Transcript of Sir David Nicholson seminar, Civitas 20 July 2015 'Is the Government still ignoring the NHS's finance problem?'

The term 'The Nicholson Challenge' was health select committee chair Stephen Dorrell putting a target on my back. Recently, George Osborne called the Five-Year Forward View (5YFV) 'The Stevens Plan'. Simon will have noticed ...

My title today: 'Is the Government still ignoring the NHS's finance problem?' I want to deal with this question in four chunks: the past financial position of the NHS and its lessons; the realities of current position; the nature of health expenditure and its relationship with the economy as whole; and the kind of reform programme that any health system will need in future.

Is the Government ignoring the NHS finance problem? Yes, for two particular reasons.

Firstly, it believes that, somehow or other, the NHS can muddle through this problem: in fairness, the service has a great history of doing so in past times of funding problems.

Secondly, if they really start to think about the scale of the financial challenge, they'll just find it too frightening.

So we'll have to explain to the general public what the likely route out of this is.

My experience, half under a Labour government and half under the Coalition, is that governments don't want to confront those issues. David Cameron wishes the NHS funding issue would go away. For Prime Ministers, there's little in it for them on the NHS - and few think deeply on its future development.

What does the past tell us about NHS financial crises? Surprisingly for a universal system free at point of use, there have been very few, and we might have expected more. But they have accelerated over the last 15-20 years.

When is the right time to set up a universal health system? We created the NHS in the aftermath of the second world war, with major cities in ruins, and hundreds of thousands killed/injured. At that time, we had the political leeadrship to set up universal system.

The idea that if we created a universal system, costs would go down was seen to be a myth right at the start - in mid-1952, the Guillebaud Commission found that health expenditure and economic growth would have too go hand in hand.

We saw the next real pressure in the early-to-mid-1970s. Healthcare costs and expenditure, from the start, has been what you can see as an exponential curve. Not until 1976 was the NHS cash-limited, by the intervention of the International Monetary Fund: before then, the NHS got what it got last year, and a bit more. General practice only became only cash-limited in the 1990s.

Today, technology pressures are outstripping those of demographics. The external threat of the IMF led to cash-limiting.

Through the 1980s, the NHS was at times squeezed, but not always, because it was essentially a regional organisation with very powerful regional health authorities choosing local allocations, so they could manage funding by moving resource round the system (with a great lack of transparency and accountability of individual organisations).

NHS finances began to be transparent with the Thatcher reforms and the creation of NHS trusts, and I'm arguing we did need financial transparency to drive discipline. Then came the Blair reforms, which accelerated financial openness. Since then, we;'ve had more periodic financial crises.

Of the last two, 2006 was not that major: the current one is the largest the NHS has ever faced in its history, preceded by a mega-reorganisation that even those outside the NHS will recognise. Organisational change is not a free good: the Goldring Audit found that reorganisation was really messing about masquerading as action.

In both the 2005-6 reorganisation and 2012 Health & Social Care Act reorganisation, there was clear financial dislocation in the system as a result. Add in the big issues, where government starts to drive expansion of staffing. In 2005-6, the increase of 88,000 more nurses and doctors since 2000 drove expense. And in the aftermath of Robert Francis' Mid-Staffs Public Inquiry Report, the regulatory changes and exhortation of politicians was likewise driving lack of financial control. That's the story of NHS financial crises to now, in brief.

'The Nicholson Challenge' - I called it QIPP (for quality, improvement, productivity and prevention). In 2008, the global financial crisis was clearly going to end the year-on-year, real-terms funding growth of the NHS, and I believed we were entering a period (one not destined to last forever...) of little or no real-terms growth.

We decided to plan our way into this new world, and did so. We took the view that for the four financial years after 2010, there'd be little or no funding growth. And we argued it would be possible to improve quality and productivity by innovation and prevention. Simple to say; complex to do.

Two things followed: then-Health Secretary Alan Johnson said we could say that this much lower funding growth was going to happen - a piece of political candour that was quite something in itself, as the secretary of state (SOS) rarely wants to discuss financial challenges. And Alan Johnson said that whatever the Independent Review Panel to advise SOS on service change came up with, he would agree: no political veto.

We tackled the scale of the quality and productivity challenge, which we assessed as being worth £20 billion. Since 1948, the NHS has had 4-4.5% a year growth on average, so we calculated that £20bn was what we had to liberate from our existing cost base to deliver on the demands on system.

Firstly, we identified what only the centre could do: pay restraint, and reducing the costs of running the system. Also, we agreed we wouldn't add extra costs as we went through. The benefits form pay restraint were about £800 million a year; cuts in management costs about £1bn a year: there were big things that only the centre could do.

Secondly, we asked how we could drive efficiency and productivity? The big lever was the national tariff, squeezing the provider sector for 3-4 years and squeezing the GP contract. That was relatively successful.

Third came changing the way deliver services, better community services and changing acute sector operation. Our first two areas had gone reasonably well, but the third only did 10-15% of what we needed.

Service change is easy to describe, but very hard to deliver. so we had to reply more on the efficiency argument, hence we've seen real strains on the NHS. But it's been in sharp contrast to most of the rest of Europe. Span, Portugal, Greece all moved reduction of expense by reducing the offer to patients of what's available: less services or more co-pays. Spain cut health expenditure by 14% and doubled waiting. Ireland and Greece significantly cut pay, by 14-20%. We constrained pay growth, but not at that scale. And others funded growth.

