MEMORANDUM
BY THE
NHS CONFEDERATION (PEX 20)
The NHS Confederation is the independent membership
body for the full range of organisations that make up the modern
NHS.
We have over 95% of NHS organisations in our
membership including ambulance trusts, acute and foundation trusts,
mental health trusts and primary care trusts plus a growing number
of independent healthcare organisations that deliver services
on behalf of the NHS.
We are pleased to have the opportunity to submit
evidence to this inquiry.
1. EXECUTIVE SUMMARY
— NHS finances are under pressure from
rising demand and inbuilt inflationary pressures. The Government's
commitment to protect the NHS budget is welcome, but our Dealing
with the downturn report[34]
estimates that with little or no cash increase the NHS needs to
plan for the equivalent of a cut of up to £15 billion over
five years from 2011-12.
— Cost pressure on social care budgets
will inevitably mean more NHS funds being spent to address people's
social care needs. While greater joint working at a local level
will help, a robust and sustainable settlement for social care
is urgently needed if the NHS is going to find the necessary savings.
— Political and NHS leaders need to be
realistic about the implications of the financial situation for
patients, public and staff. Key implications are:
— the level of financial risk on acute
trusts will increase and some healthcare providers will experience
significant difficulties;
— the 45% cut in management costs outlined
by the Government will only make a small contribution to the savings
required. Difficult decisions will be needed, and high quality
management and leadership for the health service will be central
to improving productivity;
— job reductions are inevitable in a labour
intensive health service, including clinical posts; and
— changes in how resources are allocated
at a local level will require a difficult public discussion about
real terms reductions or even cuts in some local areas.
— NHS organisations will experience significant
difficulties in accessing the capital investment needed to replace
unsuitable buildings or support reconfiguration of services. Some
kind of collateral will be necessary to support a wide-ranging
investment programme in the medium term—perhaps ultimately
provided by a banking function as a bondholder, acting on behalf
of the Secretary of State.
2. DEMAND, COST
AND EFFICIENCY
2.1 Increasing demand for NHS services is
likely to continue due to long-term trends in ageing, increasing
disease burden from improved survival and rising fertility. Our
joint report Mental health and the economic downturn highlighted
evidence that demand for mental health services is likely to increase
as a result of the recession.[35]
2.2 The following statistics for England
provide a snapshot to help illustrate increasing demand:
— In 2009-10 there were 20.512 million
A&E attendances, up from 14.629 million in 1999-2000.[36]
— In 2009-09 there were 6,621,810 elective
hospital admissions, up from 4,954,763 in 1998-99.[37]
— In 2008-09 there were 60.5 million outpatient
attendances (18.7 million first attendance, 41.8 million subsequent).
This compares to 16.5 million and 37.8 million in 2007-08.[38]
2.3 The NHS also faces a significant degree
of inflationary pressure:[39]
— Health prices tend to rise faster than
those in the wider economy.
— New drugs and devices are generally thought
to contribute cost pressures of up to 0.5%.
— Clinical Negligence Scheme Trust fees[40]
will increase, particularly if low interest rates make it more
expensive to finance annual compensation payments.
2.4 Analysis by the Kings Fund has shown[41]
that the estimated costs of implementing frameworks designed to
reduce variability in service quality and raise standards are
significant, as are the costs associated with policy decisions
such as reducing waiting times.
2.5 These pressures mean that the NHS would
need its budget to increase significantly above inflation just
to stand still. The Government's commitment to protect the NHS
budget is welcome, but the NHS—in common with the rest of
the public sector—will still experience a severe expenditure
squeeze lasting several years. In our Dealing with the downturn
report[42]
we estimated that with little or no cash increase the NHS needs
to plan for the equivalent of a cut of up to £15 billion
over five years from 2011-12. Sir David Nicholson KCB CBE, NHS
Chief Executive in England, has suggested this could be up to
£20 billion.
3. THE HEALTH
AND SOCIAL
CARE INTERFACE:
PRESSURE ON
NHS FINANCES
3.1 The cost pressures on the health budget
and the social care budget cannot be seen in isolation from each
other. The increased pressure on social care budgets that we are
seeing at present reduces the amount of preventative work that
can be done to help people stay as independent as possible for
as long as possible. As a result, it is likely that more people
will need unscheduled NHS care and there will be pressure for
the NHS to invest in the preventative work that social care budgets
can no longer cover. There is also a risk that "bed blocking"
will increase due to delays in discharging patients into social
care.
3.2 Whether in the form of unscheduled care
or preventative work, health budgets will be spent on social care.
