MANAGEMENT COSTS: The way management costs are calculated is confusing.And why is there no consensus on what the NHS needs to operate efficiently? John Appleby investigates

One staff group inexplicably omitted from the regular ministerial chant of 'more doctors, more nurses' is managers.Well, perhaps there is an explanation.Managers are not seen by most of the public as adding any value to the NHS or patient welfare. Indeed, most would like to see fewer managers and, yes, more doctors, more nurses, more beds. . .

That governments of all hues have sought to satisfy the public's desire to cut out unnecessary bureaucracy is not surprising. The very word bureaucracy is pejorative; who wants bureaucrats?

But bureaucracy is in the eye of the beholder; one person's manager - essential to the task of overseeing the implementation of some vitally important policy initiative - is another's bureaucratic pen-pusher, who, by their very existence, is depriving patients of care.

Governments'war on management costs (synonymous with managers/bureaucrats) has been going on for decades. New Labour was probably no better or worse than many previous administrations in its pledge to redirect resources to the front line by cutting wasteful bureaucracy.

New Labour, of course, set itself a target for this exercise:£1bn over five years from May 1997 was to be saved by cutting management costs.

The latest Department of Health report on expenditure says '£1bn that would otherwise be spent on bureaucracy will be freed up for patient care.'

1As intended, this sounds marvellous;£1bn can buy a lot of healthcare.

But is it all it seems? Is the government right to claim to be on target for saving£1bn by April 2002?

Management cost-savings figures were detailed in the DoH's expenditure plans published in 2001.

The report said that over the two years 1997-98 and 1998-99, management cost savings amounted to£292m. By April 2000, the report noted that savings since 1997-98 would amount to almost£500m, and that the NHS was on course for saving£1bn by the end of this financial year.

These figures are not all they might seem. Perhaps more important, they highlight the need to get to grips with a fundamental question: what level of management costs should the NHS expect to bear in order to have a well-managed service?

One problem is the way in which management costs are defined. For example, if management costs are simply defined as the total wages of all senior managers and managers, then between 1997-98 and 1999-2000 these costs rose by over 21 per cent in cash terms - equivalent to£188m - for health authorities and trusts in England. Over this period the number of senior managers rose by over a fifth and the number of managers by 17 per cent. So, no savings there, then. But, of course, management costs are not defined by the DoH in this way.

However, what should and should not be counted as a management cost is not straightforward.

Currently, the DoH identifies HAs, primary care groups, NHS trusts and primary care trusts as the organisational entities that incur costs due to management. For HAs and PCGs, management costs are derived by a process of exclusions.

2Some of these are clearly sensible - for example, payments to providers for healthcare services. But there are many exclusions for which it is hard to find a justification. In essence, these exclusions are almost all related to the implementation of the government's modernisation agenda for the NHS.

To be fair, many of these exclusions generally concern management costs associated with piloting new developments. But even so, it is not obvious why, for example, the management costs associated with setting up PCTs should not be included.

For NHS trusts, similar exclusions apply, with the general definition of a manager being 'someone with a supervisory responsibility - or, [who] performs a support function, eg planning, rather than a clinical or operational function'.

3If defining management costs is difficult, accounting for any savings made from year-to-year seems to be even more contentious. The latest figures from the DoH on management costs were given as a written answer in Parliament by the then minister of health, John Denham, on 9 April.

4Onthe basis of Mr Denham's data, is it possible to confirm the government's assertions of savings to date?

The short answer is no.

First, claims by the DoH that '£0.5bn NHS bureaucracy slashed' rely on the rather tricky accounting used by the Treasury when presenting public spending figures in the March 1999 Budget.

4In other words, savings made in 1997-98 are counted as recurring in subsequent years.

So, the claimed 'within year' management cost saving of£111m in 1997-98 escalates to£222m a year later, and£333m in 1999-2000.

The logic for cumulating or rolling over savings from one year to the next runs something like this:

a cash-releasing saving made in the first year effectively increases the baseline budget for spending on, say, more treatments for patients in that year. The following year that 'extra'money is still available for spending on another group of patients. In effect, over two years twice the number of patients are now treated than would have been the case if no savings were made in the first year.

However, when does the rolling forward stop?

Should, for example, savings from the old costimprovement programmes (CIP) of the 1980s still be counted? Recurrent CIP savings between 198485 and 1988-89 amounted to an average of around£130m a year - a cumulative total of£787m over five years. If equivalent annual savings were made between 1988-89 and 2000-01 and all were rolled forward, the NHS could claim an eye-popping cumulative saving of£19.8bn. At that rate, by 2014 the NHS could exist entirely on recycled savings without the need for any input from taxes. An example, perhaps, of the accountant's financial equivalent of a perpetual motion machine.

A second difficulty with the savings is pinning down exactly what the savings have been within each year since 1997-98. The December 1999 DoH press release noted savings in 1997-98 of£111m, and for the subsequent two years savings of£53m and£40m respectively. The departmental expenditure report noted cumulative savings in 1997-98 and 1998-99 of£292m (£11m higher than the cumulative savings detailed by the press release). And in April this year, in answer to a parliamentary question, Mr Denham provided total management costs figures (detailed in the chart) which, from 1997-98 to 1999-2000, suggest annual savings of£46m,£61m and£75m respectively.

If the most recent figures are taken to be the most accurate, then even using the cumulation method for adding up the savings, by April last year£335m (at 1999-2000 prices) had been saved. That is somewhat less than the savings claimed by the DoH December 1999 press release. It is all very confusing.

While taxpayers want to see every pound of a finite budget used efficiently, it is also clear that no health service can run without managers.

The real question that the rhetorical attacks on bureaucracy have continually failed to address is:

how many managers? This question is very difficult to answer. Two pieces of research touch on this question.

The first, by Naomi Fulop and colleagues at the London School of Hygiene and Tropical Medicine, last year set out to compare NHS trust management costs between areas containing different numbers of healthcare providers. Their very cautious conclusion was that - as a result, for example, of greater sharing and integration of services - areas with fewer providers tended not to show lower proportionate expenditure on management than in those with more providers.

5Using data from 1991-94, Neil Soderlund asked the question: do managers pay their way? His conclusion was that 'overall, management input across and within hospitals does not appear to be associated with improved productivity as measured by average cost per adjusted inpatient episode.'

6In fact, the study suggested that increasing spending on top management was associated with lower levels of productivity and vice versa.More research needed, obviously. But does it take more research to conclude that the battle to reduce management costs flies in the face of the enormous agenda for change in the NHS? Perhaps, given the increases in managers over the past few years, the DoH recognises this to be the case. And perhaps it is managers' inevitable burden to have to put up with the politicians' occasional populist attacks on 'bureaucracy'.

Key points

Government claims that the NHS will have saved£1bn on management costs by the end of this financial year are exaggerated.

Published figures on savings since 199798 vary considerably.

The question of what level of management costs the NHS should be expected to bear to run efficiently needs to be addressed.