NHS reform: the empire strikes back

In history, the time of greatest peril for liberal reformers of empires is always just after reform has begun. It is then that the forces of reaction create events which threaten the frail beginnings of a new order.

The NHS faces a choice of two futures. By the end of this decade it will spend approaching 10 per cent of UK GDP (0.3 per cent of world GDP by Department of Health calculations; over £100 billion, or over £4,500 per household). International evidence shows that this level of resource – undreamt of at the end of the last decade – can deliver immediate access and high quality. Amid all the gloom there remains, almost unremarked, a great opportunity to create a safe reliable service, characterised by greater choice, pluralism and enhanced primary care, in which patients feel like valued customers.

Yet it is equally possible to spend 10 per cent of GDP on a poor quality, unmodernised service that serves the producer interest and is characterised by monopoly and increased rationing. The huge growth in spend means that issues of performance and efficiency are hugely more important than when the service consumed 6 per cent of GDP.

In our last report published in December 2005, we identified conflicting trends. On the one hand, the inputs-led approach of this decade had greatly increased the costs of the traditional monopoly service, leading to the paradox of deficits at a time of record spending. But on the other, the beginnings of reform had started to break that monopoly. With control of costs and an acceleration of reform, competition and productivity, the service could have made a decisive step forward in 2006.

Instead 2006 saw a clear step backwards as the traditional monopoly – the “empire” – reasserted itself. The behaviour pattern of the NHS now resembles that of the British economy in the era of stagflation (“stop-go”). An inflationary increase in costs and spending (“go”) leads to a drastic “stop” which threatens investment and innovation for several years.

The sheer size of the spending increase has made it impossible to use the funding effectively and swamped the management capacity of a system which had become adapted to working on much smaller increments. These productivity problems have been well discussed and a fair summary would be that while real terms funding has doubled, activity, quality and access have risen by only 20-30 per cent.

The key developments in 2006 were:

  • Failure to control costs;
  • Rising deficits;
  • Deceleration of reform; and
  • New evidence of cutbacks on innovation, increased rationing and lengthening waits.
  • Failure to address cost pressures

The Department’s review of hospital building programmes resulted in a reduction in costs of only £500 million out of a future predicted spend of £13.5 billion. There is a clear link between existing major construction projects and hospital or PCT deficits.

The huge staffing increases of this decade have not been reviewed at all. Doctors and other staff represent a major cost yet decisions on staff levels appear to have been taken without reference to levels of funding, local needs and health economies. For an organisation with a problem of financial balance and a pressing need to invest in new services, the recruitment of an additional 270,000 staff since 1999 represents a significant policy failure.

The likelihood of graduate unemployment, with all of the waste of training resources and potential that that implies, has significantly worsened over the last year.

Rising deficits

In addition to the failure to face up to the long term drivers of costs, new, very expensive cost commitments have been made. Examples would include Connecting for Health and long term medical conditions. The Department still fails to publish its own long term cost estimates.

The result is that the service is moving away from solvency. Compared to this time last year, an increased number of NHS organisations (175 against 133) are expected to be in deficit at the end of the financial year. 21 organisations have developed “super deficits” (above 10 per cent of turnover or above £15 million).

A “contingency” is being used to cover local deficits, and will continue to do so in coming years. But a financial system which depends on windfall payments and hidden subsidies is not one which encourages strong local decision-making to get extra value for money. The shift of deficits into PCTs has worsened the situation by creating confusion.

Looking forward to the end of the decade, we predict the real terms increase in annual spending between 2006-07 and 2010-11 to be equivalent to £8.3 billion. We estimate that the service’s costs will rise by £16.5 billion over the period. That leaves a resource gap of over £8 billion (compared to last year’s estimate of just under £7 billion).

The Department is likely to argue that there will be significant gains from efficiency savings. We repeat our belief that many of the supposed gains are vague and hypothetical. Of the £3.7 billion claimed to be saved so far, only three-fifths are “cashable”. Efficiency gains that are not cashable are not a real saving but instead simply a reduction in workload.

Deceleration of reform

Ministers have set out the right reform vision. But for the vision to be translated into reality, actual measures are required. The absence of an underpinning costed reform programme is a critical policy weakness.

