A new report by think tank Policy Exchange has put forward a number of bold measures it believes could help steer the National Health Service through the looming financial drought, including a return to GP fundholding.

According to the group, if, as promised, the NHS budget is to be protected from pay cuts in the coming years - over other public departments such as education and defence - then the health service must show that it can provide value for money and make operational adjustments necessary to generate targeted efficiency savings of £15-£20 billion during 2011-2014.

“Like all public sector spending bodies, the NHS is going to face an increasingly challenging financial environment,” said Henry Featherstone, author of the report and Head of Policy Exchange’s Health and Social Care Unit, and added: “In order to meet these challenges, it is going to be far more politically palatable to look at the options for reducing costs, rather than fundamentally altering the principles of the NHS and relying on top-ups or co-payments”.

The report points out that, for one, while the focus has been on quality improvement for some time, huge differences in NHS performance still exist across the nation, with the average length of hospital stay ranging from 10.9 days in the top ten trusts to 44.5 days in the lowest performing for patients with a broken hip, for example.

Reducing such variations in clinical practice could have a massive impact on NHS coffers, the report argues, based on a range or programmes from the NHS Institute for Innovation and Improvement showing that, if all NHS organisations performed as well as the top 25%, a productivity gain of around a breath-taking £7 billion per year can be expected.

Furthermore, the report points out that 25% of hospital beds are currently unnecessarily occupied, and that action to reduce this wasted reliance on expensive acute care could also help to drive forward efficiency.

To address this issue, Policy Exchange has called for a return to GP fundholding as, it claims, evidence from the 1990s showed that “giving GPs real budgets, and allowing them to buy services for their patients, actually reduced elective hospital admissions by 3% and drove hospital efficiency by 1.6%”. And now such a reduction in admissions could deliver savings of £1 billion, it states.

Other suggestions include performance related pay for NHS staff, as currently automatic incremental pay rises are costing the Service around £420 million a year, and the decommissioning of ineffective or expensive services, by extending the remit of cost watchdog the National Institute for Health and Clinical Excellence so that it also evaluates existing treatments and excludes those that do not represent value for money.