Mike Stedman on the cost of performance

Published: 27/05/2004, Volume II4, No. 5907 Page 33

The drive for improved trust star-ratings has opened up the debate on the cost of performance improvement.

In association with national reference cost data, these ratings offer an opportunity to relate trusts' performance to their costs.

With the prospect of national tariffs and foundation status, understanding the relationship between performance and cost has now become critical.

The NHS plan requires trusts to focus on improving service performance while meeting a growing demand for healthcare and staying within funding constraints.

As part of a national evaluation, Res Consortium compared starrating performance data for trusts with their individual reference costings to identify trends in the relative cost of performance.

Available star-rating data for 2002 and 2003 were obtained for all trusts (acute, mental health and primary care trusts were considered separately). Despite concerns regarding the accuracy of the data supplied by some trusts, there was an assumption that it was credible enough to allow comparisons.

The cost base for each trust was identified using the 2002 and 2003 Department of Health reference cost indexes. This gave each trust a score relative to the national average of 100, based on the trust's own individual treatment unit costs collected for a standardised case mix. A centrally determined market forces factor was used to adjust the index for unavoidable cost differences across the country.

The breakdown by condition and treatment was significantly more detailed for acute trusts than for mental health trusts and PCTs. The total annual spend identified through this index was£25bn.

The star-rating results, which correspond to the same period, were used to match the published reference costs for acute and mental health trusts. For PCTs only 2003 star-ratings were used, as this was the first year of starrating evaluation for PCTs.

The analysis revealed that higher-performing acute trusts have lower overall unit costs of performance (graph 1). If all acute trusts achieved the threestar standard, there would be an opportunity for a 2 per cent reduction in the total acute trust spend - equivalent to over£320m per year.

In mental health, the trend again generally shows that higher performing trusts have lower overall unit costs of performance (graph 2). If all mental health trusts achieved the three-star standard, there would be an opportunity for a 3 per cent reduction in the total mental health trust spend - equivalent to over£120m a year.

The trend for PCTs is less clear (graph 3), although three-star trusts are clearly less expensive than other rating categories. If all PCTs could reach this standard, this would reduce costs by 4 per cent or£200m a year.

These results give a strong indication that higherperforming organisations cost less, therefore delivering better value and performance simultaneously. Some three-star trusts are delivering this level of performance at 80 per cent of reference costs.

Certainly the star-ratings and reference-costing systems will contain inaccuracies and are unlikely to reflect the whole picture in terms of trust performance and resource use.

Similarly, individual trusts will not be entirely comparable, with underlying factors based on their location - such as demographics and relative levels of deprivation - driving both performance and cost measures in the same way.

However, some drivers affecting performance and cost can be actively managed and improved:

Management capability - including appropriate organisational development, people management and information systems.

Organisational design - including treatment scope, research and teaching (anticipating economies of scale and scope are vital).

Change management - influencing the potential effects of recent mergers and other fundamental organisational changes.

Local network management - in which trusts relate to one another within a policy and resource framework set by strategic health authorities and national agencies.

A range of potential underlying factors might be involved, some of which might be identified through further study.

The key aim would be to achieve a virtuous circle initiated as the funds released are used to improve clinical performance and service levels further.

Establishing this circle will require focused investment based on well-defined performance improvement pathways.

Mike Stedman is a director of Res Consortium.For further information and copies of the full report, visit www. resconsortium. com