Last week's operating framework presented managers with a 'huge leadership challenge' - juggling savings with productivity. But what problems might spending cuts put in their way, asks Sally Gainsbury

NHS chief executive David Nicholson described last week's 2009-10 operating framework as a "vote of confidence in the NHS by the government". And it is true that over the next year the service will, in theory at least, be given more to spend in real terms than it has ever had before.

Around£800m - what the document calls a "significant quantum" - of the£1.8bn surplus the service has accumulated will be spent over the next two years.

That£800m is due to be spent on faster implementation of the priorities set out in the operating framework, which in the main are carried forward from the previous financial year: choice, care closer to home, infection control and reductions in mixed-sex accommodation. It will be down to strategic health authorities to manage competing demands to spend surpluses within the cap - so no wonder even the Department of Health describes the framework as a "huge leadership challenge".

As DH director general of NHS finance, performance and operations David Flory explains: "The objective is very much to put SHAs in the box seat."

SHAs will also have to deal with the uncertainty that will now hang over the status of the remaining£1bn surplus as the service moves towards the next spending review period in April 2011.

The Treasury has already warned that overall public spending growth will be cut from the 1.9 per cent real terms growth rate it has enjoyed for 2008-09 and 2010-11 to just 1.2 per cent a year from 2011 onwards. This will need to include spending on unemployment benefits, which will increase significantly during the recession, leading economists to predict that the service's share of the growth could be close to zero.

In that environment, how could the Treasury ignore the existence of£1bn in health service accounts - let alone a further possible£3bn held by foundation trusts?

In October, HSJ was told the DH had been asked by the Treasury and Number 10 to limit the pace at which the£1.8bn was spent by the NHS. It is from those discussions that the plan to spend£400m next year and the same again the year after has emerged.

last week Mr Nicholson told HSJ there is an "absolutely clear, complete commitment the surplus stays where it is in the organisations". But he is not able to be so clear about the impact individually held balances will have on the headline figure given to the NHS as a whole in 2011.

"We agreed the operating framework with the Treasury and Number 10. I don't know what else I can do. We have done everything we can to secure the position," he said.

Plausible deniability

King's Fund chief economist John Appleby jokes that this leaves the Treasury able to fulfil the 1950s CIA doctrine of "plausible deniability", as it will be impossible to know what settlement the Treasury would have given the health service were it not for the existence of the surplus.

Giving evidence to the Commons health committee last week Mr Nicholson said his focus was on the money the service did have, rather than hypothetically did not.

But therein lies the operating framework's second big unanswered question as it does not spell out precisely what the NHS's contribution will be to the£5bn public spending cuts the Treasury has warned will be made in 2010-11.

The report lists where savings to fund the cuts might come from - including back office efficiencies, collaborative procurement and better preventive care. But it does not give a number, just the term "very substantial".

Experts expect the figure to be between£1bn and£2bn, but the DH has limited its options as to where this will come from by making PCT allocations - which Mr Nicholson told HSJ were "not planning assumptions [but] real allocations" - for both next year and 2010-11.

This means some 80 per cent of the NHS budget is already committed for the year in which the Treasury's cut will be made. That would leave central budgets covering programmes such as capital expenditure and training as target sources for the cut.

The operating framework says that the transfer of primary care trust estates to public-private partnerships will "secure maximum value from the capital budget", which some suspect is code for moving the expenditure off balance sheet, requiring any investment to be made from already stretched revenue budgets.

But it has not gone unnoticed that there is a gap of some£700m a year between the 6.3 per cent annual increases in revenue funding given to the DH for the period 2008-09 to 2010-11 and the 5.5 per cent increases given to PCTs.

The DH denies there is any substantial pot of funds held back from the current financial year, but permanent secretary Hugh Taylor admitted to MPs last week that "a certain amount of money has been held back" for 2009-10 and discussions would be made in due course on what it would be used for.

Thoughts of a£1.4bn DH war chest will come as a relief to some, as such a contingency fund could help guard against any nasty surprises next March when the Treasury publishes more details on its cuts.

But some areas might find the coming years harder to manage than others. The funding targets of all but one PCT have been increased under the new allocation formula which was published alongside the framework.

But some have increased by a lot more than others. In regional terms, the biggest winner is East Midlands, with an average increase in PCT targets of 18.1 per cent. London is the biggest loser with an average increase of just 9.9 per cent (see below).

As HSJ went to press the DH had still not published the breakdown of the new allocations, so it is not clear which formula changes are driving which variations.

But an HSJ analysis has found a small but statistically significant trend to target funds to richer and older areas. Across England, there is a one percentage point increase in a PCT's new funding target for every 10 per cent decrease in income-related deprivation, and slightly less than a one point increase in their target for every one point increase in the proportion of their population over 75.

Now for the budgets

The director of public health at one rural PCT told HSJ: "This takes us out of the 'basket case' overspent set and into the underfunded set, which [is what] we have been arguing all along." But Mr Flory dismissed the implication that the new formula represented the DH's tacit admission that the surpluses and deficits of the 2005-07 period were related to a flawed allocation system, saying it would be helpful "if people paid more attention to their budgets and less to the fancy issues around formulas".

Hospital trusts have perhaps more reason to feel hard done by. In addition to a further squeeze on the increase to the payment by results tariff - from 2.3 per cent in 2008-09 to between 1.7 and 2.2 in 2009-10 and lower still in 2010-11 - trusts face the prospect of a radical and somewhat uncertain new tariff structure from April next year.

Although the DH still appears to be hedging its bets as to whether the new HRG4 tariff will be introduced next financial year, it now looks more likely than not.

Trusts have been concerned that although the tariff is designed to better recognise and reward the higher costs of specialist treatment, early tests have shown that in practice it could do the opposite.

Speaking at the Healthcare Finance Management Association conference in London earlier this month Mr Flory admitted there would be some "ups and downs" when the new tariff came in, but urged health managers to "be part of the solution" rather than stand at the sidelines sniping.

Last week, the DH published the details of the planned tariff prices for "road testing" between now and mid-January.

Although he admits the tariff is not yet perfect, Mr Flory argues that a significant cause of the instability trusts have worried HRG4 will bring will be related either to flawed coding or overpayment under HRG3.5.

But the operating framework gives SHAs the discretion to support providers they feel are unduly penalised by the new tariff. This means hospitals, including foundation trusts, could find themselves relying on SHA patronage to survive.

Mr Flory told HSJ: "The SHAs will manage this period very closely. We will stick close to them to see what issues emerge during this testing period because we still have time in the middle of January if anomalies have come out and we can recognise unintended inconsistencies to build some of that in before we go on 1 April."

SHAs will be able to use the same discretion to help trusts hit by the extra costs of bringing their private finance initiative hospitals on to their balance sheets under new accountancy rules.

The framework makes it clear that although there will be no negative impact from that move on hospital capital budgets (which could be breached by the technical move) they will have to fund any extra revenue costs - capital charges and depreciation - themselves. The DH has estimated that cost to be in the region of£146m a year.

It looks as though that box seat is going to be hot.

Great expectations

Average increase in funding targets under new PCT allocation formula

SHA

East Midlands - 18.1%

Yorkshire and the Humber - 17.9%

North East - 15.2%

West Midlands - 14.7%

East of England - 14.6%

South West - 14.2%

North West - 13.6%

South East Coast - 11.7%

South Central - 11.6%

London - 9.9%