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Demand management and administrative costs of payment by results

07.11.2006
Are Government hospital funding reforms likely to undermine demand management and expenditure control?

Will these reforms raise administrative costs?

The NHS in England is following the USA, Australia and many countries in Europe in introducing a system of paying hospitals and other providers on the basis of the work they do. Providers receive a fixed payment – the national tariff – for each type of patient treated. Termed “Payment by Results” (PbR), the policy rewards providers for volumes of work adjusted for differences in patient characteristics.

But there have been concerns about the ability of Primary Care Trusts (PCTs) to manage demand and control expenditure under PbR and about the overall administrative costs of the arrangements. The latest edition of Health Policy Matters summarises two studies studies commissioned by the Department of Health, in which staff in hospital trusts and PCTs were interviewed about these concerns.

There are a range of local strategies to deal with managing demand and expenditure, including initiatives to influence GP referral behaviour, improve patient management, and prevent hospital admissions. However, there is little evidence on the effectiveness of these initiatives and there is a need to identify and share best practice across the NHS. To ensure expenditure control, it is likely to be equally important to refine the incentive structure underpinning PbR, including consideration of how tariffs are calculated and whether activity thresholds should be introduced.

PCTs and hospital trusts have seen their administrative costs increase by £90k-£190k because of PbR. Most of the additional expenditure is due to recruitment of additional staff. Although the move to PbR has entailed a reduction in some types of administrative costs, notably price negotiation, this is more than offset by increased expenditure on other things. The main cost driver has been the increased information demands of moving to a patient-based payment system.

The main changes in administrative costs are:

- higher costs of negotiation. While there are lower costs in negotiating prices and volumes, this is offset by difficulties PCTs have in managing activity levels, because Trusts no longer have to get approval to expand their activity, thus making it more difficult for PCTs to live within their budgets.

- higher costs of data collection, due to PbR’s requirement for accurate patient-level data. Some of these costs are down to IT investment, but many are driven by organisations taking on staff to ensure better extraction of data directly from case notes rather than summary forms.

- higher monitoring costs, because the financial consequences of changes in activity are more significant and because PCTs need to verify that the type of activity – particularly the HRG allocation – is accurate.

- higher enforcement costs, with the sharper relationship between activity and income/expenditure increasing the potential for more disputes between Trusts and PCTs

But PbR has brought benefits, and there was consensus among all those interviewed that the PbR system was preferable to previous contracting arrangements, partly because PbR had sharpened incentives and introduced greater clarity into the contracting process. In addition, interviewees indicated that PbR had led to improvements in the process of care delivery, by enabling resources to be shifted across settings, because of the improved specificity of information, and by highlighting where service improvements might be made.

Andrew Street | alfa
Further information:
http://www.york.ac.uk/healthsciences/pubs/hpmindex.htm

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