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The new NHS, where money follows the patient

The penultimate part of Pf’s series on NHS Reform looks at Transaction Reform. If patient choice is going to succeed, it will only do so through Payment by Results.

Rhetoric or reality, much has been made of the Government’s attempts to create a patient-led NHS.We have already seen in the first instalments of Pf ’s series looking at NHS reform that supply and demand-style market economics are being introduced to the health service with the aim to increase competition, improve standards and drive down cost. All this is being promoted under the banner of ‘patient choice’, and with a desire to fashion an NHS that is able to respond to patients’ needs and expectations. But, in a system that is dominated by old, archaic processes, how will these supply- and demand-side reforms actually be able to take place? The answer is: transaction reform.

Transaction reform is regarded as the enabler that ensures choice and competition are not only delivered, but also funded in such a way that allows money to move freely around the NHS.

Transaction reform

The Department of Health describes transaction reform as a way to ensure that ‘money follows the patients, rewards the best and most efficient providers and gives others the incentive to improve’.

Simplistically, the reforms have been made to enable supply- and demand-side reforms to operate.

The two central elements of transaction reform are Payment by Results (PbR) and Access to Information.The latter includes the National Programme for IT (NPfIT) which has, of course, been cursed with high-profile problems.

Access to Information

The DH believes that access to information that supports patient choice, along with better clinical and management information and robust mechanisms for hearing the views and experiences of patients, will enable providers to respond to patient need more effectively. In turn, it expects practices and PCTs to use such information to drive commissioning decisions to align services with population needs. It will also, it claims, help practices, PCTs and regulators to track performance and quality.

NPfIT is the NHS’ attempt to move towards an electronic care record for patients and, in the process, connect 30,000 GPs to around 300 hospitals. According to the DH,The NPfIT programme, which will be delivered over a 10-year period, will give patients access to their personal health and care information and, it is hoped, will transform the NHS. Information, such as health records, appointment details, and up-to-date research and treatment information, will move around more quickly.

Moreover, the system will support patient choice and allow hospital outpatient appointments to be made at a time, date and place to suit the individual.

NPfIT has four aims:

• electronic appointment booking
• electronic care records service
• electronic transmission of prescriptions
• fast, reliable IT infrastructure for the NHS.

A progress report on the implementation of NPfIT will be covered in Pf in the autumn. From difficult beginnings, things may be starting to improve.

Payment by Results (PbR)

PbR is the headline component of transaction reform.The DH believes that PbR will bring greater financial transparency to the system. In its 2006 policy update ‘Health reform in England: update and next steps’ it said of the intiative:
“PbR will benefit respective and productive services and whole hospitals, and provide incentives for those providers struggling on quality or cost control. PbR also provides incentives for the development of alternative primary and community services where these are more clinically effective and cost effective than hospitalisation.”

So what is it, and how does it work? More importantly, does itwork? PbR is a centrally agreed national tariff of prices for all Trusts within the NHS and the independent sector.Through this system, a provider is paid a fixed amount for each patient that receives a particular procedure.

The fixed payment is set before the beginning of the year.The income accruing to the provider therefore varies directly with the volume of activity provided.The tariff is made up of Healthcare Resource Groups (HRGs), with a different fixed payment being made for each spell of HRG.

The scheme has not been without its critics. One major fear is that PbR may lead to cost saving at the expense of quality. Dr Robert Queensborough, Director of Clinical Leadership for Trafford PCT in Greater Manchester, describes PbR as “one of the major tools that PCTs have to make significant changes in their purchasing patterns.” Despite this, he is critical of how the system was originally set up. “The initial tariff prices were based on an average of costs throughout the country, with no sensitivity to the quality of the work undertaken,” he said. “Also, difficulties in extracting data have plagued early versions, with one tariff being withdrawn shortly after publication early in 2006.This has clearly had a detrimental impact on the ability of PCTs to commission and of providers to draw up their business plans.”

Not all areas of healthcare are covered by PbR, most notably mental health. However, it is anticipated that the system will eventually cover the majority of services, if not all of them.The evolution of the system is, says Dr Queensborough, already taking place. “Discussions are currently taking place between commissioners and providers on how the individual components of each HRG can be unbundled to ensure that services are not paid for more than once and that the benefits can accrue to the provider more precisely,” he said.

This is particularly important as GPs move towards delivering care closer to patients’ homes, a central aim of the whole NHS reform programme.“For example,” explains Dr Queensborough,“if a GP had direct access to MRI scanning, they would not wish to pay for a service that included an MRI scan in the cost as a matter of course, since any patients they may have scanned would, if referred to hospital, be charged again for that without necessarily having the test repeated.”

