Turning around NHS deficits

When the department of health's director of finance invokes Rudyard Kipling to urge NHS directors of finance to “keep your head when all about you are losing theirs and blaming it on you” (Richard Douglas, speech to the Healthcare Financial Management Association, December 2005) it is a sure sign that the NHS is in trouble. With the NHS in England overspending by £250m in the last financial year and projected to be in deficit by around £650m in this, finance directors have taken much of the blame for the deterioration in NHS budgets. Ministers and civil servants have also been criticised for failing to cost properly the new contracts for NHS staff. The problems of the NHS mirror those confronting British schools three years ago, when extra funding led to deficits because the impact of pay awards for teachers had not been fully allowed for.

For the public and patients the failure of the NHS to achieve a balanced budget in the middle of the biggest sustained increase in funding in its history must be a source of bemusement. With resources having grown by 7% in real terms since 2000, and likely to revert to the historic trend of around 3% from 2008, the need to put the NHS's financial house in order is urgent. Ministers have therefore called in teams experienced in bringing about turnarounds in the private sector to work with the NHS organisations with the largest deficits. Around two thirds of the gross deficit is concentrated in 37 NHS organisations, and these will receive intensive support over the next 18 months.

The rest of the NHS will be watching with interest to see what action is taken by the turnaround teams, and whether their intervention holds wider lessons. With a high proportion of the NHS budget spent on staff, redundancies and freezes on recruitment will be among the first steps taken in the most challenged organisations. Action to improve the use of expensive temporary staff is also likely. The challenge for those advising the organisations in most difficulty will be to find ways of improving financial performance that go beyond these tried and tested measures and offer substantial and sustainable savings without adversely affecting patient care.

To deal with this challenge, three options suggest themselves. Firstly, in some parts of the NHS there may be a need to remove surplus hospital capacity to achieve a step change in performance. Roemer's law states that the supply creates its own demand,¹ and in the NHS oversupply, particularly of hospital beds, may induce overspending. If a built bed is indeed a filled bed, then reducing the supply of beds may be the only effective way of balancing budgets. The difficulty this creates is that removing surplus capacity generates controversy and takes time and is unlikely to contribute to financial stability in the timescale required by ministers.

Secondly, considerable potential exists to improve the use of resources by tackling variations in clinical performance. The secretary of state for health indicated as much in one of her first speeches (P Hewitt, speech to NHS Confederation Conference, June 2005), in which she drew attention to big differences in length of stay for the same procedures between NHS hospitals. There are also variations in other clinical practices, including day case rates.² Improvements in performance are likely to be achieved by tackling these variations, delivering efficiency gains that will contribute to financial stability in the process. The difficulty this creates is that variations in clinical performance are as old as the NHS and have proved resistant to action by successive governments.

Thirdly, eliminating financial deficits must involve the full engagement of clinical teams in all NHS organisations. Some improvements can be achieved through leadership by chief executives and management teams, but the critical decisions on the use of resources arise out of the day to day actions of the teams that deliver care to patients. If change is imposed on these teams against their will, energy that might be channelled into strengthening the performance of challenged organisations will be displaced into unproductive conflict between managers and clinicians. Leadership of the highest order will be needed to avoid this risk and to deliver changes that both improve patient care and increase financial stability. The organisations with the biggest deficits are under pressure in part because of weaknesses in leadership, and the NHS lacks a reserve of talented managers able to help in these circumstances.

This is, of course, why ministers have looked to the private sector to bring in its skills at a critical juncture in the reform of the NHS. The attempt by the Thatcher government to attract business people into the NHS following the introduction of general management in the 1980s was not conspicuously successful, at least partly because of the political constraints on general managers and the challenge of managing in the goldfish bowl of public services.³ Turnaround teams are, of course, different in that they will be working behind the scenes, their role is advisory, and they do not carry responsibility for the consequences of their advice in the longer term. But whether the private sector will succeed where the NHS has failed remains to be seen.