This may be appropriate in some cases but will need to be carefully
assessed at a local level to make best use of available resources
across health and social care. The impact of this cost pressure
is likely to grow as our population ages and the number of people
with complex long-term conditions—and multiple conditions—grows.
3.3 We support the development of place
based budgeting based on strong local partnership working and
open book accounting. Work to reduce the burden of bureaucracy
may be necessary to enable pooling of budgets to become widespread,
and we would welcome an opportunity to work with government departments
and other stakeholders to help achieve this.
3.4 The existence of shared, flexible and
personalised health and social care packages will also be vital;
at present these are available to relatively few of those who
would benefit. This will require good collaboration between local
authorities and the GP consortia proposed in the White Paper on
health. The introduction of GP consortia may present more opportunities
for "bottom up" joint working, but challenges may emerge
if local authorities and GP consortia are not coterminus (that
is, they do not cover the same local areas).
3.5 A robust and sustainable settlement
for social care is urgently needed if the NHS is going to find
£15-20 billion of savings needed in the next four years.
The NHS Confederation looks forward to working with the commission
on social care. We want to see a sustainable and universal social
care system that gives people the reassurance of security in their
old age and the NHS the capacity to work with local government
and plan care for patients through their whole care pathway.
4. THE IMPLICATIONS
OF THE
£15-20 BILLION EFFICIENCY
CHALLENGE
Realism is required about the implications of
the efficiency challenge for patients, public and staff, and some
key implications are set out below.
Acute trusts and overheads
4.1 The reforms proposed in the White Paper
on health are intended to increase patient choice, and together
with the introduction of GP consortia this may result in changes
in referral patterns which lead to variations in demand for hospital
services. It is difficult for hospitals to adapt to even relatively
minor reductions in demand since around 80% of their costs are
in fixed costs and overheads (for example, buildings, equipment
and staff). Variations in demand will increase the level of financial
risk facing providers, and some providers are likely to experience
significant financial difficulties.
4.2 This will happen as acute trusts are
already starting to experience a difficult financial environment.
In recent years the tariff has tended to be inflationary and some
providers have been able to generate surpluses. However from 2010-11
the tariff has been frozen and some changes in how it is constructed
appear to have removed money from it for many providers. A cap
on payments for emergency admissions, which have continued to
rise, quality incentive schemes and a recently announced initiative
to fine hospitals for readmissions have further squeezed the income
available to providers.
The challenge for commissioners
4.3 Commissioners will receive a real terms
increase in funding, but this will not be sufficient to meet the
increase in costs due to the factors set out in section 2. They
also face specific cost pressures due to:
— The impact of changes to the way the
costs of patient treatments are counted (Healthcare Resource Group
(HRG) 4 appears to be inflationary for many commissioners).
— The impact of changes to the National
Institute for Clinical and Health Excellence (NICE) appraisal
process for end of life medicines.
— The operating framework sets out requirements
for PCTs to set aside 2% of spend non-recurrently on top of contingency
reserves.
— Savings from reductions in the tariff
for emergency admissions have gone to SHAs rather than PCTs.
Management costs
4.4 Management costs need rigorous scrutiny
and there are savings to be made here. However good management
plays an important role in improving productivity, and it is clear
from our conversations with leading GPs and hospital clinicians
that they recognise and value the role of high quality management
and leadership in delivering an efficient and well run service.
4.5 The White Paper on health recognises
that the efficiencies needed cannot be achieved simply by cutting
management costs. In the operating framework for the NHS[43]
savings in Strategic Health Authority (SHA) and Primary Care Trust
(PCT) management costs are required equating to savings of around
£0.85 billion (45%) by 2013-14. As a proportion of the £15-20
billion overall efficiencies required, this equates to only about
4.25-5.7%t. Further savings will be made in management costs within
acute trusts; however these figures make clear that the bulk of
the efficiency savings will have to be found elsewhere.
Jobs
4.6 Providers are looking at all areas of
cost to release savings to spend on patient care, and in a labour
intensive service this will inevitably include job numbers. Job
reductions have been concentrated in non-clinical areas so far,
but clinical posts cannot be completely protected as they make
up the majority of the workforce and account for most of the pay
bill. NHS employers are implementing approaches to employment
reductions that seek to avoid compulsory redundancies, retain
talented staff and minimise the impact on services.
4.7 It will not always make sense for providers
to reinvest efficiency savings in maintaining staff numbers. Reinvestment
may be in drugs and therapeutics rather than services run by staff.
