One Third

The Conservatives have some kind of attraction to the concept of a third. A third, the reciprocal of three. We know that three is a magical number, from the 1996 song from Blind Melon, but we do not know why a third has such a hold on Conservative politics. In this rather lengthy blog I will describe where it came from and how this value has morphed over the last couple of years.

The "third" first appeared in the Conservatives' party conference in 2009. The suggestion was that the Conservatives would remove all the extra administration that had been "introduced" into the NHS since 2003: the A&E targets, 18 week targets etc. Conservatives obsessed with the free market argued that targets were not necessary if you allow the market to close those providers that did not perform. This shows a complete misunderstanding of what the phrase "comprehensive and universal healthcare" means, and should have sounded klaxons in the minds of voters not to allow such people in control of the health service. 

The Conservatives reckoned that this extra administration cost £850m, and so if you removed this performance management then that would be an extra £850m that could be put into healthcare. Of course, it ignored the possibility that if performance managing was removed the NHS could become less productive and so the increase in costs may be more than that £850m. The Conservatives also reckoned that in 2003, NHS administration (ie other than the performance management) cost £750m more than it should, and so the uber efficient Lansley would cut that too. The total - around £1.5bn - would be a third of the estimated annual cost of administration at £4.5bn. This is where the magical third appears. A £4.5bn cost would be slashed to £3bn. All of this was extremely ambitious. But note that these were "efficiency savings": we were pledged that would get just as good a service, and it would simply (and probably, magically) cost less.

This pledge of a third made it's way into the Conservative Draft Manifesto, Chapter One (January 2010) which says:

"Our reforms will devolve decision-making closer to patients, removing the need for expensive layers of bureaucracy to oversee the NHS. As a result, we will be able to cut the cost of NHS administration by a third and transfer resources that Labour is currently wasting on bureaucracy to support doctors and nurses on the frontline."

The Draft Manifesto was a damp squib, and the Conservatives actually suffered a dip in the opinion polls when it was published. Consequently, "Chapter One" on Lansley's NHS policy was not followed by any other chapters. However, most of the policies survived, and the Conservatives 2010 election manifesto said:

"NHS staff will be properly accountable to patients for their performance, removing the need for expensive layers of bureaucracy to oversee the NHS. As a result, we will be able to cut the cost of NHS administration by a third and transfer resources to support doctors and nurses on the frontline."

There is that figure of one third again. Note what this is saying.  If administration at that point in time was, say, £3.9bn (and everything else in the NHS cost roughly £96bn) the implication is that after Lansley has made staff "properly accountable to patients" it would mean that administration would cost 67% of £3.9bn (or £2.6bn) and the "everything else in the NHS" would get that additional £1.3bn. This is illustrated here, where the grey box on the left and right is the cost of admin (£3.9bn and 2.6bn respectively, using these example figures) and the box in the middle illustrates the one third (£1.3bn) that is removed and "transferred to the frontline".

The implication is that everything else in the NHS would get more money. This is a typical politician's trick, you can never trust the term "re-invest". Right now we are seeing the effects of attempting to cut administration by one third, but are we seeing more, better quality healthcare? No, we are actually seeing cuts in healthcare where people are being denied treatments. Everything has been cut, not just admin.

The "properly accountable to patients for their performance" part is a bit of fantasy from the Tories. Basically their beef was with the NHS performance targets (things like the 4 hour A&E, or the 18 week referral to treatment targets; things that matter to patients but really piss off hospital managers). The Tories reckoned that if they replaced performance targets with the prospect of a public instigated tar and feathering* of hospital managers, the managers would make sure that they performed to avoid the aforementioned tarring and feathering*.

[* no, I don't mean real tarring and feathering, but the managerial equivalent: bankruptcy forced upon the hospital by the market through patients going to other hospitals.]

