John Appleby: Sacking staff is not the way to save money in the NHS

Analysis: Huge savings can be made by reducing variation in the delivery of clinical services

Later this week, the Chancellor will announce a small real-terms increase in the health budget. Compared with widespread cuts in other Whitehall budgets, this will seem generous. Yet the NHS will still face the biggest financial challenge in its history.

With an ageing population and increasing demand for services, it will soon need to find up to £14bn a year in productivity savings – the equivalent of 3–4 per cent of its budget. To put this into perspective, the Office for National Statistics estimates that healthcare productivity fell by 0.3 per cent between 1995 and 2008. The overall NHS budget is protected, but local budgets are under pressure. Historic legacies of debt in some NHS trusts have left them in a precarious financial position.

Moves to care for patients out of hospital and a freeze on the prices they are able charge are squeezing hospital income. With two-thirds of hospital budgets made up of staffing costs, some posts will inevitably be frozen.

Slashing budgets and sacking staff should not be the answer to the financial challenges facing the NHS. Instead, the aim should be to generate savings to reinvest in more and higher-quality care for patients. Renegotiating incremental increases built into staff contracts, for example, could save £1bn and protect jobs.

There are opportunities to improve efficiency. Huge savings can be made by reducing variation in the delivery of clinical services – evidence suggests productivity improvements worth £4.5bn could be made in hospitals alone by bringing performance up to the level already achieved by the best.

This means, for example, reducing the length of time patients spend in hospital and reducing admission rates through better care in the community. Significant savings can also be made by tackling inefficiencies in back-office functions, improving workforce productivity and improving the way drugs are prescribed.

Getting the best value must be a single-minded focus for everyone working in the NHS – from ward to board. This will not mean that every frontline job can be saved. But if it can rise to the productivity challenge, the NHS can continue to deliver on its core mission of improving quality without cutting services for patients.

The writer is chief economist at The King's Fund