Commissioning - Health Committee Contents


111. Over the last decade the NHS has experienced constant reform, described by one witness as "redisorganisation".[126] Some reforms, as we have seen, specifically aimed to strengthen commissioning, but most were concerned with other aspects of the NHS. Nevertheless, even these wider reforms have had an indirect effect on the work of commissioners. They have been inconsistent and some have made the work of commissioners more difficult. Professor Ham argued:

    the freedoms available to NHS Foundation Trusts, the regulatory regime under which they operate with the requirement to generate financial surpluses for future investment, and the system of payment by results which creates incentives to increase hospital activity, present formidable obstacles to PCTs and PBCs in achieving financial balance and bringing about the shift in care closer to home that has been at the heart of recent policies and priorities.[127]

He added

    three sets of drivers [have] been put in the system. There is the Stalinism...targets, performance, management, drive the system hard from the centre—we also have increasing regulation through....a plethora of regulators trying to improve performance, and, thirdly, we have got the market-based reforms, World Class Commissioning, Foundations Trusts, Payment by Results. The logic was that over time we might migrate with less emphasis on Stalinism, a bit more emphasis on regulation and competition and choice would drive the system. Actually what has happened is they are co-existing with each other.[128]

112. This chapter looks mainly at the market-based reforms, in particular the introduction of Payment by Results (PbR). While these reforms have tended to intensify the adversarial nature of the relationship between purchasers and providers, other changes have arguably tended to cut across this, notably the Integrated Care Pilots, which we also examine. We begin, however, by considering the consequences of one of the Government's earliest reforms under the Rt Hon Frank Dobson, the creation of NICE.


113. The National Institute for Health and Clinical Excellence (NICE) was set up in 1999 with a remit to provide evidence-based information for the NHS on the effectiveness and cost-effectiveness of healthcare interventions.[129] NICE publishes mandatory technology appraisal guidance (stipulating interventions which must be funded by PCTs), as well as advisory clinical guidelines and public health guidance (which PCTs are not obliged to implement).

114. PCTs could insist that providers adopt NICE's clinical guidelines thereby ensuring that the best care is provided in the most cost-effective way. Although NICE has been working on developing tools and resources to help commissioners put its recommendations into practice in their commissioning,[130] the evidence we received indicated that PCTs too often fail to do so. For instance, the Joint Epilepsy Council found that in 2009 more than 90% of acute trusts failed to meet the two-week guideline for a first appointment with a specialist.[131] We were advised of similar failings in evidence received from the National Osteoporosis Society,[132] HEART UK[133] and the National Rheumatoid Arthritis Society.[134]

115. On the other hand, the mandatory technology appraisal guidance is expensive and PCTs think at times the money would be better spent on other priorities. The Minister of State admitted that implementing NICE guidance could be very costly for PCTs, but insisted they must adhere to it and manage their budgets in order to enable them to do so:

    It can be inflationary, I suppose, if it is the case that they are implementing the NICE guidance without being prepared to decommission anything. The PCT has to ensure that it is delivering the best quality of care, and if NICE is saying to it, "This is the best quality of care" then the PCT really needs to think very hard if it is going to exercise some sort of discretion not to deliver the best quality of care. It would have to have a hell of a good reason for not doing it.[135]

Payment by Results (PbR)

116. Historically, hospitals were paid through some form of bulk-buying contract.[136] Payment by Results (PbR) transformed this system so that "the money follows the patient". Hospitals are now paid a fixed price for each individual case treated. The amount hospitals are paid depends on how much work they do.

Box 6: Payment by results (PbR)

Before the introduction of PbR there was no incentive for providers to increase throughput since they got no additional funding for doing so.

PbR has addressed this issue and provides fixed tariffs for healthcare resource groups. Tariffs are set by the DH and the same price is paid by commissioners no matter which hospital provides the procedure. The prices contained in the national tariff are broadly speaking set on the basis of the average (mean) cost of providing a particular procedure, calculated using data from all NHS hospitals.

PbR is being phased in gradually. The system began in a small way in 2003-4. In 2006-7 the scope of PbR was extended to include non-elective, A&E, outpatient and emergency admissions for all Trusts. As at 2009-10 the main exclusions from PbR are primary care, community services, mental health services and the ambulance service. From April 2010 there are four "best practice" tariffs which encourage clinical change in areas such as stroke care. In an effort to shift funding to the community, emergency activity levels above 2008-9 levels will only be reimbursed 30% of tariff.

According to the DH, PbR is also intended to support patient choice and a "mixed economy of providers" as well as encouraging activity levels so as to reduce waiting times.

117. The NHS Confederation highlighted the positive aspects of PbR:

    While the immediate economic constraints might make alternative payment systems appear attractive, the benefits, both delivered and possible through PbR are significant. For example, in the NHS Foundation Trust sector, PbR has supported the investment of £339 million in improved patient services in 2008-9 alone, with £353 million anticipated in 2009-10. PbR has enabled independent sector providers to enter the market competitively and further drive service improvement in areas where they provide services alongside incumbent providers. It is a system that maintains a national health service, avoiding the disruption of local pricing which would be inefficient and chaotic.[137]

118. Other witnesses, however, argued that Payment by Results had several failings. In particular, it was claimed that PbR had:

  • increased transaction costs;
  • encouraged hospitals to generate more activity to increase their income; and
  • made it more difficult to move healthcare into the community and primary care sectors.

