24 March 2006
Some of the nation's finest minds are trying to track down the culprits for the soaring NHS deficits. Andy McKeon knows where the bodies are buried and says all will be revealed once the reforms start to work
Sir Nigel Crisp's sudden departure as chief executive of the NHS and permanent secretary of the Department of Health has brought into sharp relief the three most notable features of the NHS.
Great strides have been made in improving the quality of care during Crisp's tenure, which more or less started with the launch of the NHS Plan. The money spent so far contrasts starkly with the service's current financial problems. And the programme of reform involving payment by results, foundation trusts and Patient Choice, which is aimed at making the NHS more dynamic, more efficient and more responsive to patients, is only just starting in earnest.
Expert NHS commentators have had a field day in seeking to explain why the service (or, more accurately, parts of it) has slipped into financial difficulty. Like any good Agatha Christie plot, there is no shortage of suspects. Fingers have been pointed at:
- poor management;
- 'systemic structural weaknesses' (NHS-speak for too many hospitals poorly placed to deliver twenty-first century services);
- concentrating on targets at the expense of money;
- significant pay awards for just about everybody in the service, which cost more than expected;
- a financing system that doesn't encourage efficiency and budget surpluses – but which can seem to push organisations deeper into debt;
- demoralised managers facing yet another restructuring and a fight for jobs; and
- those 'system reform' initiatives, such as payment by results and Patient Choice.
They all have a case to answer and, as in Murder on the Orient Express, they all did it. But some have played much bigger parts than others.
Now, here I have to declare an interest. In my previous job as a senior official in the Department of Health I was closely involved in developing payment by results along with foundation trusts, Patient Choice, the introduction of more private sector providers and other elements of the package known in the NHS as 'system reform'. Indeed, some would say I was the main architect and therefore a chief suspect in my own right.
However, in my defence, I offer the following alibi. Payment by results has barely begun. It has operated in full only for foundation trusts, of which there are just 32 across the country. It won't apply in full to other trusts until April 1. In those places where the deficits seem greatest there are few, if any, foundation trusts. (Indeed, one strategic health authority with large deficits suspended the partial operation of payment by results, even though it is debatable to what extent it actually operated in the first place – and its situation has got worse.) Patient Choice, under which you and I can choose where we want to be operated on, didn't start until December 2005. I rest my case.
But if that is my alibi, I really do have to submit for scrutiny the reasons why the changes are needed and why, in particular, payment by results is a good thing. In doing so, I admit that payment by results is deceptively, even charmingly, simple in concept. But implementation is far from easy.
Payment by results simply means that hospitals will be paid for the work they do at a set national tariff – so much for a hip replacement, so much for a case of pneumonia, etc. More hip replacements mean more money. It is easy to see what the incentives are when payment by results is allied with Patient Choice. If your hospital is more attractive to patients, for example because it has shorter waiting times, it will be rewarded accordingly. Obviously, the converse also applies. It is a simple, transparent, direct and powerful incentive system that offers the health equivalent of a fair day's pay for a fair day's work.
From April 1, PBR will cover most acute hospital care, but not the most specialised work, mental health or community services. Variants of it are the funding system of choice for hospitals in many developed countries. In the NHS, it replaces a system based essentially on block contracts. These guaranteed income for trusts and fixed the expenditure for their purchasers, the primary care trusts, but were not necessarily related to the actual work done. Many trusts have complained in the past about not being properly funded for the work they did. Block contracts also meant that extra patients were regarded as a cost, rather than an income stream. Neither of these points is helpful if the aim is to increase activity to reduce waiting lists.
Experience elsewhere in the world is that such payment systems will lead to increases in activity if they are designed to do so. They almost always lead to efficiency improvements. They can also sharpen purchasers' minds, leading them to concentrate more on which patients are being referred to hospital, what they are being treated for and whether alternatives would be more suitable and cost-effective.
Payment by results is also rather like those clever chemical compounds that precipitate out the gunk so one can see more clearly what one is dealing with. Financial transparency is essential if the NHS is to move on and deal with underlying problems, whether they rest with the commissioners or providers. It also acts as a catalyst, facilitating change and potentially giving a much sharper set of incentives. But, like all chemical reactions, much heat and light can be produced in the process, even if the end result is very desirable.
Like all good policies, much depends on the detail of implementation. Here there are some significant risks and a cloud to the silver lining. The risks fall broadly into three categories – technical, transitional and trading.
The technical risks lie in how the tariff is set. The tariff is based on average hospital costs. But as the data is at least 18 months old, it needs to be updated to reflect estimates of activity changes and also cost pressures over that period, as well as what they will be for the coming year. The department also makes assumptions about improved efficiency. Trusts are separately compensated for regional cost variations. The tariff also currently reimburses trusts for the average cost of capital, which means that those with more expensive new developments might feel the pinch.
