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How Lansley is fiddling hospitals’ Payment by Results system

Hospitals are being paid less to provide treatments – in plain English that's a cut

Just over half of all the activity that hospitals do is covered by Payment by Results (PbR). This payment system was introduced in 2006 and essentially means that there is a price list – called the National Tariff – for each procedure. Every month a hospital will use this price list and send a bill to the patients' commissioners (currently the Primary Care Trust, to be replaced by the Clinical Commissioning Group) for the treatments carried out.

When PbR was first introduced it was calculated as the average across England for the procedure. The PbR calculation also includes an adjustment for local cost pressures (for example, higher rents in London) called the Market Forces Factor (MFF). MFF means that some London hospitals are paid 30% more than rural hospitals.

PbR was introduced so that "money followed the patient" and was required to support the "patient choice" of hospital for treatment. Each hospital is paid the National Tariff (adjusted by the MFF) regardless of how much the procedure costs in that hospital and if the treatment is performed for less than the tariff the hospital will make a surplus. Hospitals can keep this surplus to re-invest in more healthcare. There was clearly an incentive to be "better than average" and make a surplus. However, some hospitals will be worse that average and generate a deficit. In some hospitals it may not be possible to provided some services at tariff (for example, they may not have enough patients) but the hospital may still provide those services as a social benefit for the community and fund them through cross subsidies from the surplus-generating services. Protecting these cross subsidies is important, and this is why private providers should not be allowed to "cream skim" surplus-generating services from NHS hospitals.

Calculating PbR as the average, and allowing hospitals to keep surpluses, can provide an incentive for a hospital to perform more efficiently and the result is that the average (and hence the tariff) will reduce over time. The Audit Commission and the National Audit Office say that this is the case, citing the reductions of the number of days spent in hospital and the trend towards more day cases since the introduction of PbR. The Audit Commission also said that quality of care (as measured by mortality and re-admission) showed no sign of being affected by PbR. The Centre for Health Economics (CHE) at the University of York calculates that the administrative costs of PbR amount to about 0.2% of the total cost.

So is PbR a magic bullet for hospital efficiency? Not necessarily. Hospitals are actually charging for the work they do, so this is payment for activity and the cost of each activity is called the reference cost. In 2004 the Audit Commission said that there were inaccuracies in 5% or more in most trusts’ reference cost submissions. There may also be an incentive for hospitals to do more activity regardless of clinical need. For example, some politicians complain about consultant to consultant referrals, that is, if you are referred to a consultant there is a financial incentive for the hospital for that consultant to refer you to a colleague for other treatment. I think this is a slur on the professionalism of clinicians.

The current government is in a hurry to reduce the costs of the NHS. When Lansley became the secretary of state he declared that tariff should be based on the best practice, rather than the average. This is, of course, mathematical nonsense because it means that every hospital has to be "better than average" or else they will generate deficits. Lansley knows this, but is pursuing this course regardless.

It will take several years for the "best practice" policy to be implemented, so in the meantime Lansley has simply cut the tariff. From April this year, every National Tariff was cut by 1.5%. This is at a time when inflation is at 4.2% CPI. So is it no wonder that hospitals are going into debt? Remember that phrase: "I'll cut the deficit, not the NHS"? Hospitals take about half of NHS funds and yet from April this year the payment for most of their activity has been cut. How can the government claim that this is not cutting the NHS?

Richard Blogger writes about the NHS and social policy at NHS Vault.

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