NHS hospitals have been told that they will need to make annual efficiency savings of 6%-7% a year, or 50% more than the 4% annual savings to 2014-15 initially sought by Ministers.

These new higher levels are included in a "dear colleague" letter from Stephen Hay, the chief operating officer of Monitor, the independent regulator of NHS foundation trusts, in which it outlines to the organisations the financial assumptions which it will be using from May 1 to assess applicant trusts and for risk-rating investments and transactions undertaken by foundation trusts.

Mr Hay writes that the regulator is publishing updated versions of these assumptions following the Comprehensive Spending Review, the publication of the 2011-12 Operating Framework for the NHS in England and the latest inflation forecasts published by the Office of Budget Responsibility (OBR), based on the following "high level" developments:

- a health settlement  that, while generous when compared to other departments, represents a substantial challenge to the NHS given expected demand;

- confirmation of the QIPP (Quality, Innovation, Productivity and Prevention) challenge to deliver £20 billion in efficiency savings by 2014-15;

- significant inflationary pressures, as noted in the projections released by the OBR in its economic outlook published ahead of the 2011 Budget; and

- the impact of specific tariff rules set out in the Operating Framework and the Payment By Results Guidance for 2011-12 that are expected to have "a material effect" on trust income.

Monitor says it uses two scenarios as the starting point for its financial assessments: - the assessor case, which reflects the expected pressures and risks to providers costs and incomes and is in line with estimates published by the Department of Health; and - the downside case, which builds on the assessor case, but reflects a more pessimistic view of the expected pressures and risks. 

The projected need for higher cost savings reflect the downside case, it says, and in their response to Monitor’s new financial assumptions Department officials have pointed out that this is the more pessimistic scenario. They add that the NHS is a "strong financial position" and that it is receiving extra investment of £11.5 billion by 2014-15, but also point to the challenges of higher costs and an ageing population which the Service is facing.

Monitor's letter to the trusts stresses that its updated financial assumptions "are not intended to provide any basis for commercial decisions made between providers and commissioners within the NHS, including contract negotiators." Nevertheless, it adds that existing NHS foundation trusts "may find it useful to consider these assumptions as part of their own annual planning rounds."