Public expenditure on health and care services - Health Committee Contents

4  Meeting the Nicholson Challenge to 2015 and beyond

53.  The Government's view has consistently been that the Nicholson Challenge should be addressed in three ways:

  • Nationally-driven changes (reductions in Departmental central budgets, pay restraint, reductions in administrative costs of departmental arms-length bodies, clustering and abolition of primary care trusts and strategic health authorities) - to account for approximately 40% of total savings (up to £8bn)
  • Provider-driven changes (greater efficiency and productivity in NHS trusts and NHS foundation trusts) - to account for a further 40% of total savings (up to £8bn)
  • Transformational changes (redesign of services to reduce costs and improve the quality of care) - to account for the remaining 20% of total savings (up to £4bn by 2014-15).[44]

54.  The Committee has already referred at paragraphs 23 and 24 to its reservations about this approach. While nationally driven initiatives have certainly produced some short term cost savings and may have produced some sustainable efficiency gains, the response to the Nicholson Challenge necessarily involves large scale transformational change. The Committee believes that the case for this transformational change needs to be better made and better understood.

Our findings in 2012

55.  In our previous inquiry into public expenditure, which reported in January 2012, we noted a number of recurring concerns, many of which shared a common theme: a disconnect between the views of those responsible for delivering services and the relative optimism expressed by the Government.

56.  In particular we were concerned to receive evidence which suggested that NHS organisations were according the highest priority to achieving short-term savings which allowed them to meet in-year financial objectives at the expense of planning service changes which would allow them to meet the financial and quality objectives to be required of them later in the Spending Review period.[45] We warned NHS bodies against making savings through 'salami-slicing' existing processes rather than rethinking and redesigning the way services are delivered, and we were sceptical about the degree to which reductions in the Payment by Results tariff for NHS provider services could properly drive service change of the scale required.[46]

Progress in meeting the Nicholson Challenge

57.  2011-12 was the first year in which NHS bodies were required to deliver outcomes from their plans made under the QIPP (Quality, Innovation, Productivity and Prevention) programme, the programme designed by the Department of Health to meet the Nicholson Challenge by "making savings while driving up or maintaining quality".[47] The Department reported to us that efficiencies and savings equivalent to £5.8bn had been made through QIPP in 2011-12. Its breakdown of QIPP savings by QIPP category and strategic health authority cluster is set out in Table 1.Table 1: QIPP data for 2011-12

QIPP category
SHA Cluster


Midlands & East


North of England


South of England


Acute services556 818801 6682,843
Ambulance services 827 2316 74
Community services 112122 88141 463
Continuing healthcare 2350 4343 159
Mental health and learning disabilities services 133130 10176 440
Non-NHS healthcare (including reablement) 3729 5041 157
Prescribing 214 142229 115700
Primary care, dental, pharmacy, ophthalmic 59126 117115 417
Specialised commissioning 5657 7270 255
Other32 122107 46307

Total (£m)






Source: Department of Health (Ev 60, Table 1)

58.  The Department also reported that the NHS had maintained or improved quality and access standards in a number of categories: for instance, infection rates were at their lowest since the introduction of mandatory surveillance and NHS performance measures for accident and emergency treatment, cancer care, dentistry and waiting times had all been met.[48]

59.  Sir David Nicholson, NHS Chief Executive, characterised the reported achievements of QIPP in 2011-12, and their valuation, as "a reasonable assessment of both the demand savings we [the NHS] made and the real cash savings that we made [in 2011-12]."[49]

60.  Following our evidence session with the NHS Chief Executive and Deputy Chief Executive on 13 November 2012 the Department provided a breakdown of the means whereby the reported savings had been achieved. These are summarised in Table 2, together with information subsequently supplied by the Department on estimated savings for 2012-13 under the same headings.

