Published: 13/05/2004, Volume II4, No. 5905 Page 4 5

1Fixed price tariff

This is a crucial issue for primary care trusts.

Under the system, commissioners will pay a fixed price for specific services.

The government has argued this means organisations avoid the huge transaction costs incurred under the old internal market - money spent bartering over price.

But PCTs which have historically paid low prices for services from low-cost providers are likely to see a sudden hike in what they pay.

Department of Health financial flows programme manager Bob Dredge has said a transition system will be in place - a pool of money given to commissioners to ensure their buying power is protected - although there are no details on how this will work.

The benefits for provider trusts offering services below the tariff price are obvious.

Under payment by results, they keep the surplus cash themselves.One accusation being made is that traditionally low-cost first-wave foundation trusts have been handed a multi-million pound cash windfall.

One foundation trust chief executive denied this: 'I do not see the money as surpluses. [As a low cost provider] I see it as our trust finally getting paid properly for all the work we have previously not been fully paid for in the past.'

Another concern is that by setting fixed prices PCTs will not be able to negotiate more cost-effective deals with existing alternative providers - a claim denied by the DoH.

2 Are healthcare resource groups underdeveloped?

Healthcare resource groups are the core of the payment-by-results system.

By breaking up a clinical procedure - say a hip operation or a heart bypass - into a number of HRGs, the cost of each element of the procedure, and the amount a provider should be paid, can be calculated.

The more HRGs a system has, the easier it becomes to price accurately the thousands of different NHS procedures - particularly highly complex specialist work.

Currently, the NHS uses around 500 HRGs.

But the system used in the Netherlands can now divide its healthcare activity into more than 16,000 individual elements.The Department of Health is committed to upgrading the current crop of HRGs, with a 'version four'being introduced for 2006-07.

University College London Hospitals trust chief executive Robert Naylor said: 'What is very clear is that the national tariff is [currently] inadequate. It doesn't cover enough things in my opinion.And that which it does cover, it does so in far too little detail.'

The DoH has set up a£40m risk pool to support trusts carrying out specialist work during the first year of payment by results - a sum Mr Naylor says will prevent specialist providers from bankruptcy.

The issue is whether HRGs can be developed quickly enough.Should the DoH fail to deliver on its promises, there will be a serious mismatch between the amount of money a specialist provider receives and the real cost of the work it carries out.

3 Split tariff

The idea of splitting the tariff is to ensure payment by results does not push care back into acute hospitals.

Primary care trusts can negotiate so they only pay acute trusts for the elements of care carried out in a hospital setting.

But PCT chief executives report anecdotal evidence that some first-wave foundation trusts have been unwilling to enter into deals to split tariffs and instead have insisted on carrying out the work alone.

4 Scale of payment by results

By 2008, the vast majority of a hospital's income will depend on the payment-by-results system.

It will cover accident and emergency, critical care, inpatient and outpatient care.

No system developed elsewhere - including the US and Australia - has been so ambitious, with such a short timeframe for its implementation.

And with so much income wrapped up in the tariff, it is argued small shifts in commissioning - a consequence of patient choice - could have dramatic effects on the finances, pushing provider trusts into the red.

5 Efficiency savings - unreasonable expectations?

With providers being paid a fixed fee (tariff ) for services, the system offers a strong incentive for high-cost providers to become more efficient.They will simply lose money if they cannot keep costs within the tariff price commissioners are paying.This 'financial risk' is essential to the Department of Health - without it NHS organisations have little reason to improve.

But it has created visions of hundreds of high-cost trusts going to the wall.This is no doubt exaggerated.DoH financial flows programme manager Bob Dredge has said the vast majority of provider trusts are within plus or minus 9 per cent of the national average cost, suggesting the efficiency savings needed to work at the tariff price are 'do-able'.

He told the Healthcare Financial Management Association this month that in real terms there were only 15 trusts currently above the 9 per cent threshold.Each trust can expect individual attention from the DoH or their local strategic health authority, although there are few details on what this support might be.

According to critics, even with costs at around 9 per cent above the tariff price, trusts will struggle to make the 3 per cent efficiency savings demanded each year.NHS management has historically struggled to find large efficiency savings and it is not clear how much of a trust's costs are amenable to management action.

Then there is the financial fragility of a sizeable proportion of trusts.This month, the National Audit Office report on NHS accounts said 71 trusts did not achieve financial stability in 2002-03, with 51 suffering 'significant deficits'.