Following publication last year of Professor David Kerr?s Building a Health Service Fit for the Future, a Wanless-style review of Scottish health services, the NHS in Scotland is now implementing Delivering for Health reforms, which includes a new system of paying hospitals.

Following publication last year of Professor David Kerr's Building a Health Service Fit for the Future, a Wanless-style review of Scottish health services, the NHS in Scotland is now implementing Delivering for Health reforms, which includes a new system of paying hospitals.

Payment by results in England is primarily linked to patient choice - if patients move around, money for their treatment does the same ' and is part of a broadly competitive reform package. Scotland has taken a different tack.

First, while the methodology for constructing the Scottish tariffs largely follows that in England, with the tariff set at the average cost for producing a healthcare resource group, payments only apply to patients resident in one 'board' area who are treated in another. Given considerable cross-board patient flow (see first chart), this means only an average of around 5 per cent of Scottish hospitals' income (see second chart) will be reimbursed at tariff. And given 1-25 per cent variation in patient flows, it also means considerable variation in the size of the incentive hospitals face.

In the first year of the tariff in 2005-06, it was estimated that the total financial impact of applying it to the two specialties (cardiac surgery and orthopaedics) that accounted for a quarter of all cross-board flows was just£51m, or 1 per cent of boards' total resources.

Second, Scotland also aims to use the tariffs as a managerial tool to compare costs (see third and fourth charts) of all activity between boards and hospitals, including the independent sector. But quite how above-tariff hospitals will be persuaded to do something about their costs is unclear; the incentive embodied in the English payment by results system ' an actual financial loss ' is considerably stronger. And evidence from England suggests that merely publishing cost comparisons (via the NHS reference costs database) has had no impact on cost variations.

Third, an interesting longer-term goal is to use the tariffs as a basis for setting hospital budgets and, within, hospitals' division budgets. In effect, this would apply the tariff to a much greater proportion of activity than currently envisioned.

There are as yet no details on how this might be done, but setting hospital/division budgets on this basis could, depending on the tariff, impose as great an incentive on high-cost hospitals and divisions to reduce costs as payment by results.

Perhaps conspicuous by its absence in all of this is patient choice, where Scotland again has its own version, with patients offered a choice of hospital if their local hospital cannot meet prevailing targets. How much longer before this policy moves towards an offer of choice for all patients, as in England'

John Appleby is chief economist at the King's Fund.

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