04 May 2007
Payment by results is here to stay. But now ministers are consulting on the best way to 'unbundle' the tariff-based system.
The English NHS funding system is due back on the operating table for a spot of corrective surgery. The government knows the outcome it wants but has asked for views on how best to achieve it. Launching its consultation paper, Options for the future of payment by results: 2008/09 to 2010/11, in March, Health Secretary Patricia Hewitt said: 'Our aim is clear. We want a world-class payment system that is transparent and well understood, that rewards providers fairly, and that drives and supports good clinical practice, financial efficiency and wider health reform.'
It's easy to be sceptical when government departments consult on policy direction, particularly on a financial mechanism so central to the 'wider health reform' that has been promoted so vigorously for the past five years. Payment by results is the financial building block on which high-profile initiatives such as Patient Choice, foundation trusts and a mixed economy ultimately depend. But the government does appear to be genuinely ready to listen.
The economic significance of PBR should not be underestimated. The health sector in the UK now accounts for upwards of 8% of gross domestic product, and PBR already determines how a sizeable proportion of that budget is distributed. Foundation trusts, working within a more explicitly commercial regime than NHS trusts, are starting to skew their case mix to take advantage of tariff anomalies and to quietly drop treatments that no longer pay.
Naturally, the 12-page consultation form does not offer an option of retreat from the ambitions of 2002, when the new funding system was first announced. Apart from that, the questions are wide ranging. Some are defiant, such as: 'What, if any, are the barriers remaining for unbundling tariffs?' This reflects the deeply held belief that problems in the NHS can be solved by sharper commissioning and by breaking down the tariff into ever-smaller chunks – 'unbundling', which in the jargon requires tariff 'granularity' (breakdownability).
Other questions are curious: 'Would any of our proposals lead to economic, social or environmental impacts on you or your organisation?', inviting a flippant response along the lines of: 'if not, why are we bothering?' and perhaps some more trenchant comment from places such as southeast London, where payment by results has rendered existing Private Finance Initiative schemes unaffordable. Then there are the hopeful: 'Do you have any ideas for developing PBR that you would wish to pilot?' and, finally, the challenging: 'Please outline any ways in which the PBR policy described in this document may impinge on human rights.'
This final, apparently formulaic, question might evoke a serious response. Some people view the developing market model for health care as an urban preoccupation with choice and competition that might deny 'remote' rural communities access to sound, well-staffed hospitals. Interestingly, Scotland and Wales have not, thus far, followed the English route; their systems emphasise co-operation and co-ordination rather than the disciplines of the market.
The Department of Health proposals divide into four broad areas. To understand the first, 'Strengthening the building blocks of payment by results', one needs to remember that the current system was assembled in something of a hurry, between 2002 and 2003, using whatever tools were available at the time. NHS finance and information departments somehow took notoriously rough-and-ready 'reference costs' and turned them into a price list. They classified hospital activity according to a large list of health care resource groups (HRGs), ranging from areas such as 'minor mouth or throat procedures' and 'intestinal infectious disorders' to 'lung transplant'.
These classifications were fine for clinical work analysis but were never designed to support a funding system. And very large sums moved on the basis of the 'market forces factor', a notoriously flawed element of the resource allocation model that was in no way robust enough to reflect regional cost variations.
It has been a heroic achievement, but now is the time for a more measured approach. The consultation paper:
- announces a one-year delay in the introduction of a new and expanded HRG set (HRG4) on which the payment-by-results tariff will be based – a welcome relief and a realistic approach to implementing a more subtle analysis, using some 1,400 individual classifications instead of around 550 as at present;
- grudgingly acknowledges that the more detailed classification system used by clinicians for interventions (the Office of Population, Censuses and Surveys' Classification of Surgical Operations and Procedures) and the parallel system for diagnoses (International Classification of Diseases or ICD-10) will continue;
- advocates a transition to 'bottom-up' costing, using detailed patient-level data – a 'bill of quantities' for each patient 'episode' that offers a major improvement in the quality of hospital costing information; and
- acknowledges an urgent need for improved coding and data quality. Pilot coding audits undertaken by the Audit Commission have revealed an average error rate, leading to incorrect payment, of 12%.
If Hewitt's aim is a 'world-class' payment system, it would be easy to interpret the Department of Health proposals as a longing for an Australian-style system. The report refers overtly to the Australian classification system as a possible improvement on the UK ones and describes Australian Revised DRGs (Diagnoses-Related Groups) as 'an obvious frontrunner' for a future alternative to HRG4, one that the department will 'specifically examine' as a way to 'improve the granularity of HRG4'.
More imminently, learning from Australia and New Zealand also lies behind the DoH drive for patient-level costing. The ten English strategic health authorities have already been asked to identify three candidate sites apiece, suggesting a substantial project is getting under way – irrespective of the consultation outcome.