As yet we have heard very little about this "properly accountable to patients" aspect. In fact, the government seems to have forgotten about it entirely. The Conservative pre-election policy documents talked about detailed league tables of individual consultants, and even talked about hospitals taking out advertising in the local press to publish their performance figures. Very little of this has happened. Part of the reason is that the public does not like the idea of hospital bankruptcy. Patients do not like the faff of checking performance figures or choosing to go to another hospital to "punish" those hospitals with lower performance. Basically, the public do not like market forces in healthcare. This rather kills the whole idea of "properly accountable to patients" making sure that hospitals perform, and hence if the government cuts performance administration (which they are, by abolishing SHAs) the result will be under-performing hospitals rather than better performing hospitals.

Once in power Lansley put this policy into force. The Operating Framework is the NHS rule book for the coming year, and the Revised Operating Framework for 2010/11 (the first of the Lansley regime, published before the NHS White Paper was published) says:

"The overall ceiling for Management Costs in PCTs and SHAs will now be set at two thirds of the 2008/09 Management Costs (£1,509 million), the ceiling will therefore be £1,006 million" (23, p10)

This is the only mention of the magical one third in the Operating Framework. It does not say administration will be cut by one third, it says that management costs will be cut by one third (from £1.5bn to £1bn).  But hold on a minute! This says there will be a cut from £1.5bn to £1bn, it does not say a cut from £4.5bn to £3bn, the figure that was promised at the Conservative conference. What has happened to the rest of the money?

Well, once the Tories got into power they suddenly realised that the £4.5bn included £3bn worth of stuff that they had no direct control over. That £3bn was "administration" in hospitals. Lansley has said that by April 2014 all hospitals will be Foundation Trusts, and Foundation Trusts can spend their money on whatever they like. If an FT decided to increase the number of administrators it has, it can do this and there will be nothing that Lansley can do about it. The Operating Framework only talked about the administration that the Department of Health had direct control over: the Department itself, so-called Arms Length Bodies (regulators and bodies that monitor health), PCTs and SHAs.

In June 2010 Lansley announced:

"Management costs now stand at £1.85bn and it's our intention that during 2010/11 we will remove all the management costs that have been additionally incurred during 2009/10, to get back to the level of 2008/09. Then in subsequent years, we will go beyond that, with a further £350m reduction in 2011/12."

These cuts represented a total cut of £850m or 46% of the total, although it was unclear how SHAs and PCTs could withstand such a large cut. The answer, of course, is that they cannot. The NHS White Paper, published a month after the Operating Framework, announced the abolition of these bodies. If the bodies don't exist, their costs don't exist either, right?

The NHS White paper says:

"Over the next four years we will reduce the NHS’s management costs by more than 45%." (5.3, p43)

So whatever "good" management that SHAs and PCTs were doing (and, curiously, Lansley implies the stuff that they were doing in 2008/09 was worth paying for) would be done by someone else for 55% of the money. The third has been transformed into "45% management costs". This is reflected in the Initial Equality Impact Assessment document that accompanies the White Paper says:

"By streamlining and simplifying the infrastructure, administrative costs will be reduced by more than 45% freeing up resources to reinvest in front-line services." (5.32, p14)

This effectively says that the only way that the one third in savings can be achieved is by abolishing PCTs and SHAs altogether. These bodies will be abolished, so the cost will be cut, but there is no evidence that the work that these bodies carried out can be done for 45% less.

The Analytical strategy document (another document accompanying the NHS White paper) says:

"There are also costs associated with changing the system around loss of productivity within the transition period, and potentially relocation of staff. These short-term costs will be accompanied by reductions in bureaucracy spend in the longer term, with the aim being an overall cut by at least a third in real terms." (21, p5)

This warns that cutting management would have costs associated with it, but it is still optimistic that the third will be achieved.

Two months after the NHS White Paper was published we had the Osborne spending review that outlined the money that the government would spend over the next five years. The Spending Review (October 2010) document has this general statement:

"the administrative budgets of central Whitehall and its Arms Length Bodies (ALBs) will be reduced by 34 per cent over the Spending Review period, saving £5.9 billion a year by 2014-15 so that resources can be focused on frontline services" (1.99, p38)

The magical third appears again, this time it will be applied to all administration across all government departments.

