NHS England is floating the possibility of scrapping the complex array of financial penalties and incentives currently imposed on NHS providers and replacing them, from 2015-16, with a single pay-for-performance premium.

An NHS England discussion paper currently being circulated to clinical commissioning groups and other bodies admits that the current system of “incentives, rewards and sanctions” is “often not used as intended”.

It cites examples including “commissioners setting targets that cannot be achieved in order to avoid paying [Commissioning for Quality and Innovation] monies”. Under the CQUIN scheme, providers can theoretically earn a premium worth 2.5 per cent of their contract for meeting quality improvement targets.

In other cases, it admits sanctions are “not being implemented in the event of performance failures”, or commissioners and providers have agreed block contracts which effectively “guarantee” the combined impact of all sanctions and incentives.

Reasons given for these failures include the complexity of the current regime, the volatility of payment by results prices, the time and difficulty involved in negotiating targets, and the lack of management capacity and capability. But it adds that there is also “some inconsistency in our national approach to incentive design”, with some areas of care “subject to far more national targets, incentives and sanctions than others”.

The paper continues: “We believe we should consider whether it would be desirable and feasible to switch, from 2015-16 onwards, from the current contract regime of sanctions and CQUIN incentives, to a new consistent pay-for-performance regime.

“Providers would receive a core payment for a given quantum of service provision, with this potentially flexing up and down in line with activity levels – but providers would then have the opportunity to earn a significant further percentage payment for meeting the NHS constitution, operational standards and agreed improvement goals, some nationally driven, others locally specified.”

For 2014-15, NHS England proposes continuing to have national sanctions for failure to meet national standards. But the paper adds: “We believe we should consider limiting the total proportion of contract value that can be imposed through sanctions and/or whether to set rules around reinvestment of funds retained through implementing sanctions.”

It indicates that NHS England intends to investigate whether the current sanctions regime, including “rules around retention of payment”, creates perverse incentives that are damaging to service quality.

The paper goes on to say: “We believe we should consider looking to rationalise the range, proportionality and timing of national sanctions and propose a more consistent approach to calculating the fine associated with any given sanction. We should distinguish between the requirements of the NHS constitution and other sanctions.”

And it adds that NHS England feels it should seek greater “parity of approach” in the setting of financial penalties across different types of provider. Most national sanctions in the current contract apply mainly to hospital care.

It also asks if there is a case for requiring providers to pay compensation “direct to service users, rather than (or as well as) to commissioners”.

For both CQUIN and the “quality premium” payable to CCGs, NHS England said it believed “we should ensure a more rigorous approach” to the targets used for these schemes. This might involve scrapping, or reducing the number of, the locally-set targets, setting clearer rules on the development of targets, or a national “pick-list” for locally-set targets, the paper suggests.

The deadline for responses to the paper, which is titled Review of incentives, rewards and sanctions, is 2 August.