While health service investment has soared, the pressure on organisations to secure financial control may be driving down productivity. Peter Smith unravels the paradox

Underlying the recent debates about the financial condition of the English NHS is a nagging concern that it does not provide good value for money. To what extent does the modern NHS use taxpayersi money wisely? If there are inefficiencies, are they caused by poor system design or inadequate local management? Do we have the information to be able to answer these questions? And if so, what are the remedies for eliminating poor value for money?

As an initial contribution to the debate, The Health Foundation has published Value for Money in the English NHS: summary of the evidence. The report summarises evidence from a wide range of sources, and examines how much extra money has been made available to the NHS, identifies what the extra money has been spent on, describes the improvements that have been made in the volume and quality of healthcare, and discusses the implications for NHS productivity.

On the output side, there is a lot of good news. The Office for National Statistics estimates that since 1999 the volume of NHS activity has increased by about 3.8 per cent a year. But patients are interested in benefits as well as treatments.

When the ONS introduces some measures of clinical qµalityi into the equation, the improvement in outputs is more like 5 per cent a year. This is largely due to major improvements in post-operative mortality rates, particularly in more recent years.

In addition to improved survival, many claim there have also been improvements in the quality of life following NHS treatment.

Unfortunately, this is difficult to substantiate. The NHS has failed to introduce routine measurement of patient outcomes from treatment, and the report recommends that this be urgently rectified.

A glimpse of what can be achieved has been shown in work by my colleagues at York Universityis centre for health economics and the National Institute for Economic and Social Research, which shows how outcomes data can be incorporated into productivity measures.

They use patient-reported outcome measures collected by BUPA for a limited range of procedures to confirm that - for this limited patient group - health outcomes have indeed improved over time.

Productivity push
Yet these improvements in outputs have been matched if not exceeded by the increase in inputs. Depending on the methodology used, the ONS estimates that NHS inputs have increased by between 4.8 and 5.5 per cent per year since 1999. The implication is that productivity - the value for money of the NHS as a whole - has not changed markedly over recent years.

So where has the extra money gone? The most recent annual report of the NHS chief executive suggests that about 33 per cent of the extra NHS expenditure has been consumed by extra pay and about 18 per cent by capital expenditure and staff training. One must hope that these very large investments will in future be converted into extra activity and better patient outcomes. Indeed, the intention was that implementation of the new contracts for doctors and Agenda for Changeshould be conditional on such improvements.

But while there should be no objection in principle to using pay to incentivise enhanced performance and stimulate labour supply, rigorous evidence on whether this has contributed to value for money has yet to emerge. In the meantime, sceptics will continue to argue that pay increases have been an unproductive drain on NHS funds.

The report does not refer directly to the recent problem of overspending. This is a matter of for financial management rather than a productivity issue. Yet the current travails may have a profound impact on productivity. For example, payment by results is in principle intended to increase the productivity of individual providers by incentivising more efficient treatment. But insisting on strict adherence to NHS budgetary limits for individual NHS organisations may paradoxically compromise this objective.

For example, if significant numbers of PCTs constrain the volume of referrals, thereby leaving providers with slack capacity, financial control may be secured at the expense of poor productivity levels in the current financial year.

Improving value
There are four system-wide requirements for reliably improving value for money: incentives, information, capacity and an enabling culture.

From a value for money perspective, perhaps the strongest element of recent reforms has been the incentives to improve efficiency on the provider side (such as payment by results), the more competitive provider market and the less forgiving financial regime.

These reforms are inevitably forcing providers to focus more carefully on efficiency. Yet the commissioning challenge faced by PCTs is far larger. Indeed in some ways, the central role of PCTs is precisely to secure the highest health value for their limited money.

Countless value for money questions confront PCTs. To what extent is integrated care being designed with value for money in mind? Are preventive measures (such as statin prescribing) being deployed optimally relative to curative care? Can PCTs promote value for money effectively through practice-based commissioning? How do PCTs reconcile their role on health inequalities with the value for money agenda? Is National Institute for Health and Clinical Excellence guidance helping in the pursuit of value for money, or is it an unhelpful constraint? In short, it is not yet clear whether the constraints and incentives placed on PCTs unambiguously promote the pursuit of value for money.

As noted above, it is almost certainly the case that current information resources are inadequate for PCTs to answer all the questions necessary for good commissioning. Most fundamentally, PCTs need to know what wealth gains they are securing from all the activities they purchase.

Yet without adequate patient outcomes data, it is difficult to see how they can fulfil their central resource allocation role. Equally, if patients are to act as agents of improvement, through the choices they exercise, they too will need far better information on provider quality than currently exists.

Perhaps the weakest element of recent reforms has been creating and nurturing the managerial capacity necessary to promote value for money.

In this respect, to an outside commentator, the demise of the Modernisation Agency was a surprise, as the active approach it adopted towards the sharing of best practice is likely to have been an important element in the rapid diffusion of new value-for-money ideas.

The Appointments Commission is seeking to introduce more appropriate value for money expertise and board-level awareness. But it remains to be seen whether the NHS will be capable of integrating management accountants, operational researchers and statisticians into its everyday operations.

Little in the value for money domain can be secured without a favourable organisational culture that secures the widespread acceptance of value for money principles among staff and patients. Clinicians and managers should recognise the legitimacy of integrating financial considerations into clinical decision-making, perhaps by engaging clinicians more actively in financial management.

Use of NHS resources that does not result in adequate health gain for patients should be considered unethical when other patients could benefit from the wasted resources.

On the face of it, this taxpayer perspective appears to deviate from the currently fashionable exhortation on patient centredness. Yet it is an equally important element of a publicly funded health system.

Ups and downs
Even setting aside the very high cost of recent pay settlements, it should perhaps not be surprising that NHS productivity shows a decline when activity is increasing. If the NHS is run with any rationality, it will always focus on the patients who it can secure the maximum health gain for.

In periods of expansion it can afford to relax treatment thresholds for patients that it may not have treated in the past. The health gains from treatment (relative to costs) will be modest for these patients, who are likely to be older, or require treatments with poor cost-effectiveness ratios.

Other things being equal, the inclusion of such original patients in NHS activity inevitably depresses its productivity relative to periods when resources were more constrained.

Conversely, when expenditure growth is curbed, one would expect to see a productivity rise.

In short, the easiest way for the NHS to improve productivity may be to constrain its budget. Whether patients and taxpayers are prepared to sacrifice reductions in NHS activity in order to secure such a productivity rise is a matter for politicians to determine.

Our report notes many important challenges in measuring value in healthcare, such as proper measurement of physical and human capital inputs, the measurement of healthcare quality and the treatment of ward to measurei areas like mental health.

Until these are addressed, it may well be the case that we have access to only partial and biased value indicators. Technical measurement and data collection issues will be a challenging but essential agenda for analysts over the coming years.

It is becoming clear that the careful measurement of productivity plays a central role in deciding how much taxpayersi money to spend on healthcare, in assisting purchasing decisions, and in holding the NHS to account for its spending.

So the pursuit of better measurement of value should therefore play an important part in shaping the future NHS and informing public debate.

Peter C Smith is director of the Centre for Health Economics, York University. Value for Money in the English NHS: summary of the evidenceis available at www.health.org.uk