Feature / Introduction to... Payment by Results (2)

The payment by results initiative sets tariffs for groups of similar interventions, known as healthcare resource groups (HRGs), but how are these prices set?

The mandatory national tariff is payable by primary care trusts for day cases, elective and non-elective admitted patient care, outpatient attendances and some outpatient procedures and accident and emergency attendances. Prices are based on national average costs.

Each year NHS providers submit their own average costs (or reference costs) for inpatient episodes (that is the average local cost for delivering a particular HRG) and outpatient attendances.

This data is brought together to produce national average costs for all HRGs, published annually in a national schedule of reference costs.

Because of the need to test tariffs with the service (in exercises known as the ‘sense check’ and ‘road test’) there is a three year lag between the publication of reference costs and their use in the national tariff. Reference costs for 2009/10 were only submitted to the Department in the summer of 2010 – too late to be used for the 2011/12 tariff, the sense check for which was conducted over the summer and autumn. So the 2011/12 tariff is based on 2008/09 reference costs.

These reference costs clearly have to be uplifted to take account of cost inflation in subsequent years. The net uplift that applies for a particular year takes account of the inflationary pressures – for example pay rises as part of the nationally set pay systems for NHS staff and the costs of new drugs and technologies – and also builds in an efficiency requirement.

This efficiency requirement enables the Department of Health to have a very direct influence on the levels of efficiency that the service has to deliver.

Because of the lag between reference costs submission and their use in tariff, three years of uplift have to be applied to the relevant year’s reference costs to convert them to tariff prices. For example the net uplifts for 2008/09, 2009/10 and 2010/11 were 2.3%, 1.7% and 0%. So to create the tariff for 2010/11 a cumulative uplift of 4% had to be applied to the reference costs for 2007/08.

More recently there have been moves away from national average costs as the basis for some tariffs, with prices set instead to encourage best practice care.