Comment / Health economics: Formula funding verdict

Matthew Sutton, professor of health economics at Manchester University, examines how effective formula funding has been in its aim of reducing inequalities

Formula funding has been used in the NHS in England for more than 30 years. The initial objective was ‘that there would eventually be equal opportunity of access to healthcare for people at equal risk’. Since 1998 the objective has been ‘to contribute to the reduction of avoidable inequalities in health’. But has either objective been achieved?

Commentators point to the widening area and socio-economic inequalities in health over the time that the formula has operated as evidence of its failure. But there could be many reasons:

• Formula failure – the analysis that underpins the formula is flawed
• Implementation failure – the formula has not, or has only partially, been implemented
• Commissioning failure – organisations gaining the most under the formula have not commissioned the most additional output
• Targeting failure – organisations have not targeted additional output towards the populations in their areas that need them most
• Production failure – NHS output does not influence population health
• Something else’s fault – the beneficial effect of redistribution has been more than offset by widening inequalities in other determinants of health.

With Dr Stephen Morris from Brunel University, I have examined how the formula has redistributed resources and the consequences.

At first sight, the figures suggest there has been little redistribution of resources. The table shows that less than half of one percent (0.3%) of national resources was redistributed from the organisations serving the second poorest fifth of the population to those serving the poorest fifth. The organisations serving the richest fifth lost out by the same amount to those serving the middle fifth.

But further analysis reveals more redistribution on a per capita basis. In 1996/97, the 23 health authorities serving the poorest 20.3% of the national population received 22.5% of the national allocation. In 2007/08 the PCTs covering these same areas accounted for 19.7% of the national population and 22.8% of the allocation. These areas retained their relative share while losing population share because of the change in the combined HCHS formula index (from 1.09 to 1.16). Could this more rapid increase in funding per capita in the very poorest areas have reduced health inequalities? Only if NHS output increased more in these areas and/or it was targeted at the poorest.

Our analysis of the general household survey over this period suggests that, relative to the level of need, the pro-rich bias in access to day cases was reduced, but the pro-rich bias in access to outpatients remained. And access to inpatients actually became pro-rich from being pro-poor.

In several analyses, we could find little link between changes to the funding formula and changes in the geographical pattern of healthcare usage. 

This failure of translation between the formula and commissioning is key. Evidence suggests healthcare supply does influence population health. Good targeting could have helped cut health inequalities. So once the brouhaha that will greet the autumn announcement of the new funding formula has died down, will any service users actually notice?

There is little evidence that funding on the basis of expected costs of delivering a common level of service alone will lead to greater equity in service delivery. Commissioners are not rewarded, monitored or regulated on how they distribute the resources they receive. Funding should be linked to commissioners’ contributions to achieving the equity objective. That may involve considering not only what they are expected to do but also what they will do, or will agree to do, with additional funding.

It is because the funding formula is a necessary but not a sufficient condition for achieving greater equity that it is often judged to have failed.