19 November 2009
By Noel Plumridge
Payment by results was meant to give the
NHS financial stability and encourage hospitals to improve their productivity. But how well can a tariff system designed for a period of growth work in a recession? Noel Plumridge explores some other funding methods
This is the time of year when many public sector managers anxiously await the funding settlement for the year ahead. Now, as the era of generous public spending increases draws to a close, they have more cause for trepidation than usual. But not, of course, those in the NHS in England. They can look forward to guaranteed growth of around 4% for 2010/11, the final year of the 2007 Treasury Spending Review budgets. Moreover, the five-year-old ‘payment by results’ system of tariff funding also offers NHS organisations a degree of financial stability and certainty.
Dream on. Anyone who believes this rose-tinted version of the outlook for 2010/11 is sadly mistaken. Even if the Pre-Budget Report, due on December 9, maintains the planned level of growth in the health sector, it is most unlikely that 4% will find its way into primary care trust funding allocations. With Chancellor Alistair Darling seemingly intent on halving the £175bn of public debt within four years, that growth pledge appears distinctly vulnerable. Prudence and history both suggest the lion’s share of any extra money will be retained at the Department of Health or, more likely, at strategic health authority level, creating a reserve against the mounting financial pressures. For, according to NHS chief executive David Nicholson, up to £20bn of savings are likely to be needed.
In effect, any growth money would be withdrawn from the system. Yet 4% is widely acknowledged as the minimum extra funding the NHS now needs each year to cope with three intractable pressures. Population growth, at around a million extra people per year, equates to extra demand for health care of perhaps 1.4%. The demographics of an ageing population and scientific and technological advances are each estimated to cost around 1.5% per year.
And then there’s pay. Around two-thirds of NHS spending is consumed by salaries and wages. Health Secretary Andy Burnham has been building a warmer relationship with the trade unions of late and has said NHS organisations will be viewed as ‘provider of choice’ and protected from open competition. Nevertheless, it’s unsurprising that some senior managers are quietly lobbying for a pay freeze, and in many trusts the recruitment brakes are already being applied. The trade-off between NHS pay and NHS jobs is becoming stark.
Neither can the NHS expect to use reserves to cushion the impact. As Public Finance reported on October 30, there is growing speculation that last year’s net NHS surplus of £1.7bn will be clawed back via the Pre-Budget Report, perhaps by basing the 2010/11 tariff on outcomes rather than on budgeted spending levels. Nor, in the current climate, can the separate £269m balance retained by foundation trusts be considered sacrosanct.
However, in the acute hospital sector, where more than 60% of income is derived from the payment by results tariff, there’s a potential ‘Plan B’: offset spending reductions with income growth. Under payment by results, more activity still means more income. Supporting strategies include better coding, altering the hospital case mix and undertaking more highly rewarded work. Andy McKeon, managing director of health at the Audit Commission, observes that in 2008/09 the tariff uplift was 2.3%, yet acute and specialist trust income rose by 6.8%, more than the PCTs’ total cash uplift.
But PCT commissioners have no extra funding to pay for such unplanned growth. In some parts of England, they are already reportedly refusing to pay hospital trusts’ invoices, in a de facto reversion to cash-limited block contracts. Commissioners have always lacked effective tools to manage demand; and some are beginning to question the appropriateness of tariff funding in a recession.
So, is payment by results – that is, payment per clinical procedure according to a fixed national tariff – an appropriate mechanism for funding the NHS through a recession? It was introduced in 2004 specifically to encourage hospital productivity during a time of embarrassingly long waiting lists. But there are other perfectly legitimate ways of financing health care. If you want stability and guaranteed infrastructure, say the theoreticians, use block contracts.
To encourage the integration of hospital, community and GP care, you can pay on a capitation basis – a fixed amount per individual patient, rather than per individual treatment. This method offers an incentive to avoid unnecessary hospital admissions. It is already used to fund complex care packages for people with long-term health conditions and is also the way many US health maintenance organisations work.
If the priority is quality, you can pay according to ‘quality metrics’, using a defined essential element of practice.
The NHS already uses a combination of methods. Less than 40% of NHS funding is based upon the PbR tariff. GP practices, for instance, are funded via a mixture of capitation and, for about 15%, quality metrics using the Department of Health’s innovative Quality and Outcomes Framework. This annual reward and incentive programme for GP surgeries in England, based on practice achievement, has been attracting international interest.
And this year an embryonic system of quality metrics has been used for a small percentage of hospital funding.
It’s not that any single method is right or wrong, either during growth or in a recession. It’s about an appropriate balance of incentives and risk.
Little of this is evident in recent Department of Health guidance on what to expect from payment by results in 2010/11. In September, David Flory, director general of NHS finance, performance and operations, published a provisional timetable for ‘refining’ some aspects of the tariff structure.
