News / News analysis: The axe cometh

Even before primary care trusts and strategic health authorities had been given notice to quit, the government had already set out its stall on management. Its revised operating framework announced an acceleration to the previous administration’s management cost cuts. It took the previously announced 30% cut in primary care trusts and strategic health authority management costs over four years – unveiled at last year’s HFMA annual conference – and increased it by half again. The new cap – a 46% cut on 2009/10 costs – now needs to be delivered by 2013/14.

This will inevitably have an impact on the NHS finance function. Yet the call to cut management comes just when good management – and good financial management in particular – will be vital. History tells us that structural change – such as the proposed move from PCT to GP consortia commissioning – can provide additional challenges in terms of financial control. In fact in an HFMA survey, PCT finance directors saw the loss of financial control as one of the three main risks during the transition to the new structure, alongside redundancy costs and the erosion of staff morale.

And this particular reconfiguration exercise has the added complication of coinciding with the service’s biggest ever productivity drive – with £15bn to £20bn of savings needed over the coming four years to meet demographic pressures and the costs of rising demand and new technology.

There is something a little contradictory about a need to increase focus on financial management and governance, while making major reductions in management costs. This dilemma was neatly summarised by HFMA president Paul Assinder in the last issue of Healthcare Finance, when he wrote about concerns that the ‘need for finance staff in commissioners, providers and regional tiers to breathe life into sketchy policy comes amid a rush to slash management costs’.

The problem for finance is that while not all finance staff are managers, all the costs of finance (as a corporate function) count towards the current definition of NHS management costs. Either finance itself will face a near halving in costs or other non-finance-related management costs will have to face a higher share of the burden.

Depending on how this is implemented, it could have a huge impact on the size of the existing NHS finance function. Health secretary Andrew Lansley told the Commons health committee in July that PCT management costs reached £1.5bn last year. But we have no further breakdown of how this was made up. However, PCTs and SHAs together account for nearly 4,500 of the 16,263 NHS finance staff listed in the HFMA finance function census (NHS finance function in profile, June 2010). While the specific target is to cut costs not positions, clearly significant numbers of finance staff could be under threat.

HFMA undertook a small survey of PCT finance directors over the summer. The 26 directors who took part represent around 20% of the existing cohort of PCT finance directors. They were split almost down the middle on this issue. Some 46% expected the draconian cuts to apply equally to finance as to other disciplines. The rest felt that finance would be – indeed it would have to be – a special case.

One director said that their local management cost reduction target was 56%. ‘It is difficult to see us achieving this within finance without threatening financial control/core processing,’ they added. Another said: ‘Financial control is paramount and is given prominence in the white paper. This cannot be achieved without maintaining most, if not all, of the team somewhere in the system.’

Many PCTs have already outsourced parts of their finance function to NHS Shared Business Services (NHS SBS) or other shared services providers (see ‘One for all’, page 12). In theory, this means they have already reduced their finance costs – for instance, taking advantage of the 20% reduction in costs promised by NHS SBS. But it also restricts their ability to cut those costs further – at least beyond the promised 2% reduction per year offered by SBS.

Mike Sobanja, chief executive of  the NHS Alliance, is wary of granting any discipline special protection or ‘feather-bedding’, as he puts it. But he said the management cost reductions had to be differential. ‘It can’t be the same for everybody,’ he told Healthcare Finance. ‘Essentially you’ve got to understand what are the core functions that can’t be avoided.’

He said he suspected most of finance would fall within ‘core functions’. However, he expected to see more use of benchmarking to ensure that core functions were provided in the most efficient way possible. He added that the inclusion of all finance costs within the definition of management costs should also be reviewed.

PCT finance directors have had little time to work out the likely impact of the proposed changes on their own careers. However, 40% of an admittedly modest sample expected to find a role within the new GP consortia, even allowing for the expectation that chief finance officers will cover more than one consortium. A further 15% believed they might end up in the new NHS Commissioning Board – either operating nationally or perhaps in a regional tier. The rest – more than half the sample – anticipated a future outside direct NHS commissioning, with one in five expecting to move into the acute/foundation trust sector in some capacity.

Where next for staff?

The directors, who oversaw departments ranging from about 10 to 50 staff, were also asked to estimate how many of their staff would find roles somewhere within the reformed system. Nearly three quarters felt that more than 60% of finance staff would find a place within the new system, with nearly four in 10 thinking more than 80% would be okay. However, two respondents took a more pessimistic view of the NHS drop-out rate: one predicting that just 40% of their staff might find roles in the new structure, another believing this could be as low as 20%.

On a slightly different take to the question, finance directors were asked what impact they thought the move to GP consortia would have on the number of finance staff needed to support the commissioning function. Nearly one in four thought that the diseconomies of scale would lead to an increase in the numbers required. A further quarter thought there would be little impact, while just over half predicted a reduction in numbers.

The proposed management allowance – as yet unspecified – will be key. If PCT management costs stand at £1.5bn, this equates to a management cost ‘allowance’ of more than £25 per head of weighted population (52 million).

There have been reports suggesting the allowance could be set somewhere between £9 and £12 per head of population – more than a 50% cut – although this could take account of the fact that some of the current management costs are tied up in existing provider operations.

Perhaps the real question is whether management cost cuts and future allowances are realistic. At just 3% of total expenditure (according to Department of Health evidence to the Commons Health Committee in 2009), management costs already compare favourably to most international systems and to the private sector – despite the arguably greater burden of public sector accountability. And the management challenge facing the service is as great as ever.

NHS Confederation acting chief executive Nigel Edwards voiced these concerns over the summer. ‘PCTs and SHAs are on the receiving end of a significant amount of criticism without any acknowledgement that they are crucial to maintaining performance and delivering change,’ he said. ‘I am concerned about the implications of this for the delivery of future reform.’

He told Healthcare Finance that cutting too deeply on finance costs could have implications for financial control. But he was concerned that imposing unrealistic management caps would doom the new consortia to failure. ‘If you are prepared to trust GP consortia with £80bn and you are going to stop micro-management, it seems curious that the only bit of micro-management you do is on how much they are allowed to spend on management,’ he said. ‘Particularly as the US evidence is that if you skimp on management, you are much more likely to fail.’

He added that the numbers being talked about – the £9 to £12 per head of population – are simply premature, especially as we don’t even know exactly what the remit of the new consortia will be.

The proposed cap on consortia management costs seems to some to be an exercise in delivering a headline about management savings, rather than getting the right level of management to achieve the best results on commissioning.

Mr Edwards said that GPs he had spoken to recently recognised the importance of good management. ‘With some bits of management there is a view that they weren’t that necessary, particularly around the performance management machinery,’ he said. ‘But the blanket view that managers are bad, clinicians good is not one that most clinicians seem to share.’