Taken together, tariff-setting is probably the most significant area of risk for many organisations. It is also complicated and new. In January, the department issued the tariff for 2006/07, only to withdraw it a few days later because of a 'spreadsheet error' which would have resulted in trusts being reimbursed at a much higher rate than planned. It has now been withdrawn for reworking. This has been embarrassing but, as Donald Rumsfeld memorably said, 'stuff happens'. Other countries have also found that it takes time for a tariff to settle down as experience is gained, so we can continue to expect some turbulence but probably no more spreadsheet errors.
The transitional risks are bound up with moving to a single national price. PCTs that are used to paying less have to pay more, with consequent windfall gains for the recipient trusts. Trusts with higher costs than the tariff need to make savings, and there is obviously a question of how and whether they will manage this.
The changes are being phased in over the next three years. The early foundation trusts have by and large benefited significantly, as their costs were below those of the tariff. PCTs that have to pay more are being compensated for this through a 'purchasing parity' adjustment. This was to have been 100% compensation but, in announcing the tariff for 2006/07, the department found that in some cases significant sums were effectively moved from more deprived areas to less deprived ones. It promptly halved the compensation for 2006/07, leaving a hole in some PCTs' budgetary planning at a late stage in the process.
The trading risks concern the financial incentives. Payment by results is an incentive for hospitals to do more work. This is fine where more activity is needed to help reduce waiting lists. It is less fine for non-elective care where the aim is to reduce the number of hospital admissions by providing better primary care for patients with chronic conditions. The incentives ought to work for PCTs – feeling the financial pain of additional admissions is one way of encouraging them to improve care and thereby keep more patients out of hospital.
But the question is whether they have the capacity and capability to do this, especially as their controls over those who do the referring (GPs) and those who do the admitting (hospital consultants) are relatively weak. The department has reduced the financial risks in this area by requiring payments to be made at a set marginal cost if non-elective activity goes above or below certain levels.
There are also incentives for hospitals not only to improve their coding of patients but also to change their coding practices to get more income – a more complex hip replacement pays more than an ordinary one. Every country with this type of system has had to introduce independent checks on coding which also improve the quality of the data. The department has now asked the Audit Commission to put such checks into place here.
So, payment by results has risks that need to be managed if the benefits are clearly to emerge. The commission's report Early lessons from payment by results, published last October, which reviewed the initial experience of foundation trusts and purchasing PCTs, found that the signs were promising. Those who had experience of using the system were generally positive about the direction and the discipline it brought. But there is still much work to be done on the risks, including reducing the number and size of late changes to the system.
Payment by results can't be seen in isolation. Its success depends very much on the financing regime and other policies that surround it. Patient Choice in elective care, when allied with payment by results, should sharpen trusts' responsiveness to patients, making them keep their waiting lists short while providing good customer service. Similarly, the financing regime for foundation trusts that need to make surpluses to fund their borrowing – and their concentration on cash rather than income and expenditure balance – goes hand in hand with the disciplines imposed by payment by results. These changes, along with the introduction of payment by results, are the main reason why large capital developments such as at Bart's and the London Trust are being scrutinised for their affordability in the new NHS world.
To get the best out of the system, two things need to happen.
First, the capacity and capability of purchasers needs to be much improved. This is partly so they can better manage the risks and partly so they can take advantage of the system to provide more care outside hospitals, which is advocated in the latest white paper, Our health, our care, our say.
This is also seen as a way of providing more cost-effective and responsive care for patients. The restructuring of PCTs in the summer, roughly to halve the number, along with the introduction of fitness for purpose assessments and the spread of practice-based commissioning (ie, budgets for GP practices) will help, by concentrating good management with clear priorities in a smaller number of bodies and getting the right incentives in place for those who actually treat and refer patients.
The second essential step is for trusts fully to take on board the budgetary and information requirements that payment by results demands. And it's right here that attention to detail needs to be tight. Payment by results, along with the foundation trust finance regime, puts a premium on knowing the fine detail of the hospital's cost structure, providing the relevant information on income and expenditure (or profit and loss as they are coming to be known) on individual specialities and even procedures to managers and clinicians, and controlling or even reducing costs in the knowledge that the tariff is all that there is.
By happy coincidence, these two steps, with payment by results as the catalyst, are also in my view the best way of putting the NHS on a sound financial footing, even if it means in some cases clearly identifying where services have to change. They are also critical to the NHS successfully matching public expectations with the rising costs of providing health care when the rate of increase in funding slows after 2008.
Andy McKeon is managing director, health, at the Audit Commission
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