Sir David qualified the Department's overall methodology in assessing the breakdown of savings achieved. He was confident of the accuracy of figures where the NHS had been able to assess performance from the top down, but conceded that the NHS had not sought to plan for and monitor QIPP savings in each NHS organisation: "that would be the wrong thing to do in terms of the way they save [ . . . ] but we can give you an assessment of what we think happened locally."[50]Table 2: QIPP savings by method, 2011-12 and 2012-13
QIPP saving methodY1, 2011-12 (actual) Y2, 2012-13 (projected) Overall Y1 and Y2
Total value (£m) % of QIPP savingsTotal value (£m) % of QIPP savingsTotal value (£m) % of QIPP savings
Tariff efficiency2,400 41.32,400 47.74,800 44.2
Demand management675 11.6200 4.0875 8.1
Administration costs 71712.3 1633.2 8808.1
Pay freeze850 14.6850 16.91,700 15.7
Prescribing417 7.2472 9.4889 8.2
Primary care, dental and ophthalmic costs 2554.4 1943.9 4494.1
Other savings501 8.6757 15.01,258 11.6
Total 5,815 5,036 10,851

Source: Department of Health (Ev 71, Table 1 and Ev 119)

61.  The National Audit Office has since issued a report on progress made by the NHS in meeting the Nicholson Challenge.[51] Many of its key findings cover areas which we examined in the course of our inquiry:

  • Almost all the forecast savings for 2011-12 were achieved (£5.8bn against a forecast of £5.9bn)
  • Most reported savings were generated through contractual levers applied by the Department of Health, such as reductions in tariff payments and freezes in pay
  • It will be increasingly difficult for the NHS to generate new efficiency savings in future years
  • Only limited action has been taken to date to achieve service transformation in a way which will enable future savings

62.  We are also concerned to note the following findings of the NAO report:

  • There is limited assurance that all the reported savings were actually achieved
  • The Department of Health cannot be certain that its demand management is not inappropriately restricting access to care

63.  The NHS Confederation told us that in its 2012 survey of 252 chairs and chief executives of NHS organisations, 87% "felt confident that they would meet their QIPP or cost improvement targets in the coming year" (i.e. 2012-13).[52] The Confederation nevertheless reported "a general feeling in the NHS that to date the efficiency savings which have been delivered are predominantly the 'quick wins' or 'low hanging fruit'": in its survey, the most commonly cited actions reported to achieve QIPP savings were:

  • rationalising estates and use of assets (34%)
  • reducing management and administrative costs (33%) and
  • making changes to clinical staffing or skill mix (13%)

64.  Mike Farrar, Chief Executive of the NHS Confederation, expanded on this in oral evidence:

[ . . .] we have made what I describe as quite a lot of level 1 savings. Level 1 savings are those that you can make within an individual organisation that have no impact on others around you. Internal efficiencies, thinking about using lean methodology to try to take out waste in the system, and land sales would be good examples of things that have happened to try to support individual organisations.[53]

In essence, what we have done is good but it tends to be short term, to rely heavily on the national pay settlement and on short­term local actions by local organisations.[54]

65.  We note that David Flory recently told the Public Accounts Committee that by the end of Year 2 of the Nicholson Challenge - that is, by March 2013 - £12.4 billion in savings, representing 66% of the current savings target of £18.9 million, would have been achieved.[55] The estimated savings are set out in Table 2 above.

66.  The Department has since supplied a breakdown of the figures on which this estimate was based, indicating that on a like-for-like basis the NHS expects to make £5.04bn in efficiency savings in 2012-13, to add to the £5.82bn achieved in 2011-12. By the end of Year 2 of the Nicholson Challenge, therefore, the NHS expects to have made £10.85bn in efficiency savings, or 57.4% of the target. The discrepancy between this figure and the £12.4bn figure quoted by David Flory is accounted for by taking account of £1.5bn of savings which the Department tells us were delivered centrally by the Department and its arms-length bodies in 2010-11 and 2011-12.[56]


Pay restraint

67.  While the NHS Confederation estimated that up to £2.4 billion of the £5.8 billion savings made in 2011-12 were attributable to pay restraint in the NHS, Sir David Nicholson and David Flory were more sanguine, telling us that £850 million of the savings were directly related to restraint in pay increases, or, as David Flory put it, "the avoidance of what we had assumed would otherwise have been a 2% pay award".[57] A further £650 million was saved from pay costs ancillary to other savings measures: £240 million saved in expenditure on agency staff, £160 million saved through reduced levels of sickness, and the remainder (£450 million) assumed to have been saved through reduced increases in pay drift in local NHS organisations.[58]

68.  While savings on this scale may be repeatable in 2012-13 because of the continued freeze in the level of public sector pay, it cannot be assumed that they will be available in 2013-14 or future years: rates of public sector pay are set to increase by 1% in 2013-14. David Flory conceded that from 2013-14 "the level of saving on pay will be less than we have seen in the previous two years but still a level of saving below what the [ . . . ] previous level of pay award would have been."[59] The NHS will not be able to rely on the present rate of paybill savings once the present restraints on public sector pay are relaxed in April 2013. Furthermore, although pay restraint is undoubtedly key in the short term, it is neither prudent nor just to plan for sustainable efficiency on the basis that NHS pay continues to fall relative to pay elsewhere in the economy. Short term pay settlements will always reflect prevailing circumstances, but in the longer term NHS employees will share the same aspirations as employees elsewhere in the economy to participate in economic success.

