Commissioning: sizing up the issues of financial security

With the pathfinder consortia named in December and some consensus emerging on the future of commissioning, the creative energy for service improvement is taking hold.

However, there are four challenges every commissioning consortium must solve. In last week’s article we focused on the challenges of how GPs can add value to commissioning, and of management cost. Here we examine financial risk and how to manage performance.

Financial risk

There are four major sources of variation in financial performance:

• Management risk - Variation driven by differences in medical and operational effectiveness;
• Demand risk - Variation due to differences in healthcare demand in consortium catchments;
• Supply risk - Variation driven by differences in provider structure, eg hospital density;
• Intrinsic risk - Variation not driven by any distinguishable factor, ie random statistical variation.

The government has control over one important lever to influence theses risks: the allocation formula. But consortia can manage the risks through being the right size, using reinsurance, and by operational excellence.

Increasing the size of consortia reduces risk (see graph). Our analysis of patient-level cost data from Germany suggests that if English consortia each have 100,000 patients, about
4 per cent of them would run a deficit greater than 2 per cent of total budget.

Across England, this implies 20 of the 500 consortia of this size would incur a deficit of £80,000 per GP each year, and about 20 per cent (100 consortia) would run a deficit above 1 per cent, or £40,000 per GP each year.

By contrast, at a size of 300,000 patients, only 6 per cent of consortia would run a deficit above 1 per cent, implying 10 out of the 160 consortia of this size would run a deficit of £40,000 per GP.

At a size of one million lives, no consortium would be likely to run a deficit above 1 per cent.

Reinsurance mechanisms cut risk by setting aside provision for financial difficulties, for example through a topsliced risk pool. The pool could cover the risk of financial deficit or a more specific risk, such as a high cost patient.

There would need to be copayment to reduce moral hazard and ensure affordable premiums. Consortia will need to consider how to price risk internally for consortia members. In extreme form, pooling one million lives would mean little risk of major overspend in any given year, but also little incentive for any given GP to manage costs; in a smaller consortium, the reverse would be true. If the consortium charged its members different prices based on prior claims and operational excellence, that would create an incentive for good performance while maintaining cost-effective self-insurance.

There has been discussion of outsourcing risk pools to insurers. However, the English population of around 50 million and spending of  around £100bn is larger than that covered by any private insurer and carries effectively zero risk of random events causing a deficit. There would therefore be incremental costs with little value in outsourcing the risk to a private insurer, who would need to capture a margin for profit and an allowance for risk.

Operational excellence reduces risk. The only method to control risk that a consortium can actively manage is ensuring high quality day to day care.

There are powerful means to improve operational excellence, including adhering to best medical practice, fostering more integrated care and implementing better pathways.

Additionally, consortia can use predictive risk stratification to identify high risk individuals and manage them in needs based end to end programmes, which is particularly valuable for patients with long term conditions. Of course, these tools actually focus on improving patient care – it is really a side benefit that they also reduce financial risks. However, financial performance varies greatly between practices, so it is crucial.

How to manage performance

Commissioning performance largely depends on the performance of GP practices as providers. Practice performance varies hugely at present, as shown in the graphs above.

Yet systematically tackling underperformance in primary care has proved difficult, with few major successes. Consortia will need to:

Be clear what good performance looks like. Value needs to be the key measure: value can be measured as quality (outcomes, experience, safety) divided by cost per patient.

Use transparency to show GPs how they are doing, and peer pressure to lift performance. This will require information actively shared on a day to day, week to week basis.

Work through the consequences of strong and weak performance for individual practitioners, practices, practice clusters (if multi-tier) and the consortium. This includes determining how to respond to persistent, serious underperformance: good performance could be a condition of consortium membership, where a GP cannot meet the performance bar, they may need to leave and either become a list holding member of another consortium, or continue as a salaried GP, with their list transferring to others.

Work out what performance will be managed by the consortium and what will be managed by the commissioning board. Consortia should avoid the temptation of leaving everything to the board: GPs are the best managers of GP performance, and it will likely result in more positive impact for consortia to take on the management of their colleagues.

These challenges must be tackled if consortium commissioning is to be a success and improve care for patients. GPs should focus on:

• Deciding what improvements in patient services they are most excited to make, and begin improving commissioning as soon as possible. This can be done, for example, by the consortium taking on responsibility for improving quality and reducing cost, devolving specific projects to local champions.
• Determining their approach to management costs and, in particular, the scale at which they operate and the extent to which they outsource commissioning functions.
• Determining how to manage risk, including how to price risk within the consortium.
• Deciding how they will manage performance within the consortium.

It will be vital for GPs to get to grips with the practicalities of learning how to work together, agree a management hierarchy and grasp the commissioning agenda. Robust decisions about these critical points at this early stage will determine the future success of consortia commissioning. They should be the focus of discussion nationally and locally.

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