Key points

  • How health care providers (such as hospitals) are paid is one way of influencing the quality and efficiency of NHS care. Over the coming years the NHS will face unprecedented challenges as it tries to recover the substantial backlog of unmet need after the pandemic, deliver on already demanding efficiency targets and redesign care, shifting services towards more community and primary care.
  • Through the pandemic the NHS has been operating under an emergency payment approach to meet the exceptional costs associated with COVID-19. This approach will continue until at least October 2021. Over the coming months, policymakers need to decide what should replace these emergency arrangements.
  • At the same time, the way the NHS is organised is changing. The new Health and Care Bill will repeal much of the 2012 Heath and Social Care Act provisions for competition and place increased emphasis on collaborative approaches. These will be led by new statutory bodies, integrated care systems (ICSs).
  • Before the pandemic, the NHS payment system was moving towards a blended approach where providers receive an annual fixed payment supplemented by activity and quality-related funding – to replace the payment by results (PbR) tariff.
  • With waiting lists at record highs, it might be tempting to move back to the PbR tariff to incentivise hospitals to treat many more patients. This would help address the backlog of care. But over the coming years the NHS also needs to improve care of an ageing population with complex, long-term health problems. Coordinated care across hospitals, community, primary and mental health services is a priority and activity related payments are not well suited to this goal. Funding is going to be tight so improving efficiency and making sure the service does not overspend will also be key objectives. Even after the pandemic, a blended payment system to replace the PbR tariff remains the right direction of travel to help balance these potentially competing priorities for the NHS.
  • While the broad direction of travel for the NHS payment system is clear, the devil is in the detail and COVID-19 has made determining the balance of fixed, activity and quality payments harder. Work needs to begin urgently on the specific design of a new strategy for the payment system if it is to be in place for 2022/23. Both to support the new ICS model and enable health services to recover from COVID-19.