the immediate resignation of two non-executive directors from the NHS London strategic health authority. One of them, chair Sir Richard Sykes, explained: ‘Our visions of health care delivery bear so little in common that it would make no sense for me to continue.’

NHS London, along with much of the rest of the NHS, is puzzling over how it will plug a very substantial financial black hole in the coming years. Besides, by April 2012 NHS London will be no more. One of the other early decisions of the new ministerial team has been to axe the ten strategic health ­authorities. They will be downgraded to regional offices of a new NHS board – a Tory policy commitment – with overall resource allocation and ­commissioning strategy responsibilities.

The precise role of the new NHS board is thus far uncertain. However, it would appear to be constrained, as resource allocation in England has recently been reviewed (and is a tricky area anyway in the absence of financial growth) and GPs and councils will lead on commissioning.
Meanwhile, Monitor, the independent regulator of foundation trusts, will take on the role of economic regulator and appears likely to assume the DoH’s tariff-setting responsibilities. Steve Bundred, who took over as chair of Monitor at the start of May, has already proposed that foundation trust assets should be ­removed from the public sector balance sheet, a move that has sparked privatisation fears among the unions.

So just how big is that financial black hole? Current NHS projections for the period from 2011 to 2014 allow for ‘flat cash’: zero growth. Yet keeping up with an ageing population, population growth and medical advances is estimated to cost an extra 4%–5% per year. Inflation – as measured by the retail price index – is currently running at some 3.5%.  Without matching growth in NHS funding, these costs can be covered only by significant cash-releasing savings. The DoH believes that £15bn–£20bn needs to be saved from 2011 to 2014, on a total annual spend of some £100bn.

It might not be quite that dire. The savings target originates from a leaked 2009 McKinsey report, finally published last month, which in turn broadly matches Sir Derek Wanless’s 2002 report on health funding needs. However, not all of the original Wanless assumptions still stand.  A recent review by John Appleby, chief economist at the King’s Fund, suggests the overall funding shortfall could be reduced to perhaps £12bn–£14bn via policy interventions such as a pay freeze, no further reductions in waiting times and a freeze on capital investment.

That would equate to a slightly less daunting annual efficiency gain of 3.5%–4.5%, which sounds almost achievable. But according to the Office for National Statistics, NHS productivity actually fell by 0.4% per year between 1997 and 2007.  (The revised GP contract, which ended mandatory out-of-hours cover, is at least partly to blame.)  In recent years, slippage on cost improvement targets has effectively been masked by funding growth, and there is no track record of productivity gain on the scale now needed. It’s ­arguably the DoH’s biggest challenge.

But there are other ways of viewing the health challenge, and there is more to the NHS than acute hospital throughput. Only about a third of health spending falls within the payment-by-results driven, sweat-the-assets NHS market economy of acute hospitals: mental health, community services and primary care remain outside the market. And without the political embarrassment of long hospital waiting lists, the new ministerial team might not need to prioritise acute care in quite the same way as their predecessors.

Together the new ministers form an interesting group. Andrew Lansley, as secretary of state, now occupies the role he has been understudying for years. Like Patricia Hewitt, he has the job he always wanted. Knowledgeable and committed, his views permeate recent Conservative policy pronouncements on health, up to and including the election manifesto. Simon Burns is his minister of state for health and enforcer on performance, quality and patient safety, supported by Earl Howe in the Lords. 

In Paul Burstow, the Liberal Democrat minister for care services, Lansley has an elegant counterbalance. Also something of an expert in the field, and with a special interest in the care of elderly people, Burstow was LibDem health spokesman between 2001 and 2005. His brief now includes the divisive political hot potato of adult social care – remember the campaign issue of the ‘death tax’ – with an independent commission on funding scheduled to report within a year. And Conservative Anne Milton, as under-­secretary for public health, takes on a brief that includes the important health improvement agenda: tobacco, drugs, alcohol, diet and the rest.

It’s too early to judge where most ministerial energy will be expended, but Lansley and his team will certainly need to attend to two realities beyond the assumed £20bn funding gap. One is that health commissioning, as it is currently configured, is unlikely to solve the problem. As recently as March, it was roundly ridiculed by the Commons health select committee as ‘20 years of costly failures’ in a report that derided primary care trusts as weak and passive and even suggested the whole notion of a purchaser-provider split could be scrapped. 

No-one in government is currently suggesting this, nor any curtailing of payment by results and the other machinery of the NHS market. But with the health service committed to reducing its management costs by a third and cutting the number of quangos, the expense of maintaining 152 primary care trusts in England is already coming under scrutiny. The health select committee report suggests the transaction costs of the purchaser-provider split might now be as high as 14% of total NHS expenditure, and the committee condemned the vagueness of civil servants on the subject.
It said: ‘We are dismayed that the Department [of Health] has not provided us with clear and consistent data on transaction costs; the suspicion must remain that the DoH does not want the full story to be revealed.  We were appalled that four of the most senior civil servants in the ­Department of Health were unable to give us accurate figures for staffing levels and costs dedicated to commissioning and ­billing in PCTs and provider NHS trusts.’

Thus far, the coalition appears to be pursuing a dual strategy of budget-holding GPs and increased democratic input to PCT boards, an approach that combines Conservative and Liberal health policy aspirations and might yet prove contradictory. The pledge on PCT management is ‘a stronger voice for patients… through directly elected individuals on the board of their local primary care trust’, with the remainder of the board ‘appointed by the relevant local ­authority or authorities, and chief executive and principal officers appointed by the secretary of state’. Eliminating a third of management costs along the way will add a certain spice to the change process.

A second reality is that whatever progress is made on hospital productivity, the big gains – both for the NHS and for society at large – lie in the complex, partnership-dependent world of preventing illness and reducing social inequality. Four behavioural risk factors – smoking, physical inactivity, alcohol consumption and poor diet – are estimated to account for at least £9.4bn of direct costs to the NHS each year as well as being major risk factors for the onset of long-term conditions. If costs outside the NHS are included, these costs rise further. For example, the Cabinet Office estimates the social cost of alcohol misuse to be £20bn per annum. 

Then Sir Michael Marmot’s independent review of health inequalities, published earlier this year, estimates the direct NHS costs arising from social inequality to be more than £5.5bn per year. Again, the costs to the broader economy are very significant. Marmot finds that inequality in health care costs more than £20bn per year in welfare payments and lost taxes, plus a further £31bn–£33bn in lost economic productivity. 

But enormous as these costs are, the NHS continues to focus on hospital productivity. The Audit Commission’s Healthy balance, published in March, found little to show for the £21bn of NHS funding now allocated on the basis of health inequalities. Much of the money appears to go on higher hospital costs and higher rates of hospital admission: the effects of inequality, rather than its root causes. And direct intervention at national level, in the form of tightened alcohol licensing or food production controls – not to mention Marmot’s proposals for minimum income levels – might prove divisive within the coalition.

The health sector is not short of challenges. Some say implementing the pledge to ‘renegotiate the GP contract’ would be daunting enough. All will become clearer on June 22. But it might be that public sector austerity measures change the nature of the health agenda in the second part of the year. Managing through a period of pay cuts, pension cuts and industrial unrest, rather than improving productivity and public health, might prove to be the new ministerial team’s priority for 2010.  And that, too, could strain the coalition.

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