Payment by Results: Implications for Acute Trusts

CIMA briefing, November 2004

What this briefing covers

• Why the NHS is doing this?• How it will work?• Main immediate implications for Acute

Trusts• Longer term issues to consider/discuss

WHY MOVE TO PbR?

• Facilitate patient choice • Enable diversity of provision • Introduce some of the benefits of a market

without haggling over prices• Promote efficiency at higher cost Trusts

(because they have to reduce costs to a national tariff level)

• Evidence that it works in other countries

Patient choice

Requires a financial system that:• Is flexible enough to allow money to move

as the patients do (no block contracts)• Allows patients’ choices to be made on the

basis of quality and responsiveness not price

• Ensures choices are affordable for PCTs and good value for money

Diversity

Requires a financial system that:• Works for new as well as traditional

providers• Minimises transaction costs • Sets a common national framework and

contracting arrangements for all providers of services to NHS patients

Experience in other countries

• Most OECD countries use casemix payment methods or are planning this

• Most OECD countries use standard tariffs, not competition, to pay for most healthcare

• Casemix payment increases productivity, reduces use of inpatient care

• Researchers have not found adverse effects on quality

HOW IT WILL WORK

• Trusts to be paid for actual patients they see and treat

• Payment is based on national tariffs• Tariff is set at national average cost,

excluding regional cost differences• Tariff uses over 500 Healthcare Resource

Groups (HRGs) to reflect relative patient complexity

Tariffs for admitted patients (1)

• Tariffs cover the entire spell between admission and discharge or death. Finished consultant episodes (FCEs) are not a contract currency.

• Tariffs for each HRG (over 500 of them)• Some specialist work is excluded. Some

earns a premium on the HRG tariff (the HRG grouper software decides).

Tariffs for admitted patients (2)

• Separate tariffs for elective & non-elective, at least in 2005/6

• Elective includes day cases – no separate price for these

• Additional payments for very long stays (based on national “trim-point” by HRG)

• Lower tariff for short stay emergencies (these have been increasing, and it would be unfair to pay the normal price)

Outpatient tariffs

• Prices for each specialty• Higher prices for children• First attendance has a higher price than

follow-up• No additional payment for minor procedures

done in outpatients

A&E tariffs

• Three price bands per attendance: normal (£61), high cost (£93) and minor injuries (£35)

• Most payments are fixed based on expected activity: 20% variable for under performance, but full tariff if over

• Existing payment arrangements (normally by host PCTs on behalf of all) continue for 2005/6

What is NOT covered by tariffs in 2005/6The main activity excluded is:• Some specialist work, e.g. burns and

transplants• Critical care (but costs of coronary care are

built into relevant HRG tariffs)• Ward attenders• GP direct access servicesThese will all be covered eventually.

The transition to tariffs

• PCTs pay Trusts for planned contract activity at tariff (it’s not negotiable).

• Tariffs are based on NHS average costs. But any Trust’s costs may be higher or lower than tariff.

• Trusts with costs above tariff receive extra income (tapering off over three years). This is taken from Trusts with lower costs.

Contract arrangements in 2005/6

• Trusts will continue to have contracts with each PCT (legally binding contracts for Foundation Trusts)

• These will specify all the detailed planned activity valued at national tariff, and the value of work not covered by tariff

• Activity variations in year will nearly all be at full tariff (for PbR activity)

• Separate arrangements to replace “OATs”

What about non-NHS providers?

• Essentially the same rules apply (but some of the non-NHS contracts work differently from NHS ones at present)

• PCTs pay the same tariffs to non-NHS providers (if the DoH negotiates anything different, the DoH handles the difference)

• Patients should choose who treats them based on quality and waiting time, not price

MAIN IMMEDIATE IMPLICATIONS

• Volatility of income• Savings required• Information needed• The importance of coding• Some activity earns high prices, some low• Understanding the Trust’s own costs

Volatility of income

• Income earned depends on work done• PCTs will scrutinise work done more

carefully, and won’t pay for work done against their wishes

• PCTs still have cash-limited budgets, and will aim to manage within the total they set aside for acute activity

Savings required

• The national tariff assumes 1.7% cash-releasing efficiency savings in 2005/6

• In addition, Trusts with costs above tariff have to find further savings – up to 2% a year

• This isn’t negotiable – it is simply removed from Trust income

• Trusts also have to sort out any underlying financial problems

Information needed

• All needed at PCT level, possibly at GP practice level

• HRG activity should come automatically from the grouper software

• So should information on short and long stays

• Outpatient attendances should be easily available

• A&E might be more difficult?

The importance of coding

• Coding affects the HRG which an episode is coded to

• The HRG affects the price• So it’s important to get coding right (it

always was, but now it affects income)• Longer term, the NHS may audit counting

and coding of activity more rigorously

High and low prices

The NHS has set fairly low prices for activity it doesn’t want to encourage, i.e.

• Outpatient re-attendances• Short stay emergency admissions• Long stays (over the “trim point”)This largely fits with good clinical practice.

Understanding the Trust’s costs (1)

Relatively high costs can be caused by:• Activity not counted or coded properly• Poor throughput and productivity• Diseconomies of small scale• Site problems creating inefficiency• Poor clinical practice (e.g. infections)• Cross-subsidising R&D or education• Rich case mix not really covered by tariffs

The important things are:• Recognise what you can change in the short

term and what you can’t• Accept that there’s little information on

other Trusts’ costs (but plenty on lengths of stay)

• Aim for real changes, not re-allocations of overheads

Understanding the Trust’s costs (2)

LONGER TERM ISSUES (Discussion topics)• Internal financial control under PbR• Critical mass under PbR• New capital expenditure – affordable?• Clinical practice and quality• Practice Based Commissioning• Will PbR change where care is delivered?

Internal financial control under PbR

• Fixed budgets for expenditure start to be inappropriate if income starts to vary significantly in-year

• In principle, spending £50k more can be justified if you earn £100k more income

• But departments which earn less income would similarly have to save money

• Financial contribution (however defined) could start to be a key measure

Critical mass under PbR

• Ultimately PCTs no longer “fund” anything. They simply pay for work done.

• Hence there is no longer a “funded establishment” of doctors and nurses. If the work reduces, some of the people can’t be afforded.

• If income levels don’t support the level of staffing required by Royal Colleges, Trusts will have hard decisions to make.

Funding new capital expenditure

• In the medium and long term, any new development has to be affordable at tariff

• Important to make robust assumptions, as the Trust carries the risk

• There may be some short term NHS Bank funding for major PFI schemes for five years at most

Clinical practice and quality

• HRGs distinguish different types of work• And some sorts of work can earn a premium

for complex cases in an HRG• But there is no financial reward for

providing better than average NHS quality (unless it reduces overall cost, or attracts more business)

Practice Based Commissioning (1)

• New policy, expected to be introduced in 2004/5. Any GP practice which wishes can have an indicative budget – largely covering acute care subject to PbR.

• This may improve (but may complicate) how health care is commissioned.

• It will demand more detailed information.• And practices are more likely than PCTs to

challenge the detail.

Practice Based Commissioning (2)

• PCTs see PBC as a means of controlling the rise in acute activity. Practices may be better than PCTs at controlling what is done.

• Practices can reinvest savings in other healthcare: this is their incentive for taking on a budget.

• Savings for practices will mainly come out of Trust income. PBC increases risk?

Will PbR change where care is delivered?• PbR is meant to encourage choice and

diversity of provision• PCTs can pull out income if they shift work

from secondary to primary care• How much is this likely to happen?• What should the Trust’s strategy be?