The next area considered in the paper is 'the future of tariff setting'. This suggests, unsurprisingly, that the government will retain responsibility for the tariff itself and the broader management of the system, rather than transferring it to an independent body (as some advocated after the debacle of the 2006/07 tariff withdrawal).
The other two areas of the consultation paper – 'Developing the national tariff' and 'Extending the scope of payment by results' – might, however, be more significant for what they omit rather than what they propose.
True, in the first there are radical proposals on the tariff-setting process. The payment-by-results price list has hitherto been derived from the long-established NHS 'reference cost' system and ultimately from national average costs.
But why should that be so in future? Why not use a representative sample of organisations, as proposed in the 2006 Lawlor review of the tariff-setting process? Why not, indeed, calculate a price based on ideal care pathways and efficient treatment and care, encouraging providers to adopt recognised best practice? The NHS Institute has been leading the work in this field, alongside its published measures of provider efficiency, and there is some enthusiasm for using it to target a number of procedures, including joint replacement surgery.
There are also interesting signals on incentives to reward high-quality performance, learning from the experience of the NHS in northwest England. Payment by results has always been a misnomer: payment has little relationship with clinical outcomes (did the operation actually work?) and everything to do with throughput and productivity (how many did we do?). 'Unbundling' is seen as the key to redesigning care pathways and moving more health care work out of hospital (for example, breaking down the price of a hip replacement into pre-operative preparation, surgery and post-operative rehabilitation). But we are only likely to see a slightly wider range of indicative unbundled tariffs in 2008/09, derived from historic reference cost data, and there are only limited further proposals beyond 2009/10.
While it is good to see clear recognition of the importance of funding the whole care pathway, rather than the hospital phase in isolation, there is evident nervousness about alienating clinicians and, beyond the familiar rhetoric of 'funding services not institutions', there is little of substance.
The plans to extend the scope of payment by results can be seen as an overdue acceptance by the DoH of the inadequacy of clinical data outside the hospital sector. The paper outlines what it describes as 'three payment by results models': national currency and price (the current model), national currency and local price, and local currency and price.
Among the services for which local currency and price are judged entirely appropriate are ambulances, out-of-hours care, community services and long-term conditions care.
But 'local currency and price' is not tariff-based funding as generally understood. It is merely a wish for improved commissioner engagement with aspects of health care that are notoriously difficult to measure. This might be pragmatism, but it is a far cry from earlier visions of tariff funding being 'rolled out' across the whole of the NHS. Some see expanding the definition, rather than the scope, of payment by results as a neat reinvention. In practice, the problems remain.
For instance, the complexity of moving to a national currency in mental health care has always been considerable, and the projects that have been running since 2003 have struggled. This mirrors international experience, and it is refreshing to see the scale of the challenge acknowledged.
But without an agreed currency, some 12% of NHS expenditure automatically falls outside the tariff system, probably leading to a long-term leakage of resources. And the mental illnesses that fit most awkwardly into a meaningful analysis – schizophrenia and depression, for instance – are essentially no different from physical long-term illnesses such as diabetes, emphysema and arthritis. None of these conditions conforms neatly to the current tariff formula's 'price per spell', and one significant absence from an otherwise comprehensive review is explicit consideration of the 'spell' as a method of counting activity. The spell – that is, a spell in hospital – was introduced relatively late in the day to replace the familiar 'finished consultant episode'.
The other material omission is the whole sensitive area of education, training, research and development, long recognised as an anomaly by which some £3bn bypasses the transparency of payment by results each year.
David Stout, director of the NHS Confederation's PCT Network, describes the consultation as 'largely technical' and stresses the importance of using it to probe the areas that still don't quite fit. 'Why do we commission general practice so differently from acute care?' he asked recently. 'Is there an argument for funding capital costs separately?'
The report, predictably, is silent on the conflict between tariff funding and existing PFI-funded assets. One might also ask for the business case for investing in patient-level costing software. Churlish, perhaps, but with the recent track record of NHS software investment, a ministerial challenge or two might reasonably be expected before the tenders are let.
And overall there is a sense in which the Department of Health, understandably cautious about extending the scope of the tariff, has preferred the safer ground of strengthening payment by results in its home territory of the acute hospital. Payment by results, now established as the way NHS hospitals are funded, needs strong building blocks. But amid the arcane discussion of which HRG or DRG analysis we should follow, it is vital not to miss the bigger picture.
The overriding pressure on the NHS is not hospital efficiency, it is the growing burden of long-term illness. And perhaps the biggest risk for payment of results is that it becomes the province of anoraks.
Noel Plumridge is a former NHS finance director and the author of CIPFA's Payment by results. The PBR consultation ends on June 22. www.dh.gov.uk/en/Consultations/Liveconsultations/DH_073103
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