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The Commons Public Accounts Committee publishes its 26th Report of this Session which, on the basis of evidence from the Department of Health, examines NHS hospital productivity in recent years and delivering improved productivity in future.

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

"Over the last ten years, the productivity of NHS hospitals has been in almost continuous decline. Over the same period, the amount spent on the NHS increased from £60 billion to £102 billion a year. The quality of the health service has improved as a result of this increase in spending. But the taxpayer has been getting less for each pound spent.

The Department of Health will now have to work to reverse the trend of falling productivity if it is to meet its ambitious revised target of achieving, by the end of 2014-15, savings of up to £20 billion each year.

A key problem is that national pay contracts have not so far been used to manage the performance of staff effectively. It is indicative of this that consultants' productivity has fallen at the same time as they have had significant pay rises.

There are, however, risks for the NHS in achieving productivity improvements at the same time as delivering radical reforms. The Department needs to achieve £20 billion in efficiency savings and must not lose focus on this enormous challenge."

Margaret Hodge was speaking as the committee published its 26th Report of this Session which, on the basis of evidence from the Department of Health, examined NHS hospital productivity in recent years and delivering improved productivity in future.

The committee's findings

Over the last ten years Government spending on the NHS increased by 70%, from £60 billion in 2000-01 to £102 billion in 2010-11, with around 40% spent on services provided by acute and foundation hospitals. This substantial increase in funding enabled hospitals to invest in more, better paid staff and improve their buildings and equipment. 

In return there have been significant improvements in the performance of the NHS, particularly in those areas targeted by the Department of Health (the Department) such as hospital waiting times and outcomes for patients with cancer and coronary heart disease.  However, the level of hospital activity has not kept pace with the increased resources as hospitals focused on meeting national targets, but not on improving productivity, and productivity has actually fallen over the last decade.

Productivity is defined as the ratio of the volume of resources (inputs) to the quantity of healthcare provided (outputs), adjusted to reflect their relative costs and quality.  Figures produced by the Office for National Statistics (ONS) estimate that, since 2000, total NHS productivity fell by an average of 0.2% a year, and by an average of 1.4% a year in hospitals.

The taxpayer has therefore seen a better quality NHS as a result of the additional investment but, per taxpayer pound, is getting less in return.  The trend of falling productivity will need to be reversed if the NHS is to deliver the Department’s productivity challenge, to deliver £20 billion of efficiency savings a year, by 2014-15, without compromising services.

One would expect productivity to fall at the start of a period of expansion as the inputs in the form of staff and resources can be increased rapidly, while improvements in outputs tend to lag behind.  But, in 2002 the Department promised that, in exchange for increased funding, it would deliver annual productivity improvements of between 1% and 2%.. The Department failed and we have had ten years of almost continuous decline.

The ONS measure of productivity is the most authoritative there is, although the Department points to its shortcomings.  We accept that it is challenging to make accurate adjustments for quality improvements.  But, despite previous assurances to this Committee, the Department has failed to reach agreement with ONS on how the measure should account effectively for improvements in quality.

The Department promotes efficiency and productivity improvements in hospitals primarily through national pay contracts and by setting a fixed price, or ‘tariff’, for individual hospital procedures (Payment by Results).  While Payment by Results does seem to have driven some improvements, the system only covers 60% of hospital activity and there is substantial variation in hospital costs and activity.

The Department is introducing ‘best practice tariffs' to promote greater hospital efficiency. On the one hand, this tariff system could promote efficiency and productivity, but on the other hand could prioritise price over quality. The Department needs to set outhow it will mitigate the risk that, with best practice tariffs and any increased price competition, hospitals may reduce the quality of service, or may decide not to provide some services.

National pay contracts have not yet been used to manage staff performance effectively, and consultants’ productivity has fallen at the same time as they have had significant pay rises.

There are risks to the NHS being able to deliver up to £20 billion savings annually, for reinvestment in healthcare, alongside implementing a substantial agenda of reform.  Productivity improvements will be key to delivering these savings. 

The Department points to areas where the reform agenda complements the delivery of savings; for example, by reducing management costs associated with Strategic Health Authorities and Primary Care Trusts, and in the requirement for hospitals to improve their performance prior to becoming Foundation Trusts. 

The Department and an expert independent witness told the committee that although the risks to delivering savings have increased in light of the planned reforms, the reforms could increase its ability to improve productivity in some areas.  The committee expects to return to the issues of NHS efficiency savings and productivity in future reports.

• Report: Management of NHS hospital productivity
• Public Accounts Committee