Other non-repeatable savings

69.  David Flory told us that "over 90%" of the £5.8 billion savings made in the first year of QIPP were recurrent savings: "they are changes to the system".[60] However, he confirmed that there had been a number of savings credited to QIPP in the first year of operation which would not be repeatable in future years, such as land sales, from which "there is a one-off cash benefit and in most [ . . . ]cases there is a profit on sale that would be credited to the accounts of the organisation in that one year only. But once it has gone, it has gone." Mr Flory estimated that between 7 and 8% of the total QIPP savings in 2011-12 - between £0.41 and £0.46 billion - was attributable to non-repeatable measures.

70.  We note the fact that some NHS organisations have reviewed their balance sheets and disposed of assets such as land or property which are deemed surplus and we recognise that such disposals may relieve short term resource pressures. Sale of capital assets should however be regarded as a movement of reserves, rather than a response to the Nicholson Challenge. The QIPP programme should be focussed on the need for sustainable redesign of services; as we have noted elsewhere in this report, Provider reserves (including capital receipts) should be available to support service change - but they not a substitute for it. The primary response of the NHS to the Nicholson Challenge should be to prioritise fundamental service redesign which will lead to better quality care for more NHS patients. Counting cuts to the NHS asset base as Nicholson Challenge savings risks distorting the programme's priorities.


71.  The Department told us that in 2011-12 the NHS was required to make net efficiencies of 4% through the Payment by Results tariff structure, which it achieved by "setting prices below the mean, adjusting long stay payments, expanding best practice tariffs and applying a net price reduction to both tariff and non-tariff services". Taken together, the Department estimates that tariff reduction measures contributed efficiency savings of £2.4 billion in 2011-12, or 41% of the total estimated efficiency savings.[61]

72.  Tariff efficiencies entail a reduction in the sums paid to NHS providers by NHS commissioners, consequently requiring the providers to find corresponding savings in their operations. While tariff reductions can be tailored to achieve policy objectives, they must, as we said in 2012, be regarded as a tool to achieve service reconfiguration, not as a policy objective in itself. The Government, in its response to our 2010 report, conceded that changes to tariff prices did not in themselves deliver efficiency improvements: NHS organisations needed to identify underlying efficiencies to enable them to live within tariff prices.[62]

73.  Closer examination of the savings achieved through tariff efficiencies reveal that £1.6 billion of the £2.4 billion of savings attributed to the tariff in 2011-12 were made through reductions in staff costs: compared to historical pay trends, £240 million was saved through reduced expenditure on agency services, £160 million through reduced sickness absence costs and £250 million through reduced pay drift. The Department also estimates that the net productivity increase from a 1.2% increase in activity and a 1.2% decrease in staff numbers is equivalent to 2.4% of the overall NHS paybill of £43 billion, or just over £1 billion in savings.

74.  The Department suggests that a further £217 million of savings was attributable to lower than expected expenditure on drugs in the hospital and community health sector: the growth trend in drug prices was estimated to be 10.4% (or £422 million) in 2011-12, while actual expenditure rose by 5.3% or £225 million.

75.  The remaining £533 million of tariff efficiencies are attributed to undifferentiated "broad operating efficiency measures" - reductions in the cost of service provision to deliver financially sustainable services.

76.  While the former Secretary of State, Rt Hon Andrew Lansley MP, conceded to us in 2011 that the tariff could be described as a "crude mechanism", he argued then that the tariff could be structured to develop best practice.[63] On the evidence of the first year of QIPP tariff efficiencies, we are not persuaded that the bludgeon has given way to the scalpel: efficiencies have been achieved through bearing down on pay, sickness absence and numbers of regular and agency staff, driving up activity, cutting down on drug expenditure and reducing operating costs.

