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The NHS should be doing less of its work on click-of-the-turnstile contracts, and better incentives are needed to help demand – for this, there is a broad consensus.

But the extent to which Payment by Results should be phased out, and what the new incentives should look like, is going to be fought over for a long while yet.

While some areas have already made their minds up and moved off PbR, most have been waiting for NHS England and NHS Improvement to provide some guidance.

In their tariff proposals for 2019-20, the national bodies offer a tentative step towards risk sharing, in what they describe as a “blended” payment system for emergency care.

This involves a fixed payment based on expected activity, plus a variable element (20 per cent) for activity above or below plan.

The all-important expected activity level could be locally agreed, effectively replacing the old baselines used for the marginal rate emergency tariff (which would be scrapped).

Not in the blend

As yet, I’ve not heard much enthusiasm for the blended system.

As stated in the proposal document by NHS England and NHS Improvement, one of the key drivers for change is to try and “minimise [the] transactional burdens” associated with PbR.

But most reckon the blended approach will increase the need for transacting (negotiation and contracting), rather than reduce it.

There will be high stakes in play right from the start, as commissioners and providers try to negotiate the expected activity levels. Commissioners will low ball and providers will high ball. Even if they don’t, they’ll be suspected of it.

During the year, activity will still be measured through the PbR definitions, so the familiar arguments about counting and coding will remain in play, as well as the staff employed to focus on this.

The “break glass clause” offers another potential clash point, when it’s clear that activity is going to be much higher or lower than expected at the start and a renegotiation is required.

Risk and reward

Earlier this year, a strategy team within Midlands and Lancashire Commissioning Support Unit undertook a detailed assessment of these types of contract – which they described as “risk and reward sharing” – and came to a similar conclusion.

They looked at risk and reward sharing contracts deployed in the US and concluded: “Whilst capitated budgets hold the promise of reducing transaction costs, we should expect the intermediary stage, risk-reward sharing, to produce an increase in transaction costs as commissioners and providers maintain the pre-existing fee-for-service arrangements in addition to administering new processes associated with risk-reward sharing schemes.”

There is also limited evidence from the US that risk and reward sharing contracts offer a step on the journey towards fully capitated budgets. The vast majority of accountable care organisations have not progressed to capitated budgets (as was envisaged), because they are unwilling to take on the increased risk.

Aligned incentives

To be fair to NHS England and NHS Inprovement, the blended approach could offer a realistic option for health economies which aren’t ready to make more radical changes, but which want to test out some new incentives. Neither are they proposing it as a long-term solution, nor mandating it for everyone.

Instead, they call it the “default” payment model and stressed that local systems can move faster and further if they wish.

This has been the approach of Simon Worthington, the finance director at Leeds Teaching Hospitals Trust and formerly Bolton Foundation Trust (with approval from NHS England and NHSI).

The Bolton and Leeds health economies both now operate fully under what he terms an “aligned incentive contract”, which doesn’t get into PbR at all. Instead, it gives a fixed income to the provider which is based on the previous year (including adjustments for inflation and demand etc), and, if the provider’s costs run over, then they have to get together with the commissioner and agree how to pay for that.

It’s not perfect, and may have benefited from the relational skills of Mr Worthington, but it seems to have worked so far.

What does Mr Worthington think of the blended tariff?

“It’s a step in the right direction and is certainly more like what we did in Bolton and what we’ve done now in Leeds. But in my view it doesn’t go far enough.

“There’s still an element of variability so I think there’ll still be a lot of arguing about the baseline with these proposals, and then you still get into PbR and a transactional relationship if the baseline is exceeded.”

There is certainly some nervousness about the Bolton/Leeds/(and some others) approach at a national level, as PbR has proved an effective way to slash elective waiting lists. 

But if the aligned incentive contract is set up to deliver a certain referral-to-treatment performance (92 per cent, for example), then everyone in the health economy is incentivised to achieve that and can be held to account against it. Perhaps PSF, or something like it, could be offered to health economies that meet their target, if a further financial incentive is needed.