Feature / Dragon’s den

The newly restructured NHS organisations in Wales have six months to recover their financial positions after an in-year overspend was revealed at the HFMA Wales annual conference.

The new integrated local health boards (LHBs), which began life on 1 October, face a battle to balance their books before the end of March. The Welsh Assembly government has called in consultancy McKinsey to help structure recovery plans.

Paul Williams, director general of the Wales Department of Health and Social Services and NHS chief executive, told the conference the service had an overspend of around £75m. Financial discipline had to underpin service developments such as shorter waiting times, he said. While people were generally feeling more confident that the recession was coming to an end, the tightening of the public purse strings had only just begun.

‘I have started to establish five-year service, workforce and financial plans,’ said Mr Williams. ‘They are not grand plans but first and foremost I want it to shake us very hard about what we need to do for 2009/10. The service is telling me at the moment that it is £75m in deficit. I have no money to cover that.’

He warned that if the service failed to tackle the deficit this year, then next year would be even more difficult as more significant reductions in funding growth begin to bite – the 5% cost improvements this year could turn into 6% or 7% next year and the year after that.

‘The bottom line is preparation for this year,’ said Mr Williams. ‘In the private sector it would be a question of whether you were bankrupt or not. If you don’t feel that urgency in the service then you are missing the point.’

He told the conference that NHS Wales must harness the reforms to shift its emphasis onto clinical quality. ‘I have always been a great believer that if you get the quality right then the bottom line will look after itself,’ he said. ‘For the first time all the organisations will be integrated and we must maximise that opportunity to deliver services in a more cost-effective and quality way.’

Job cuts leak

Although plans should spring from local organisations, McKinsey will help put them together. In recent weeks, the consultancy has become notorious for a leaked report in which it suggested culling 137,000 jobs over the next five years to help meet NHS England’s efficiency drive.

Mr Williams insisted the Welsh Assembly government would stick to the no-redundancy policy enshrined in its One Wales policy document. ‘McKinsey is already quite clear that what it will be doing for us will be in line with the One Wales commitment,’ he said. ‘The plans will require significant trend analysis – demographic changes, service demand, opportunities for service improvement and impacts of new technologies.’

Boards should agree the half-year balance plans by November and have their 2010/11 plans ready just after Christmas.

Eifion Williams, speaking as interim director of resources for NHS Wales, hammered home the message. He said the current financial year was ‘extremely challenging’, with efficiency savings of around 5% needed, but the service had to deliver financial balance.

‘There is no money in the Assembly government to cover organisations that are over their resource limit. We have to get the overspend down so that we are delivering on the resource limit,’ he said.

Under the new finance system that accompanies the structural reform, resource limits had been introduced for both revenue and capital.

‘This is going to be a new requirement for many of us,’ said Eifion Williams. ‘We know we cannot breach the annual resource limit without getting the organisation’s accounts qualified. And, because of the size of the new organisations, if one set of accounts is qualified, then the Assembly government’s accounts will be qualified.’

The new local health boards are about to revisit this year’s cost improvement plans with the help of McKinsey. Eifion Williams highlighted where he believes the problems lie: the service had entered 2009/10 planning to save around 30% of its £228m target through service efficiency and redesign.

However, he insisted the figure should have been closer to 50%. ‘I think we are doing what we have done in the past, which is go for 2% to 3% savings. We have not recognised we need to do 5%. The savings plans we have are about good housekeeping, which isn’t going to do it for us.’

Next year promises to be no easier, as the Welsh Assembly government must deal with a £216m drop in its overall revenue because of plans by the UK government to reduce spending announced in the April Budget.

‘We have to handle this year’s challenge this year and not leave it until next year because next year will be a big enough challenge on its own,’ said Eifion Williams. ‘During 2010 there will be a Treasury review of how much of the £9bn planned UK savings accrue to the Welsh Assembly government.

‘We will have to make efficiency savings like we have never done before and annual savings of between 5% and 7% will be the norm for the foreseeable future.’

Eifion Williams said the financial regime had been altered to suit the new NHS structure, adding they had taken ‘the good bits’ from other systems and adapted them to fit with the objectives of NHS Wales.

Patients will flow between LHB areas and for these patients new, all-Wales standard costs would take away the arguments over price that characterised the internal market.

The standard costs would also be pivotal in performance management.

‘We haven’t got an internal mechanism or market that provides a challenge to efficiency within an organisation, so we need to recreate that through our own internal mechanism,’ said Eifion Williams. ‘We will be using a payment by results-style mechanism that uses standard costs as the challenge mechanism.’

Service line reporting

All organisations in Wales have been mandated to introduce service line reporting (SLR) and this, together with the standard costs, would create the information necessary to benchmark performance against other Welsh organisations and with other regions of the UK.

Chris Hurst, who has taken over as the Department of Health and Social Services’ director of finance, attended the conference and threw his weight behind SLR.

‘I would like us as a finance community to put our shoulders behind SLR,’ he told delegates. ’There is real value in knowing how much it costs to do things. It enables us to begin that conversation with our clinical colleagues about their practice.’

He added that the service in Wales had to retain the confidence of taxpayers and recognised that in terms of this year’s financial position, time was short.

‘I don’t underestimate how difficult it is because you are going through organisational change and financial challenges,’ said Mr Hurst. ‘At the same time, some colleagues may be disappointed by their changes in roles.

‘However, there are some fantastic opportunities for the finance family. I will be trying to create opportunities for you to take part in the work that has to be done, as well as ensuring there is time for training, succession planning and personal development.’

The NHS in Wales has begun a new era, with a new structure, a new finance regime and a new finance director in place at the Welsh Assembly government.

However, it faces a familiar challenge – to find efficiencies over the medium term and, more pressingly, in the remainder of this year. The new LHBs will have to hit the ground running.

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