News / News analysis: More and less

One element of the 2010/11 operating framework was bound to grab headlines, particularly in an election year – a 30% cut in management and agency costs in primary care trusts, PCT provider arms and strategic health authorities over the next four years.

A cynic might insist that the move was motivated by the need to garner votes, but efficiencies in the public sector will be an essential part of the country’s financial recovery programme, whoever wins power. At the same time as handing out these cuts, the framework continued to devolve more responsibilities to regional and local organisations. Heads may still be reeling in PCTs and SHAs.

The exact nature of the cuts is still to be divulged. Guidance due out over the next couple of weeks is expected to clarify how the 30% will be measured, including what baseline will be used and any interim targets for reduction.

The NHS has been led to believe that cuts will be frontloaded, although some SHAs are advising PCTs to expect a 15% target over the first two years. And Department of Health director general of finance, performance and operations David Flory warned the HFMA conference last December that it could be as much as 15% in the first year.

Other points stand out. The operating framework said that each SHA area should achieve a 30% aggregate cut in management costs by 2013/14, although SHAs will be able to decide how much each organisation should save.

The guidance will detail the baseline to be used. PCTs have told Healthcare Finance that they understand the 30% cut will be based on the management cost figure in their 2009/10 accounts. But they will be interested to see whether the guidance settles on the current definition of management costs, which has been largely unchanged since 2002, or opts for a different, possibly wider, definition.

Whatever the definition, the cuts will be difficult and it is unlikely redundancies will be avoided. Formal and informal mergers are also possible. A recent board meeting at NHS Salford was told that it would have to save £2.4m on management over the four years, while Heart of Birmingham Primary Care Trust’s board was told the cuts would be a minimum of £1.5m. Nearby, NHS Walsall believed a 15% target in the first two years would mean it must make a £1m recurrent saving in each of the years.

As part of their preparations for the management cost cuts, many PCTs have noted the government’s Putting the frontline first: smarter government document, published alongside December’s pre-Budget report. This sprung from last year’s operational efficiency programme and while this was primarily aimed at Whitehall departments, including the Department of Health, December’s document also addresses the wider public sector.

Challenging benchmarks

Putting the frontline first sets new, challenging benchmarks for back office functions, including reducing the cost of finance functions to 1% of organisational spend, cutting occupancy to 10 square metres per staff member and improving the ratio of human resources staff to non-HR staff to 1:77.

Trusts have also taken note of Putting the frontline first. Ashford and St Peter’s Hospitals NHS Trust will review its back office functions in the light of this and it plans to reduce management costs from 4.3% to the 3% of comparable local trusts.

Karl Simkins, director of finance at NHS Leicestershire County and Rutland, said local PCTs are targeting savings of about 20% in the first year. Part of this will support development of the East Midlands collaborative commissioning and procurement arrangements from which further savings on commissioning costs are expected.

For the PCT’s finance function, the reduction in management costs will first mean looking at how best to integrate routine financial management and accounting arrangements with Leicester City Primary Care Trust to drive productivity and efficiency through collaboration. ‘For example, we’re looking at whether we can provide primary care management accounting arrangements on behalf of Leicester City PCT to get efficiency out for both organisations. If it’s transactional and you only need to do the job once, we’re looking at potentially sharing; where you need analysis and further intelligence from an organisational perspective, where you have to do the job twice, then we need to develop lean, value-added teams focusing on more tailored requirements,’ he said.

Other short-term measures have been put in place, including a recruitment freeze and joint work across the local health economy (PCTs and trusts) to fill long- and short-term vacancies using existing staff. ‘There may be a risk of redundancy, but recent history tells us there are ways of dealing with formal or informal restructuring, certainly on a health economy-wide basis to minimise this risk,’ he said.

He is working on the basis of reducing about £600,000 from the PCT’s management costs over the period. Collaboration will be crucial across all sectors of health, he said. A re-evaluation of moves to existing shared services will also be part of this.

‘It's going to be very challenging. When you need to get up to the 30% mark, it focuses the mind to look at what we need to stop doing, what jobs we’re doing that don’t add value and where we can cut rework and duplication with other teams in the PCT. But in terms of the finance function, some things are core business and must be maintained to a high standard. Ensuring we produce high-quality monthly and annual accounts to time and ensuring key governance arrangements and audit compliance are high priorities and will be a focus for me in both local or collaborative arrangements,’ Mr Simkins said.

Pace of change

Cathy Kennedy, deputy chief executive and director of finance at North East Lincolnshire Care Trust Plus, said PCTs were concerned, especially because of the pace of reductions expected. ‘I’m aware of organisations – though we are not one of them – where they have already implemented a recruitment freeze. There is concern that just when there is major service change required so that we are able to manage within financial constraints, there will be fewer people around to manage this agenda,’ she added.

‘On the flip side, of course, people are starting to look at innovative solutions, which may not have been looked at if the cuts were being done on a small scale each year.’

This includes working more closely with local authorities – something that her organisation, as a care trust, has already done. It is still looking for other means of generating savings.

For example, it is already working with BT on implementing an agile working initiative in its headquarter services. The intention is that this will allow the organisation to get the same outputs with fewer people. Agile working allows staff to work in a variety of settings and uses techniques such as hot desking and mobile working as well as home working.

Other PCTs are learning from private sector organisations’ actions to the recent recession. Many law and accountancy firms introduced shorter working weeks in order to cuts costs but retain talent. Bradford and Airedale Teaching PCT, for example, is considering ways to secure the management cost reductions, wherever possible, without resorting to compulsory redundancies.

Its plans include making use of staff turnover, reduced hours or part-time working, while it is also working in partnership with NHS organisations and other public sector bodies in Bradford and Airedale to develop a collaborative approach to staff redeployment.

Mrs Kennedy said this sort of approach could help, but under current national terms and conditions such variations from employment contracts would have to be agreed locally. ‘The national terms and conditions and pay framework can make it less easy to make that type of change happen. But I think there’s an awareness at national level that they have got to help us by not having pay frameworks that make it difficult to make these changes.'

PCTs and SHAs are in for a difficult four years. Not only will the financial environment be tighter, but more will be asked of them and there will be fewer managers around to do it.