Without an overall reform plan, central planning has remained the dominant mode. The reform programmes remain “bolt-on” additions to a centrally planned monopoly rather than drivers of competition. The momentum of these programmes has slowed:

  • Fewer than expected Trusts will achieve foundation status by 2009.
  • The use of Independent Sector Treatment Centres has been pushed from the centre and not taken up by local managers. The local commitment to plurality is so weak that when the current block contracts end the future of independent providers is uncertain.
  • Patient choice and practice-based commissioning have made less progress than headline statistics suggest.
  • The implementation of payment by results has been delayed.
  • Retreat from innovation, new forms of rationing

Last year’s Reform report warned that the worsening financial position could lead to “new forms of postcode rationing” and “rising waiting lists”. Evidence of both trends emerged in 2006:

Waiting times in some specialities have flat-lined and in others are increasing.

  • Deficits are leading to “innovation phobia” where Trusts and PCTs cut back on all new innovation as well as use of third sector providers.
  • New forms of rationing have been reported in fertility services, orthodontics and public health.

Looking into 2007, some service “reconfigurations” are clearly driven by need to reduce deficits. There are huge risks in conflating the two:

  • The temptation could be to cut individual services instead of focusing on the real long term cost drivers of labour and capital across local health economies.
  • If services are simply closed down, this only shifts patients and costs to other locations, threatening quality, access and financial stability. Reductions in some deficits could then lead to increases in others, in a kind of “deficit see-saw”.
  • Because of the lack of good financial information, it may well be that cost-cutting and service changes, seen as deeply threatening by local communities, may not in fact achieve the savings required to meet deficits.

Despite seven years of unprecedented spending, a number of unpopular areas of treatment still need improvement: the treatment of medical emergencies in elderly patients, deafness, COPD, stroke care and mental health. There is a danger that the 18-week target will shift spending towards consultant-led services and away from these services which are often led by other professionals.


There is no realistic way in which a continued NHS monopoly can deliver an expanding and changing service for very limited increases in funding. The all too likely response is a tightening of provider domination by acceptance of higher costs, increased rationing and reductions in output. The correct NHS path to change must use competition, choice and pluralism as key incentives in moving towards the new order.

The immediate aim should be to settle the deficit problem in 2007-08. A “new start” would involve: a writing-off of all deficits; and a new discipline that all organisations must stay in surplus or balance. Following the new start, any organisation falling into deficit would face administration (with some flexibility for foundation trusts). The write-off could be funded through greater than expected productivity assumption in tariffs (e.g. 3.5 per cent rather than 2.5 per cent) and a reduction in planned budgets of around 3 per cent in other areas.

Looking to 2010, we set out a six point programme to bring choice, competition and pluralism as powerful forces to reshape the health service and to release resources for new investment. Given the strengthening of the monopoly in 2006, radical action on the demand-side is needed to deliver a patient-led service.

  • PCT’s commissioning role should be given a new sense of direction by giving them a key role as health maintenance organisations with a clear “constitution” to secure best value for the patient. Their provider functions should be shifted to independent social enterprises. They should have one focus on getting a better service for patients within the financial constraint of the capitation funding for a local population.
  • The funding of primary care services should be turned into an annual payment which an individual could take to any Primary Care Trust. Patients would sign up for three year periods and could freely change after that.
  • There should be a general move towards independent Foundation Trust status for providers
  • Monitor’s role should be expanded to that of an economic regulator.
  • There would be new kinds of private/public partnerships, including direct payments, in certain care areas where the NHS was not providing a credible service such as audiology.

There would be a changed approach to staffing with moves towards a smaller, better supported workforce and in capital which would stress smaller projects related to immediate income.

In our past reports (December 2004 and December 2005) we set out the likely scenario of serious short term financial problems. These have become now all too obvious.

In this report we seek to move forward towards the “new world” following April 2008: much more limited public funding and intense pressure from rising patient expectations. The key issue is whether the NHS moves to a mixed economy of care or stays within an NHS-provided monopoly with continued high long-term costs.

The NHS is now deep into a make or break period of change. Reform is the crucial resource for re-engineering as the NHS moves towards competition and choice.