Competition in the NHS: ‘Payment by Results’

Jon Sussex, Deputy Director of the OHE, researches incentives and competition in UK health services.  In July, he presented findings on ‘Payment by Results’ to the Health and Social Care Conference held by the Association of Chief Executives of Voluntary Organisations.

‘Payment by Results’ (PbR) was instituted in the NHS in England in 2003 to stimulate provider efficiency, encourage health care purchasers to plan and manage demand better, enable patient choice, reward quality in service provision and be transparent.  Money was to follow the patient.  Previously hospitals were funded mainly by block contracts, which provided little incentive for increasing patient access to care.

PbR uses units of activity similar to DRGs in other countries. It provides a fixed price for a unit of activity: an inpatient or day-case ‘spell’, first or follow-on outpatient treatment, or A&E attendance.   PbR applies to most NHS-funded acute hospital care in England and applies to care from all providers – third-sector and private hospitals as well as public hospitals.

Critics of PbR have questioned its effects, charging that it may have increased unnecessary care, discouraged moving care to other settings, scrimped on quality to reduce unit cost, led to recoding care at higher price levels (‘upcoding’), and discouraged treating the sickest/most expensive patients.  These assumptions were tested by quantitative and qualitative research performed by Aberdeen University and the OHE that compared  activity in hospitals subject to PbR to those not subject to it.

The research showed a slight increase in efficiency, measured by length of stay (days) and proportion of day cases.  Spells, i.e. the volume of activity, did increase slightly although the data do not show whether any was for ‘unnecessary’ care.  Quality was not affected adversely when measured by rates of in-hospital mortality, 30-day post surgical mortality and emergency re-admissions after treatment for hip fractures.  With respect to upcoding, the evidence is mixed, with shifts observable in maternity care but not elsewhere.

PbR may be less successful, however, in achieving its objective of stimulating competition on attributes of care other than price.  This may be in part because charity and private providers are at a financial disadvantage in two respects.  First, NHS pensions are subsidized by taxpayers, while those of other institutions are not, amounting to a difference of 6-7% in total costs.  Second, VAT differences, e.g., on services that are contracted out, amount to approximately 3.5% on the price. 

In future, PbR is likely to be expanded to include mental health and community services.  National ‘best practice’ tariffs are likely in several additional treatment areas, encouraging more day-case care, streamlining patient care pathways and encouraging best-practice care.  These will be supplemented by local quality incentives including: (1) the Commissioning for Quality and Innovation (CQUIN) payment framework, which makes a proportion of providers’ income conditional on quality and innovation and (2) payment-for-performance (P4P) schemes.

Still uncertain is how the new tariffs may be constructed with respect to units of activity, disaggregation of treatment, and unbundling.  With changes under the new Government, it’s also not clear who will be making decisions about which care to purchase from where – GP consortia, individual physicians, patients or another provider.  No matter how the situation develops, however, providers of mental health and community services should prepare by collecting good data on what services are provided for what kinds of clients/patients and at what cost – including both structures (fixed v. marginal; ‘common’ v. specific) and levels.

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