What did the government promise?
Labour's 1997 manifesto explicitly rejected the competition created by Conservatives' internal market. Its blueprint for NHS reform, the 2000 NHS Plan, dismissed competition between hospitals as a 'weak lever for improvement', and stated that the market ethos 'undermined the teamwork between professionals and organisations vital to patient-centred care'.
However, the new Labour government retained a key Conservative reform that split hospitals (or providers) from those parts of the NHS that held budgets (purchasers). This decision would later allow the introduction of much more radical NHS reform than was attempted by the Conservatives.
How did things change?
A new agenda emerged in October 2002, when the Department of Health published Reforming NHS financial flows: Introducing Payment by Results. This laid out far-reaching changes to how money moved round the NHS, and set up incentives for NHS hospitals to behave more like businesses in the future.
Payment by results aimed to increase the amount of work done by hospitals, especially in areas with long waiting times, such as hip operations. It also opened up the way for money to begin to follow patient choice.
Under payment by results, hospitals are now moving away from locally negotiated block contracts. These allowed for considerable variations in prices for operations across the country, in line with their actual costs to hospitals (although the calculations have often been rough and ready). In addition hospitals were often paid even when they under-performed, failing to carry out number of operations required of them.
How does payment by results work?
Under payment by results, hospitals are paid only if an operation or treatment is carried out. The Department of Health has drawn up a long list of procedures, such as hip replacements or treatment for heart attacks, each with its own Healthcare Resource Groups (HRG) code.
There are more than 1,000 HRG codes, designed to capture all the treatments and procedures that a patient might have while in hospital for a particular condition or operation. Similar coding systems exist in many other countries. Most importantly, the price of each HRG procedure or treatment is fixed in relation to a national tariff, based on its average cost across the NHS. For example, under the national tariff the cost of a hip replacement is £4,830, and treatment for a heart attack is £1,775, no matter where the operation is done. Hospitals that operate in parts of the country where staff costs are unavoidably high, such as London, are reimbursed directly by the Department of Health.
What changes will it bring?
Payment by results means a hospital will be paid the fixed price for every treatment it undertakes. If the treatment costs more – and around half of England’s hospitals are expected to fall into this high-cost category – the hospital will have to find ways of bringing those costs down. It can either cut costs, or try to do more operations to generate extra money.
On the other hand, if it costs a hospital less than the national tariff price to perform a treatment, then it can keep the extra money, just as businesses retain their profits, to use as it sees fit. If a hospital is able to increase its volume of treatments or operations, by attracting larger numbers of patients, it can also make money.
The assumption underlying this new system is that hospitals will want to make a surplus, on top of their existing legal obligation to balance the books. To do this, they will have to retain existing patients and attract new ones. This includes diverting patients away from other hospitals or places of treatment, by being 'more responsive' to their needs. In other words, only a few years on from the publication of the NHS Plan, competition between hospitals is now being planned into the system.
Concerns exist in GP surgeries and other community services that payment by results might create incentives for hospitals to treat as many patients as possible, even when it would be more appropriate for treatment to take place elsewhere. However, it may also encourage local primary care trusts to work with general practices to improve care and reduce the risk of costly hospital admissions.
How fast is it being implemented?
Payment by results is being rolled out relatively slowly. It will not be fully implemented until 2008/9, when the target is for 90 per cent of hospital care to be covered by the system. This will allow hospitals and primary care trusts, the local NHS health bodies who hold the budgets and buy services for patients, time to adjust to the new tariffs.
From April 2003, tariffs were initially applied to non-emergency surgery for 15 procedures, including cataracts and hips, both areas where there were significant waiting lists. Foundation trust hospitals have also started to use payment by results for nearly all their activity.
From April 2005, all other hospitals will use the system for all non-emergency surgery. But fears about the potential destabilising effects of the system to hospital finances have delayed its roll-out to emergency and outpatient departments.
Some benefits
If payment by results works as planned, the NHS will become more efficient and productive, undertaking more operations and treatments. Evidence from other countries with similar systems points to shorter waiting times (as in Australia) and shorter lengths of stay in hospital (as in Sweden).
Other potential benefits include more transparency about the work that hospitals actually do. The national public spending watchdog, the Audit Commission, recently found a 'significant proportion' of hospital trusts with inaccurate records, or in some cases, no data at all for some of their work.
Under the new system, hospitals will not get paid for unrecorded or badly recorded ('uncoded') activity. In theory, tax payers will have a much clearer idea how their money is being spent.
Some problems
Payment by results rewards volume, not quality. Hospitals can make money if they bring costs down, or increase the amount of work they do. But cutting costs might be at the expense of better-quality equipment or staff numbers.
One lesson from other countries is that quality of care can suffer when hospitals are given incentives of this kind. For example, there is some evidence that patient mortality in the United States increased in the period soon after discharge from hospital. This is likely to be one of aspects of the new system that the Healthcare Commission, which inspects and monitors hospitals, will be watching closely over the next few years.
Another is that hospitals can start to cheat on coding. For instance, the NHS tariff pays two prices for different kinds of heart attack treatment: £1,775 for treatment of patients without medical complications, £3,676 for those with complications. The risk is that hospitals will falsify the code (or, worse still, give unnecessary treatment) in order to make more money.
It is not easy to set tariffs for all health care activities. Procedures that have a clear treatment and roughly predictable length of stay – such as hip replacements – are relatively easy to cost, but it is much harder to set a fixed rate for treatments with fewer agreed definitions or end points.
In mental health, the timetable for introducing payment by results is on hold. Even given the strong case for extending to patients with mental health problems the same choices as other patients, very few countries have managed to come up with workable tariffs for complex long-term conditions such as depression or bi-polar disorder, with many competing and variable treatments.
Wider implications
It remains unclear what might happen to health service provision as a whole if hospitals find they are losing money. They might choose to move money across from profit-making areas, or cut costs in the loss-making area, with potential risks to quality. They might give up offering some types of surgery or treatment altogether. All market systems imply winners and losers, but it may well prove highly controversial if some local services start to disappear.
It is also unclear how competitive the hospital sector will prove compared with other ways of delivering health care. The Government has said it wants to see more care outside hospitals, particularly for people with long-term conditions – for example, in GP surgeries. Incentives are now in place to encourage this, but it may prove difficult to curb the traditionally powerful influence of hospitals.
What does the future hold?
Payment by results has the potential to become one of Labour's most far-reaching NHS reforms. But it seems to have been adopted without much public debate or indeed a great deal of questioning from the two main opposition parties.
It is too early to say what impact it is having on the NHS, but the evidence from elsewhere is mixed – there are potential benefits but the risks are considerable. It will require close scrutiny.