77.  The Foundation Trust Network reported that changes to the tariff designed to incentivise NHS Trusts and Foundation Trusts to reduce overall numbers of emergency admissions - a 30% marginal payment on emergency admissions and non-payment for readmission of recently discharged patients - was, on top of the overall tariff squeeze, placing additional financial risk on providers, who in many cases were earning less from commissioners for the same work as they did before. The FTN believed that the emergency admissions tariff changes did not properly encourage the primary care system to take its share of responsibility for reducing rates of emergency admissions. Moreover, savings to commissioners from tariff reductions were not passed on to providers: "providers need to be engaged in how to spend the savings from readmissions and marginal tariff policies, otherwise this simply represents a fine on acute trusts with no way for them to support the goals of integration and care in the community."[64]

78.  We have highlighted in previous reports our concerns about the use of tariff reduction as an overall policy to drive efficiencies on the provider side. Tariff reduction does not encourage efficient behaviour on the commissioner side, and we have received little evidence to suggest that the tariff is being used intelligently to drive service transformation and greater integration. We fear that further turns of the tariff ratchet will lead to further salami-slicing of NHS Provider services in ways which prioritise expenditure reductions over imaginative service redesign.


79.  The Department has indicated a number of instances of service redesign in the NHS driven by the QIPP programme, and told us that a database had been established with over one hundred case studies of service change which could increase NHS quality and productivity. Examples given included the establishment of multidisciplinary alcohol care teams in district hospitals, multidisciplinary teams improving approaches to local stroke services, and the reconfiguration of stroke services across London, as well as the development nationally of urgent clinical care dashboards for GPs and the implementation of a year-of-care approach for the management of long-term conditions.

80.  These examples of greater service integration are all welcome: without such imaginative approaches to fundamental service redesign which delivers more and better quality services for the same or less money, we fear that the NHS will fail to achieve the transformational change it requires to provide the services the population demands in the uncertain financial climate beyond the end of QIPP in 2014-15.

81.  As we have noted above, transformational change is expected to deliver only £875 million of QIPP savings at the half-way point of the Nicholson Challenge in March 2013, against an overall target of £3.78 billion, or 20% of the overall Nicholson Challenge target. While the Department has consistently said that the bulk of the expected transformational change will occur in the latter half of the Nicholson Challenge period, we consider that the NHS is leaving it late to prepare for these changes. Moreover, the pace of savings delivered through transformational change has slowed markedly: £675 million of savings were achieved through what the Department calls 'demand management' measures in 2011-12, but only £200 million in savings are expected to be delivered under the equivalent category in 2012-13.

82.  Our principal concern is, however, the implication that there is a distinction to be drawn between "provider-driven change" and "transformational change". A successful response to the Nicholson Challenge would involve sustained, year on year efficiency gain in the health and care system at twice the long term average rate which prevails in the rest of the UK economy. The Committee believes that it is simply inconceivable that this performance can be delivered - together with the quality improvement that is also required - if planning proceeds within traditional silos. The commitment to "transformational change" needs, therefore, to embrace every aspect of the QIPP Programme including - in particular - the major existing providers.

83.  At the current rate of progress, we doubt that the predicted savings through transforming and integrating NHS services will be fully realised by the end of the Nicholson Challenge period. Unless significant steps are taken to plan now for service redesign and integration, a significant opportunity to improve the effectiveness and quality of NHS healthcare will have been missed.

44   National Audit Office, Progress in making NHS efficiency savings, HC 686, paragraph 1.11 Back

45   Health Committee, Public expenditure, HC 1499, paragraph 40 Back

46   Ibid., paragraphs 57 and 58 Back

47   Ev 60, paragraph 1.1.2 Back

48   Ibid., paragraph 5 Back

49   Q 124 Back

50   Q 129 Back

51   National Audit Office, Progress in making NHS efficiency savings, HC 686, 13 December 2012 Back

52   Ev 101, paragraphs 2.1 to 2.3, and 4.3 Back

53   Q 2 Back

54   Ibid. Back

55   Oral evidence taken before the Public Accounts Committee, 14 January 2013, HC 865-i, Q 49 Back

56   Ev 119 Back

57   Q 127 Back

58   Ibid.  Back

59   Q 139 Back

60   Q 136 Back

61   Ev 71, Table 1 Back

62   Department of Health, Government Response to the Second Report of the Health Committee, Session 2010-11, Cm 8007, p 14, cited in Health Committee, Public Expenditure, HC 1499, paragraph 49 Back

63   Health Committee, Public Expenditure, HC 1499, Q 121  Back

64   Ev 79, paragraphs 26-28 Back

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Prepared 19 March 2013