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Payment by Results: Preparing for 2005

This document identifies the key decisions needed for implementing the next stage of payment by results. It outlines how it will apply to NHS Foundation Trusts from April 2004 and to all NHS Trusts from April 2005 and seeks your feedback on the proposed approaches.

Need for change

1. The way the healthcare system works needs to change so that patients receive a more personalised and responsive service.

2. The NHS Plan, together with Delivering the NHS Plan set out a major programme of investment, expansion and reform for the NHS over a ten-year period.

3. The vision of the NHS Plan is to offer prompt, convenient, high quality services which treat patients as partners. The delivery of this vision is shaped by the Government's framework of principles for public sector reform; namely:

High national standards and clear accountability;
Greater local ownership and innovation;
Increased flexibility for frontline staff;
Greater choice for patients helped by greater diversity of provision.

4. This programme of reform is supported by the highest ever sustained growth in funding. Over the years 2003-04 to 2007-08, there is an increase of £34 billion or 43% in real terms, from £56bn in 2002-03 to £90bn in 2007-08 (England); an average annual real terms increase of 7.4% a year over and above inflation.

5. The NHS is already treating substantially more people. There are significant changes in the way services are delivered which represent real progress in improving quality, especially in reducing waiting times.

6. But the aim of providing a more personalised service for patients requires:

Primary Care Trusts (PCTs) to commission effective services that are more responsive to patients;
Help from a greater range of providers delivering NHS services to common national standards which are independently inspected by the Commission for Healthcare Audit and Inspection;
The financing system to change to support the overall aim.

Rolling out payment by results

7. The introduction of payment by results is necessary to support a devolved health system with care delivered by a diverse range of providers responding to patients' needs and choices. The new system:

Pays NHS Trusts and other providers fairly and transparently for services delivered;
Rewards efficiency and quality in providing services;
Supports greater patient choice and more responsive services;
Enables PCTs to concentrate on quality and quantity rather than price.

8. In this document we identify the key decisions needed for implementing the next stage of payment by results. It outlines how these will apply to NHS Foundation Trusts from April 2004 and to all NHS Trusts from April 2005.

NHS Trusts

9. For 2003-04 national tariffs apply to extra elective activity across 15 healthcare resource groups (HRGs) while for 6 specialties price is locally determined but HRGs cost weights are used to adjust for casemix. Failure to deliver growth in activity will lead to withdrawal of funds at national tariff. But the pace of change will accelerate:

For 2004-05 we have identified an additional 33 HRGs making a total of 48 for which volume growth will be funded at tariff. Cost and volume contracts adjusted for case mix will need to cover all surgical and most medical specialties;

For 2005-06 a further step change means that (nearly) all specialties will be commissioned on a cost and volume basis adjusted for casemix and moving from local to tariff prices with convergence to national tariff over 3 years.

NHS Foundation Trusts

10. The first NHS Foundation Trusts will be established in April 2004. Additional activity will be funded at the tariff price. They will thus begin their transition path in 2004-05, a year ahead of the rest of the NHS. The arrangements proposed will be as close as possible to the overall payment by results system for NHS Trusts in 2005-6 and the transition that will follow.

Setting the tariff

11. Our aim is a tariff that represents a fair level of reimbursement for providers and a fair price for commissioners. Where providers have high costs because they treat more patients with complex needs this should be recognised in the funding they receive. Our longer-term aim is to have a set of tariff prices which will apply irrespective of where a procedure is carried out.

12. For 2005-06 we propose the tariff will be based on the approach developed for 2003-04 but with some further key decisions:

using spells as the basis for activity planning; and
an approach to funding critical care.

13. In addition work is ongoing for 2005-06 on high and low cost exceptions, on funding specialised services and on reflecting technology costs in the tariff. We are consulting on these matters.

Scope of the tariff

14. The aim is that the tariff will over time cover all activity covered by commissioning arrangements including all inpatient and day case services together with outpatient, accident and emergency, mental health, community services and elements of primary care. For expanding the scope of payment by results for 2005-06 we are limited to those for which we already collect detailed national activity and costing information. Areas most likely to be included for 2005-06 are:

Outpatients;
Critical care;
Accident and emergency.

15. We are also considering how and when we can extend the scope of payment by results to mental health and community health services. We are particularly interested in feedback on these proposals.

Transition from April 2005

16. From April 2005 when the tariff will cover all activity in surgical specialties and most in medical specialties there is a risk that this will profoundly change the way money flows through the system impacting on the income of some NHS providers and PCTs. To minimise any potential instability for NHS organisations we are proposing a 3 year transition period covering 2005-06 to 2007-08.

The key elements of this are:

PCTs should adopt full tariff prices from April 2005 with the proviso that their initial purchasing power will be maintained for 2005-06;
The move to tariff prices for Trusts should happen in 3 equal steps and the maximum efficiency saving expected over the 3 years should be 9%. Separate proposals will be needed for organisations needing to make efficiency savings above 9%.

17. We are inviting views on these proposals and more technical issues such as whether the methodology for calculating the starting point for transition should be bottom up or top down.

18. More broadly over the transition period we shall be seeking to ensure that all organisations have a manageable transition path including specialist trusts.

Commissioning

19. Effective commissioning through service contracts that have robust risk sharing, the right incentives and performance monitoring arrangements is crucial to the successful implementation of payments by results. Funds must move with patients. The expression of patients' choices makes this doubly important. We are therefore interested to have feedback from the NHS on whether the model SLA we have published is robust enough for these purposes or if there are areas where it needs development.

Trust financial regime

20. We are reviewing the NHS Trust financial regime to ensure that it is consistent with Payment by Results from April 2005 and are looking at surplus and deficit retention, breakeven duties, and capital investment and charging issues. This work remains at an early stage and we would welcome feedback on any other issues we should be looking at.

Costing

21. Although there has been some improvement in the quality and consistency of costing across the NHS, it is widely recognised that quality is not yet sufficient to support payment by results across all areas of activity. We propose to introduce greater prescription in the treatment and classification of costs to ensure a level playing field between providers. This document seeks views on how this can best be achieved.

Consultation

22. The full list of questions for consultation is at Annex C. The questions are primarily aimed at NHS Trusts, Primary Care Trusts and Strategic Health Authorities. Responses are welcome by 31 October 2003.

Technical papers

23. A number of technical papers have been produced by the NHS financial reforms project team to inform and support our thinking. In order to assist in the wider understanding and debate on these issues and to give considered background analysis for this consultation, these are available from the links below.

• Download full consultation paper (PDF, 272K)
• Download technical paper: Currency for commissioning (PDF, 52K)
• Download technical paper: Critical care (PDF, 71K)
• Download technical paper: Cost of new technology (PDF, 32K)
• Download technical paper: Review of levies (PDF, 23K)
• Payment by Results Preparing for 2005 : Consultation outcome