Feature / Tariff on target?

It is always important to see whether policies are having their intended effect. The Audit Commission’s report The right result? Payment by results 2003-07, published in February, does just that.

We were keen to find out how the report had changed behaviour at the frontline, and to what extent the aims set out by the Department of Health in 2003 had been achieved. We also looked at the future challenges and how the NHS and policymakers should respond.

Payment by results has created a more commercial focus in the NHS. It has also become a fundamental part of the way of doing business. Financial management systems have become more robust. Trusts and primary care trusts report a clearer basis for planning, reporting, understanding of costs and cost trends, and information to support strategic decision-making. In particular, providers’ focus on understanding costs and the profitability of specialties and services has also helped with clinical engagement.

Service line management in trusts is becoming all the rage. Some trusts are moving on to patient level costing to improve understanding of their cost drivers, service profitability and any opportunities for improving efficiency. Investing in patient level information and costing, however, will not make sense for all trusts. Benefits may be limited for small trusts in rural locations that are unlikely to experience a wholesale change in the way they deliver services.

Also, not all hospitals will have the capacity to maintain a patient level and information costing system (PLIC). We think that the merits of investing in and introducing PLICs should be evaluated on a trust-by-trust basis, rather than being routinely applied across the NHS. What is important is that providers have enough detailed information to support optimum service delivery and contractual requirements.

Information systems have improved. There is also a very welcome increased interest in data quality. Trusts have become more rigorous in counting and coding activity. The Commission’s payment by results data assurance framework has also found that fears of deliberate ‘gaming’ of activity data to secure unwarranted payments have not been realised. There are, however, examples of inaccurate or poor coding that need to be addressed.  

Benefits of monitoring
Some PCTs have become very sharp on monitoring payment by results data, using it to challenge trust payments and clinical pathways. The first is a natural development. But the second is really important. It shows that this is not just a payments system. It is also directly related to what happens to patients and how services can be improved. Salford and Birmingham East and North PCTs, two of the report’s case studies, prove what can be done by monitoring and verifying data for contract and demand management. They show that PCTs can be commercially aware, effective commissioners and a match for their foundation trusts. Others must follow their example.

The national aims of payment by results were to improve the fairness and transparency of hospital payments, stimulate provider activity and efficiency, and focus local negotiations on quality of care. The results here are mixed. Transparency has improved. But commissioners have only just got used to working with the payments system. And only a few have moved on to focusing on quality. Some commentators suggested that payment by results would adversely affect the quality of care as hospitals cut costs to meet or beat the tariff. The good news is that we found no evidence of this.

Efficiency potential
It is in the area of efficiency that results have not turned out as policymakers might have hoped. Experience elsewhere suggests that payment by results is a powerful incentive system that will drive activity, particularly in elective cases, and greater efficiency.

There have been increases in activity, primarily in short-stay patients (including emergency short-stay admissions but mainly elective day cases) and reductions in average lengths of stay, particularly for elective inpatients. Analysis, however, suggests that, at most, payment by results has contributed to these trends rather than driven them. There are also signs that PCTs have responded to the incentives by reducing the number of avoidable admissions.

There are several reasons why payment by results has not achieved more to boost efficiency. The policy was phased in so its impact has been gradual. Trusts have also taken time to adjust their financial management systems and implement service line reporting. PCTs have also been reorganised. Other policy measures have also been introduced that have had their own impact and clouded the picture.

The basics of the policy are right. Payment by results will achieve more, now that it has had time to bed in. And it can go even further with refinement and development. The Department of Health recognised this in consulting on options for the system last March.

The first task is to strengthen the infrastructure relating to the quality and timeliness of information, both nationally and locally. Beyond that, changes should be made to achieve greater efficiency and fairness and better reward quality of care.

There is scope to set normative tariffs based on what efficient providers delivering a good-quality service can achieve. It is unlikely that any provider can achieve full efficiency across all aspects of a care pathway, as the Foundation Trust Network demonstrated, but it should be possible for the tariff to do better than simply reward average performance on costs. While it would not be feasible to apply normative tariffs to all healthcare resource groups, it should be possible to make this approach work for specific services.

Such an approach would need to be applied to selected services, signalled well in advance and be a contribution to an overall efficiency saving, rather than an additional requirement. We think that normative tariffs could best be used to improve efficiency, rather than improve quality where other approaches may fare better.

Greater fairness may also be achieved by addressing the funding of capital investment. The tariff includes the national average revenue costs of capital investment. Trusts with new capital facilities may consider themselves disadvantaged. It is important to note that there is no significant statistical relationship between private finance initiative schemes and a trust’s position on the reference costs index. The way that capital developments are paid for and encouraged needs reviewing, however, and this is being undertaken by the Department.

One option is to continue including capital costs in the tariff. This would incentivise trusts to better plan their capital investments and achieve the efficiency savings that are claimed in business cases but perhaps not always delivered in practice.

The alternative approach is to make separate payments outside the tariff to fund capital costs. Many other prospective payment systems internationally have adopted this approach. This would allow capital funding to be more effectively targeted, particularly if triggered locally by commissioners to support investment in their local providers. Such an approach could improve fairness and support quality, innovation and the provision of care closer to home, but it would need to be matched with measures to ensure efficiency and give providers some flexibility to innovate themselves.

Quality drive
The final area is quality, where three developments might help. The first is to develop a more detailed tariff that can be unbundled into its component parts more easily and reflect different care pathways in different places. This depends on having much higher-quality data.

The second is to allow greater flexibility for local currencies to develop where services are innovative. Although some adjustments are made to take account of National Institute for Health and Clinical Excellence guidance, for example, there are also advances in medicine and better ways of working that are not covered.

The third is to explore the use of separate payments for achieving agreed quality standards. The North West Strategic Health Authority is experimenting with this approach. It is an important development but needs to be evaluated carefully before being rolled out. A central question is whether payment, as opposed to other approaches, is best suited to driving quality.

Payment by results has real long-term potential, but the infrastructure needs to be strengthened and the policy refined if it is to meet Lord Darzi’s vision of a fair, efficient and personalised NHS.

Andy McKeon is managing director for health at the Audit Commission.