The NHS beyond the Budget

We are in a serious recession from which the NHS cannot be immune. The Budget, while relatively benign for the health service over the next two years, signals that no matter who is in power from 2011, the medium-term spending prospects are grim – the NHS will have to manage with very low or no growth in its funding. Given rising demand, this will feel like a cut to services that have experienced unprecedented growth in recent years.

There are also immediate challenges. The £2.3 billion cut in health funding in the Budget had been assumed in the Operating Framework and will be delivered from reductions in central budgets and the loss of the contingency. In addition, there will be a squeeze on the tariff to achieve efficiency savings within the PCT funding envelope. This could give PCTs a real opportunity to start reinvesting in community services, but there is of course a danger that the automatic response from acute trusts will be to protect their income by seeking to do more work or by clawing back money from non-tariff activity. Tackling this will require a whole-system response rather than individual organisations working in isolation to address their own financial pressures. It is possible too that PCTs will not work effectively with their local GPs to manage demand. This has been evident over a difficult winter, and there looks to be no end in sight to the increased pressures across the whole of the country.

Capital investment is already being squeezed, with both private and public sources of capital finance under pressure – this could restrict efforts to redesign services and will affect training budgets. But the real challenge must be to prepare for a period of severe financial constraint. The government is talking about a 0.7 per cent growth in spending on public services from 2011 but that does not begin to tell the real story. In real terms, the cost of debt repayment is likely to wipe out any growth and to mean that the NHS will face reduced budgets whatever happens. In addition, there still appear to be significant gaps in the Chancellor's sums, and his belief that growth will return in a matter of months may be optimistic. Once all these factors are taken into account, prospects for the other side of the election look very serious indeed.

If the challenge of the past nine years has been to manage growth in the health service, the challenge now must be to drive efficiency – but to do this while keeping the focus on quality. The threat to quality is real as the inquiries into both Maidstone and Mid Staffs demonstrated – both had become obsessed with cost savings programmes that ultimately sacrificed quality to finance.

The cap on funding will of itself drive up productivity – the challenge will be to avoid just running faster on the same spot but to redesign the system in a way that releases savings, because things are being done differently.

There is a window of opportunity: we've never had a better understanding of how services should be organised and delivered and, assuming the 2010 Comprehensive Spending Review figures are adhered to, we may have nearly two years to prepare for the big squeeze.

What's more, as international health care improvement guru Don Berwick says, quality comes cheap – we know that high performance and safety can save money or to put it another way, poorly designed services are wasteful.

Of course there's a danger that the system puts its head in the sand and pretends it can plough on regardless, or that it feels it has no alternative but to jam on the brakes and indulge in crude cost cutting – freezing posts and delaying care.

But there are many things that the NHS should be doing to prepare for the downturn. Some are particularly challenging, especially in the shadow of an election, such as tackling difficult reconfiguration issues.

There are technical improvements in the way services are run that still need to be tackled – Monitor's efforts to ensure that service line reporting is adopted is one obvious way forward to engage clinicians and drive efficiency, and some organisations could do worse than revisit the Modernisation Agency's 10 High Impact Changes. There is a need too to generate insight from the variations in performance both in acute sector activity and in referral rates that will also be critical for both productivity and quality gains.

All that said, the reality is that any significant reduction in the cost base of the NHS can come only through reductions in staff, however creative the service redesign process is. This is likely to have major implications not just for the health service, but also for those local economies that rely heavily on the NHS as a major employer.

At The King's Fund we will shortly launch a programme that is analysing and assessing the likely scale and implications of reduced spending, drawing on the evidence about cost drivers and variations and attempting to support organisations to deliver both quality and value.

In more than one way then the difficult financial environment could help bring about lasting reforms in the way we deliver care – or as Rahm Emanuel, President Obama's 'enforcer', put it 'let's not waste a good crisis'.

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