Reinvestment may also be in purchasing services from other providers,
and staff will not necessarily be suitable for transfer. Furthermore,
improved efficiency will sometimes involve doing the same work
for lower cost rather than more for the same or less.
4.8 The White Paper on health proposes that
following the current pay freeze the current national framework
should be reviewed with a view to providing much greater local
flexibility for local employers. NHS Employers will be working
with the Department of Health on the changes that are needed.
We need to be realistic about the inevitable trade-off between
pay levels, including pensions, and jobs.
5. RESOURCE ALLOCATION
IN THE
NHS
5.1 Resource allocations for PCTs are based
on a national formula which takes account of the health needs
of the local population as well as geographical variations in
costs. The formula is complex and has been contentious. The formula
has been subject to a number of changes over the years. Most recently
following a ministerial decision, from 2009-10 15% of funding
has been designed to take account of health inequalities. The
current government proposal in the White Paper on health to separate
out the public health budget from health service commissioning
budgets could help provide more clarity in this area, but strong
accountability mechanisms will be important.
5.2 Individual PCTs allocations have been
moved incrementally from historical funding levels towards their
weighted capitation target funding. These shifts in allocations
are phased in through the pace of change policy, which is decided
by Ministers and recognises that historic patterns of treatment
and referral take time to shift. In recent years the growth in
the NHS budget has enabled relatively painless phasing by varying
growth levels depending on whether a PCT is below or above target;
it has not been necessary to cut individual PCTs' funding. However
with reductions in levels of growth for the NHS going forwards,
this approach may no longer work.
5.3 The shift to GP-led commissioning proposed
in the White Paper on health means a new formula for allocating
resources will be needed. This formula must be transparent to
ensure its legitimacy and be seen to be free of political influence,
if it is to avoid the criticisms faced by the current funding
formula. Funding allocations should reflect the characteristics
of the patients registered with GP consortia, and work by the
Nuffield Trust[44]
to develop person based resource allocations demonstrates that
this should be possible. Unregistered patients will also need
to be factored into allocations, and this is recognised in the
White Paper on health.
5.4 The move from 151 PCTs to a potentially
significantly larger number of GP consortia would be likely to
mean there are more commissioning organisations experiencing a
significant variation between the current spend and a fair allocation.
Getting the pace of movement to fair shares right will be critical
to the success of GP consortia. In the next few years there will
be very limited if any real terms growth, so a difficult public
discussion is needed to make clear that resource shifts will mean
real terms reductions in allocations or even cuts in some areas.
6. DEMAND MANAGEMENT
6.1 All PCTs across the country have put
in place measures to seek to manage demand more effectively within
the NHS. These usually aim to avoid unnecessary hospital admissions
or outpatient care by improving community based care. This can
be for people with long term conditions or for one-off episodes
of care.
6.2 It is difficult to measure the effectiveness
of these initiatives at national level. Often they have been relatively
small scale, targeted at very specific groups of patients. At
national level, hospital activity has continued to rise, but there
are a number of potential explanations including:
— Demand management initiatives have been
too small scale to make a detectable impact.
— These initiatives have been successful,
but that thresholds for treatments have been lowered so that spare
hospital capacity is filled up.
— These initiatives have failed to deliver
any impact.
6.3 To some extent the proposals in the
recent health White Paper are predicated on the assumption that
GP commissioning consortia will be more effective than existing
PCTs in managing demand. To be successful, it will be important
for any new initiatives to be of sufficient scale to allow fixed
hospital costs to be removed. There will also need to be close
analysis of the relative costs of community based services compared
to hospital services. We should be wary of casual assumptions
that community based care is inevitably cheaper than hospital
care.
7. CAPITAL INVESTMENT
7.1 Although there has been a significant
programme of building, capital funding for further maintenance
still needs to be found. In 2006-07 the total backlog maintenance
costs for NHS organisations was £3,740 million. 8.2% of backlog
maintenance was high risk, and 25.2% represented a significant
risk.[45]
Capital funding is often needed to enable efficiency savings by
supporting service reconfiguration, but NHS organisations may
experience significant difficulties accessing capital in future.
7.2 Trusts often cannot recover the actual
costs of capital investment in new buildings through the tariff.
When new facilities are required they are significantly more expensive
than the buildings they replace because building standards have
changed over time to recognise changes in patient expectations
about privacy and dignity, new medical technology, infection control
and a range of other factors. In addition to being more expensive
to build, new buildings have high depreciation charges. The way
the tariff allows for capital requirements fails to reflect the
actual replacement value of the NHS estate, in part because the
calculations on which it is based include a large number of old
buildings[46]
which are already depreciated, as work by the King's Fund[47]
has demonstrated. There is a need to revise how capital costs
are treated in the tariff to enable investment in modern facilities
that are fit for purpose.
