We have undertaken various projects into Payment by Results, by which English hospitals are paid a fixed tariff for each type of patient treated. These projects include the following:
- Estimating the costs of specialised care
- Paying for mental health care
- Evaluating payment policy for NHS and private providers (Independent Sector Treatment Centres - ISTCs)
- Evaluating demand management strategies
- Assessing adminstrative and transactions costs
Hospitals providing care to NHS patients are receiving an increasing proportion of their income under Payment by Results (PbR), which rewards providers for volumes of work adjusted for differences in the type of patients they treat. The key differences to previous contracting arrangements are that prices are fixed nationally, hospital income is related to activity, and activity ceilings have been removed.
PbR should stimulate improved NHS performance. Facing a fixed payment – the national tariff – hospitals have an incentive to cut costs and reduce length of stay in order to free up capacity to accommodate more patients. Access should improve because hospitals have a direct financial incentive to do more work: they receive extra funds for each additional patient treated. And commissions have the financial means to substitute activity from hospitals to primary and community care settings. PbR also supports and facilitates patient choice, thereby helping to develop a responsive and higher quality NHS.
Our research is used both to inform policy design and to evaluate the impact of policy on practice.
Under Payment by Results, hospitals are paid a national tariff for treating particular types of patients. This project examines whether the tariff fully reflects the costs associated with the provision of specialised care.
We analyse data for more than 12 million patients treated during 2008/9 and find that costs are higher for patients receiving some types of specialised care. For instance, costs are 20% higher if specialised children services are provided and 21% higher for specialised orthopaedic services. Hospitals providing these specialised services might be paid a top-up to the national tariff to reflect these higher costs.
The study also demonstrates large variation in costs among hospitals. This variation cannot be explained by the provision of specialised services, nor to other patient characteristics, nor to differences in factor prices. If hospitals with higher costs fail to improve their efficiency they will struggle financially.
The use of casemix-based funding mechanisms is increasing internationally. This funding approach potentially offers incentives for a range of diverse objectives, including improvements in efficiency, quality of care and patient choice. However, to date, the application of this approach to mental health care has been limited and there is no long-term experience to inform policy and practice.
In England, the Department of Health plans to extend the scope of Payment by Results to mental health. The Care Pathways and Packages Clusters comprise a set of 21 ‘care clusters’ that together form ‘currencies’, or units for contracting and commissioning mental health services. Each cluster defines a package of care for a group of service users who are relatively similar in their care needs and therefore resource requirements. The currencies are being refined and tested at several sites in England. In addition, costing exercises are underway to investigate the resource implications of the currencies.
Our report examines the international literature on payment mechanisms for mental healthcare services. These approaches are described and critiqued, drawing on relevant theoretical and empirical research to explore the strengths and weaknesses of payment mechanisms. Implications for the proposed Care Pathways and Packages Clusters are explored and recommendations are outlined.
Since 2004 NHS patients have been given the opportunity to be treated by private rather than NHS providers. Most private (or ‘independent sector’) providers are treatment centres that specialise in one or two high volume procedures, such as hip replacements or cataract removals, and that avoid taking on complex operations.
All providers are to be remunerated under a prospective payment system (Payment by Results) that offers a price per patient. This payment system presupposes that any remaining cost differentials between providers result from inefficiencies. Our research assesses the grounds for this supposition.
In one study, we examine the constraints that could cause public and private providers costs to differ for reasons outside their control. These constraints may be regulatory in nature, such as taxes and performance management regimens, or relate to the production process, such as input costs, the provision of emergency care and case mix issues. Most of these exogenous cost differentials can be rectified by adjustments to either the regulatory system or to the payment method.
In another, we analyse data in the Hospital Episode Statistics (HES) and find that reported activity falls well below contracted levels and that some private companies fail to record the diagnostic information required to determine the patient’s payment category, making it impossible to identify what types of patient have been treated. To ensure that private sector providers have a clear incentive to make proper returns, payment for treatment should be contingent upon the quality of data, as it is for NHS providers.
We also find evidence that NHS providers are treating patients of greater complexity than private providers. Specifically, patients treated in NHS hospitals are more likely to come from more deprived areas; to have more diagnoses; and to undergo significantly more procedures than patients seen by the private providers. If these differences drive costs, then payments for treatment should be refined to ensure that providers are reimbursed fairly.
The graph shows coded and uncoded activity by ISTC group: 2007/8.
The need for effective demand management has become more transparent following the introduction of Payment by Results. A particular concern is that the incentives for hospitals to do more work may be too strong, the danger being that patients who would be better treated in the community are treated in hospitals instead. To resist this, commissioners must manage demand appropriately and effectively if they are to live within their global budgets.
In this study we conclude that, rather than placing the onus exclusively on commissioners and GPs to exercise expenditure control, consideration should be given to refining the incentive structure underpinning PbR. This might involve the imposition of activity thresholds, the introduction of two-part tariffs, and tariff setting on a basis other than average reference costs.
We apply a transaction costs approach to quantify and analyse the nature of how contracting costs have changed as a consequence of the change from locally negotiated block contracting arrangements with a system of national prices to pay for hospital activity. Data collection was based on semi-structured interviews with key stakeholders from hospitals and Primary Care Trusts, which purchase hospital services. Replacing block contracting with activity based funding has led to lower costs of price negotiation, but these are outweighed by higher costs associated with volume control, data collection, contract monitoring, and contract enforcement. There was consensus that the new contractual arrangements were preferable, but the benefits will have to be demonstrated formally in future.