Two of the most senior figures in NHS England have, between them, named the central problem. Sir Jim Mackey, chief executive of NHS England, says the service is “pretty much maxed out on what’s affordable.” [1] Dr Penny Dash, its chair, sets out the other half: “the biggest issue is you’ve got to take out the old, and that’s the bit we consistently struggle with.” [2]

They are right, on both counts.

Yet England’s ten year plan, like the majority of comparable plans across the OECD, carries on as if the hard part does not exist. [3,4] Hospital to community. Treatment to prevention. Analogue to digital. Three shifts with the same problematic assumption: that money will follow the new service model.

It rarely does. Efficiency gains are not generally cash releasing. Freed staff time does not improve the bottom line.

Stranded costs are what remain after services are reduced, reorganised or moved. Costs that were rational under the old pathways, technologies or contracts, but cannot be recovered under the new ones. [5] The acute estate is not configured for demand patterns shifting away from it. Staff and beds do not scale down proportionately when admissions fall. Around 127 NHS PFI contracts, worth roughly £13 billion, run into the 2040s. [6]

Take virtual wards. England now runs more than 11,000 after an initial £450 million investment. They may well be more cost effective than holding a fit-for-discharge patient in an acute bed. But cost effective is not the same as cash releasing. The Health Foundation concluded it is unclear whether they reduce hospital pressure, since we do not know how many patients would otherwise have been admitted. [7]

That is the stranded cost problem in miniature. Good idea. Serious investment. Real clinical benefit. No way to move the cost.

There is a deeper problem no transformation plan addresses. Acute services are paid for activity. Community and primary care are largely funded through block contracts. When activity moves out of hospital, payment falls, but the underlying fixed costs of the acute provider do not.

The payment system has no mechanism for addressing stranded costs. Until tariffs reflect fixed cost coverage during transition, the financial incentive will point the wrong way. The system is, quite literally, paying providers to resist the shifts it says it wants. The Lancet’s recent Viewpoint put it plainly: productivity gains are mostly assumed rather than proven, and where they exist they are absorbed into existing demand. [4]

That explains why capacity gets refilled. If demand keeps absorbing the gains, why can we not just shrink the capacity instead? Close the beds. Reduce the rotas. Take the money out on the supply side, since we cannot release it on the demand side.

The answer is that the payment system will not let us.

Alain Enthoven saw this in the early 1980s. His prescription was integration along the lines of Kaiser Permanente: one organisation owning both the budget and the buildings. [8]

We did not take that path. We split the NHS into commissioners who hold the money and providers who deliver the care, and built a system where money follows the patient. [9] The more activity a hospital does, the more it earns.

It sounds sensible. In practice it does the opposite of what we now need for transformation. Roughly four pounds in every five spent in a hospital cannot be flexed within the year. When activity moves out, the income follows it. The fixed costs do not. The hospital loses, say, £100 of income for an avoided admission, but only saves £15 or £20. The other £80 is a stranded cost, suddenly visible, fought over by the provider losing the income and the commissioner forced to fund the gap.

So put the two parts together. Demand refills any space we create. The payment system penalises any attempt to remove the capacity that creates the space.

The trap is structural, which means it is fixable. Other systems have already fixed it. Ham and colleagues put NHS bed day use at three and a half times Kaiser’s. [10] That gap is not about clinical skill. It is about architecture, built up over decades. Kaiser can move the money when it moves the care, because the same organisation owns both, and has done so since Enthoven was writing.

The point is not that the NHS should become Kaiser. Had we taken Enthoven’s path in 1985, we may not now face this scale of stranded costs which have been compounded over decades.  An integrated payment approach lets a system act on its own diagnosis. Money-follows-patient prevents it.

Other sectors have built similar mechanisms. US electricity restructuring in the 1990s added a transition charge to customer bills. [11] The UK applies similar logic in water, energy and rail through regulated price controls. The EU’s Just Transition Mechanism set aside €55 billion to fund regional transition as coal and heavy industry are phased out. [12]

Different sectors, different instruments. Same principle. Transitions cost money. Those costs have to go somewhere. The question is whether you plan for them in advance or pretend they will absorb themselves once the new model arrives. Healthcare keeps choosing the second option.

The NHS has spent forty years moving the boxes around the organogram without ever changing the wiring underneath. We already know what an alternative architecture looks like. Nobody has yet found the political courage to build it.

Three things would change the conversation.

First, make stranded costs visible. Every ICB and trust should maintain an inventory of what cannot flex quickly: acute estate, PFI and long-term contracts, rotas, workforce skills. Force business cases to specify the threshold at which capacity can credibly be reduced, and who has authority to bank it. Otherwise, transformation plans remain financially imaginary.

Second, finance the transition deliberately. A national shift fund, ring-fenced and multi-year, to bridge the gap between investment in new models and return from retired ones, and to compensate providers for fixed costs they cannot yet retire.

