Published: 08/01/2004, Volume II4, No. 5886 Page 31

Andrew Street and Karin Lowson on pricing anomalies for payment by results

The introduction of payment by results means that all English trusts will face a fixed price for specific treatments.

Providers have a three-year timescale to move to tariff prices, with some having to make 9 per cent efficiency savings.

Architects of the payment by results programme are forthright about the consequences to providers of failing to reduce costs to the tariff amount.

'If you are in deficit, you will get paid by the tariff or not at all, ' says Department of Health payment by results project lead Bob Dredge (finance, page 35, 30 October). 'There is no borrowing or handouts if you are in trouble.'

This assumes that the sole source of 'trouble' is inefficiency and, by implication, that there are no inaccuracies in how services are defined or how prices are determined. The truth of this assumption depends on the answer to three questions.

How robust are healthcare resource groups as descriptions of casemix?

Trusts will have to ensure that their coding is accurate because errors will impact on their income, yet there are significant coding differences across the 15 HRGs to which the tariff currently applies. For example, the balance of activity between the pairs of HRGs covering cataract extractions and breast surgery is markedly different across trusts.

These differences could be genuine, but may indicate variations across trusts in their coding of procedures and secondary diagnoses. Trusts now have a financial incentive to ensure that coding is accurate. But unless coding practices are standardised and audited, there is no assurance that the tariff applies to the same service across all trusts.

Nor does the current HRG classification fully capture genuine differences in casemix complexity. Inaccuracies are greater for those HRGs that group together a large number of procedures. For example, cardiac valve procedures (HRG E03) amalgamate 48 types of procedure, while coronary bypass (HRG E04) covers 52.

If, within an HRG, some trusts routinely treat patients who require more costly procedures, they will be penalised financially.

This problem may be resolved with the release of version-4 HRGs in 2006. Until then, forcing through cost reductions based on inaccurate descriptions of services may be detrimental to patient care.

How robust are the reference costs?

Data collected on the inpatient and day-case reference costs reported by all trusts shows similar patterns. First, costs for all 15 HRGs have risen over time despite the fact that length of stay, usually considered a significant cost driver, has reduced over the same period by around two days.

At the same time, there has been a large increase in NHS funding.

However, the extra money has not been spent primarily on increasing throughput. Instead, the cost of inputs has increased and there has been investment in quality and access initiatives, such as reducing waiting times. The cost of such initiatives is included in the calculation of reference costs, but its value is ignored because it does not contribute to throughput.Unless this is rectified, quality may suffer under the payment-by-results regime.

Second, there is substantial variation in the reference costs reported by trusts for the 15 HRGs - and there is no evidence that there has been a general reduction in variation over time.

This variation may reflect differences in the methodology used to apportion overhead and other shared costs to individual treatments. In the past, trusts have had little incentive to invest in accurate costing, but the fixed price regime may force trusts to take costing seriously.

What 'efficiency gain' is it reasonable to expect?

Departmental estimates of efficiency gains derive from trust performance as measured by the reference cost index (costs of individual treatments), adjusted for the market forces factor (where budget allocations are adjusted for avoidable variations, such as location). The RCI is a crude measure that fails to take account of other factors likely to influence costs that cannot be controlled by trusts, or of the statistical significance of the trust's financial position.

Our research shows that in a large majority of English acute trusts there is enormous overlap in levels of efficiency, with no statistically significant differences and only 10 or so trusts with efficiency scores some way below the rest of the sample.Almost all of these are tertiary centres specialising in orthopaedics, neurosurgery or cardiothoracic surgery. Their apparent poor performance may be indicative not of inefficiency but of the imprecise measurement of the complexity of the treatment these centres offer.

For trusts to survive under the new payment system, they will have to improve their coding and costing procedures and find ways to improve their efficiency. But trusts may struggle simply because the fixed tariffs are inappropriate.

The DoH has to ensure that casemix differences are captured accurately by the HRG system, improvements in quality and access are recognised explicitly in the payment system, and there may be good reasons why trusts incur different costs for providing what appears to be the same service.

Andrew Street is senior research fellow, York University centre for health economics, and Karin Lowson is project director, NHS Consulting, York Health Economics Consortium.