More than 50 trusts face being unable to cover the costs of entire inpatient departments, economic modelling by the Department of Health suggests.

Whole departments - or service lines - at 58 hospital trusts will cease being able to cover their costs if commissioners succeed in cutting “low priority” treatments at just half the rate recommended by best practice.

The modelling calculates how expected reductions in the volume of hospital procedures will increase unit costs as hospital departments lose economies of scale and are left with fixed costs, such as buildings.

HSJ used the model on individual hospitals to predict the impact of primary care trust plans to restrict low priority treatments such as tonsillectomies and knee surgery.

The worst hit departments are trauma and orthopaedics, gynaecology, and ear, nose and throat, with 66 departments in all moving from generating small surpluses to running losses on their tariff based work as high as 8 per cent.

The econometrics for the DH’s model was undertaken by PricewaterhouseCoopers.

The management consultants’ lead health economist on the project, Ed Bramley-Harker, told HSJ changing commissioning patterns would “have a significant effect on the financial position of providers”.

He said: “As a provider changes the volume of a service being delivered, this will impact the unit cost of delivering that service.”

The PwC work forms the basis of a toolkit published by the DH intended to help commissioners and providers discuss proposed changes.

Its calculations are based on an analysis of both the relationship between unit costs and volume for different service lines in the NHS and the proportion of costs that are fixed or semi-fixed - see the attached diagrams in the Related Files column.

HSJ has used the most conservative calculations in the model to predict the impact of proposed cuts in low priority treatments on NHS hospitals.

The proposed cuts are based on the 2009 McKinsey report on NHS productivity, which have been absorbed into recently published PCT commissioning plans. These plans target 226 separate procedures in the NHS tariff as low priority.

Although McKinsey recommended sweeping cuts of up to 90 per cent for some procedures, HSJ has based its analysis on only the midpoint recommendation made by the consultants.

For Hinchingbrooke Health Care Trust, for example, a 22 per cent reduction in specific “low priority” orthopaedic procedures including joint surgery would contribute to an 11 per cent overall reduction to its trauma and orthopaedic service line activity and a 16 per cent reduction in its tariff income.

However, according to the DH model, the trust’s costs would not reduce by the same rate due to a minimum of 24 per cent of costs within the service line being fixed.

The model estimates the trust’s costs would only decrease by 9 per cent, which would leave it making an 8 per cent loss.

The trust’s director of finance, informatics and performance Dean Westcott said it was currently negotiating contracts with commissioners and was focusing on redesigning pathways rather than decommissioning specific procedures.

“Should our commissioners wish to decommission certain services, we would look at the implications on a case by case basis,” he added.

HSJ’s analysis suggests Winchester and Eastleigh Healthcare Trust’s ENT and trauma and orthopaedics service lines would move from making surpluses to recording losses of 6 and 7 per cent respectively.

Trust deputy director of finance Lisa Thomas said it was aware of its “challenges” and was “trying to work with the PCT rather than have these things imposed on us”.

She said a particular problem was the proportion of hospital costs which were fixed. This meant that, when patient volumes and income were cut, up to 50 per cent of costs were retained.

She said: “If you take one patient off a ward you can’t close anything or save any money.”

In order to recoup savings the trust has calculated it needs to close beds in groups of six - enabling it to shut an entire ward bay and save on staffing costs.

NHS Confederation acting chief executive Nigel Edwards said there was a danger that commissioners could do little more to help local providers than simply give them as long as possible to implement planned changes.

He warned paying premiums to help smooth a service change could be seen as anti-competitive by the new NHS economic regulator, Monitor.

East Lancashire Hospitals Trust director of finance Jonathan Wood said recent audits had suggested any reduction in low priority procedures would have only a “limited effect” on the trust.

Download the full results of the analysis here.

The Worst Hit Departments

Key: T&O = trauma and orthopaedics; Gynae = Gynaecology; ENT = ear, nose and throat

ProviderService Line% modelled cut% loss under DH analysis
Hinchingbrooke Healthcare TrustT&O-11.3-7.9
South Tees Hospital FTT&O-10.3-7.8
James Paget University Hospitals FTGynae-15.5-7.4
Winchester & Eastleigh Healthcare TrustENT-27.8-7
Queen’s Elizabeth Hospital King’s Lynn TrustGynae-13.6-6.3
East Lancashire Hospitals TrustGynae-12-6.3
Winchester & Eastleigh Healthcare TrustT&O-9.5-6
Barnsley Hospital FTT&O-8.8-6
Worcestershire Acute Hospitals TrustT&O-10.7-6