How much will the NHS reorganisation cost?

"To go forward with a reorganisation that turns everything upside down, that costs £3.5 billion, how can that possibly make any sense particularly when it's being done in the teeth of opposition from NHS staff?"

Andy Burnham, Shadow Health Secretary, Sky News, 5 February 2012

"Andy Burnham keeps repeating this mistake that he says the cost of the modernisation is £3 billion. He knows it's not, the impact assessment shows it is between £1.2 and £1.3 billion as a one-off payment and by the end of this parliament there will be savings of £4.5 billion of which every penny will be reinvested in health care."

Simon Burns, Health Minister, Sky News, 5 February 2012

Labour and the Conservatives reignited an old conflict over the costs of NHS reorganisation on Sunday.

Following on from Labour's claims of 'hidden costs' last November, Shadow Health Secretary Andy Burnham claimed that the reorganisation planned in the Government's Health and Social Care Bill amounted to costs of £3.5 billion, far more than the £1.2 - £1.3 billion claimed by the Government.

Minister of State for Health Simon Burns branded this figure a 'mistake', reasserting the Government's own figures as the correct estimate.

So how can we diagnose these competing claims?

Analysis

The Government's claims can be sourced from a Combined Impact Assessment of the Health and Social Care Bill. Originally published in January last year, an updated version was published at the start of September. Helpfully, it summarises the costs:

Emphasising that the provided figures are 'best estimates', Mr Burns' figure refers to the 'total costs of transition' as a result of reduced redundancy costs. This puts the cost at between £1.2 and £1.3 billion.

Closer examination of Andy Burnham's figure reveals that the Shadow Health Secretary's source is somewhat different to Mr Lansley's. A Labour press release puts it clearly:

"The Government's new NHS guidelines will force the NHS to set aside millions of pounds more than previously thought to cover reorganisation costs. The request is buried in the 'Operating Framework' document and takes the cost of the NHS reorganisation above the £2-3bn estimate for the first time...

Primary Care Trusts are to hold back £3.44bn from the NHS frontline over two years. Whilst the total cost of the Government's plans are set to rise yet further if the controversial Health and Social Care Bill clears Parliament in the New Year." 

The said document is the Operating Framework for the NHS in England, 2012/13 which, as in previous years, outlines the structures and allocation frameworks planned for the upcoming financial year.

Crucially, the document states:

"As in 2010/11 and 2011/12, the requirement for all PCTs to set aside 2 per cent of their recurrent funding for non-recurrent expenditure purposes only will continue... The non-recurrent cost of organisational and system change during 2012/13 will need to be met from the 2 per cent."

In essence, Mr Burnham's argument seems to stem from the holding back of this 2 per cent of PCT funding for use for the organisational and system change during 2012/13.

Labour claims this amounts to £1.69 and £1.7 billion for the years concerned. This comes from taking the total NHS PCT allocations (£87.5 billion in 2012/13) and finding 2 per cent, amounting to roughly £1.7 billion.

However, after putting this claim to the Department of Health (DH), they informed Full Fact that the 2 per cent reallocation of PCT funding had already been factored in to the total estimates in their impact assessment and should not be counted again. A spokesman said:

"We have set out the costs of transition in the impact assessment for the Health and Social Care Bill and £3.5billion is a large overestimate - we anticipate costs of £1.2-1.3bn over the lifetime of parliament, which will be vastly outweighed by the savings. Over this Parliament, modernisation will save £3.2bn. We will save £1.5billion each year from 2014/15 onwards."

Interestingly, the DH also pointed out that the 2 per cent reallocation was not new. In fact, this had been in place under the last Labour Government. Examining a similar Operating Framework from 2010/11 (drafted under the previous Government) confirmed this:

"SHAs must ensure that PCTs do not recurrently commit the totality of their recurred funding in their 2010/11 plans, such that at least 2 per cent of recurrent funding at the aggregate regional level is only ever committed non-recurrently...

These resources are available to be deployed non-recurrently in-year to support service transformation..."

However Mr Burnham has rebutted this in a similar interview with Sky News last year, stating that:

"I said that 2 per cent should be used to transform patient care, to find new ways of delivering services that could save money, it was money that was going into patient services. It was not money to pay for redundancies, for consultants, for all of the wasteful costs that come with an unnecessary and dangerous reorganisation"

So the essence of the Labour argument is that money set aside for one-off non-recurrent payments which was formerly 'going into patient services' is now going towards the costs of transition.

The Government maintain, however, that the hidden costs Labour speaks of are already accounted for by its own impact assessment and should not be counted again. They emphasise that, while the £1.7 billion reallocation is larger than their impact assessment, not all of this reallocation will be used for reorganisation, hence why double-counting must have taken place.

Conclusion

The essence of the dispute arises from each party using different sources for their data. Labour maintain that the Government are 'hiding' costs under their PCT funding reallocation while the Government contest this is accounted for already in its impact assessment.

While Labour are correct to point out the planned source of the reorganisation costs, it does not appear correct to assume that the entire 2 per cent - or £1.7 billion will be used for the reorganisation, as the Operating Framework merely states that the costs will be met from the funds and gives no indication that the entirety of the funds will be used.

Hence the avaliable evidence suggests the Government's estimate provided by the Impact Assessment already takes into account Labour's 'hidden costs' anyway, and that these costs in themselves are likely to have been overestimated based on the information provided in the Operating Framework.

Of course, the costs could eventually end up higher or lower than any of these estimates in reality. Time will paint the clearest picture.