This chapter focuses on where the opportunities are to reduce costs within the NHS as distinct from improving productivity or redesign that will result in a more cost-effective system. It addresses three major areas where efforts have been concentrated in cost reduction - reducing transactional spend, typically via better contracting, reducing the costs of agency staff and procurement. It also explores national factors such as the prices of drugs and devices, which influence the NHS’s cost base but which trusts cannot control individually.
When asked where the greatest opportunities lie for further efficiencies, trust leaders say the biggest savings are not necessarily those that will be realised quickly. Figure 4 shows that trust leaders believe that cutting agency spend and making technical accounting adjustments offer the best immediate opportunity. It also shows that the largest efficiency saving opportunities tend to require complex, long-term transformation, which may require agreement across the clinical community or work across several institutions in a local system. For example, two opportunities identified by trust leaders for efficiencies at scale were addressing workforce challenges through better workforce planning and changing the skill mix.
Figure 4
Figure
Reducing transactional spend
Removing overhead costs could involve transforming a trust’s use of property and estates, for example moving staff onto sites it owns and out of leased accommodation. But it could also include commercial savings. An ambulance trust told us they saved up to £4m by better managing their contracts with firms they lease their fleet from, for example by challenging unnecessary repair works.
Trusts have also outsourced transactional services such as payroll, catering or outpatient pharmacy, to firms that can run these services more cheaply at scale. Interventions such as these do not necessarily make a trust run more efficiently – but they do make it more cost-effective.
Trusts also told us that saving money through better contract management is not "free" – it can only be achieved where trusts continue to invest in commercial skills. Plus, saving money on contracts may require more intensive management, such as monitoring and challenging contractual performance, which can lead to additional costs.
An ambulance trust told us they saved up to £4m by better managing their contracts with firms they lease their fleet from, for example by challenging unnecessary repair works.
Agency spend
The nationally coordinated drive to reduce the costs of agency nursing shifts has been an unqualified success. Trusts have managed to reduce expenditure on agency staff from £3.7bn in 2015/16 to £2.4bn in 2017/18. Respondents to our survey rated it highly as an effective contribution to the efficiency drive from NHS Improvement (see chapter 5), while one interviewee said it was a "game changer".
The approach taken by NHS Improvement, which set caps on the amount that could be paid, and a clear set of rules for breaching the cap when safety required it, shows how national bodies can act effectively on behalf of all providers. Trusts acting alone could not have achieved similar reductions, as the market in agency labour made them competitors, driving prices up.
The reduction in agency spend also illustrates an important nuance in the efficiency debate about reducing cost, increasing value and releasing cash. In 2017/18 for example, while trusts reduced expenditure on agency staff by over £500m, overall spending on temporary staff remained broadly flat because they ended up spending more than expected on bank staff. This represented better value, as trusts get more shifts per pound from bank spending than they do from agency and most likely improved quality of care by maintaining staffing levels.
However, it also raises an important point - while an intervention may appear to reduce costs when viewed in isolation, it may have knock-on effects elsewhere in the system. In this case trusts argue that while the agency cap had the potential to release cash, they still spent this money on temporary staffing, rather than being able to use it in other places within the trust. Therefore these approaches are most certainly worth doing, but may not release money that can be spent, for example, on pump-priming transformation.
The nationally coordinated drive to reduce the costs of agency nursing shifts has been an unqualified success. Trusts have managed to reduce expenditure on agency staff from £3.7bn in 2015/16 to £2.4bn in 2017/18.
Procurement
The move to centralise procurement under the Department of Health and Social Care’s (DHSC) 'future operating model' scheme is intended to have a similar impact to the agency cap, by introducing national negotiation to yield savings that trusts acting alone cannot.
However, the approach is not without risk. Firstly, any reductions in prices paid will have to cover the substantial increase in administrative costs before they yield cashable savings. Trusts will be expected to fund almost £0.5bn over the next two years to pay for the new centralised procurement service. Secondly, the analogy with agency spending is not perfect. With agency staff, competition between trusts was driving up prices – this does not apply to routine consumables and services. Finally, procurement is already undertaken at scale through regional hubs – the DHSC plans for the proportion of regional procurement to fall from 40% to 10%, and the national spend to rise from 40% to 80%. However, it is not clear that moving from regional to national purchasing will lead to significantly lower prices.
One finance director in a trust providing some extremely specialised services noted that their organisation was already effectively conducting national purchasing, where it was buying devices for services that few other trusts provided. In cases such as these, providers will have long-established relationships with suppliers and expert knowledge about which products support the best outcomes. In such cases, it is reasonable to doubt whether centralising procurement will result in either better prices or better results for patients.
The move to centralise procurement under the Department of Health and Social Care’s (DHSC) 'future operating model' scheme is intended to have a similar impact to the agency cap, by introducing national negotiation to yield savings that trusts acting alone cannot.
Technology
More than one interviewee told us IT procurement constitutes an opportunity for a more coordinated approach to release savings. One acute finance director said trusts on their own in his region had been unable to coordinate purchasing computers, tablets and smartphones because they had different clinical cultures. Another community trust told us that Microsoft licences, which used to be paid for centrally, now cost their organisation £300,000 a year. These could potentially be purchased more effectively at scale.
The opportunities that better use of technology offers for system working are detailed in chapter 4.
National factors
There are significant risks and opportunities impacting on costs that are beyond the control of individual trusts and sometimes the leadership of the national bodies.
This year marked the beginning of the end of eight years of pay restraint in the NHS. This is necessary and welcome, and staff have borne the burden of austerity for too long. However, the new pay deal will increase trusts' cost base in 2018-19 – and by more than the £800m made available by the Treasury to cover the pay rise. Holding down pay rises at rates below inflation since 2010 has artificially made the NHS appear more productive: outputs have risen, while cost inputs have risen more slowly. (National Audit Office, 2018) While paying staff more is the right thing to do, it will have the effect of making the NHS appear to be losing ground on some measures of efficiency as input costs begin to rise more quickly with no related increase in outputs.
This year marked the beginning of the end of eight years of pay restraint in the NHS. This is necessary and welcome, and staff have borne the burden of austerity for too long.
Another important national factor beyond trusts’ control is the price of drugs. The total drugs spend in the NHS was around £17.4bn last year (The King’s Fund, 2018), meaning even just a 6% shift could cost the NHS around £1bn, equivalent to 35% of the total planned recurrent CIPs. It is clearly vital that national bodies use the collective bargaining power of the NHS to get the best deal possible for medicines. But it is also dangerous to assume that they are not already achieving good value. It should be remembered that the NHS remains exposed to changes to exchange rates, for example, or inflationary pressures specific to the pharmaceuticals industry, which could have a major impact on the NHS’ cost base.
The NHS' cost base is complex. Some of it can be controlled by trusts or national leaders, and some of it cannot. However, the introduction of the agency cap policy suggests that where national co-ordination is appropriate, it can have significant, positive impact.