7.3 We expect the Department of Health to
have little capital available to lend to NHS trusts in the next
few years. However it is extremely difficult to make a commercial
case for capital investment in new NHS facilities, and this capital
is more expensive. Most healthcare provision is labour intensive
and there is limited scope for capital investment to reduce the
amount of labour that is needed, which means it is often not possible
to generate the level of cash savings which would pay for the
investment. NHS organisations can require more capital than they
could borrow privately (for example, their revenue stream might
not be enough to get a commercial loan to cover the cost of rebuilding
part of a hospital).
7.4 The long term nature of Private Finance
Initiative (PFI) contracts appears to be less suited to the new
more uncertain environment. Some hospitals' income may fall in
future as patients choose other hospitals or GP consortia shift
work. Hospitals with existing PFI contracts have much less flexibility
to reduce running costs, as payments to the PFI consortia are
relatively inflexible and can be as high as 18 per cent of turnover.
The long term nature of the contract, and often the design of
the buildings themselves, limits the flexibility of providers
to reduce the size of their estate and therefore their costs in
response to changes in the market.
7.5 The cost of the capital is often less
of an obstacle than the on-going revenue consequences; in other
words, the ongoing costs associated with paying back capital investment,
allowing for depreciation, staffing new facilities, heating and
lighting. There are a number of examples where government has
made capital available but NHS organisations have been reluctant
to take it up.
7.6 The Treasury sets an expenditure limit
for capital (DEL) for the Department of Health. All capital spending
by Foundation Trusts counts against this DEL but the Department
of Health has no method of directly controlling this spending.
This was not viewed as a problem when Foundation Trusts were introduced,
but will become more significant since the Department of Health
has less capital available just as all trusts become Foundation
Trusts. The White Paper on health proposes that the role of Monitor
in regulating borrowing should be removed from 2013.
7.7 The solutions to how trusts can be enabled
to access the investment capital they need are not at all clear
and there is a need for further policy development in this area.
Providers' own balance sheets are unlikely to be of sufficient
scale to support a wide-ranging investment programme in the medium
term, and some kind of collateral will be necessary—perhaps
ultimately provided by a banking function as a bondholder, acting
on behalf of the Secretary of State.
October 2010
34 NHS Confederation (2009). Dealing with the downturn:
The greatest ever leadership challenge for the NHS? NHS Confederation,
p 3. Back
35
Royal College of Psychiatrists, Mental Health Network, NHS Confederation
and London School of Economics and Political Science (2009), Mental
health and the downturn: National priorities and NHS solutions,
p 7. Back
36
Department of Health statistics, see http://www.dh.gov.uk/en/Publicationsandstatistics/Statistics/Performancedataand
statistics/AccidentandEmergency/DH<_>077485 Back
37
Health Select Committee, Public Expenditure on Health and Personal
Social Services 2009, 20 January 2010, HC 269-I 09-10, Memorandum
received from the Department of Health containing Replies to a
Written Questionnaire from the Committee, Ev 129. Back
38
NHS Information Centre (2009). Hospital Outpatient Activity, 2008-09. Back
39
NHS Confederation (2009). Dealing with the downturn: The greatest
ever leadership challenge for the NHS? NHS Confederation,
p 2. Back
40
The Clinical Negligence Scheme for Trusts (CNST) provides a means
for NHS Trusts to fund the cost of clinical negligence litigation
and to encourage and support effective management of claims and
risk. Membership is voluntary and open to all NHS Trusts and Primary
Care Trusts in England. Back
41
Appleby J et al (2010). Improving NHS productivity:
More with the same not more of the same, pp 8-10. Back
42
NHS Confederation (2009). Dealing with the downturn: The greatest
ever leadership challenge for the NHS? NHS Confederation,
p 3. Back
43
Department of Health (June 2010). Revision to the Operating
Framework for the NHS in England 2010-11. Back
44
Person Based Resource Allocation http://www.nuffieldtrust.org.uk/projects/index.aspx?id=338 Back
45
HC Deb, 1 September 2008, c1754W. Back
46
In February 2009 the Government claimed that 20% of NHS buildings
pre-dated the establishment of the service. HC Deb, 2 February
2009, c606. Back
47
Palmer, K (2005). How should we deal with hospital failure?
Facing the challenges of the new NHS market. The King's Fund,
pp 42-3. Back
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