119. It had been expected that PbR would reduce costs because it ended the need to negotiate prices and volumes. This had happened, but research commissioned by the Department found that any reduction in costs had been offset by an increase in other transaction and administrative costs.[138] Dr Meldrum of the BMA told us:

    The problem I have with Payment by Results is that you either have a very crude system where you have a relatively small number of resource groupings, in which case it is easy for certain providers to cherry-pick the easy cases, leaving the more complex ones to the NHS who have got intensive care facilities and such like, and get paid the same. So you either do that, or else you go down a much more complicated route where you have many, many more disease groups and payment groups, but, of course, the more you go down, the more sophisticated you make that, the more bureaucratic it becomes and the more you get more onto the American system where almost for every aspirin you have to put a tick in the balance sheet. So I think there is a real Catch 22 situation that actually, if you want to make it fairer, you have got to make it more bureaucratic. The more bureaucratic it is, the more costly it is to administer and to run and you will end up with administration costs of getting on to 30%, as they have in the American healthcare system.[139]

120. Professor Street described Payment by Results as "Essentially an activity-based funding system".[140] Although early assessments of PbR, such as that undertaken by the Audit Commission in 2005, found no evidence that PbR had increased activity, concerns about the incentives PbR created for hospitals to generate activity were widely expressed by witnesses, for example by the Cystic Fibrosis Trust,[141] British Society for Gastroenterology[142] and the National Childbirth Trust.[143] The Association of Greater Manchester PCTs informed us:[144]

    ...we would also highlight the extent to which national policy can confound local economy efforts to balance supply and demand. NHS provider organisations tend to have a high fixed-cost base and are rewarded for increased volumes under the NHS financial regime payment by results. They therefore have a major incentive to increase activity in order to secure increased tariff income at full cost, running directly counter to the objectives of commissioners

121. While the NHS Confederation had been very positive about PbR in written evidence, a subsequent communication from Nigel Edwards, Deputy Director of the organisation, was critical of the way PbR creates incentives for providers to generate, rather than help manage, demand for secondary care:

    Tariff systems can work in emergency care and for long term conditions but unless they are used carefully they have the risk of providing incentives that are not really aligned with what patients or the wider health system needs. In particular it has the potential to create incentives for providers to generate rather than help manage demand for secondary care." (letter to Howard Stoate from Nigel Crisp. 8 Feb 2010)

122. The King's Fund explained how PbR affected strategies to switch services out of hospitals:

    PCTs have few of the freedoms afforded to foundation trusts—they are restricted by stringent governance and regulatory structures and must break even on an annual basis. As noted above, the power differential is exacerbated by a mismatch in the quality of information accessible to trusts and commissioners. Work undertaken in the acute setting is coded and costed very carefully to ensure that costs are covered, but there is a significant delay before commissioners receive that information. The lack of specialist knowledge at PCT level means that commissioners find it very difficult to challenge coding. The complexity of the pricing structure of PbR has combined with these incentives to restrict the ability of commissioners to act on strategies that seek to redesign services and/or shift care out of hospitals.[145]

The Royal College of Physicians warned that care might be pushed into hospitals rather than the community.

    More profoundly—for Care Closer to Home advocates—PbR may create perverse incentives, so that it appears financially easier to admit the patient rather than manage them outside the hospital or to commission separate specialist services in primary care, thus avoiding the fully tariff price of a consultant-delivered service in an outpatient clinic.[146]

Integrated Care Pilots

123. It has long been argued that the different elements of healthcare and social care in England are too often poorly coordinated, failing to form seamless "pathways" that ensure the right care is delivered in the most effective way. This adversely affects patients' quality of life and clinical outcomes, as well as efficiency in the use of resources. Addressing this is made all the more urgent as the population ages and the prevalence of chronic diseases increases.

124. Government policy sees the answer to this problem in greater integration of services, both "horizontally" (e.g. between primary care and social care) and "vertically" (e.g. between primary care and acute care). In April 2009, the DH launched a pilot programme, as proposed by Lord Darzi in High Quality Care for All, to test and evaluate several models of integrated care through 16 Integrated Care Pilots (ICPs) over two years. The Department has recently announced that, following successes in the original ICPs, the programme is being expanded to encompass a wider range of stakeholders nationally and identify further worthwhile initiatives.

