Published: 21/11/2002, Volume II2, No. 5832 Page 20 21

I am writing in response to your article on the proposed NHS financial flows system ('news, pages, 4-5, 24 October).

In its favour, the approach simplifies the primary care trust/acute trust negotiation. It will stop the argument over marginal work and how it should be paid for either below or above the agreed service-level agreement. It will reward rapid expansion and attempts to reduce costs per case. I would expect to see extra day-case surgery and reduced length of stay in the local providers. It will also drive high costs towards the average and make it easy for the PCT to contract with many providers.

I am concerned that the impact of the financial reform will be to unleash supplier-induced demand. Incentivising volume will encourage individual services to do more, which will drive up costs, and for PCTs with a statutory obligation to break even, this will threaten the ability to pay. The document suggests hospitals will carry the risk for variation in demand because the maximum volume will be agreed in the SLA. However, risk should be managed by the organisations most able to manage it, and primary care holds the key for demand for referrals. In addition, if supply is switched off at the SLA upper limit then extra activity will come through the emergency route, continuing to drive up costs. Hospitals do not have sufficiently sensitive systems to switch on and off activity according to agreed SLAs.

The other risk of 'variation in cost' is also to be met by the hospital because the tariff is based on fixed price.

I have a number of concerns about the overall proposals:

The payment by healthcare resource groups will reinforce treatment rather than prevention.

It will reduce incentives for hospitals to co-operate with the re-engineering of care into community settings as this will guarantee a loss of income.

It reduces the incentive for care pathway design across sectors based on stable supplier relationships. With the plurality of provision, it will be difficult to sustain management effort on agreed integrated care pathways.

Trusts that can provide a service at below average cost will receive extra funding for no gain for the local PCTs. This will mean the PCTs will lose the ability to invest in other settings and, therefore, demand will increase.

It will legitimise volume in all hospital care.

We should heed lessons from the US. The use of diagnosisrelated groups in Medicare led to HRG creep, where hospitals recorded more serious procedures/casemix. The incentives will also lead to unbundling of coding, so two episodes are recorded rather than one. In the US, software companies such as Health Payment Review sold software specifically to unbundle payment coding.

The only sensible response is the introduction of utilisation management techniques by PCTs in partnership with hospitals.

This will consist of pre-hospital referral management so gateways are introduced to choke referrals as necessary.

Concurrent inpatient review will need to be introduced if patients are subjected to procedures influenced by payment, as well as retrospective review of referral rates etc. This will mean the significant new management costs related to utilisation review and case management.

The introduction of managed care into the US Medicare market was to reduce the impact of supplier-induced demand caused by the introduction of DRGs. It is imperative the UK does not adopt another inflationary factor within the service without thought on how to manage the consequences.

Dr Graham Rich Chief executive West Hull primary care trust