The financial problems of the NHS are extremely serious – but more like anaemia than haemorrhage. It is the financial equivalent of a long term medical condition, says Nick Bosanquet.

The NHS Commissioning Board has just appointed Professor Malcolm Grant as chair and must now determine the likely funding, costs and demand over the next five years. Not just the cost commitments already there, such as from private finance initiative schemes, but also from increasing numbers of medical graduates, and rising energy and food prices.

Trusts’ financial problems have probably been underestimated. The Department of Health names 20 trusts it is concerned about, but 18 others on PFI schemes and at least three in London with known financial issues can be added to that list. Most of the 40 or so trusts with problems are in or near London.

The NHS has to redesign services while facing deep uncertainty about budgets. The 250 new clinical consortia will have allocated budgets by 2013, but it will be 2014 at the earliest before they can be confident these are realistic.

There is a danger of funding for new programmes being blocked. Managers are preoccupied with short term survival and consultation activities when the service is faced with urgent funding and design problems, with great uncertainty about responsibilities, funding and service development. There are also problems looming regarding quality of care, especially for elderly patients.

Primary care trusts have data on activity and cost that will not exist for new boundaries, and PCT clusters can work as development agencies for the consortia during their remaining life. A partnership between clinical consortia, PCT clusters and local government, in its new and positive public health role, is needed, with close coordination due to the four different funding streams: the clinical consortia, the commissioning board, the health and wellbeing boards, and social care funding.

Local strategy must be defined first. As the old and wise maxim says, strategy has got to come before structure. New services are going to have to be paid for by savings on the old ones, but the incentives to make them would be much greater if people had an idea of what the money would be spent on.

The new consortia must start developing these strategies well before 2013. Service redesign can use the new four stage model of healthcare: prevention, early diagnosis, ambulatory treatment and care programmes.

Many of the current services are obsolete, provider dominated and on the wrong side of the digital divide. We need a process of change that will take years, but has to start with a clear statement from the new commissioners of what they want. They should signal their intent to use patient choice and qualified providers as key resources in getting change. International evidence supports a new approach to hospital admissions. From 1999-2000 to 2009-10, hospital admissions rose 38 per cent in England, compared with 1.6 per cent in Sweden. Both countries have ageing populations yet admissions for the over 75s increased 66 per cent in England compared to 0.6 per cent in Sweden. Reducing admissions is essential to improving the quality of hospital care and should be a major priority for the new consortia.

The Nicholson challenge needs to be redefined in terms of a 10 per cent reduction in costs – and not just for hospitals. The immediate goal is for £15bn-£20bn of savings, but all of this cannot come from acute hospitals when they account for only 39 per cent of PCT purchasing of services and the rest goes on primary care, community and mental health services.

Some savings will need to be re-invested in better hospital care for elderly patients and new drug therapies, where spending has been rising 10 per cent a year. Such cost cutting is important as per patient costs will rise in response to reduced admissions.

Finally, a bonfire of controls must be lit. The general aim of moving commissioning closer to patients is a good one, but it will be tough to kick the central planning habit. Local commissioners and providers must regain their initiative and flexibility. The NHS has attracted many talented staff in the past 10 years. Let’s use them to get back to solvency.