Public sector spending projections raise the spectre of real terms cuts from 2011. Sally Gainsbury dissects the figures and looks at the options for the NHS as growth makes way for austerity

In November 2007, when the health service’s surplus for that financial year was revealed for the first time by HSJ, NHS chief executive David Nicholson’s response was to say he had not got the money in a safe in his office – it was “out there” with primary care trusts.

But while Mr Nicholson may not have had the £1.7bn, there was a sigh of relief across the NHS last week when it learned that he does have the £2.3bn the Treasury now wants back from the Department of Health’s resource allocation for 2010-11.

Mr Nicholson’s prudence ostensibly means the DH will not need to revisit the primary care trust allocations it has already set for 2010-11. It also enabled chancellor Alistair Darling to proclaim in his Budget speech that funds for “local health services” were rising by “over 5 per cent”, even though the Department of Health’s overall resource funding will increase by just 4 per cent between 2009-10 and 2010-11.

In reality, PCT allocations have already been affected. In the settlements announced for 2008-09 and 2009-10 there has been a gap of at least £700m between the 6.3 per cent increase in revenue funding received by the DH and the 5.5 per cent increases it has passed on to PCTs.

Add the £500m “contingency fund” created at the beginning of 2008-09 and the DH had been quite comfortably close to meeting the Treasury’s demands.

But that comfort is likely to be short lived. The chancellor used his Budget to amend his projections for total public spending increases for 2011-12 onwards from the 1.1 per cent real terms annual growth he envisaged just five months ago to just 0.7 per cent.

Institute for Fiscal Studies senior research economist Gemma Tetlow says that could mean government departments receiving annual real terms cuts of 2.3 per cent, once the unavoidable growth in spending areas such as social security and debt interest payments are accounted for.

But that figure includes the Treasury’s annual 17.3 per cent real terms cut in capital spending, meaning the headline effect on revenue allocations could be less severe.

Even so, with the NHS representing almost a third of the government’s departmental spending, King’s Fund chief economist John Appleby says it is very hard to see how the NHS can escape a real terms cut.

“The others [departments] would have to suffer much more than a 2.3 per cent reduction if the NHS didn’t,” he says.

A real terms cut would be a major adjustment for the NHS, which received annual real terms growth of 7.4 per cent from 2002 to 2008. Asked if the chancellor’s figures mean a cash cut for the NHS, Mr Nicholson told HSJ last week: “We will have to look at that in a bit more detail… I can’t speculate.”

NHS Confederation policy director Nigel Edwards says whatever the final settlement is for the period from 2011-12, “it is clear it is undoubtedly going to be grim”.

Shrinking ambitions

KPMG head of healthcare Alan Downey says it is likely the cuts would mean the NHS will need to scale back its ambitions.

“Noble aims are things which aren’t going to be pursued over the next 10 years. It’s going to be about retrenching back to what are seen as the priorities.”

The target to reduce health inequalities could be dropped, particularly under a Conservative government with less commitment to equality.

NHS North West chief executive Mike Farrar says that to keep their levels of investment stable, PCTs need to start thinking now about introducing new efficiencies to “smooth” spending over the next five years.

Asked if this would see the return of the dreaded “top-slicing” of PCT funds Mr Farrar says: “Rather than describe it as a top-slice, what PCTs and SHAs need to agree is what level of reserve people need. I think PCTs will do that voluntarily. I don’t think we will need to go for draconian top-slicing because we are able to plan for it from now.”

Any PCT savings are likely to be based predominantly on a further squeeze on acute trust income. This was signalled immediately after publication of the Budget last week when the DH confirmed the tariff increase in 2010-11 will be just 1.7 per cent, compared with 2.2 per cent in 2009-10 - or, in government efficiency speak: the “tariff efficiency assumption” will be increased from 3 per cent in 2009-10 to 3.5 per cent in 2010-11.

For the Treasury, if not experts within the NHS, it is this extra efficiency which will create a £500m saving against 2007-08 costs in tariff prices and another £500m in hospital length of stays.

“The evidence is that when you squeeze the tariff, the acute sector puts its foot down and tries to do more or moves to non-tariff areas”

But King’s Fund chief executive Niall Dickson warns: “The evidence is that when you squeeze the tariff, the acute sector puts its foot down and tries to do more or moves to non-tariff areas.”

For Mr Farrar, a possible solution to this supplier induced demand problem may be to give acute providers “an interest in community services”. In other words more vertical integration - a controversial concept for some PCTs still concerned about giving powerful foundation trusts a platform from which to boost acute referrals. Mr Farrar stressed the solution may not be applicable to all areas.

Nigel Edwards agrees the financial tightening will require more co-operation than competition.

“For many organisations the solution will lie in how the whole system is reconfigured rather than just individual organisations,” he says. “Organisations that have a strong idea about how they work together with others will do better than those who see themselves in adversarial terms.”

But he warns: “Some of the tough choices about what’s in and what’s reconfigured will require some national or at least regional discussions - or else we will be back in the late 1990s when we were on the TV every night, being asked to justify the postcode lottery.”

Mr Dickson says the imperative for radical reconfiguration comes at the “worst possible timing in the electoral cycle”.

“Politicians are terribly brave until it’s in their constituency,” he says.

But if politicians have struggled to be brave about clinically backed regionalisation of specialisms, they may find it even harder when the rationale becomes cost saving.

Workforce at risk?

Mr Farrar says if costs are going to be reduced by moving acute services into the community then the NHS must urgently improve its workforce planning, or it will risk making clinical staff redundant in the acute sector, only to re-employ them again in community services.

But as Audit Commission head of health Andy McKeon remarks, the billions of pounds the Treasury claims can be saved “only arrives if you can take out the infrastructure and the staff”.

“You have to have fewer people and beds to do this.”

Inevitably, earliest sights will be set on administrative staff. From 1998 to 2008, the number of full time equivalent NHS staff in management, administrative or infrastructure support grew by 34 per cent to 187,177. Although overall NHS staffing grew at a similar pace (32 per cent) which means the proportion of administrative staff has stayed fairly stable at 17 per cent of the total. Mr Edwards says he expects PCTs particularly to come “under pressure” to reduce their staffing costs.

The current pay settlement lasts until the end of 2010-11 and Mr Edwards said there was “no appetite” to revisit that. But for 2011-12, there are now “some conversations to be had about trade-offs between head count reduction or pay restraint”.

The only possible bit of good news comes from PricewaterhouseCoopers lead healthcare partner Ian Wootton, who says the cold maths of redundancy costs means he expects the balance to come down in favour of frozen pay, rather than redundancies. l

In numbers

47,709

The additional full time equivalent “infrastructure support” staff employed in the NHS between 1998 and 2008

£200m

The approximate value of a 0.5 per cent cut in prices paid for hospital activity

£1bn

The annual saving the Treasury says can be made through shortened hospital stays and extending the tariff

7.4 per cent

The real terms growth in NHS funds between 2002 and 2008

2.3 per cent

The Institute for Fiscal Studies predicted real terms cut for government departments from 2011-12 onwards