With potential budget claw backs of 20% to be found in UK health care in forthcoming years, the question arises as to how these might be achieved. Based on the long-standing economic principle of marginal analysis, a framework for managing such a National Health Service credit crunch is outlined. The framework incorporates not only the natural starting point for cuts through schemes aimed at achieving the same for less cost, such as lean thinking and service redesign, but also the genuine disinvestments, in the form of stopping some services for some people, that might be required.

## Introduction

With the International Monetary Fund wolves at the door1 and the prospect of post-election cuts in public services, where does the National Health Service (NHS) go from here? Indeed what will happen to health services worldwide as they seek to cope with unprecedented scarcity? In England, despite initiatives such as World Class Commissioning (WCC), old techniques and phrases are being trotted out as though we are in some budgetary downturn of the sort which happens from time to time. Some, such as ‘lean thinking’, simply amount to ‘squeezing more efficiency out of the system’. ‘Disinvestment’, too, is often used to refer to taking resources from areas of care that provide no added value, as though disinvestment will do no harm. Does anyone really believe that the scale of cuts required can be met by such means? Despite recent promotion of such approaches,2,3 and the elevation of the QIPP (Quality, Innovation, Productivity, and Prevention) agenda in the NHS, the evidence says that quality improvement initiatives, for example, provide very little scope for cost savings.4 A more realistic agenda has been set in two recent papers.5,6 Buried in the NHS Confederation document is the statement that opportunities to decommission infrastructure ‘as part of an agreed strategy to cease or shift service provision’ (p. 7) should be identified.5 This is in fact the almost-unspoken key. Logically, some services will have to be scaled back or stopped, either to avoid deficits or allow other services to expand, which better meet need.

Such genuine disinvestment will inflict harm, so how is it to be done? In 60 years of the NHS, no guidance on this has been provided. The lack of widespread adoption of any tools for doing this reflects, in part, the culture of contentment that has arisen in health care. Repeated bail outs and budget increases have led to a generation of clinicians and managers desensitized to managing scarce resources for best health. However, lack of adoption also reflects the political difficulties involved in explicit priority setting. Nevertheless, tools have been developed over a 20-year period of research.7,8 More than 10 years ago, NHS managers and clinicians were familiar with cash limits and the need for such tools.9–11

To begin such a process, it is important to get the thinking right. To minimize harm, ‘rational disinvestment’ is the only logical way forward. We first reflect on common methods of rationing used to date. The framework of marginal analysis, advocated for many years as the way to think about how to maximize benefits from publicly funded health care, is then described before outlining how rational disinvestment stems from that framework. Although implementation is not the main focus of the article, the question of whether rational disinvestment can work, and especially how clinicians can be engaged, is briefly addressed.

## How are resources currently allocated?

Of course, in many health care systems, quite sophisticated formulae are used to allocate resources across geographically defined health care entities, such as primary care trusts (PCTs) in England. However, within such entities, the most common resource allocation method is ‘history’; what you had last year plus a little bit more. Questions are rarely asked about how this money is used never mind whether to maximum effect.

Unsurprisingly, the main approach to dealing with budgetary downturns is equally unsophisticated—that of across-the-board cuts. At best this might be seen as fair, with every part of the organization ‘doing their bit’ by scaling back spending by some fixed percentage amount. However, it almost certainly ensures that what is left is not used to maximum effect.

More sophisticated approaches to deal with budget contractions are now in vogue. Lean thinking and service redesign feature prominently in NHS Evidence and NHS Institute for Innovation and Improvement web sites. The basic idea is to improve pathways of care to deliver the same (or better) outcomes at less cost. This would, of course, be the logical starting point for any rational disinvestment process—pain-free disinvestment. However, with the prospect of looking for a £20 billion cost reduction on the £100 billion NHS budget in England,12 will they be sufficient? A broader framework is required within which lean and service redesign can fit.

## Marginal analysis

An economic approach to priority setting simply has to adhere to two key economic concepts; ‘opportunity cost’ and ‘the margin’. Opportunity cost refers to having to make choices within the constraint of limited resources; certain opportunities will be taken up while others must be forgone. The benefits associated with forgone opportunities are opportunity costs. Thus, to spend a limited budget to maximum effect, we need to know the costs and benefits from various health care activities. Marginal analysis refers to the fact that assessment of costs and benefits is best addressed ‘at the margin’. The focus is on the benefit gained from the next unit of resources or that lost from having one unit less. If marginal benefit (MB) per pound spent for, say, an elective heart operation programme is greater than that for an elective hip replacement, then resources should be taken from hips and given to hearts. But where does this allocation process stop? Do we wipe out the hips programme completely?

