Published: 24/10/2002, Volume II2, No. 5828 Page 4 5

Radical proposals to scrap block contracts and introduce a tariff-based system by which trusts are paid according to their activity have been launched by the government.

The NHS Confederation described Reforming NHS Financial Flows, the consultation document published last Thursday, as being as significant as the internal market reforms of the early 1990s. It describes how money will follow the patient in a system designed to be driven by patient choice.

The new tariff system is based on models in the Netherlands, Australia and the US and will be phased in over the next three years.

It will account for only an estimated 0.5 per cent of hospital spending on patient care in 200203, but is planned to cover more than 90 per cent by 2005-06.

Next year, block contracts across six specialties - ophthalmology, cardiothoracic surgery, ear nose and throat services, trauma and orthopaedics, general surgery and urology - will end.

Primary care trusts will be expected to develop service-level agreements (SLAs) with explicit links between the funding they offer and the volume of services provided. Healthcare resource groups - the 'building blocks' to allow commissioning along the care pathway - will be used to reflect the intensity of the case-mix to ensure providers are rewarded fairly for the work they carry out.

The Department of Health says prices in SLAs next year can still be determined locally rather than by a national tariff. 'There is no requirement to use national tariff in commissioning agreement covering these specialities, ' the document states.

A national price tariff will be set for 15 'high volume/high expenditure' HRGs - those the DoH is describing as 'critical' to meeting waiting-time targets and priority areas like coronary heart disease.

National tariffs - based on 200102 reference costs - will apply to all activity covered by these HRGs above the 2002-03 baseline.

Providers will then lose money on a cost-per-case basis for failing to deliver the activity they were commissioned to do, with PCTs free to use this money to commission alternative providers on the basis of the national tariffs. Where providers treat extra patients, they will be able to earn extra resources which can be used for service development. The document argues this will provide a strong incentive for trusts to expand capacity to meet NHS plan access targets.

Yet, crucially, it warns: 'Though greater clarity and fairness in rewarding work done are necessary conditions for increasing activity and improving waiting times, they may not be sufficient.

'International and previous domestic experience suggests increasing activity alone may not be enough to improve access and reduce waiting times. PCTs and trusts will need to manage referrals and admissions thresholds and the priorities for admitting patients.'

From 2005-06, the new system will be extended, with national tariffs applied to many other HRGs - up to the current total of over 450. They will cover most inpatient, daypatient and outpatient activity, including both elective and non-elective services in surgical and medical specialties.

The document says further work will be needed if this system is to be introduced for patients with chronic illness and services such as mental health.

The document says that when the system is fully running, it should 'accommodate and facilitate the growing diversity and plurality' of providers. Next year, PCTs will be expected to commission services from diagnostic and treatment centres separately - even when they are part of existing trusts.

The majority of activity commissioned from them will be based on the 15 HRGs.

Because the centres will be new, it will not be possible to determine a 2002-03 baseline against which to plan increases in activity so the cost of all activity commissioned will be based on tariff prices. Overseas teams and UK private providers will still be able to compete on price: PCTs will commission their services on a competitiive basis for the next year 'at least'. Consultation ends on 15 October.