The current NHS payment system

 

Payment mechanisms are used in health services across England, and further afield. Each mechanism has its own advantages and disadvantages, but an effective payment system will combine complementary payment and non-payment levers, with the optimal mix dependent on the priorities of the system. Payment mechanisms differ in the extent to which they bundle payments for services, and include:

  • block budgets, in which payments for all services provided are bundled together, with a lump sum paid to providers at intervals, independent of the level of activity
  • capitation, under which bundled payments are made per patient
  • case-based payments, in which providers receive a prospective fixed sum for an episode – rather than single instance – of care
  • fee-for-service, where providers are paid retrospectively per unit of activity undertaken.

No single mechanism is perfect (the pros and cons of each payment mechanism are discussed in more detail elsewhere). It is common to apply a combination of different mechanisms within the overall health care payment system. This is true for the NHS, where the payment system consists of a blend of methods used across services, incorporating block budgets, capitation and case-based models.

The acute sector: payment by results

Payment by results (PbR) covers the largest segment of NHS spend. Introduced in 2003/04 to cover a small proportion of elective hospital care, it accounted for 60% of the total income received by all NHS trusts and 67% of acute income by 2014/15. PbR is an case-based payment system with nationally set prices for units of care that apply across providers. It therefore supports patient choice by allowing funding to follow the patient to wherever they choose to be treated, within a range of available options. PbR is also applied to emergency care to provide ‘yardstick’ competition, incentivising providers to improve efficiency where patient choice is not possible.

This shift from block to activity based payment in the NHS acute sector at a time of long waiting lists – accompanied by other complementary incentives such as waiting time targets – had the intended impact of increasing activity levels, with a rise in elective spells leading to a reduction in waiting times. Resulting resource savings were estimated to be between 1% and 3% over a 5-year period following the introduction of PbR, with no evidence of a coincident deterioration in quality. This suggests that the introduction of PbR led to improved efficiency.

These findings are consistent with those from other countries that have moved away from block payments to activity based systems. Internationally, activity based payment systems similar to PbR have been associated with increases in life expectancy. However, they do tend to be more complex than some other systems, are costly to implement and run, and make financial control difficult as increased activity is incentivised, which can encourage supply induced demand. They can also discourage joint working with other providers, or investment in initiatives to prevent future ill health – both of which are now national policy objectives.

Through this sort of payment system, providers are incentivised to improve their efficiency – reducing costs while maintaining or improving quality – in the following ways.

  • Setting national prices based on average cost means higher-cost providers are incentivised to improve efficiency to reduce cost through yardstick competition. Providers with below-average costs are incentivised to keep them below the average as they will retain the marginal difference.
  • The fixed price means that providers must compete based on quality of their service rather than price, thus incentivising cost reductions through improved efficiency rather than reduced quality.
  • A national efficiency factor is incorporated preventing the price paid from rising at the same rate as costs, so providers must continuously improve efficiency.

Initially the national efficiency factor was set at a level to encourage efficiency improvements, but also to allow the overall price paid to rise above inflation. Following national austerity measures introduced in 2010/11, the efficiency factor has been set much higher, creating annual net unit price reductions, with the aim of driving greater efficiency savings.

The system has continued to evolve, with various pay-for-performance schemes, such as best practice tariffs (BPT) and Commissioning for Quality and Innovation (CQUIN) payments, introduced alongside PbR to further encourage quality improvement. These have had variable impact, with the level of clinical engagement appearing to be a key deciding factor of their success. The maternity pathway tariff has been introduced to reduce variation in care pathways in different hospitals. Additional cost-saving measures have been introduced to encourage providers to reduce their emergency activity, such as the marginal rate emergency tariff (MRET).

Community and mental health services: block contracts

In contrast, the predominant payment systems in community and mental health services are block contracts. While there has been some development of patient-based payment systems, including mental health clusters, these sectors have seen much less innovation in their payment systems. Block contracts can be more straightforward, resulting in lower transaction costs. They may allow more flexibility for innovation by providers as a result. They also make expenditure predictable and budgets easier to control. But this can be at the expense of the efficiency of the service and can mean a lack of transparency. It can also incentivise inappropriate care settings, with providers potentially avoiding more complex patients.

Block contracts may therefore lead to lower responsiveness as increases in activity are discouraged. CQUIN payments and Any Qualified Provider schemes have been extended into mental health and community services. This is to counteract the potential limitations of block contracts on quality and patient choice, but the lack of efficiency incentives remains a fundamental challenge.

Primary care: capitated payments

General practice is beyond the scope of this research, but provides an example of capitated payment systems, with risk-adjusted per-patient payments in operation alongside the Quality Outcomes Framework, which has been used – successfully to a certain point – to incentivise improvements in the quality of care processes for chronic conditions.

Direction of travel: towards whole-population budgets

Although a combination of methods is likely to be appropriate in most instances, the current combination of a case-based system for most acute care and block budgets in out-of-hospital services has provided a balance of incentives that are counter to the national ambition to provide more care out of hospitals and to treat mental and physical health services with parity. Equally they do not incentivise prevention or early intervention.

New payment models are being developed and tested in local areas in line with the development of the various new models of delivering care. As one example of this, a version of capitation-based payment known as ‘whole-population budgets’ has recently been suggested to support these new models of care. However, arrangements for ongoing evaluation of these new payment systems and spreading of best practice are not currently clear, and must be developed and shared.


For more information see the appendix, for a brief history of the NHS payment system: www.health.org.uk/effective-payment-system-eight-principles

§ While the research for this report did not specifically cover primary care, it is a crucial part of the total payment ecosystem, so must be considered in any systematic review.

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