The NHS is facing its biggest organisational and financial challenge ever, a report published by the NHS Confederation today warns.

But the health service can meet the challenge if it acts decisively and now.

In Dealing with the downturn: the NHS's greatest ever leadership challenge, the Confederation gives a sober assessment of a future of tightening funding and difficult spending decisions. 

The report says that in just under two years the NHS will face the most severe constriction ever in its finances and that action is required now if the service is to remain true to its founding principles and continue to provide care free at the point of need.

In the five years from 2011 it forecasts that the impact of the recession, allied to rising costs mean it is likely the NHS will face a real terms shortfall of £15bn.  

The Confederation's report also warns that many of the options of past slowdowns in funding, which included cutting training, across the board budget cuts, reducing quality and allowing waiting lists to grow could prove counter-productive and ultimately lead to extra costs.

Published on the first day of the NHS Confederation's annual conference in Liverpool, the report says that the solution to this crisis lies in NHS leaders embracing innovation, change and efficiency.

And it gives examples, of the kind of service redesign and innovation that can help deliver savings, saying that the rest of the NHS now needs to learn from the leanest and most efficient organisations.

NHS Confederation chief executive, Steve Barnett in his opening speech to the conference is expected to challenge the NHS to innovate its way through the funding crisis.

"With little or no cash increase from 2011/12 the NHS has to prepare itself for real terms reductions in what it can afford to do and needs to make the hard decisions about which programmes to fund, how to reward staff and how to reorganise services now," he said.

"If it does not, then the mistakes of the past could be repeated and shortages in funding will translate to the kind of across the board cuts which could see waiting lists lengthen, standards fall and dissatisfaction with the service grow among patients and staff."

"The NHS needs to take the opportunity to find efficiencies and savings– I believe it has the people, the ideas and the capacity to meet this challenge but we should be under no illusions of the size of the task ahead."

The author of the report, Confederation Director of Policy, Nigel Edwards, said that while there was considerable scope to make savings the task was not an easy one and difficult decisions would be needed.

"It is really important that the significant improvements that have been made in the NHS are not lost through short term cuts and crude approaches to cost control," he stressed. 

"Quality improvements through greater efficiency and redesigning services can provide the budget savings necessary to navigate this crisis,"

"The emphasis is increasingly going to be on the need to deliver value for money and efficiencies as well as meeting the Targets we have already hit."

"There are savings in the system, but there will have to be tough decisions made to find them."

"The principles of the NHS still enjoy huge public support but if they are going to remain the same, a great deal will have to change and in doing this there is the opportunity to make the service better as a result."