The value of focus in the NHS: at least £8bn per year in trapped value

Strasys analysis shows that NHS Trust productivity tends to decrease as the size of the Trust increases. In addition, health outcomes relative to disease prevalence within the population also decline as Trust size increases, whether Trust size is measured by activity volume or Operating Expenditure. This creates an interesting “trapped value” scenario within the NHS.

There are 13 acute trusts over £1.5bn in annual Operating Expenditure (FY23-24). Not one of those trusts can match the average productivity of the other 104 smaller acute trusts; if all 13 did manage that average productivity, the NHS would have saved over £8bn in financial year 2023-2024. Moreover, health outcomes would be significantly improved.

Given we all know that “There. Is. No. More. Money”, maths and the reasoning set out below would suggest that “There. Must. Be. More. Focus”. This is central to the Strasys thesis for better healthcare.

Economies of scale and economies of focus

It often pains me when economic and business terminology is misapplied in the public sector. After 26 years with a foot in both the private and public camps, I know that bi-directional sharing of lessons is beneficial, but I also know that context and reasoning from first principles is essential.

Take the application of “economies of scale”: whilst the idea of amortising fixed costs over the largest possible variable cost base and reducing marginal costs per unit through scale has some obvious merit, what is often missed is the tipping point at which complexity of service lines means bigger is harder, not better.

Economies of scale, and perhaps more importantly for healthcare, economies of learning, occur when an organisation can do more of the same thing, and do that thing in a standard way. A hospital that just does hernia repairs can get really good, and really efficient, at fixing hernias by doing lots of them in a consistent fashion (see: Shouldice Hernia Hospital).

An acute hospital with typically 50+ medical service lines does not necessarily get more efficient or more effective by adding more volume; and it certainly compounds its problems by adding more service lines. In healthcare, economies of focus need to be better understood.

Hospitals: the most complex human organisation ever devised

Dr Nadeem Moghal, Chief Medical and Innovation Officer at Strasys, quoted Peter Drucker in his Friday Fish and Chip Paper: hospitals are “the most complex human organisation ever devised.” It stands to reason that such complex human organisations follow different rules to simpler companies addressing narrow customer segments or delivering related products.

Do NHS Trust mergers improve productivity and outcomes?

This analysis started by asking whether the 15 mergers of acute NHS Trusts that occurred between 1 April 2017 and 1 April 2023 drove noticeable improvements relative to the performance of the pre-merged trusts. To cut short a lot of data cleansing and time buried in Python and spreadsheets, the answer is no.

What surprised me most was that it became hard to tell whether the relative poor performance of merged trusts was because of the merger, or just because larger trusts underperform. Some trusts do well post-merger (Royal Devon and especially South Tyneside and Sunderland deserve credit here), but the results are worrying enough that any Trust Boards currently planning a merger should pause and consider what the data shows.

Trust size, defined as OpEx less Impairments and High Cost Area Supplement (HCAS) costs, has a Pearson correlation coefficient of -0.31 to productivity, defined as total activities delivered per £1,000 of adjusted OpEx. That has a p score of 0.0006, well below the p < 0.05 statistical significance threshold. That means size only determines approximately 10% of productivity variation, but the financial sums are staggering. If the 13 trusts over £1.5bn in annual OpEx were to reach the average productivity of the 104 smaller acute trusts, we would be talking about over £8bn per year in FY24 figures of savings.

The relationship is not strictly linear. The “big trust penalty” gets worse for the very largest trusts. A trust two standard deviations below the mean size loses approximately 0.20 SD of productivity for each +1 SD size increase. At +3 SD, the loss grows to approximately 0.42 SD per +1 SD, roughly double the penalty faced by small trusts.

It is not just productivity that is adversely impacted, but also outcomes

Whether you look at OpEx or total activity volume, there is a clear negative correlation with what we at Strasys call Health Alpha. Health Alpha is a trust’s outcome score (based on a combination of mortality and emergency readmissions) relative to the disease prevalence within the population the trust serves. A positive Health Alpha means better outcomes than would be expected for that disease prevalence; a negative Health Alpha means worse outcomes.

Total volume of activity and Health Alpha have a Pearson correlation coefficient of -0.33 (p=0.00023). OpEx and Health Alpha have a Pearson correlation coefficient of -0.32 (p=0.00041). Again, size only determines approximately 10% of health outcome variation, but scale that out across England and we are talking about a significant number of excess deaths and readmissions that should not be occurring.

If you are wondering why this is not well known against publicly available data, the answer is in the data complexity. Strasys maps data from multiple public sources including TAC (keyed on non-standardised trust names), HES, ECDS, CSDS, QOF, SHMI, and others to reach a comparable view across the system. The analytical rigour required to do this reliably is significant.

So is the answer to demerge trusts or fragment large ones?

Absolutely not. Years and billions of pounds would be wasted, and patient care would be disrupted in the process.

What the NHS does need is the implementation of new models of care, centred on meticulous understanding of patient needs, volumes, and behaviours. You reduce friction (cost) and improve outcomes by designing services around the patient. There are four strategic focus lenses that healthcare organisations can apply, and six high-level models of care that drive organisational effectiveness. If we build around those and address the idea that district general hospitals can still be most things to most patients, there are substantial improvements to be made within the existing financial envelope. Money that could then be deployed to new treatments and addressing the structural imbalance described in Gainsbury’s Law.

If you have questions or would like to discuss any of the above, please get in touch.