Bureaucrats under the scalpel

Labour intends to cut NHS management costs by pounds 1.5bn. But such radical surgery could harm patient services, argues Chris Ham

As the election approaches, Labour and Conservative politicians have found common cause in a concern to reduce the amount of money spent on NHS bureaucracy. Both Stephen Dorrell and Harriet Harman have committed themselves to cut the number of "men in grey suits", thereby releasing money for direct patient care. The question is: how far can the cuts in NHS bureaucracy go - and will there come a point at which further reductions will endanger patient care?

The answer hinges crucially on understanding the size of the increase in management cost and the reasons it has happened. Figures released by Labour suggest that expenditure on administration in England increased by pounds 1.5bn in real terms between 1988/89 and 1994/95. A large part of this is due to the appointment of an additional 20,000 senior managers (that is, those earning pounds 20,000 per year or more who are not primarily clinicians). There has also been an increase in the number of lower-paid administrative and clerical staff. Some of the extra costs of NHS management result from a reclassification of nursing and other professional posts into the senior management grade, but much has come from the policy of strengthening management and introducing the NHS reforms.

Three main factors have been at work. First, the separation of purchaser and provider responsibilities within the NHS has led to the appointment of many more senior managers in NHS trusts. With more than 400 trusts in England alone, and with the pay of trust managers having increased in recent years, it is not surprising that management costs have risen. Equally important has been the appointment of business managers within trusts to support doctors and nurses - part of a long-term trend to strengthen the management of clinical services which pre-dates the NHS reforms.

Second, the introduction of a market in health care has turned NHS management into a paper chase. In particular, the negotiation of annual contracts between purchasers and providers and the requirement that GPs seek approval to refer patients outside the terms of these contracts - so-called extra contractual referrals - has led to the employment of large numbers of clerical and administrative staff whose services were simply not needed in the old NHS.

Third, GP fundholding has added to the complexity of contracting. This is because trust hospitals have to negotiate contracts with an increasing number of small purchasers. The terms of these contracts vary, but the result is a significant administrative burden, both in the negotiation of contracts and ensuring that invoices are issued on time.

If this were not enough, fundholders receive management allowances to help them run their budgets. This has led to the employment of fund managers and other staff to deal with the workload involved in purchasing from a primary care base. As the Audit Commission has shown in its recent report, the result has been some improvement in services for patients but so far the costs of fundholding appear to outweigh the benefits.

Cutting management costs therefore hinges crucially on simplifying NHS contracting, and addressing the workload generated by fundholding. The Government itself has acknowledged the need to reduce the complexity of contracting and Stephen Dorrell has announced a move towards longer-term contracts and a simplification of the system of extra contractual referrals. These are sensible developments which are expected to release around pounds 40m for patient care.

The workload generated by fundholding has not yet received the same attention. The dilemma here is that fundholding is seen by ministers as the jewel in the crown of the reforms and they are loath to antagonise GPs by tightening up on their budgets or restricting their freedom of manoeuvre. As a result, the Government has concentrated instead on setting ever tighter controls over management costs in health authorities and NHS trusts.

The difficulty with this strategy is that most of the easy savings in this area have already been made - for example, through the merger of district health authorities and family health services authorities and a cut in the number of authorities in England and Wales. The risk in going further is that health authorities and trusts will be stretched to the limits in terms of their ability to carry out their statutory responsibilities. It is therefore essential that any further reductions are carefully targeted at those areas of the NHS where there is scope for making savings. Politicians need to wield a scalpel rather than a sledgehammer, otherwise they risk creating considerable collateral damage.

It is at this point that the consensus between politicians breaks down. By promising to abolish the internal market and GP fundholding, Labour has held out the prospect of freeing up large sums of money for patient services. In practice, it will take time to release this money as Labour is unlikely to end fundholding overnight. If, as expected, Labour decides not to allow new practices to enter fundholding and encourages existing fundholders to relinquish their budgets in favour of GP commissioning groups, then it would be realistic to expect the changes to be implemented over a period of three to five years.

Even if this happens, there is no chance that pounds 1.5bn can be saved from Labour's policies. Abolishing fundholding would release some cash - and produce some redundancies. But there will be at least some offsetting costs in establishing Labour's replacement - GP commissioning - more widely. And the fact is that a Labour government would only be able to deliver its plans for the NHS if there is a sufficient cadre of experienced managers in place to produce the improvements in efficiency and quality which Labour, like the Government, will continue to seek. If competition is not to be used to stimulate these improvements, then a well-managed health service in which doctors, nurses and other healthcare professionals are fully involved in decision making will be needed. To this extent, some of the recent increase in management costs is justified in compensating for the relative neglect of management in the past. Away from the rhetoric of political debate, this is acknowledged by Opposition politicians - and a more measured approach to change can therefore be expected in the wake of a Labour victory.

The only other obvious route to major savings would be a signficant reduction in the number of NHS trusts. While there is certainly scope for that, the active encouragement of trust mergers would, for the Government, run counter to the policy of promoting competition. It is therefore unlikely overtly to encourage them. And while Labour may well look for money through this route, there are redundancy costs to allow for and the cash won't come quickly.

The bottom line for both parties is that while there is cash to be squeezed out of the NHS it is unlikely to amount to pounds 1.5bn and it will not be released overnight. A more thoughtful approach would go beyond a simplistic analysis of management costs and relate spending on management to the results achieved in different hospitals and health authorities. The paradox is that the NHS is over-administered but under-managed. Rather than run an unthinking attack on bureaucracy, what politicians ought to be asking is whether higher management spending pays for itself in improvements to the health of the population and in health services. A focus on outcomes rather than just inputs is needed to raise the debate to a new level.

Professor Chris Ham is director of the Health Services Management Centre, University of Birmingham.