Third, pair every transformation announcement with an explicit decommissioning plan. Which services stop. Which estates are released. Which contracts are renegotiated. And when. Without that, shift is a slogan, not a strategy.

Mackey is right that the service is maxed out. Dash is right that the hard part is taking out the old. Stranded costs sit between those two truths. Every transformation portfolio already has an implicit stranded cost strategy. The only question is whether we acknowledge it, and act on it.

References

1. Campbell D. NHS funding has been ‘maxed out’, says new boss in England. The Guardian. 10 May 2025. https://www.theguardian.com/society/2025/may/10/nhs-funding-has-been-maxed-out-says-new-boss-in-england
2. Dash P. Remarks at South West Health and Life Sciences Summit, Bristol Tech Festival, 24 October 2024. Reported in: BI Foresight. Innovation in UK healthcare: Dr Penny Dash on challenges, opportunities and the NHS. 2024. https://biforesight.com/ai/innovation-in-uk-healthcare-dr-penny-dash-on-challenges-opportunities-and-the-nhs/
3. Department of Health and Social Care. Fit for the future: 10 year health plan for England. London: UK Government; 2025. https://www.gov.uk/government/publications/10-year-health-plan-for-england-fit-for-the-future
4. Anderson M, Pitchforth E, McGuire A, Mossialos E. The NHS 10-year plan: between aspiration and implementation. Lancet. 2026. doi:10.1016/S0140-6736(26)00035-8.
5. Joskow PL. Does stranded cost recovery distort competition? Electr J. 1996;9(3):31–45.
6. National Audit Office. PFI and PF2. HC 718, Session 2017–2019. London: NAO; 2018. https://www.nao.org.uk/reports/pfi-and-pf2/
7. Chappell P, Co M, Hardie T, Lloyd T, Tallack C, Gerhold M, et al. What do virtual wards look like in England? London: The Health Foundation; 2024. https://www.health.org.uk/reports-and-analysis/working-papers/what-do-virtual-wards-look-like-in-england
8. Enthoven AC. Reflections on the management of the National Health Service. Nuffield Provincial Hospitals Trust Occasional Papers 5. London; 1985.
9. Dixon J. Payment by results: new financial flows in the NHS. BMJ. 2004;328(7446):969–70.
10. Ham C, York N, Sutch S, Shaw R. Hospital bed utilisation in the NHS, Kaiser Permanente, and the US Medicare programme: analysis of routine data. BMJ. 2003;327(7426):1257–60.
11. Borenstein S, Bushnell J. The US electricity industry after 20 years of restructuring. Annu Rev Econom. 2015;7:437–463.
12. European Commission. The Just Transition Mechanism: making sure no one is left behind. Brussels: European Commission; 2020. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/finance-and-green-deal/just-transition-mechanism_en

Authors

Andi Orlowski

Andi is a health economist and Director of the NHS Health Economics Unit, a NHS consultancy team that supports health and care organisations locally, regionally, and nationally.

He is also a Senior Advisor for NHS England and the World Bank, providing expertise in population health management, non-communicable diseases, prevention, and data analytics.

Specialising in population health analytics, health inequalities, and strategic commissioning, Andi lectures and is pursuing a PhD at Imperial College London. 

He serves as Vice-Chair at the Healthcare Value Institute at the Healthcare Financial Management Association (HFMA) and Deputy Chair at Kaleidoscope Health and Care.

Outside of work, Andi plays rhythm guitar in an NHS covers band called the HEUristics and in a heavy metal band called the Black Museum.

Nigel Edwards

Nigel Edwards is and Honorary Visiting Professor HSMC Birmingham University, a Senior Advisor at PPL and NAPC and an Expert Advisor at the European Observatory on Health Systems and Policies. He was previously the chief executive of the Nuffield Trust.  

Emma Knowles

Emma is responsible for the HFMA’s policy, technical and research work, as well as its communications activities. This includes developing a programme of guidance and research to support members and the wider NHS finance community. She is a member of the Chartered Institute of Public Finance and Accountancy and a fellow of the Association of Chartered Certified Accountants. She has over 30 years’ experience of working in NHS finance and policy roles, including 12 at the Audit Commission where she was responsible for its national health financial management studies programme. 

Gwyn Bevan

Gwyn Bevan is Emeritus Professor of Policy Analysis & former Head of the Department of Management at the London School of Economics & Political Science. He was Director of the Office for Health Care Performance in the short life the Commission for Health Improvement.

Declarations of Interest
Andy Orlowski is employee of the NHS Health Economics Unit, a lecturer at Imperial College London, an advisor to the World Bank Group, Vice Chair of the HFMA’s Healthcare Value Institute and Deputy Chair of Kaleidoscope Health and Care. Nigel Edwards is an advisor to NAPC, PPL and the European Observatory on Health Systems and Policies. Emma Knowles is the Director of policy and communications and interim deputy chief executive officer at the Healthcare Financial Management Association. Gwyn Bevan is an emeritus professor in policy analysis at the London School of Economics & Political Science.