@mellojonny asks if anyone can explain why there are large cuts going on in the NHS now.  This is a good question because until 31 March NHS was still receiving levels funding which were relatively generous by historic if not recent standards.   There are a number of possible reasons, I've listed a few here and maybe others will add to them since I've done this quickly and I should really be doing something else.

1)      Unresolved structural issues in a number of places which means that they are unable to become more efficient or are locked into high cost facilities or they have developed a model of practising medicine and running the organisation that is high coster than similar places. The last decade of growth has meant that in many places this issue has not been dealt with.  The Secretary of State's decision to put a number of these changes on hold is will have increased the deficits in a number of places and led to a search for other more direct but probably less effective methods .

2)      In some cases the resource allocation formula may not be properly recognising needs in some areas while overcompensating others. The beneficiaries of overgenerous resource allocation tend not to advertise this.  The big issue may be that the formula does not recognise the impact of age as well as it should.  It may also be weak for areas with very unusual factors – for example very high levels of non-english speaking patients. 

3)      A number of strategies commissioners used to save money have involved moving work out of hospitals. The reason for doing is that the out of hospital care appears to be cheaper.  In some cases this may be genuine but often it is more likely to be an artefact of accounting practice and overhead allocation.  The direct costs may well be very similar.  The relationship between fixed costs and variable cost in hospitals is very unfavourable and so any loss of income leads to a large amount of fixed and overhead cost being left uncovered. The easiest solution to this is to increase the workload in other areas to replace the contribution to overhead and fixed costs that has been lost. The result of this is often that any savings that were made by arbitraging the difference between hospital and community settings is completely removed by the additional cost of new work in the hospital.  This can be seen in the phenomenon reported by the Audit Commission who observed that most of the increases in income generated by providers was in non- tariff activity where it is easier to negotiate both volumes and prices.  The effect of this is that when this work is decommissioned or demand is managed the amount that needs to be saved is much greater than the variable costs saved by stopping the work.

4)      The operating framework required the PCT should hold back 2% of their spending to be used non recurrently to deal with change. There was also relatively limited ability to pull down other retain surpluses. Both commissioners and providers are starting to see non-recurrent money running out and therefore taking action now.  This means less income for providers.

5)      Hospital tariffs were set at 1% below the average cost and a range of adjustments were made to tariffs which had the effect of embedding a 2% efficiency savings into it.  The target for non-tariff work was -1.5%. In addition to this the penalties for readmission, the measure which limits payment for emergency cases beyond the level in 2009/10 to 30% of the tariff and some other technical adjustments all add up to an extremely challenging pressure on providers.

6)      Providers can see years of this ahead of them and are getting ahead of the curve if they can

7)      Social care budget reductions are starting to impact on the ability of trusts to discharge

8)      Demand still seems to be rising

9)      Hospitals with large PFIs have reduced scope to make savings as the payment for the building and its maintenance are protected and there may be constraints on other services bundled as part of the PFI.

10)   When people start to declare big savings programme there is a tendency for there to be a herd response as it is useful to get an announcement out under the cover of the angst caused by others.  This also encourages statements about the initial savings  to be over stated.

I was talking to the chief executive of a large university hospital trust on Friday who has an enormous cost improvement programme. His observation was that in many places people have got out of the habit of living with stringent cost improvement. He thought that many cost improvement programmes in the last decade have been delivered using additional income rather than through improved efficiency and this is my impression as well. This certainly seems to be suggested by the sluggish performance in productivity that the NHS has demonstrated - putting aside the enormous methodological difficulties of actually measuring this. His trust, by contrast, has had very low levels of growth and therefore has needed to deliver 6 to 7% of genuine efficiency improvement in the last few years, something most other trusts only just come to terms with. His view is that because this is new and this type of change is difficult some of the responses to this may not be very subtle.