The market-based system of payment by results is not functioning as hoped, causing adversarial relationships,

At the NHS Alliance conference in November, health secretary Patricia Hewitt conceded that 'perverse incentives' were undermining NHS reforms. The introduction of a market-based health system underpinned by payment by results and a fixed tariff of treatment costs has meant a crude national pricing.

The results are pitting primary care trusts against hospitals as clinicians tussle with their financial managers to tackle a national NHS deficit estimated at£94m. Preventative medicine is suffering and fears are growing that finance is taking precedence over patient care.

When former health minister John Hutton unveiled PbR he said NHS organisations would be paid more fairly for the treatment they provided, and the more efficient a trust was, the more it would benefit from extra resources.

But in November Ms Hewitt conceded there were serious issues. 'There are perverse incentives in PbR and we are aware of that. My view is that the real benefit is that it does enable everybody in the NHS to understand the costs and the value of what they are doing.'

She said the government was trying to build a dialogue of co-operation and competition, increase unbundling to give PCTs more control and focus on outcomes and best practice.

But an adversarial relationship has developed between PCTs and acute trusts as private providers, and to a certain extent foundation trusts, wait in the wings to increase their slice of the market.

Perverse incentives

One of the longstanding perverse incentives is 'gaming' where acute trusts avoid penalties under the four-hour admissions target by admitting patients at the last minute, earning a PbR fee in the process. Although dismissed by many, this is reflected in statistics that show a sharp rise in accident and emergency admissions in parallel with short stays. The government hopes to tackle this by introducing a tariff rebatement system so shorter stays are paid less.

Another perverse incentive is that the tariff fails to take account of best clinical practice and long-term cost savings. NHS Confederation policy director Nigel Edwards says there are 'particular issues' with new technology. He cites the use of stents to alleviate restricted blood flow in coronary arteries for common operations such as an angioplasty. While a cheaper stent is likely to lead to a follow-up operation, a more expensive model will mean a far lower cost in overall patient care.

But health chiefs hope to resolve this through the ongoing refinement of healthcare resource groups - which aim to adjust payments to hospitals in line with case complexity.

Services that curb future emergency admissions such as diabetes clinics are not paid for under the tariff so there is little financial incentive to fund these.

But providers and commissioners can agree local arrangements for services outside tariff, so the patient is helped earlier and the PCT avoids the cost of an emergency admission.

'All parties need to be encouraged to achieve these win-wins. There is nothing in the operating framework or PbR guidance to prevent this,' says Mr Edwards.

More patient-led practices that involve fewer visits or more advanced equipment are punished, and this is one of the drawbacks of tariffs being based on reported average costs. But the NHS Confederation and the Department of Health are working on the tariff delivering best practice. Called 'normative pricing', the DoH is expected to advocate for this and ask for volunteers to work on it.

Mr Edwards says: 'The idea is that in future, tariffs will not be informed by average costs as they are now, but a clinically agreed best practice pathway will be created and a tariff set on what is deemed reasonable to deliver the service within that pathway.'

Another perverse incentive is undermining hospitals at the forefront of innovative community-based treatments for conditions such as chronic obstructive pulmonary disease.

One leading service unveiled a one-stop shop to prevent patients coming in four or five times for tests. This means tests for lung function, chest x-ray and appointments with junior doctors are timetabled into a single two to three-hour session.

But because hospitals are paid per visits under PbR they are paid£250 instead of what could be about£550 through multiple visits. A hospital consultant who has seen such a service scrapped says: 'The problem with PbR is that there is no tariff for doing something like that. What is the incentive to do a one-stop shop? My managers are saying that the hospital can't afford to do it.'

Mr Edwards adds: 'The reward for participating in measures to manage long-term conditions in the community is that their admissions fall and their income falls.'

Payment by activity

This problem can only be resolved by commissioners and providers agreeing a required care pathway, he adds. On top of these perverse incentives, 'miscoding' is heightening financial headaches. Because similar procedures can come under differing price codes, many hospitals opt for codes that pay the highest amount.

Jonathan Fielden, chair of the BMA central consultants and specialists committee, says: 'There are perversities to upcode so that the treatment is more complex and therefore more expensive than it is.

'To counter this you need accurate coding that is facilitated by strong commissioning by the trusts.'

NHS Alliance chair Dr Michael Dixon says: 'The fundamental problem is that the current system is payment by activity and that activity might not be the most efficient. There has been an awful lot of simply paying the bills and not standing their corner.' He says that a discharge summary with code details should be provided so that codes can be checked before bills are paid within set deadlines.

A central complaint with PbR is that it is payment by activity and it is not sensitive enough to tackle ill health before it becomes acute.

Mr Fielden says long-term targets should be set with incentives built in to reward greater care in the community.

He defends the need to bring in the system to cost NHS treatments, saying the£50m cost will bring clarity and improve efficiency.

The pressure on PCTs to ensure they tackle deficits through cutbacks is also hitting services. NHS Alliance lead Phil Taylor, a GP in Axminster, says: 'In our area the climate of cutbacks and trying to ensure that the NHS does not have a deficit has completely scuppered any hope of trying to reduce costs.'

But where PCTs have combined on the commissioning function they are starting to challenge providers, he adds. Mr Taylor calls for a 'floating price' system, which takes regional treatment costs into account and rewards innovation that cuts waiting times and community-based treatments.