In 2002 the Department of Health announced a fundamental change to the way in which NHS hospitals in England are paid for the work they do.
Under this new system – Payment by Results (PbR) – hospitals are reimbursed for the activity they carry out using a tariff of fixed prices that reflect national average costs.
This reform introduces some strong levers into the NHS system that are intended to improve efficiency and quality.
In theory, PbR creates a strong incentive for hospitals with above-tariff services to reduce costs to avoid running at a loss. It provides commissioners with an extra incentive to manage demand for care because each individual admission has a cost attached to it. This also offers greater opportunities to put pressure on providers to improve quality, as it makes it easier for commissioners to switch providers or reconfigure services.
In conjunction with patient choice, PbR could also encourage providers to improve the quality of their care to avoid losing the custom of patients. Such a payment system also allows the price setter – the Department of Health – to adjust prices as an incentive for providers to change volumes or patterns of work.
The government is currently considering whether and how the system can be improved and extended to more services in the future.
This briefing explains how Payment by Results works, examines the evidence on whether the system has achieved, or is likely to achieve, the policy aims set for it, and describes the government's current proposals for the future of PbR.