The last time an NHS funding settlement was so tough, wards were axed, quality fell and waits surged. HSJ gathered some of the leading players in healthcare finance to debate how the service will fare in the new economic landscape. Ingrid Torjesen reports

Last month chancellor George Osborne unveiled the comprehensive spending review, claiming he had protected the NHS by awarding a real terms increase of 0.1 per cent per year over four years.

The first test will come when we have the first serious service failure

However, in reality, it is not that straightforward. Mr Osborne also announced a cumulative £3.8bn transfer over four years from the NHS capital budget to fund adult social care. After that transfer, which will peak at £1.1bn in 2013-14, the average real terms change falls to minus 0.1 per cent per year. In addition, local authorities are to take over public health and will be given an additional, and as yet unannounced, proportion of the health budget for this.

An HSJ roundtable explored what the settlement will mean for the NHS at the frontline. It was chaired by HSJ editor Alastair McLellan and his first question was to ask whether the settlement had been a good one for health. The unanimous response was that it was as good as could have been expected in the current financial climate.

But Andy McKeon, managing director for health at the Audit Commission and a non-executive at the National Institute for Health and Clinical Excellence, added that it was not the overall headline figure that was critical, but how much individual primary care trusts would ultimately be given in their spending allocations.

The last time the Department of Health received a settlement as tough as this was in the 1980s. Then, the DH effectively screwed down on pay by rejecting review body recommendations, pushed efficiency and cost improvement programmes and brought in compulsory competitive tendering. The selected limited list was also introduced, which removed a raft of medicines from NHS availability. “Money got very tight and the quality of the service dropped,” Mr McKeon said.

Stephen Thornton, chief executive of the Health Foundation and a non-executive at the foundation trust regulator Monitor, was a junior administrator at the time and recalled the steps managers took.

The first was to close down facilities. “We had what we called painting programmes,” he said. “We closed whole wards and delayed the renovations, and the result was a massive increase in waiting times. Waiting was just not an issue.”

The second was “to give no regard whatsoever to quality” in competitive tendering which was introduced across core services. “We just cut cleaning, catering and every non-medical support service to the bone,” he admitted.

He hopes societal pressure on the service now will prevent that “slash and burn mentality” from returning, but fears there is a degree of political and public complacency that the NHS is all right and that all the trouble will be somewhere else in the public sector. 

Neil Griffiths, director of healthcare at Capita, said organisations, which had experienced real terms growth over quite an extended period of time, now suddenly has to change direction at the same time as “a root and branch” restructuring is going on. “The people you want to be focusing on how we now manage much greater pressures financially are [instead] focused on, ‘what is going to happen to me, where am I going to end up, will I still have a job?’” he said. He predicted that waiting lists would lengthen now that targets had been removed.

Mr Griffiths said the NHS could learn from local authorities, which had received tight funding rises in recent years, and as a result, developed competitive tendering into a much more effective outsourcing mechanism.

Four year fears

Finance directors are relatively confident they could come in on balance this year, said Healthcare Financial Management Association chief executive Mark Knight.

But he warned things would get tougher over the four years. While it might be possible to implement pay constraints initially, by the third and fourth year there will be more pressure in the system.

“Don’t forget people are also likely to take a pension cut and increased pension contributions are a pay cut effectively,” Mr Knight said.

Controlling pay will be vital as 70 per cent of the NHS budget goes on salaries. Mr Knight repeated director general of NHS finance, performance and operations David Flory’s warning that there would have to be a trade-off between pay and jobs - with a 1 per cent pay rise equivalent to roughly 10,000 jobs lost.

Mr McLellan asked whether people thought there would be a freeze in Agenda for Change increments next year. Beverley Bryant, managing director of Capita’s health division, predicted the government would let the decision be made at trust level. Although foundation trusts are already allowed to opt out of Agenda for Change altogether, Mr Thornton said few did so because most did not have the capability to manage the difficult HR challenges involved.

Mr McLellan questioned whether the NHS funding settlement was “cast in stone” or whether more or less money could be available in certain scenarios?

Mr Thornton warned that if the economy did not recover at the speed anticipated, the government might make more public sector cuts. “In those circumstances it is going to be very hard for the NHS to say ‘leave us alone’ again,” he said.

He added that, if the NHS did not accomplish the required £20bn in efficiency savings and had to make cuts, people on the right of the Conservative party would start to want to explore funding options such as co-payments or insurance.

Ms Bryant said this would be particularly likely if waiting times lengthened significantly and patients noticed a decline in quality of services.

However, Mr McKeon predicted it would take two or three years before a real impact on services was evident because of the recent significant growth and next year’s pay freeze and because the impact of restructuring would not be felt until after 2012.

In the current financial climate, Mr McLellan wondered if the Treasury might demand a much higher level of accountability from GP commissioners than the GP community would be prepared to accept.

But Mr McKeon said another significant issue would be GPs’ reluctance to take over commissioning responsibility from financially struggling PCTs. 

Mr Thornton believed the deciding factor in the future financial management of the NHS would be whether the government would really allow local decision making or whether, as in the past, there would eventually be a reassertion of central control.

“The first test will come when we have the first serious service failure and how health secretary Andrew Lansley is going to respond,” he said.

Management could not come from the centre if quality and safety of services was to be maintained, he said. “There has to be much greater reliance on local accountability and delivery. That is one of the reasons why, on balance, what the government is doing with commissioning seems to be the right direction of travel.”

Mr McKeon predicted that there would be a continued move towards block contracts for acute trusts because they were the best way for commissioners to manage risk and give trusts certainty of income. “The tariff is doing its job, I think, in terms of pricing and keeping down cost increases in terms of tariff goods but non-tariff income is now 30 per cent and growing,” he said.

