Most of us have read the claim that the introduction of the internal market increased NHS administration costs from 5% to 14%, with many variations on the theme claiming for example that this means £10bn could be saved by ending the internal market.

The source for the claims about 5% and 14% is the 4th Report of the Health Committee, Session 09/10 on Commissioning. The following extracts are from the report…

According to the official historian of the NHS, Dr Charles Webster, the service:

has traditionally scored highly on account of its low cost of administration, which until the 1980s amounted to about 5% of health-service expenditure. After 1981 administrative costs soared; in 1997 they stood at about 12%

An estimate of administrative costs since 1997 has been made by a team at York University, in a study commissioned by the DH but never published. This concluded that:

management and administration salary costs represent, as a very crude approximation, around 23% of NHS staff costs, and around 13.5% of overall NHS expenditure…

In the English NHS, the purchaser-provider split, private finance, national tariffs and other policies aiming to stimulate efficiency in the system and create a mix of public and private finance and provision mean almost unavoidably that the more information is needed to make contracts, hence transactions costs of providing care have increased, and may continue to increase.

The Health Committee concluded that …..

Whatever the benefits of the purchaser/provider split, it has led to an increase in transaction costs, notably management and administration costs. We are dismayed that the Department has not provided us with clear and consistent data on transaction costs; and the Department of Health was unable to give us accurate figures for staffing levels and costs dedicated to commissioning and billing in PCTs and provider NHS trusts.

Two things should immediately be pointed out. The quote about 5% is from an excellent book, A Political History of the NHS by Charles Webster, but the passage in the book does not itself have any references to where the 5% came from or what it actually contained. It is almost certain that in the era pre 1980 many tasks which might now be characterised as “administration” or “management” were only done as part of a wider job and so would not have been recorded in any way.

And the York University Report – NHS Management and Administration Staffing and Expenditure in a National and International Context, from March 2005, time and again sets out that comparison of costs between countries and between periods in our own NHS are beset with many issues around classification, so for example the 14% contains an “estimate” of consultants time which might be classed as management. It stated:-

There are no agreed definitions of ‘administration’ and ‘management’ in health care between (and sometimes even within) countries’ health care systems. Substantial ambiguity exists around any comparisons, particularly as definitions shift as groups of workers are recategorised. Consequently, all cross-national and cross-sectoral figures must be viewed with extreme caution.
The York Report also has these key passages:-

Before reviewing the data we have accessed, it is useful to emphasise the particular nature of the political debate about NHS ‘bureaucracy’. Expenditure on management in other public sector organisations (e.g. schools) is rarely measured systematically, and it is not denigrated in the way that the alleged ‘excesses’ of health sector management are. Yet in all service industries and organisations, management and administration is essential for the efficient delivery of services. Furthermore, as the complexities of health care delivery have increased, and there has been increased recognition of system failures such as practice variations, clinical errors and inappropriate or untimely treatment, the need for effective management and administration has increased in all health care systems, public and private.

and

Expenditure on management and administration, in the NHS and in all other health care systems, is a means to an end: its purpose is to improve patient care. The relatively ill informed and superficial debates around whole system ‘bureaucracy’ make little attempt to assess the value of management and administration in particular activities, or accept that some such expenditure is essential to ensure the appropriate and efficient delivery of care. The primary policy issue should not be overall management staffing levels or costs, but how investments of this type affect the performance of the health care system and its component parts.

Some Conclusions.

The figures relate to the total estimated cost of administration and management not just the cost of commissioning.

The comparison of 5% to 14% is pointless as we have no comparable basis.

There was an increase in administration costs (probably quite significant) due to the late 1980s early 1990s changes as many new organisations came into being and transaction costs grew but this has not been quantified.

But there are argued to have been compensating benefits from the changes, such as in information technology, but no study has set out what these actually contributed to the 5% v 14% issue.

Whilst reference is repeatedly made as if the cost of commissioning (or of the Purchaser Provider split) is 14% this is not the case. Our own work has estimated the cost at far less, as does the Impact Assessment for the H&SC Bill.

If, perhaps when, the H&SC Act is repealed and the competitive market is removed then there will be scope for savings but not of the order of £10bn.

Further savings could come from reducing the number of NHS organisations through consolidation, but merges and other transactions have a bad track record.

We can only “guesstimate” but this might over time be of the order of 1 – 2% of total English NHS expenditure, but there would be considerable transition costs to be met and neither change would be easy and consolidation would be contested!

Richard Bourne, October 2013