The envisaged developments include:
Some of these developments are potentially far-reaching. The beginning of a switch to prices based on best clinical practice – that is, what a procedure should cost, rather than what it historically has cost – is especially significant, as are the procedures selected:
Prices based on good clinical practice tend to be lower than current averages. Crucially, they eliminate the cost of delayed discharges and unnecessary pre-operative admissions. And their transparency means they are more likely to gain the support of senior hospital clinicians, those with the power to affect actual expenditure levels.
The commitment to a ‘currency’ for mental health is also significant, though for different reasons. Extending the scope of payment by results into mental health and community care has long been a DoH ambition. For a patient with a chronic illness, payment by results offers the hospital a perverse incentive to admit and rack up an extra payment, whereas good chronic disease management invariably regards an unplanned hospital spell as a failure. However, identifying a meaningful way of counting health care provision over an extended period, as compared with a ‘spell’ in hospital, has thus far proved an insuperable obstacle.
So why commit to a development that, internationally, has tended to be judged too difficult? Not to protect mental health funding, that’s plain enough. The real answer – according to one DoH insider – lies in the Treasury. Having funded the NHS’s extensive growth in the early years of the decade, it is now asking difficult questions about the productivity gains its investment should have bought.
If there’s a coherent theme running through these proposed changes in the payment by results regime, it’s the urgent quest for savings. Practice-led commissioning was quietly declared dead last month by DoH primary care czar David Colin-Thomé. Now, although Flory’s letter might suggest policy continuity, more radical initiatives are taking shape in Whitehall.
The essence of payment by results is a fixed national price. However, the DoH is reportedly contemplating using marginal pricing, from April 2010, for any activity above a threshold agreed with commissioners, on the grounds that hospitals will already have covered fixed costs, such as wards, theatres, support functions and most of the payroll.
Moreover, in the beginning of a cross-party consensus, shadow health secretary Andrew Lansley last month also proposed marginal pricing, albeit with a view to bolstering the core Conservative policy of… GP-led commissioning. Like the parrot in the Monty Python sketch, this is conceivably not dead but sleeping.
There are, however, practical problems. Provider fixed costs might not, in an environment of heroic cost improvement expectations, actually be already covered. Efficiency gains of 5% or more don’t simply happen. More significantly, without full payment, will hospitals be willing to undertake the ‘extra’ work? Perhaps the most striking NHS achievement of the past five years has been the virtual elimination of the waiting list in England. We have moved from an 18-month wait for surgery being commonplace to a wait of more than 18 weeks being unacceptable. But if hospitals decide not to accept patients at marginal cost, waiting times will inevitably lengthen in 2010/11. Perhaps politicians have already taken the view that such difficulties will not become apparent until after next year’s election and that, even then, they will still be able to blame administrators and bureaucrats.
And then there’s quality. Payment by results was always really payment for activity, but Andy Burnham’s immediate focus is quality. In 2010/11, financing the quality imperative seems likely to take two forms. One is allowing PCTs to refuse payment for failed clinical procedures: seemingly uncontroversial though the definition of ‘failure’ might be problematic. The other is a boost to the 0.5% funding earmarked for locally agreed quality measures. Speculation is that as much as 1.2% might be allocated in 2010/11, a relatively large sum in such straitened times.
So, in all this, what are the challenges for the NHS finance community, beyond the savings imperative? There are perhaps two. One is managing within a system that holds the seeds of increasing confrontation, with PCTs – mindful of talk of a coming ‘bonfire of the quangos’ – anxious to use their new powers and foundation trusts needing to cover their operating costs.
The other is making an effective contribution to genuine quality and productivity. Strategically, savings are likely to be realised not through budgetary control but through integration and innovation. But payment by results gets in the way. A pricing model based on average costs finds step changes – often driven by science – awkward to accommodate, and gives little support to service redesign aimed at eliminating variations in current clinical practice.
The challenge for finance directors is to support innovation – whether driven by science or by redesign – and turn the gain into hard cash.
Noel Plumridge is a former NHS finance director and the author of CIPFA’s Payment by results
By Noel Plumridge
Payment by results was meant to give the
NHS financial stability and encourage hospitals to improve their productivity. But how well can a tariff system designed for a period of growth work in a recession? Noel Plumridge explores some other funding methods
This is the time of year when many public sector managers anxiously await the funding settlement for the year ahead. Now, as the era of generous public spending increases draws to a close, they have more cause for trepidation than usual. But not, of course, those in the NHS in England. They can look forward to guaranteed growth of around 4% for 2010/11, the final year of the 2007 Treasury Spending Review budgets. Moreover, the five-year-old ‘payment by results’ system of tariff funding also offers NHS organisations a degree of financial stability and certainty.