So there was a unique NHS response, keeping the universal offer together. Results from the Audit Commission concluded that of the £20 billion target, we did £18.3bn of savings. Not perfect, but progress.

Now? The funding squeeze has kept on two years longer than the maximum we expected and whatever else you may say, the stress and strain are now clearly showing. There's not much evidence of major system-wide service change; nor of efficiency gains cranking up. Hospitals are now struggling to deliver.

Looking to 2020, the projection is for another £30bn of efficiency gains - or reductions in demand growth. It seems that the deal Simon Stevens has done with the PM and Chancellor is to get a promise of £8bn of investment for £22bn from efficiency gains in the NHS. If we look at that, £8bn will takes us in GDP terms back to where we were in 2005: it's not really largesse from the Government.

Short-term, this is probably the most financially challenging time for the NHS ever. Back in 2005-6, we had a deficit just over £1.5bn, gross £1bn. Today, the deficit is probably £2bn on the provider side alone: net, not gross. About 70% of providers say they're in deficit, and more commissioner organisations are in the same trouble.

And one reflection is that we've never has a commissioning organisation solve their financial problem without using growth money. There's no history of commissioning organisations putting their own house in order without extra cash.

So it's even harder to solve this than in the past. Part of the Government's dilemma is its belief that the NHS gets itself sorted out. This problem is systemic. You can't credibly argue that 70% of organisations are in distress because of local issues to their locality.

This is systemic, as it was not before. Most things that we thought we could do financially have been done. It's hard to see how to reduce running costs more, when the NHS's are among the world's lowest anyway.

There will be a limit to the maximum amount of pay restraint. I don't know if the Chancellor's approach will hold: frankly, I would be surprised, because the NHS is in a global marketplace for medical labour.

I think there are massive opportunities in procurement, but what's stopped us acting is less any failure to understand the scale of the problem, but much more people's inability to work together in a coherent way to make savings happen.

Another issue is the NHS's position in relation to social care. As we saw in 2005 and before, local government can reduce its offer, and has done. But now, this is massively impacting on the NHS. Any solution to the current financial problems must include social care. We need more transformational change for the delivery system, and in my view we're not organised to help that happen.

The healthcare system is not capable of making that happen. Nationally, DH and ministers have been adding costs onto the NHS, with regulation changes, and 7-day services, and new targets for cancer and mental health taskforces. In theory, these may make future savings, but they are now adding to running costs. The NHS will rise to many of these challenges. But the most likely outcome some form of managed decline over the period.

When I was appointed, I had regular meetings with Tony Blair. He didn't see the 2006 deficit as a problem, but rather as a sign that his reforms were working. It's not the deficit that kills you, but when people try to start to deal with it and the consequences.

If you think about the context in which we operate, the NHS gives remarkable value for money. Our expenditure per head is currently £5,900 per capita less than France's, £8,000 per capita less than Germany's (data from Daily Telegraph analysis). Multiply what that is by gross uplift, our annual underspend on healthcare compared with France and Australia is £20bn. With Sweden, £50 bn.

In the past, healthcare expenditure was broadly seen as a drain. The last government produced the 'Innovation, Health And Wealth' report on the impact of heath expenditure on economic growth. And that report found that healthcare spending is a very effective boost to demand in your own country - as Stuckler and others' work on the healthcare multiplier shows. This is seen not least in the boosting of our own life sciences industry, and on absenteeism rates and cutting employers' costs. It shouldn't be hard to argue a case for more resources for healthcare.

What do we need in the NHS? To boost productivity, improve quality and put more money in. This is about doing a series of things: these key six have been tested internationally. Most of the world's health systems are facing these kinds of dilemmas (and no-one knows the answer)

1. Involve people in self-management. Easy to say; hard to do - but massively important to do using technology. How can we invest in this, if we can't see it may possible save us money?

2. Strengthen primary care: potentially great for the health system. It helps meet long-term conditions demand, also early diagnosis. But this means changing the way primary care operates: it's impossible to change the delivery model on back of what are effectively corner shops.

3. Changing how we deliver continuity of care, and improving quality and cost.

The current Government would embrace most of these three, so far.

4. More concentration and centralisation of healthcare in a smaller number of acutes; this will be controversial, but it's very important, and there's good evidence. It will not save huge sums, but will stop future cost growth and improve quality.

5. Massively improve productivity of elective providers, learning from India, Africa and South America, cutting treatment costs by 20-30% by standardisating and volumes.

6. Review highly specialised service provision. Currently, we have about 300 providers of specialised services. We could do the job with about 27: concentrate, centralise and reduce costs.

All these latter three will be practically and politically very problematic. And I know they would be extraordinarily unpopular.

So we have to keep calm: this is going to be very hard. We need political leadership as with the closure of large psychiatric hospitals: Enoch Powell's 'water towers' speech worked because it wasn't just words, but was also backed with resources.

We need to win arguments in the system around quality and cost, and we need to work together.

And the Government needs to come up with more money. This is going to require a degree of bravery and political courage not seen from governments over the last 15 years.