The Operating Framework 2011/12 covers the first full year of Lansley's regime. It says

"By 2014/15 the overall running costs of the new NHS superstructure, compared to the running costs of the current NHS superstructure, will decrease by one third. This decrease includes the over 45 per cent reduction in management costs detailed in Equity and excellence: Liberating the NHS, in relation to SHA and PCT non provider management costs." (5.14, p49)

This includes both the magical third and the 45% cut in management costs.

In January2011 the Health and Social Care Bill was published. The Impact Assessments document that accompanied the Health Bill alludes to the spending review when it says:

"The Comprehensive Spending Review set the admin baseline for 2011/12 onwards for the Department of Health, SHAs, PCTs (excluding provider arms) and Arms Length Bodies which is 33% lower in real terms (27% in cash or nominal terms) than 2010/11 baselines." (A45, p14)

Interestingly, this says the cut is 33% in real terms which is a 27% cut in cash terms. Note also that this statement excludes the administration in PCT provider arms. The reason was that from April 2011 PCTs no longer have provider arms (these are things like community hospitals, some GP practices and community health services), these services were mostly moved to Foundation Trusts which (as I have explained above) are completely out of the control of Lansley. Since the admin in these organisations cannot be cut, it means deeper cuts elsewhere.

The Impact Assessments document says that administration costs of SHAs and PCTs was £3.941bn in 2009/10 and so given that there is a pledge to reduce this by a third by 2014/15 this means that administration in that year (in real terms, 2009/10 prices) will be £2.627bn. So administration would cost £1.314bn less. Clearly this is a cut (the Department provides less money but demands the same work) but it is always quoted as a "saving". The document does not say how this money will be saved, it merely says that if the target is achieved then administration will cost £1.3bn less every year. Thus, in the figure above, the grey box on the left is £3.9bn, the grey box on the right is £2.6bn and the box in the centre is £1.3bn.


The government often says that the "reforms" will save £1.3bn a year. The Impact Assessments makes it very clear that this "saving" is a result of the pledge to cut administration by one third, it does not say how this "saving" will be made, it just says that it has to be made. A saving implies that you can get the same outcome for less money, yet we have no evidence to show that the outcome (effective commissioning) will be the same. Thus since this is merely a reduction in the money paid to commissioners, it is a cut not a "saving". The other thing to be wary about, is that this £1.3bn "saving" is quoted as if the Department of Health will be able to hand a cheque with £1.3bn back to the Treasury and this will buy some more healthcare (illustrated above, where the third in grey becomes part of the white box that represents resources for healthcare). This is not the case. The Department will merely be given less money, there will be no transfer to frontline care.

One final point to make, and it is rather interesting point, is that this pledge to cut management costs originates from Lansley. The last government commissioned the McKinsey report to recommend ways to improve efficiency in the NHS. This report said that there could be "£13 to £20bn efficiency savings, over the next 3 to 5 years" which became "£15 to £20bn efficiency savings by the end of 2013/14" under the last government and "£20bn efficiency savings by the end of 2014/15" under this government (do you see what they did there?). Nowhere at all does the The McKinsey report say that money could be saved in management. £1.3bn of savings is huge (6.5% of the "£20bn efficiency savings"), yet this is not mentioned at all in the McKinsey report.

This makes you wonder one of two things: an either/or case. First, are McKinsey incompetent; if they did not notice such a huge saving, can they be trusted on anything in their report? Or, second, if McKinsey can be trusted, then this means that administration cannot be cut by one third and so it is not possible to "save" £1.3bn a year.

The message you should take from this is that PCTs and SHAs will be abolished merely because they are the only parts of the NHS over which Lansley has any direct control. He cannot tell hospitals how much they can spend on administration, and so this means he has to make a bigger cut in the parts of the NHS he does control. This is why he has decided to cut management costs in commissioning by 45% and why he has decided to abolish PCTs and SHAs.