This is best answered by use of the sequence of conceptual diagrams in Figure 1, which illustrate the notion of marginal analysis. Let us assume that we can measure both costs and benefits (i.e. health gains) from treating hearts and hips in terms of money, as on the vertical axis (Figure 1a). A further assumption is that these programmes and all others are operating at maximum ‘technical efficiency’ in the sense of there being no waste in the system. Minimization of technical inefficiencies (the focus of ‘lean thinking’ and QIPP) has been explored in the literature,13 and can be incorporated into the framework, but is set aside for now for purposes of illustration. First, we activate the economic (and reasonable) assumption of diminishing MB, whereby physicians and surgeons treat people in order of the magnitude of benefits to be gained. Thus, those who gain most from a heart operation will be treated first (Figure 1b). Accordingly, if we increase the number of patients that are treated over a set period of time, we are adding patients that benefit less and less from the procedure, leading to the downward sloping MB line for hearts (Figure 1c and d) and a corresponding one for hips; although note that the hips line has a different slope (Figure 1e). If we also assume for purposes of illustration that the cost of each procedure is constant and equal for all patients receiving the procedure (Figure 1f), then cutting back on hips from its starting point (Figure 1g) will increase its ratio of MB per £ spent, while expanding hearts will diminish its equivalent ratio (i.e. we will get less and less return in terms of health gain for each additional £ invested in hearts). To maximize total patient benefit derived from the combined budgets of the two programmes, the process of reallocation should continue until the ratios of MB to marginal cost for the programmes are equal (Figure 1h).

Figure 1.

Marginal analysis. (a) Benefits and costs can be measured in pounds. (b) Treat those who benefit most. (c) Benefits diminish for each additional patient treated. (d) Continuous downward sloping ‘curve’. (e) Same for hips, but different slope. (f) Equal marginal costs. (g) Where do we go from here? (h) Move resources from hips to hearts, until ratios are equal (as indicated by dashed horizonal line).

Figure 1.

Marginal analysis. (a) Benefits and costs can be measured in pounds. (b) Treat those who benefit most. (c) Benefits diminish for each additional patient treated. (d) Continuous downward sloping ‘curve’. (e) Same for hips, but different slope. (f) Equal marginal costs. (g) Where do we go from here? (h) Move resources from hips to hearts, until ratios are equal (as indicated by dashed horizonal line).

Thus, we would not propose a total elimination of either service. The application of economics becomes about the balance of services, not necessarily introduction or elimination of a service in totality. Examining changes at the margin is central to attempting to make the most of resources available by deploying them either across or within programmes so that relevant outcomes are achieved in the best manner possible. In fact, without this principle, resources will ‘never’ be allocated optimally.

## Operationalizing opportunity cost: a pragmatic framework

The proposed framework is outlined in Box 1. The scenario of hearts vs. hips has obviously been used for effect. The framework, however, provides a structured way of thinking about planning service delivery either at the level of a programme or services for a whole population. Within programmes, it might be used to take resources from one part of the clinical pathway to give to another to achieve the same benefit for less cost—for example, by improving blood glucose control and coronary vascular disease risk management for people with diabetes. In such cases, patients would not necessarily be deprived of benefit, merely treated differently. The pain here would be incurred by providers in one part of the pathway losing resources to providers in another part. Across services for the whole population, it could mean stopping services for one group in order to expand or introduce a service for another. Many of our own and others’ experiences of using and developing such a framework have been described in recent years.7–11,14–17

Box 1 Programme budgeting and marginal analysis (the five questions)

Programme budgeting and marginal analysis addresses priorities from the perspective of resources:

• What resources are available in total?

• In what ways are these resources currently spent?

• What are the main candidates for more resources and what would be their effectiveness and cost?

• Are there any areas of care within the programme, which could be provided to the same level of effectiveness but with less resources, so releasing those resources to fund candidates from (iii)?

• Are there areas of care which, despite being effective, should have less resources because a proposal (or proposals) from (iii) is (are) more effective for the resources spent?

The starting point is to examine how resources are currently spent; this is programme budgeting and encompasses the first two questions in Box 1. The last three questions pertain to marginal analysis. The underlying premise of programme budgeting is that we cannot know where we are going if we do not know where we are. If the health care budget is fixed, opportunity cost is accounted for by recognizing that the items for service growth (question 3 of Box 1) can be funded only by taking resources from elsewhere (questions 4 and 5). This can be done by being more technically efficient (e.g. treating the same conditions differently and achieving the same health outcome at less cost, as addressed by question 4), thus encompassing ‘lean’, service redesign or eliminating unwarranted variations in care. If there is no more to be gained from ‘lean’, questions of allocative efficiency come into play (e.g. treating entirely different conditions to achieve a greater health outcome at the same overall cost, as addressed by question 5). This is ‘true marginal analysis’, but is more difficult to address because it involves taking resources from some groups of patients to give to others. However, all it is doing is to ask what is the optimal balance of services in light of resource constraints. Although in reality quantitative data on MBs is often lacking in many areas of health care, it is the way of thinking underpinning the framework that is of prime importance. Indeed WCC is compelling PCTs to use and produce the data to enable them to set priorities more systematically, with advances already having been made in quantifying benefits.17 Recent legislation in the form of the NHS Constitution and subsequent directions to PCTs and NHS Trusts will also require defensible processes to be in place for deciding on such priorities. PCTs have little hope of ‘getting it right’ without taking on board the thinking described here.

