Feature / Wanless revisited

The NHS is being called on to make unprecedented efficiency savings. John Appleby explores what these productivity gains are intended to achieve and reassesses the scale of the productivity challenge

the NHS IS grappling with the prospect of a complete halt to real increases in NHS funding from 2011 onwards. But there is a danger that the (always necessary) focus on improving productivity becomes, at best, an end in itself, and at worst, a misunderstanding that the NHS faces the need to dramatically cut budgets, reduce services for patients and sack staff. The reality is more complex.

Over the next few years different sectors of the NHS will face different financial pressures. While commissioning budgets will be frozen in real terms, providers will face real reductions in tariff prices and as a consequence possible falls in income. Variations in the size of accumulated surpluses and deficits (and production costs relative to tariff) across NHS organisations will mean varying degrees of short-term financial cushioning.

But despite the headline challenge to the NHS to achieve unprecedented productivity improvements of between £15bn and £20bn, policy choices still need to be made at national and local level. These could reduce the scale of the task and help the NHS to focus on the fundamental question of what improving productivity is meant to achieve.

Gap analysis

It was NHS chief executive Sir David Nicholson’s annual report for 2008/09 that first identified the ‘unprecedented’ £15bn-£20bn efficiency savings required between 2011 and 2014. This ‘gap’ in funding was based on assumptions that income would receive zero real growth, while expenditure would need to meet demographic changes, upward trends in demand for care, additional costs of NICE guidance, changes in workforce and pay and the costs of implementing government policy.

Assessing what funding the NHS needs is no simple task. An alternative assessment of the productivity challenge was produced last year in a joint analysis by the King’s Fund and the Institute for Fiscal Studies. This reached similar conclusions on the potential shortfall in NHS funding. But a key difference from the Department’s analysis was the King’s Fund/IFS use of the funding projections produced by Sir Derek Wanless’s 2002 review of NHS funding.

Although the Wanless analysis is nearly eight years old, it remains the most sophisticated attempt to date to define future healthcare funding needs. The joint KF/IFS analysis of actual funding prospects for the NHS used Wanless’s funding scenarios as a benchmark to get a handle on the scale of any potential shortfall in funding.

The analysis stressed, however, that the Wanless recommendations were based on a large number of assumptions about the demand for, and supply of, healthcare in the future. These ranged from changes in population and population structure to trends in smoking and obesity on the demand side, to improvements in NHS productivity and improvements in service quality – reduced waiting, better use of IT, improved infrastructure and so on.

The KF/IFS analysis suggested that there were three ways of making up the shortfall in actual funding compared with Wanless’s recommendations:

- Reductions in real spending across all other departments

- Increases in taxation

- Improvements in NHS productivity.

The conclusion was that the size of the real reductions in other spending departments and the scale of the necessary tax increases – on top of anything needed to deal with the structural debt problem facing the government – were so large as to be unlikely options.

This left improving productivity as a way of squeezing extra value out of each healthcare pound – value that would need to be equivalent to the probable funding gap.

Assuming no real rise in funding over 2011/12 to 2013/14 and no increase in productivity, the funding shortfall compared with Wanless’s middle scenario (solid progress) also amounted to around £20bn by 2013/14. This is equivalent to nearly a fifth of the English NHS budget and represents an annual productivity target of about 6%.

As Sir David has noted, such a target is ‘extraordinarily challenging’ – but particularly so perhaps given that productivity in fact declined by 0.4% a year over the 10 years from 1997, according to figures from the Office for National Statistics.

Achievement goals

The Department of Health and KF/IFS analyses of the productivity gap may reach broadly similar estimates. But by using Wanless’s funding recommendations as a benchmark, it is possible to decompose the headline productivity gap to see what improvements in productivity are meant to achieve.

As part of a separate piece of work, the King’s Fund has summarised the factors and assumptions underlying the 2002 Wanless review’s funding projections. The cost drivers are described in table 1 (above).

Taking these drivers and applying them to the growth in the NHS budget implied by the 2002 Wanless review for 2011/12 to 2013/14, it is possible to decompose the increases in funding under each of Wanless’s three scenarios. For the period 2011/12 to 2013/14, table 2 (above) shows that the total increase in the NHS budget suggested by Wanless ranged from around £11bn (fully engaged) to £15bn (slow uptake). The value of the cost drivers is estimated to be similar for all three scenarios – around £20bn – but the value of the productivity improvements (reducing the size of the increase in actual spending) was assumed by Wanless to vary between the scenarios – from £5.4bn to £8.7bn.

It should be stressed that this decomposition is an estimate, and relies on assumptions about, for example, the timing of costs due in particular to implementing the national service frameworks. Nevertheless, the estimates provide a reasonable picture of what comprises the spending growth suggested by Wanless.

What the decomposition reveals is that a key goal of Wanless’s recommendations was to secure improvements in health services by using existing national service frameworks and rolling them out to other areas. Such improvements would account for about half the total increase in spending – between £10bn and £12bn – in 2011/12 to 2013/14.

The value of real pay and price increases assumed by Wanless accounts for 17% to 21% of the total growth over the whole three-year period. The remaining 25% to 20% is accounted for by the estimated costs of meeting improvements in waiting times, clinical governance and capital, together with meeting higher demand for healthcare services arising from demand drivers such as demographic change and the population’s anticipated health seeking behaviours.

To appreciate the scale of the productivity challenge facing the NHS, figure 1 (right) shows the funding the NHS needs in 2013/14 (£126bn) based on Wanless’s solid progress scenario, the cumulative shortfall (£21bn) if no real increase in NHS funding or productivity (as assumed by Wanless) for three years from 2011/12, and what this funding ‘gap’ represents according to Wanless’s original 2002 analysis.  

Policy questions

A closer look at the potential funding shortfall raises several questions. First, are some of the original Wanless aspirations and assumptions already met or no longer appropriate? This would mean further increases in funding for some areas are no longer needed. Second, given the recession and financial consequences of the global banking crisis, is there a case for reviewing assumptions underlying the increased funding suggested by Wanless?

On the former, it might be argued that having achieved the 18-week maximum inpatient/outpatient/diagnostics waiting times target and with waiting times no longer the public concern they were, the increased funding of £1.3bn-£1.7bn over the three years to 2013/14 – estimated as needed by Wanless to reduce waiting times to a maximum of two weeks by 2022/23 – is no longer necessary.

It might further be argued that much of his capital and clinical investment objectives have also been met – another £2bn to £2.3bn.

On the latter, exceptional economic circumstances might suggest that the assumption of a 2.5% real annual pay increase for NHS staff over and above general inflation in the economy is, for the moment and with the prospect of zero real additional funding for the NHS, untenable. The pre-Budget report effectively announced this, with a proposed cap on public sector pay of up to 1% in cash terms. The cost of this Wanless assumption will form the bulk of the real pay and price effect cost of between £3.4bn and £4.2bn.

Overall, through a pay freeze and policy decisions not to further reduce waiting times or invest in new capital for the next three years, the cumulative funding gap by 2013/14 could be reduced from about £21bn to £12bn-£14bn. That’s equivalent to annual productivity improvements of 3.5% to 4.5%. Such gains remain challenging, however, and rely on difficult if not contentious decisions on pay.