Mr Knight asked Mr McKeon whether he thought next month’s operating framework might allow for payment by results to be suspended. Mr McKeon replied it was more of a question of not specifically banning block contracts.

The Audit Commission’s health chief said that only around £35bn of the £84bn commissioning budget is spent on acute trusts and that half of that goes on non-elective work. “There is an awful lot else that needs to be looked at in PCT spend,” he said, adding that there would soon be a squeeze on mental health and community services, and drug expenditure.

Untying billions

Mr Thornton agreed primary care needs more scrutiny so its efficiency can be challenged. “We don’t even know about the activity, let alone the efficiency of that activity,” he said. “This is where billions of pounds is tied up, and people don’t know how many visits a day district nurses make or how many patients GPs see.”

But Mr Knight pointed out that increasing this scrutiny would be difficult at a time when GPs were having to be persuaded to take on commissioning.

Mr Thornton branded the lack of focus on out of hospital care as “the biggest omission in the whole reform programme”. He said there were growing numbers of GPs who wanted to get hold of the money for out of hospital care as well as the money for secondary care because they don’t see better commissioning of hospital care as the most important area where they could add value. If this happened, those leading-edge GP commissioning groups would begin to look at the relative performance of their colleagues in providing out of hospital care and, if they considered it unacceptable, put the contracts out to tender. “I would like to see a lot more political encouragement for this,” Mr Thornton asserted. “I think this is where there is the greatest opportunity for significant savings and improvement in care coordination.”

Earlier this month the DH announced that NICE would lose its powers to advise PCTs on which drugs should be available on the NHS and that GP consortia would take these decisions locally. Mr McLellan asked how that would impact on NHS finances.

Mr Thornton said: “At the moment, those really difficult local decisions are made by a committee within a PCT and it is all done very professionally. It will be interesting to see how it might be done in a GP consortium.”

However, Mr Griffiths doubted whether many GPs would make such decisions. “The national commissioning board will reserve the right to take functions back where it believes that those aren’t being conducted adequately. Equally there is increasing mention of consortia being allowed, if they choose, to hand back services. That might be quite a lot of services in some areas where there isn’t quite the enthusiasm that there is in other parts of the country.”

The national commissioning board is due to be established in shadow form next year. Mr McLellan asked what impact it was likely to have.

Mr Thornton wanted a political statement made on the philosophy of the board and the related reforms. “If you believe big society and the Cameron view, it is a much more locally devolved separate arrangement,” he said. “You read other stuff and you think we are putting back a national coal board.”

It was very unclear what powers the board would have, Mr McKeon added.

“What they do with regional services is going to be very interesting because that enables them to take a bigger or smaller slice of commissioning. Taking more specialised services away from consortia is a way of managing risk.”

Mr McLellan asked what strategies and tactics NHS organisations should adopt to enable them to deliver the best possible services and what role the private sector had to play.

Local government had been working with companies such as Capita in areas including HR and finance to help achieve economies of scale for some time, Ms Bryant said.

She continued: “We need, not just one national provider [of these services], because we know that doesn’t work [for the NHS], but a few large providers. It’s a big change programme so the financial benefit has to be large enough for it to be worth going through. I don’t think it is a one to two year saving, it is a five to 10 year saving.”

Mr McLellan asked whether she was proposing a model similar to the national programme for IT, where a number of local service providers were given the responsibility for delivering programmes across a region.

Ms Bryant said that dictating five or six providers from the top would not work. The best shared services were developed when organisations worked with their neighbours because there was “pure ownership”. However, she admitted this approach could be time consuming and creating hundreds of such locally owned services might not produce the levels of savings required.

She emphasised the need for a mixture of sophisticated solutions. While pure outsourcing worked well for generic services such as finance and IT infrastructure, services such as HR needed a local understanding of Agenda for Change and someone on site to deal with personality issues.

Mr Griffiths estimated that the proportion of administrative and clerical services that might be shared in a typical trust was around 25 per cent. The remaining 75 per cent were patient administrative functions and there was also potential for savings here but through a different model.

Ms Bryant said: “Managing appointments, doing the discharge letters, making sure that whole pathway works is central to care, but it is not treated as central to care. I think that is where the private sector can come in, because that is the bread and butter of what we do.”

Mr Knight said: “I don’t want to diminish the savings that can be made by shared services and better procurement, but for the real big gains it is all about clinical engagement, improving the patient pathway, putting the patient at the centre, doing it right first time and making sure clinicians are an engaged part of the team.”

Mr Thornton said specifically medical rather than clinical leadership was needed and that this needed to be directed towards four particular areas:

  • Reconfiguration of services such as stroke and trauma had to be got to grips with, because there were plenty of opportunities for improving quality.
  • Industrial scale quality improvement, particularly the way in which hospitals are organised. “Why is a general hospital, where elderly patients are largely admitted between 8am and midnight seven days a week, staffed Monday to Friday 9am-5pm, and your least experienced technicians - your junior doctors - are the only people available out of hours?” he asked. “It is complete nonsense!”
  • Better co-ordination between hospital and out of hospital care because there are financial and quality benefits.
  • Shared decision making with the patient. “All the evidence shows that if you share the decision making with the patient, the patient chooses the more conservative and least costly option and often the one that is better for them,” he explained.

“Surely the heart of managing the NHS should be managing the clinical processes,” Mr Thornton concluded.

“It is interesting that it is the one that we haven’t got our head round yet,” he said.


  • Andy McKeon, managing director health, Audit Commission, non executive NICE
  • Neil Griffiths, director of healthcare, Capita
  • Stephen Thornton chief executive, the Health Foundation, non executive Monitor
  • Mark Knight chief executive, HFMA
  • Beverley Bryant, managing director, healthcare, Capita
  • Alastair McLellan, editor HSJ