Don't you believe it: Cost-cutting reduces costs

It can increase them. To understand why, let's look at a long-running issue that is back in the headlines because of public sector cost-cutting.

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Last Updated: 03 Oct 2011

Thousands of older patients are forced to stay in hospital long after they are fit to leave because local social services will not or cannot look after them at home. This causes overall costs to rise, because it costs more to look after people in hospital than in their own homes. It also prevents hospitals admitting those who really need hospital care.

So why does this happen? Because hospital care is paid for by one organisation (the National Health Service) and care at home by another (the local council). Local councils are cutting their budgets and making it harder for people to qualify for care at home, so patients get stuck in hospital.

It is the classic sub-optimisation problem. There is a system, made up of several parts, that performs a function. If one part of the system (the council) wants to improve its performance or reduce its costs, often the easiest way to do it is displace problems or costs onto another part of the system (the NHS). Thus raising total cost and reducing overall effectiveness.

The solution? One body, with one budget, responsible for care of the elderly, wherever it is provided. In a big, complex, politically driven system like healthcare this is easier said than done. Your organisation isn't that big or that complex, but if it is any bigger than tiny there will be sub-optimisation somewhere. Find it, or your attempts to reduce costs or increase efficiency are likely to backfire.

- Alastair Dryburgh is chief contrarian at Akenhurst Consultants. Read more at www.dontyoubelieveitblog.com

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