Perils of payment-by-results

20 Feb 14
Anita Charlesworth

It might seem obvious that it is a good idea to link payment to achieving the goals of particular public services, but the record in health suggests that payment-by-results is a limited and blunt tool for improvement

Across our public services, the fiscal crisis has put an ever more intense focus on the search for value.  Shrinking or stable budgets coupled with still-rising expectations mean the order of the day is to either find ways to get improved outcomes for a given expenditure or, increasingly, ways to get the same service for less.

And as this imperative increasingly dominates the priorities of policymakers, they look to make sure that incentives for providers are pushing them to put value first too. In sectors including hospitals, schools and prisons, this has led to renewed focus on payment by results, where providers are paid according to what services they actually provide, rather than according to their responsibilities or costs.

As the government put it in their Open Public Services White Paper, for the services central government commissions ‘it makes sense to build in an element of payment by results to provide a constant and tough financial incentive for providers to deliver good services’.

From an NHS perspective, this is a familiar refrain. The health service first introduced an element of payment by results a decade ago – the pioneering initiative was quite simply called ‘Payment by Results’.  It started as a means of paying hospitals for episodes of care they provided to patients, on the basis of nationally fixed prices called ‘tariffs’.

Coupled with the extension of patient choice, this was designed not only to push hospitals to improve efficiency as they tried to deliver care at below the tariff payment price, but also to improve quality. The idea was that national fixed prices would mean hospitals competed for patients – and thereby additional income - based purely on how well they delivered for patients, not on cost.

Over the past five years the focus on quality has increased with the addition of various formal pay-for-performance components into hospital care, building on the Quality and Outcomes Framework scheme for GPs introduced in 2004.

The Payment by Results scheme and pay-for-performance initiatives have been subject to many formal evaluations. Our report published today summarises their findings – drawing out both good and bad news for policymakers rolling out payment reform elsewhere.

Research in the NHS does find that the introduction of Payment by Results was associated with statistically significant improvements in metrics of efficiency (such as the time patients spend in hospital).  This is consistent with the results of studies of similar schemes introduced across Europe.

But the impact was small: and while individual provider efficiency may have improved, it is not clear whether this improved the efficiency of the health system as a whole.  Payment by Results was associated with more activity in hospitals, and in the era when clearing waiting lists and lowering waiting times ruled the political agenda, this was seen as a desirable outcome.

Now, though, facing a funding squeeze and an increasing focus on preventing potentially avoidable admissions, leaders in health often see the key priority as being to treat fewer patients in hospital, and more in community care and general practice. With this shift in priorities, many in the NHS are very concerned that Payment by Results, with its incentives for hospitals to do as much as possible, has become an impediment to system-wide improvement.

The findings from research assessing the impact of the various pay-for-performance schemes in the NHS present an even more complex picture. These schemes typically involved top-slicing budgets, or ring-fencing extra funding, and then giving it to providers if certain goals for safety and good medical practice are met.

Some do seem to have been associated with improvements in process measures of the quality of care.  Even more encouragingly, one 2008-2009 pilot scheme in the North West of England, Advancing Quality, provides some of the most positive findings for pay-for-performance in health care ever seen in the international literature.

It showed a statistically significant reduction in morality for one condition – lives saved apparently due to a better way of paying for care, a result unfortunately not seen elsewhere.  Sadly, though, the NHS wide scheme that replaced it, ‘CQUIN’ did not lead to statistically significant improvements in outcome measures of quality.

Experiences with these schemes should also send a clear message to policymakers in other fields not to underestimate the sheer technical challenges associated with designing and implementing pay for performance.  In health care, after several years, we still lack good quality, comprehensive data on the costs, outputs and outcomes we are supposed to be paying for.

More fundamentally, our understanding of the relationship between processes of care and outcomes is incomplete, as is good data on the comparative efficiency of hospitals and GPs.

However, there has also been a silver lining to these difficult realisations. The focus pay-by-performance brings to the actual goals of public services, and the cost of delivering quality, is a benefit in its own right. The clarity it provides is almost certainly essential for accountability and transparency in public services.

Taken together, the evidence from all the various pay-for-performance schemes introduced in the NHS, across hospitals and primary care, delivers a warning that these schemes need to be carefully designed if they are to secure real improvements.

It might seem obvious that it is a good idea to link payment to achieving the goals of the system, but the record in health suggests that payment systems are a limited and blunt tool for improvement. The evidence points to a number of key features for successful schemes.

Two stand out above all. The first is getting the full engagement and support of the front-line staff who need to deliver change. The second is making sure that the direction of incentives in the payment system lines up with other policy and managerial levers for improvement, rather than clashing with them.

In short, payment systems will only improve outcomes where they go with the grain of the professional ethics and policy imperatives that shape how public services understand and achieve results.

Anita Charlesworth is chief economist at the Nuffield Trust

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