News / News analysis: Two years to prepare

Last month’s Budget may have delayed the direct impact of the economic recession on the health service, but hard times are coming for the NHS

NHS staff may have breathed a collective sigh of relief when chancellor Alistair Darling sat down after delivering his second Budget. The NHS had escaped largely unscathed with, crucially, no changes to PCT allocations. But the relief will not last long. The stark reality of the macro-economic position was clear and the NHS will not remain immune.

The NHS does face a small amount of pain in the short term with a 2% cut to its overall budget in 2010/11. However, the £2.3bn clawback – health’s contribution to the £5bn increase in the overall public sector efficiency savings target over the 2007 spending review period – will be focused on central budgets and contingency funds. There will also be an increase in the tariff efficiency requirement in 2010/11 from 3% to 3.5% but the £164bn promised to PCTs in allocations over 2009/10 and 2010/11 will still flow into local budgets.

There have been no detailed announcements about allocations beyond 2010/11 – that will be the job for the next comprehensive spending review. But there is no doubt that the NHS is facing severe financial challenges. NHS chief executive David Nicholson acknowledged the coming pressures, but was upbeat about the service’s ability to prepare. ‘Looking ahead to the next spending review, it is clear that growth is likely to be significantly slower than the historic increases we have recently enjoyed,’ he said. ‘We need to use the relatively generous growth in the next two years to prepare for the leaner times ahead.’

However, an overall guideline of a 0.7% real terms increase in revenue spending across the whole public sector between 2011/12 and 2013/14 needs to be understood in the context of the broader economic conditions. Increased demand on social security budgets and rising debt interest, coupled with low or even negative inflation, mean the NHS faces the real prospect of zero or very small cash increases.

Following the Budget, Institute of Fiscal Studies research economist Gemma Tetlow said it was a plausible scenario that departments will face 2.3% real cuts a year – with health likely to see cuts.

One thing is clear, ‘growth’ will certainly be less than that assumed in PCT financial plans. According to some estimates, PCTs could have to find £7bn of savings from their existing long term plans, which are based on higher levels of growth (see Prepare for a decade of delivery, p11).

Where can savings be made?

The issue will be where can savings be made and how quickly. There is inevitably sensitivity about cuts from frontline services and the Budget focused on potential savings from support functions. The operational efficiency programme (OEP) report, released in advance of the Budget, set out ambitious savings from activities such as back office functions, collaborative procurement, asset management, property and local incentives – worth an additional £9bn across all public services by 2013/14. (Some £6bn of savings in these areas, compared with 2007/08, are already expected to be in place by the end of 2010/11 – giving £15bn of savings in total.)

Early application of the OEP work in health is expected to yield £100m from back office functions and collaborative procurement in 2010/11. And the department insists there is more potential. Greater use of back office services provider NHS Shared Business Services – which it said had already delivered over £40m of savings – could deliver up to £150m per year if all organisations signed up. The public value programme (PVP), launched in the 2008 Budget and reported on this year, also set out possible savings for health. For instance new metrics on estate utilisation are expected to support savings of up to £100m a year in estate costs by 2013/14.

However, the PVP also seeks to ‘deliver billions of pounds per year of cash savings and quality improvements by 2013/14 through improving the capability  and planning capacity of NHS commissioners and extending the success of the NHS tariff pricing system into new areas’. This recognition that savings will need to be made from the health service’s core activity, the delivery of healthcare, was welcomed by managers. Finance managers spoken to by Healthcare Finance acknowledged that support functions could contribute to the overall savings needed but improved leaner patient pathways were the key issue, pointing out that 70% of expenditure was tied up in staff costs.

Echoing the comments of many finance directors, one FT director said that bold decisions were needed. ‘In the short term there is an opportunity to prepare and plan to ensure the NHS is ‘in shape’ for the more difficult times to come. In the longer term, things will inevitably be difficult and some of the measures used to cope in such difficult times in the past will not be options given the regulation around access and quality standards that are now part of the landscape. Bold decisions such as a freeze in public sector pay are going to be required.’

Another director said that public expectations would also need to be managed. ‘The budget reduction is of great concern, not simply because it is a reduction in spend, but more importantly there has been no attempt to start reducing the aspirations of the public. We need to start limiting services to what is affordable and there needs to be a proper national debate about this. As the economy nose dives we need to be much more realistic and look much more at affordability.’

Policy forum response

A policy forum was convened by the HFMA in the week following the Budget. Finance directors attending acknowledged existing opportunities for savings – for instance by improving prescribing efficiency, reducing inappropriate admissions and reducing length of stay. But they said these had to be delivered in a collaborative way across health economies and involving partners such as councils.

They said it would be important to find real savings rather than simply shift costs to other services – either in health or social services (with specific concerns also about reduced spending in social services leading to higher demand on NHS services). And they added that reducing length of stay would have a knock-on impact on beds and workforce. Reducing the use of agency staff and better rostering would be priority issues.

Frontline staff knowledge

Clinical engagement will be vital. Clinicians need to understand the need to reduce costs and then take a leading role in identifying and driving efficiencies. Service line management is also seen as important, moving spend and save decisions to local teams. Finance managers stressed that frontline staff knew where the money was spent and how it could be saved and this knowledge had to be tapped into.

Managers agreed that improved quality could lead to lower costs and said that use of lean principles – which the department said had been used to good effect at Royal Bolton Hospitals NHS Trust to reduce standardised mortality rates and length of stay – needed to be more widespread. However, while they said all organisations needed to improve pathways and eliminate waste, they also pointed out that lean should not be seen as an overnight solution. Lean adopters talk of 10 years, rather than a quick fix.

But working together was seen as the overarching requirement. Writing on the King’s Fund website, the think tank’s chief executive Niall Dickson summed it up. ‘There is of course a danger that the automatic response [to the 0.5% increase in efficiency requirement] from acute trusts will be to protect their income by seeking to do more work or by clawing back money from non-tariff activity. Tackling this will require a whole-system response rather than individual organisations working in isolation to address their own financial pressures.’