Aligned incentive or guaranteed income contracts shift the focus of providers to reducing waste and cost to achieve financial stability, notes Chris Ham

Since taking up post as independent chair of Coventry and Warwickshire Sustainability and Transformation Partnership in January, I have become acutely aware of the mismatch between how the NHS contracts for and funds services and the emphasis now being placed on system working.

Contracts between commissioners and providers almost invariably lead to arguments about activity, performance and funding as the end of the financial year approaches. These arguments are most evident in the case of acute services, especially where payment by results is the main way of funding care.

Providers understandably expect to be paid for the work they undertake. The challenge for commissioners is how to find the funds to do so when their budgets are fixed and in the face of many competing demands on their resources.

Zero-sum game

Arguments between commissioners and providers can rapidly descend into a zero-sum game about where deficits should sit and make it much harder to work in the collaborative manner on which the success of STPs depends. The alternative is to see commissioner or provider deficits as a failure of both and an essential step on the road to system working.

Recognising this, some areas have adopted alternative approaches variously known as aligned incentive or guaranteed income contracts. These alternatives start by acknowledging that there is a finite sum of money to be spent on NHS care and that decisions on how this money should be spent are best taken collectively. They also acknowledge that risks should be shared between commissioners and providers.

Areas working in this way adopt an open book approach in the belief that transparency is an aid to decision making and the building of trust. Commissioners negotiate with providers the resources that will be allocated to them, linked to the delivery of agreed objectives. Provider income is guaranteed even if activity falls.

A clear message from early adopters is to “keep it simple” and rely on trust rather than extensive contract documentation

Guaranteeing income means that providers have certainty about their funding and can retain savings when they change how care is delivered in line with agreed objectives. Moving beyond payment by results signals that providers cannot expect to grow clinical income by increasing activity when NHS funding is constrained. The focus of providers then shifts to reducing waste and cost to achieve financial stability.

Financial contingencies may be used to cover cost pressures when these arise. These contingencies can be released to providers to fund agreed transformations in care if they are not required for other purposes. In this way, incentives are more closely aligned with transforming and improving care rather than simply sustaining current service models.

Leaders I have spoken to in areas like Bolton, Dorset, Leeds, South Tyneside and Sunderland which already work in this way are universally positive about their experiences. They also emphasise the need to build new forms of contracting and funding on collaborative relationships and trust between leaders.

One of the points they emphasise is that aligned incentive contracts work best where there is a commitment to clinical leadership of service improvement. This includes helping clinicians understand that they no longer need to generate more activity to enable providers to achieve their financial targets. When mindsets change, it becomes easier to focus on how care is delivered and to embrace new ways of working.

Early adopters report that debate is now focusing on how to use the common pool of resources to deliver system priorities such as the provision of more care in the community. 

Redesigning outpatient services in line with the ambition set out in the NHS long-term plan also becomes more feasible when providers are able to redeploy savings from changing outmoded ways of delivering care by bringing in new service models. A further benefit is that it releases staff from contract monitoring and contract disputes to more productive work.

A clear message from early adopters is to “keep it simple” and rely on trust rather than extensive contract documentation. This view is echoed in the experience of the Canterbury District Health Board in New Zealand which makes use of an alliancing approach in which leaders work on the basis that they operate in “one system with one budget” whatever their role might be.

A further similarity between Canterbury and NHS areas using alternative approaches is a commitment to plan and contract over a number of years in place of the annual contracting round.

Albert Einstein is reputed to have said that the definition of insanity is to keep on doing the same thing and expect a different result. Moving to aligned incentive or guaranteed income contracts will require a leap of faith but confidence can be gained from areas now working in this way.

System working will wither on the vine if partner organisations are unwilling or unable to make this leap.