Dream on. Anyone who believes this rose-tinted version of the outlook for 2010/11 is sadly mistaken. Even if the Pre-Budget Report, due on December 9, maintains the planned level of growth in the health sector, it is most unlikely that 4% will find its way into primary care trust funding allocations. With Chancellor Alistair Darling seemingly intent on halving the £175bn of public debt within four years, that growth pledge appears distinctly vulnerable. Prudence and history both suggest the lion’s share of any extra money will be retained at the Department of Health or, more likely, at strategic health authority level, creating a reserve against the mounting financial pressures. For, according to NHS chief executive David Nicholson, up to £20bn of savings are likely to be needed.
In effect, any growth money would be withdrawn from the system. Yet 4% is widely acknowledged as the minimum extra funding the NHS now needs each year to cope with three intractable pressures. Population growth, at around a million extra people per year, equates to extra demand for health care of perhaps 1.4%. The demographics of an ageing population and scientific and technological advances are each estimated to cost around 1.5% per year.
And then there’s pay. Around two-thirds of NHS spending is consumed by salaries and wages. Health Secretary Andy Burnham has been building a warmer relationship with the trade unions of late and has said NHS organisations will be viewed as ‘provider of choice’ and protected from open competition. Nevertheless, it’s unsurprising that some senior managers are quietly lobbying for a pay freeze, and in many trusts the recruitment brakes are already being applied. The trade-off between NHS pay and NHS jobs is becoming stark.
Neither can the NHS expect to use reserves to cushion the impact. As Public Finance reported on October 30, there is growing speculation that last year’s net NHS surplus of £1.7bn will be clawed back via the Pre-Budget Report, perhaps by basing the 2010/11 tariff on outcomes rather than on budgeted spending levels. Nor, in the current climate, can the separate £269m balance retained by foundation trusts be considered sacrosanct.
However, in the acute hospital sector, where more than 60% of income is derived from the payment by results tariff, there’s a potential ‘Plan B’: offset spending reductions with income growth. Under payment by results, more activity still means more income. Supporting strategies include better coding, altering the hospital case mix and undertaking more highly rewarded work. Andy McKeon, managing director of health at the Audit Commission, observes that in 2008/09 the tariff uplift was 2.3%, yet acute and specialist trust income rose by 6.8%, more than the PCTs’ total cash uplift.
But PCT commissioners have no extra funding to pay for such unplanned growth. In some parts of England, they are already reportedly refusing to pay hospital trusts’ invoices, in a de facto reversion to cash-limited block contracts. Commissioners have always lacked effective tools to manage demand; and some are beginning to question the appropriateness of tariff funding in a recession.
So, is payment by results – that is, payment per clinical procedure according to a fixed national tariff – an appropriate mechanism for funding the NHS through a recession? It was introduced in 2004 specifically to encourage hospital productivity during a time of embarrassingly long waiting lists. But there are other perfectly legitimate ways of financing health care. If you want stability and guaranteed infrastructure, say the theoreticians, use block contracts.
To encourage the integration of hospital, community and GP care, you can pay on a capitation basis – a fixed amount per individual patient, rather than per individual treatment. This method offers an incentive to avoid unnecessary hospital admissions. It is already used to fund complex care packages for people with long-term health conditions and is also the way many US health maintenance organisations work.
If the priority is quality, you can pay according to ‘quality metrics’, using a defined essential element of practice.
The NHS already uses a combination of methods. Less than 40% of NHS funding is based upon the PbR tariff. GP practices, for instance, are funded via a mixture of capitation and, for about 15%, quality metrics using the Department of Health’s innovative Quality and Outcomes Framework. This annual reward and incentive programme for GP surgeries in England, based on practice achievement, has been attracting international interest.
And this year an embryonic system of quality metrics has been used for a small percentage of hospital funding.
It’s not that any single method is right or wrong, either during growth or in a recession. It’s about an appropriate balance of incentives and risk.
Little of this is evident in recent Department of Health guidance on what to expect from payment by results in 2010/11. In September, David Flory, director general of NHS finance, performance and operations, published a provisional timetable for ‘refining’ some aspects of the tariff structure.
The envisaged developments include:
- a return to a single weighted tariff for day-case and elective inpatient surgery. These were ‘unbundled’ in the 2009/10 tariff
- mandatory tariffs for a limited range of high-volume outpatient procedures, and the removal of non-mandatory outpatient tariffs
- ‘rebundling’ of diagnostic imaging into outpatient attendances
- extending the healthcare resource group 4 classification, introduced (with some trepidation) across most of the payment by results system in April 2009, to cover accident and emergency services
- introducing four tariffs based on ‘best practice’ rather than average cost. They are to cover cataracts, cholecystectomy (gall bladder removal), fragility hip fractures and stroke
- a ‘currency’ (not a tariff) for adult mental health services.
