NHS Efficiency Puzzle Solved – well, sort of

With a little help from my friends (see below) I’ve finally got a handle on how the Government manages to claim “£15-£20bn” of annual efficiency savings for the NHS by 2013-14. Unfortunately, the answer seems just daft as the Tories latest efficiency claims.

NHS budgets are to be held steady in ‘real terms’ under Labour’s plans but they claim that “front-line services” will be protected. What that means is that about 95% of the Department of Health’s budget will be frozen in real terms – the main chunk that goes on the ‘front-line’ – but the other 5% is apparently fair game).

The key here is the phrase “in real terms” – i.e. spending will increase roughly in-line with inflation. The problem is that NHS costs rise faster than general inflation – an aging population, technological advances, drugs costs, etc means that the NHS needs a real-terms about 5% a year increase just to stand still.

When all this became apparent last year the NHS mandarins cooked up a scheme to bridge the gap by claiming they could make about 5% a year efficiency gains – that is they could improve NHS output by that sort of figure whilst costs were frozen. This would mean the NHS would be around 20% more efficient in 4 years time – equivalent to £20bn per year. This seems to be where the £15-£20bn number came from – but it doesn’t explain the confusion between the Department and Treasury. (Incidentally, the cumulative ‘savings’ over four years would therefore be in the region of £50bn!).

Several things to note about this:

  • first, the monetary figure is irrelevant – this is all about increasing outputs in line with demand without increasing costs;
  • second, it’s also irrelevant to any debates about the deficit, debt and ‘savings’ – the NHS’s spending would be the same whether or not these ‘savings’ were made – they are in the jargon “non-cashable” – all that would change if they are not is that services will be fail to meet demand;
  • third, the NHS has lost productivity in recent years and a target of 5% per year growth in efficiency/productivity over four years is, to put it mildly, a “big ask”. It’s highly unlikely to be achieved and so services will be in effect cut.

[Thanks to my colleagues, at Manchester, Steve Harrison and Kieran Walshe and to Nick Timmins (FT) for advice.]

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