125. We received evidence from some of the NHS organisations involved in the initial pilots. John Parkes, the Chief Executive of Northamptonshire PCT, told us that initiatives being pursued by his pilot including pooled mental health budgets and joint commissioning of mental health services with colleagues in social care.[147] From the provider side, Stephen Graves, of Cambridge University Hospitals NHS Foundation Trust, told us that the pilot in which his organisation was involved, relating to end-of-life care, was not proving straightforward: "I will be very clear; it is not easy". Bringing together the information held by different organisations had turned out to be particularly difficult.[148] Mr Graves admitted that, even after a year, the pilot was still in its early stages: "it has taken a year for us to all get our brains round the issue".[149]

126. It is not clear how the integrated care pilots relate to other Government policies, for example how it relates to CQUIN, another policy with its origins in the Darzi review. In December 2008 guidance from the DH on CQUIN merely stated that:

    in areas where Integrated Care Organisations are being piloted those involved may wish to discuss how to apply the principles of the CQUIN framework to the care they are providing.[150]

127. Similarly, it is unclear whether the integrated care pilots are consistent with PbR. Several witnesses, including the BMA[151] and the British Association for Sexual Health and HIV (BASHH)[152], argued that PbR fragmented care. The fpa claimed that PbR created "disjunctions" in care pathways.[153] Dr Brambleby, a PCT director of Public Health, argued that PbR had drawn attention away from commissioning whole care pathways.

    I am not by any means alone as a clinician working in the NHS to be deeply ambivalent about payment by results. We feel that it was a sincere and partially successful attempt to address the wrong question…. It is the overall health of the patient for which we want to commission. To that end payment by results has been a distraction and distortion and is tangibly counter-productive in some cases.[154]

The overall impact of reforms on commissioning

128. It is not just that integrated care pilots sit uneasily with CQUIN and PbR, but several witnesses, including the King's Fund, the RCP[155] and Professor Bevan, stressed that recent reforms were inconsistent. Professor Bevan told the Committee that it was not that there were too many cooks, but that they were cooking different meals.[156] The King's Fund informed us that:

    ...when examined in detail and in the context of the system as a whole, it is apparent that there are areas where the various incentives and structures do not align. As a result commissioning remains weak. It is not that the policies themselves do not "fit" with WCC, but rather that the structures and mechanisms within which they are operating are working against the aspirations of WCC.[157]


129. The Government has embarked on a series of sometimes contradictory reforms which have had significant effects on commissioning. In the first wave of reforms undertaken when the Rt Hon Frank Dobson was Secretary of State, NICE was created. This has led to threats and opportunities for PCTs. Potentially, PCTs could insist that hospitals use NICE guidelines to provide the best, cost effective care; unfortunately, they have done this less often than they should have. On the other hand, there is a tendency for NICE guidance to be "inflationary" in its effect on spending by PCTs, obliging them to pay for certain expensive treatments. We repeat our regular injunction that NICE should do more to specify where disinvestment should take place.

130. The next wave of reforms, made when the Rt Hon Alan Milburn was Secretary of State, sought to achieve a more market-oriented NHS; they included the introduction of PbR. We were informed that this has had a number of disadvantages for commissioners. PbR threatens to increase transaction costs and, in part because of the weakness of commissioning, provides hospitals with an incentive to generate more activity to increase their income.

131. More recently the DH has appeared to place less emphasis on the market-based approach. The present Secretary of State has stated that the NHS is the "preferred provider" and Integrated Care Pilots have been introduced. It is unclear how this policy relates to earlier measures such as PbR.

132. Although there has been slightly less emphasis on market reforms recently, the NHS remains characterised by tensions between purchasers and providers. The weakness of commissioners faced by powerful providers means that the reforms have threatened to undermine some of the Government's key aims, such as switching care from hospitals to the community. Strengthening commissioners' powers and skills is vital and we now turn to Government attempts to do this.

126   Ev 15 Back

127   Ev 331 Back

128   Q 527 Back

129   NICE was initially called the National Institute for Clinical Excellence. It changed its name in 2005. Back

130   Ev 232 Back

131   Ev 321 Back

132   COM 111 Back

133   Ev 44 Back

134   Ev 60 Back

135   Q 621 Back

136   A variety of contracts were used:

· Block contracts

Under a block contract the provider is paid an annual fee in instalments by the commissioner in return for access to a defined range of services. The provider receives a flat payment to care for the patient population regardless of the actual care given. A sophisticated block contract is similar to a simple block contract but requires the commissioner to monitor the provider to ensure that they are providing the required care.

· Cost per case contracts

Under a cost per case contract the commissioner agrees an allocation of funding for each patient treatment provided, so the provider is paid based on the cost of the medical services supplied.

· Cost and volume contracts

Under a cost and volume contract cost and activity are linked. The provider receives a sum in return for treating a specified number of cases. These types of arrangement allow for a variable cost per case adjustment between a threshold and a ceiling. Back

137   Ev 313 Back

138   Georgia Marini and Andrew Street, "The administrative costs of Payment by Results." CHE Research Paper 17. York: Centre for Health Economics, (2006) Back

139   Q 33 Back

140   Q 170 Back

141   Ev 72 Back

142   Ev 304 Back

143   COM 118 Back

144   Ev 50 Back

145   Ev 253 Back

146   Ev 124 Back

147   Q 353 Back

148   Q 467 Back

149   Q 471 Back

150   Department of Health, Using the Commissioning for Quality and Innovation (CQUIN) payment framework, December 2008, para 30 Back

151   Ev 213 Back

152   Ev 241 Back

153   Ev 91 Back

154   Q 206 Back

155   Ev 123 Back

156   Q 62 Back

157   Ev 252 Back

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