One challenge to the adoption of such frameworks has been the tendency of governments to add real resources incrementally to health organization budgets year-on-year anyway. Thus, top priorities for service development could be funded that way, avoiding the real issue of trade-offs. However, given that such increased funds are unlikely to cover all proposed growth areas (i.e. scarcity still exists), the principles of marginal analysis still apply. More pressing is how they might apply in the face of a forthcoming public services credit crunch; hence rational disinvestment.

## Rational disinvestment

From Figure 2, it can be seen that rational disinvestment looks similar to standard marginal analysis. Indeed, the principles are the same. However, where real budgets are being cut, it is the least beneficial treatment (for resources expended) that would lose out, at least in the first instance. Obviously, once again, one would first seek to eliminate waste in the system. Beyond this, as in the case of Figure 2, real and harmful cut-backs would have to be made. In this hypothetical example, hips would be cut back while hearts would not expand. The degree of cut-backs in hips would depend on the size of the overall budget cut to health care. With larger cuts, hips could be cut back to a point whereby the MBs of hips and hearts are equal (denoted, again, by an emboldened horizontal line, which this time crosses at the slightly higher starting point for hearts). Beyond this point, the cut-backs would be shared between the two programmes in proportion to their MBs.

Figure 2.

Rational disinvestment.

Figure 2.

Rational disinvestment.

If seeking to maintain maximum benefit or, more accurately, minimization of harm caused by budget cuts, this is the only logical way to do it and should form the basis of decision-making approaches addressing disinvestment.

## Can we do it?

Instinctively, one may think that there are several barriers to implementation of such a different way of thinking. Some of the main ones are listed in Box 2, with a response to each.7,17–26 Additionally, there are many examples of health care organizations of different sizes using marginal analysis to guide resource allocation decisions. Over 70 health organizations worldwide had used the framework by 2000, with use sustained in many.27 So, it has been done. The best example of the use of rational disinvestment in the context of financial downturn is that of Calgary Health Region (Canada).28,29 Calgary was facing a CAD$42 million deficit in 2002–03 and the Provincial Government of Alberta (funder for this health authority) refused to ‘bail them out’. Instead of an across-the-board budget cut, rational disinvestment was used. The result was not only deficit elimination but also the implementation of new investments in programmes, as those were found to provide greater benefits than the lost benefits from cut-backs beyond the required CAD$42 million. This has since been replicated in other Canadian provinces. For instance, in British Columbia (Canada), at present, the six health authorities face a combined CAD\$350 million deficit with no bail-outs forthcoming. One seniors’ care facility in this jurisdiction recently finalized its budget plans for the next year using the rational disinvestment approach and, as in Calgary, was able to not only address its deficit but also introduce new spending initiatives (F. Dionne et al., submitted for publication). In England, such implementation, while not easy, can fit within the core competencies of WCC. Indeed, in recent years programme budgeting has become well established in England and is promoted within the WCC framework to aid investment and disinvestment decisions (http://wcc.networks.nhs.uk/). However, we must embrace the principles of opportunity cost and diminishing MB and, through these, take on the mantle of rational disinvestment, if the intent is to achieve maximum population benefits from publicly funded health care. Anything else will be a disservice to the patients and population we serve.

Box 2 Barriers to rational disinvestment

Time

There are two responses to this. The first is that substantial work has taken place on building rational economic frameworks into health care management processes in ways that minimize the extra burden in terms of time taken to conduct such exercises.18,19 Secondly, what can be a more important use of management time than working with processes to ensure best use of resources?

Outcome measurement

It might be thought that sophisticated outcome measures, such as quality-adjusted life years, are required for such processes. These would help, but are not necessarily needed. Also, such measures are often too narrow for what has to be taken into account. Disparate benefits can be weighed against each other in their natural terms—we compare apples and oranges every day—and can be supplemented by multi-criteria decision analysis, as some case studies have already shown.17,20–22,

Do we need measures at the individual level?

It may be thought that the continuous nature of the ‘curves’ in Figures 1 and 2 imply that we need to be able to measure outcomes and cost at the individual level. However, decision-making in health care is more ‘lumpy’ than that and it has been shown that marginal analysis can be applied in such situations.23 Indeed, this is the norm.

Stakeholder involvement

Such decision-making is complex because it requires multiple stakeholders to be involved. However, all (good) decision-making requires this, and it has been argued that programme budgeting and marginal analysis is actually useful in pulling together different stakeholder views under one framework.7 In addition, there are also formal approaches such as decision conferencing that can be used to engage multiple stakeholders in the process in practice.17 Recent experience has shown that clinicians are willing to suggest ways of disinvesting from their own clinical areas, through identifying wasteful or low-benefit interventions,24 that general practitioners have engaged with this agenda25 as well as more progressive health care commissioners.26

Conflicts of interest: None declared.

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