The shift away from PbR

The 2012 Health and Social Care Act emphasised the PbR system as a key pillar of a more market-based approach to the NHS, in which autonomous providers competed to deliver care. But the NHS is increasingly emphasising collaboration over competition, and seeking to incentivise integrated care., A mismatch between policy intentions and payment incentives has emerged – and the ubiquity of PbR challenged. This section of the briefing explores why. Figure 2 provides an overview of changes to secondary care payments.

Figure 2: Timeline of key changes to the NHS secondary care payment system

In 2003/04 the NHS introduced a limited number of tariffs for elective surgery, for example £5,323 for a hip operation in 2012. These tariff payments were designed to help to manage waiting lists during a period where reducing waiting times was a key priority and the NHS was receiving large annual increases in funding. Activity-based payments later grew in number and would cover a much wider range of services. The policy emphasis progressively changed, from incentivising additional elective care to reduce waiting times, towards ‘efficiency’ as NHS funding growth slowed dramatically after 2010. PbR sought to focus competition on quality, which is harder to observe.

During austerity the PbR tariff was used to set demanding efficiency targets for providers, direct competition was less important and there was more emphasis on ‘yardstick competition’. Increasing activity was no longer a goal, rather the aim was to limit the rate of growth in hospital activity. Head-to-head competition has increasingly been replaced by collaborative benchmarking and other tools to manage demand.

From 2016, with NHS deficits increasing, PbR was increasingly augmented with other forms of payment, such as risk-sharing and block contracts. By 2019, the amount of acute health care being paid for under the PbR system had fallen to just under 60% by value.

The focus on ‘efficiency’

The PbR tariff system focuses on a limited view of health care efficiency. The tariff incentivises lower unit costs and high quality for specific episodes of care. This is an important source of efficiency gains but narrow when taking a long-term, system-wide perspective. For example, in isolation, it fails to place enough weight on disease prevention, earlier diagnosis and integration across different types of care which reduces avoidable hospitalisations.

Some of the key opportunities to improve efficiency across the health care system will come from redesigning pathways to provide care in ways that avoid costly hospitalisations or late-stage treatment. The PbR tariff provides little incentive for the providers of care to focus on these opportunities.

Over time the payment system should also encourage rather than penalise innovation in medical treatments and processes for engaging with patients and the wider public. The PbR tariff system unintentionally made innovations more challenging, such as the move from face-to-face to telephone or digital consultations, as it took time to create new categories of services with an appropriate price that commissioners could use to reimburse the provider. COVID-19 has increased the rate of adoption of new technologies, for example transforming outpatient care with more appointments shifting to telephone or online. In a survey of NHS staff (total sample size 1,413) conducted by YouGov for the Health Foundation between 23 October and 1 November 2020, just over four-fifths of respondents (82%) said their organisation had increased its use of technology to some extent during the first phase of the COVID-19 pandemic (the period covering the beginning of the first lockdown in March 2020 to when the survey was conducted in October 2020).

While there is much work to do to establish the most appropriate and inclusive use of digital services, it is clear that this will, and should be, part of the way care is provided in future.

These wider system considerations will be a key focus for the new ICSs and any future approach to payments needs to target a broader understanding of where the main opportunities to improve efficiency lie.

* Yardstick competition describes the process by which each hospital is forced to compete with its ‘shadow hospital’ based on nationally set prices, calculated from the average cost of delivering an episode of care adjusted for the expected rate of efficiency year on year across the NHS and any unavoidable differences in cost between hospitals. Yardstick competition is used in regulating monopolies where actual competition is not possible or desirable to incentivise efficiency. (Shleifer, A. 1985. A theory of yardstick competition. The RAND Journal of Economics 16(3) 319–327).

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