I'm sorry, local currency and price is not payment by results in. a meaningful sense

The original idea behind payment by results was disarmingly simple. In essence it was what the old-time factory operatives used to call 'piecework'. Instead of a salary, you were paid by the widget. The more widgets you made, the more money in your pay packet.

Piecework was a crude but effective incentive for greater productivity, and back in 2002 the NHS needed greater productivity to achieve the access improvements politicians were promising.

The tariff funding approach that the Department of Health adopted quickly became known as payment by results, although good clinical outcomes - the common understanding of success in healthcare - were not the results being rewarded; the new system was about payment for activity.

But what's in a name? Payment by results is a snappier title than its more accurate predecessor, new financial flows, which carried an implicit message that it was complex, technical and probably better left to the accountants.

Even if payment by results didn't quite do what it said on the tin, and even if there was a growing amount of small print, the NHS quickly came to understand the concept. And it worked. Activity levels increased, counting became slicker and commissioners grew anxious.

But piecework has two central problems. In an environment where output is everything, there's a temptation to cut corners. And in the areas of the English NHS that conform most closely to the production line model there have been dark mutterings about poor workmanship; about surgery that won't last.

The other is what happens to the rest of the process. If piecework makes the factory more productive, how can one also accelerate the supply of raw materials, the packaging and the distribution so the whole system works smoothly?

From the outset the really interesting challenge for tariff funding in the NHS has been how to extend it beyond the elective surgery production line, through the factory gates and into the wider world.

This was part of the original 2002 vision, which envisaged payment by results being rolled out to include mental health, community care, long-term conditions and generally as much of the NHS as possible. It would be tough, but the stakes. were high.

How else to counter the perverse incentive, inherent in a funding system that pays by the spell, to do more in hospital despite good chronic-disease management viewing unplanned hospital admission as a failure? And how else to prevent the growth of 'successful' hospitals causing unplanned shrinkage in mental health or primary care?

Now it's not often that the words 'department', 'health' and 'elegant' appear in the same sentence, but the solution proposed in the current DoH consultation paper, Options for the Future of Payment by Results, is elegant indeed. The proposal is to extend the scope of payment by results by, in effect, extending its definition: by taking things the NHS already does (or should be doing) and accommodating them within a new, broader definition.

So in future there will be three generic models of payment by results. One is the familiar 'national currency and price' that the NHS uses for most elective and emergency hospital activity, and which most of us understand as payment by results. But two others are planned: national currency, local price: where there is sufficient standardisation across different areas - as with adult critical care, for which healthcare resource groups have been introduced, and potentially for mental health; local currency and price: where there is significant diversity at local level, or poor data. This will cover, at least for the time being, ambulances, out of hours, walk-in centres, preventive services, community care and long-term care.

Maybe we should be glad that the DoH has adopted a more pragmatic approach to the future funding of non-acute care, one that recognises the complexity of measurement and the paucity of information systems. Attempts to construct a meaningful HRG analysis for care outside hospital, or to agree on a better method of counting than the 'spell' or 'contact', have not been altogether successful.

The DoH acknowledges that despite four years of pilots, a national currency for mental health is 'still some way off'. We should also be thankful that one lesson from the 1990s internal market, that 'unmanaged price competition can have an adverse impact on the quality of care', has been learned.

In retrospect we saw the early signs last autumn with the retreat from - that is, devolution of - unbundling. 'The Department bottled unbundling', one strategic health authority finance director unkindly put it recently. Realistically they had little choice, and although breaking HRGs into their constituent granules for commissioning purposes remains DoH dogma, its practical application remains constrained by the same lack of good data now being accepted.

But I'm sorry, local currency and price is not payment by results in any meaningful sense of the term. The words on the tin start to bear even less resemblance to the contents. Local currency and price is an appeal for some degree of consistent commissioner engagement with areas that commit very large amounts of NHS resource. Which is hardly ambitious; although it's interesting that mainstream primary care is to be spared from even this emasculated form of tariff funding.

Redefinition may elegantly solve the DoH dilemma of how to disguise a retreat from the payment by results vision, but it will do little to promote efficiency in non-acute care, or to protect services like mental health from the impact of expansion elsewhere.

If I were on the board of a mental health foundation trust, I'd be casting a critical eye over those income projections.

Noel Plumridge is an independent consultant and former NHS finance director.