Need to know basis:

Payment by Results

PbR is a financial system designed to provide a transparent, rule-based method for paying Trusts. MORPh Consultancy looks at the initiative and its implications.

Payment by results is at the heart of NHS financial modernisation. Essentially, providers are paid for the volume of work they carry out, and this is adjusted for ‘casemix’ – the complexity of the care being provided.Therefore, in theory, the more complex a patient’s condition and the more complex and multi-faceted the care, the greater the cost.

PbR has also introduced the concept of a national tariff.This is a major departure from ‘block contracts’ where hospitals were provided with an allocation, based on historic budgets.

Drivers for PbR

The old system did not offer Trusts much incentive to carry out more procedures than agreed and provided little incentive for GPs to limit referrals. In addition, to increase patient access, a combination of the 18 weeks target from referral to treatment, the need to increase capacity, reduce length of stay and increase efficiency, made change essential.

Patient choice:
Through PbR, the money needs to follow the patient, and by applying patient choice, the patient becomes part of the process rather than on the periphery. By limiting provision to one or maybe two block contracts, as was the case in the old system, choice is constrained and the service quality may suffer.The introduction of a plurality of providers and a fixed price concentrates competition on quality. However, there needs to be transparency and consistency in the prices paid for hospital care. Commissioning from the private sector is also being encouraged and the use of Independent Sector Treatment Centres (ISTCs) is becoming more widespread – the system needs to support this.

Key features of PbR

Healthcare Resource Groups
PCTs pay for each patient admission, A&E attendance or outpatient appointment.The basic ‘currency’ for inpatient activity is the HRG – Healthcare Resource Group. HRGs group together treatments which are similar both clinically and in terms of cost.

HRGs support the casemix approach, which allows an assessment of the complexity of different treatments and their resource intensity. HRGs are defined by clinical codes which describe the nature of the treatment or procedure.

HRGs are not new – Diagnostic Related Groups (DRGs) were trialled in the ‘80s, and HRGs have been used routinely since 1992.

Since then four major versions have been released. It is only with the introduction of PbR, that HRGs have been used to directly support payment of healthcare providers.

A price or ‘tariff ’ is allocated to each HRG.This uses a hierarchical approach, where more resource-intensive HRGs carry a higher tariff.Tariff prices are calculated using references costs from all providers – these are the costs which are calculated locally for providing care within a particular HRG.The tariff is based on the average reference cost.

Outpatient care is mostly reimbursed by clinic speciality rather than by HRG.The tariff price is the same across England. Service level agreements between commissioner and provider are developed, which include expected levels of activity, any quality standards, and clinical pathways. As a minimum, they should include a commitment for commissioners to reimburse all PbR activity at the national tariff rate. PCTs only pay for the treatments provided by Trusts. Trusts can retain and reinvest any profits made.

Benefits of PbR

• Improves efficiency and value for money – providers and commissioners can reinvest savings.
• Facilitates choice – the money follows the patient.
• Facilitates plurality of provider and contestability – providers compete on an equal basis whether NHS or independent sector.
• Stimulates quality improvements – rewarding those providers who attract patients through quality.
• Stimulates the introduction of new models of care – by allowing the development of services in more convenient and community-based locations.
• Reduces waiting times.
• Fairer reimbursement system – a casemix approach allows payments which reflect both volume and complexity.

The future

The system will become more sensitive with improvements to clinical codes and the coding processes. All providers will have to use the system and PCTs will develop systems to ensure accurate coding. Some elements of care are being ‘unbundled’ – this allows commissioning of different elements of care (for example acute phase and rehabilitation following stroke) from different providers and so supports service redesign. High cost drugs are being considered for unbundling and so may be reimbursed through the tariff rather than via local arrangements as PbR exclusions. In the future, the tariff will be extended to include services provided in the community.

What do you need to know?

PbR may represent an opportunity for your company to help its customers effect service re-design, ensuring that more of your patients are appropriately treated.To best maximise the opportunity, sales professionals need to know the following:

• the current patient pathway in your product areas
• how your patients will be coded
• the tariffs that will be applied
• whether your drug is included or excluded
• whether your drug is on the agenda to be unbundled.


PbR is a major financial reform, and represents a financial risk for both PCTs and Trusts. Early lessons suggest there is still a lot to learn. As tariffs are fixed costs and HRGs are the unit of currency, competition will be based on quality of service provided.This gives obvious advantages to specialised sites, ISTCs and the private sector.

The system supports choice, redesign and access agendas.

MORPh consultancy is a pharmacists-led organisation with a local, national and international experience. It specialises in 4 core services; training, technical, advisory and research. MORPh provides its clients with a full service strategic partnership. Contact Rachel Jeynes M.R.Pharm.S on rachel@morphconsultancy.co.uk or  07976 417312  07976 417312
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