Some of these developments are potentially far-reaching. The beginning of a switch to prices based on best clinical practice – that is, what a procedure should cost, rather than what it historically has cost – is especially significant, as are the procedures selected:
- cataract surgery has traditionally been followed by routine out-patient appointments. Under a best practice tariff, it is likely that payment for such follow-ups will be strictly limited
- some 70% of gall bladder removals could, in principle, be performed as day cases. However, the actual day-case level in the NHS is still less than 30%. A tariff based on a day-case pathway would be a powerful incentive to improve, as hospitals (and surgeons) sticking to current practice would not cover their costs
- Care Quality Commission ratings for 2008/09 highlight poor NHS stroke care, with one in six trusts failing on vital indicators such as providing a brain scan within 24 hours
- hip fracture is a high-volume, high-cost condition with considerable variation in both practice and outcomes.
Prices based on good clinical practice tend to be lower than current averages. Crucially, they eliminate the cost of delayed discharges and unnecessary pre-operative admissions. And their transparency means they are more likely to gain the support of senior hospital clinicians, those with the power to affect actual expenditure levels.
The commitment to a ‘currency’ for mental health is also significant, though for different reasons. Extending the scope of payment by results into mental health and community care has long been a DoH ambition. For a patient with a chronic illness, payment by results offers the hospital a perverse incentive to admit and rack up an extra payment, whereas good chronic disease management invariably regards an unplanned hospital spell as a failure. However, identifying a meaningful way of counting health care provision over an extended period, as compared with a ‘spell’ in hospital, has thus far proved an insuperable obstacle.
So why commit to a development that, internationally, has tended to be judged too difficult? Not to protect mental health funding, that’s plain enough. The real answer – according to one DoH insider – lies in the Treasury. Having funded the NHS’s extensive growth in the early years of the decade, it is now asking difficult questions about the productivity gains its investment should have bought.
If there’s a coherent theme running through these proposed changes in the payment by results regime, it’s the urgent quest for savings. Practice-led commissioning was quietly declared dead last month by DoH primary care czar David Colin-Thomé. Now, although Flory’s letter might suggest policy continuity, more radical initiatives are taking shape in Whitehall.
The essence of payment by results is a fixed national price. However, the DoH is reportedly contemplating using marginal pricing, from April 2010, for any activity above a threshold agreed with commissioners, on the grounds that hospitals will already have covered fixed costs, such as wards, theatres, support functions and most of the payroll.
Moreover, in the beginning of a cross-party consensus, shadow health secretary Andrew Lansley last month also proposed marginal pricing, albeit with a view to bolstering the core Conservative policy of… GP-led commissioning. Like the parrot in the Monty Python sketch, this is conceivably not dead but sleeping.
There are, however, practical problems. Provider fixed costs might not, in an environment of heroic cost improvement expectations, actually be already covered. Efficiency gains of 5% or more don’t simply happen. More significantly, without full payment, will hospitals be willing to undertake the ‘extra’ work? Perhaps the most striking NHS achievement of the past five years has been the virtual elimination of the waiting list in England. We have moved from an 18-month wait for surgery being commonplace to a wait of more than 18 weeks being unacceptable. But if hospitals decide not to accept patients at marginal cost, waiting times will inevitably lengthen in 2010/11. Perhaps politicians have already taken the view that such difficulties will not become apparent until after next year’s election and that, even then, they will still be able to blame administrators and bureaucrats.
And then there’s quality. Payment by results was always really payment for activity, but Andy Burnham’s immediate focus is quality. In 2010/11, financing the quality imperative seems likely to take two forms. One is allowing PCTs to refuse payment for failed clinical procedures: seemingly uncontroversial though the definition of ‘failure’ might be problematic. The other is a boost to the 0.5% funding earmarked for locally agreed quality measures. Speculation is that as much as 1.2% might be allocated in 2010/11, a relatively large sum in such straitened times.
So, in all this, what are the challenges for the NHS finance community, beyond the savings imperative? There are perhaps two. One is managing within a system that holds the seeds of increasing confrontation, with PCTs – mindful of talk of a coming ‘bonfire of the quangos’ – anxious to use their new powers and foundation trusts needing to cover their operating costs.
The other is making an effective contribution to genuine quality and productivity. Strategically, savings are likely to be realised not through budgetary control but through integration and innovation. But payment by results gets in the way. A pricing model based on average costs finds step changes – often driven by science – awkward to accommodate, and gives little support to service redesign aimed at eliminating variations in current clinical practice.
The challenge for finance directors is to support innovation – whether driven by science or by redesign – and turn the gain into hard cash.
Noel Plumridge is a former NHS finance director and the author of CIPFA’s Payment by results
