NHS providers are planning to cut pay budgets by £1.9bn this year, a study released exclusively to HSJ has revealed.

The findings, based on a survey of Foundation Trust Network members, have prompted warnings that trusts will be unable to make such large cuts without opting out of national pay structures.

Acute, mental health, community and ambulance trusts responded to the survey. They reported savings programmes totalling £1.6bn for 2011-12. On average 63 per cent of the efficiencies are due to come from reductions to the paybill.

The report said that across the provider sector, this indicated a total target of £3bn, meaning approximately £1.9bn savings would come from pay.

The weighting towards pay is even heavier in the mental health sector, accounting for three quarters of cost savings. The FT Network said this was because mental health trusts typically have lower drug and equipment costs than acutes.

The report says trusts will realise the majority of pay savings through natural wastage and restricting bank and agency usage, but “in some cases” redundancies will be necessary.

£3bn:

Predicted value of provider organisation cost improvement plans in 2011-12

However, asked whether trusts would have to consider freezing Agenda for Change pay increments – which unions have rejected – FT Network director Sue Slipman said: “I think the logic of where we are is that they will have to be revisited.”

She said the paybill for trusts “isn’t affordable in its current form” and “organisations will want to have conversations with their staff which are realistic about money”.

She added: “I can’t say whether people will break away from national terms and conditions – I’m sure this is something which is being looked at.”

In March, NHS deputy chief executive David Flory told HSJ that “continuing to grow the paybill will bust the system”.

Some organisations, such as Salford Royal Foundation Trust, have opted to withhold increment rises from staff who have high sickness absence records or face disciplinaries. But many others have avoided such a move, fearing industrial action.

Health secretary Andrew Lansley met with health unions on Monday. HSJ understands staff representatives raised concerns over threats to terms and conditions.

The potential for industrial conflict is likely to be discussed again today when the Social Partnership Forum – made up of NHS employer and union representatives – is due to meet with the NHS Future Forum as part of the NHS reform “listening exercise”.

63%:

Proportion of cost improvement plans made up of paybill cuts

Board papers highlight the difficulties of cutting paybills. For example, Basildon and Thurrock University Hospitals Foundation Trust beat its 2010-11 cost cutting figure of £15.2m, but fell short of the £4.5m target for pay, managing only £3.1m.

Newham University Hospital Trust predicted in March it would save £2.2m through pay savings, but for 2011-12 it is tasked with £11.6m of pay cost savings.

Hay Group public sector practice director Phil Kenmore said: “For the best FTs, it’s likely that they can do it. But can the rest? It’s probably unlikely.”

Managers in Partnership chief executive Jon Restell said: “There isn’t masses of expertise around pay bargaining or managing contractions of staff.”

Mr Restell said vacancy freezes and natural wastage alone were “not necessarily a very effective way of managing a reduction in staff”, as managers were unable to predict when savings would be realised.

Overall, the survey showed trusts face an average cost improvement plan of 5.7 per cent of income in 2011-12, broadly in line with earlier HSJ analysis and estimates from Monitor. The highest worst-case plan was reported at 16.9 per cent.

Respondents to the survey said the need for savings was increased by “unsophisticated commissioning, exacerbated by the move to primary care trust clusters and the loss of existing provider/commissioner relationships”.

The FT Network wants rules on readmission penalties changed to relieve some of the financial pressure. Its report said many PCTs were using the penalties to generate savings rather than improving community services.

Ms Slipman said non-payment should only apply where readmission is under the same healthcare resource group classification as the previous admission. The network estimates this could cut readmissions penalty costs to providers by at least 40 per cent, and that the change could be implemented “overnight”.