Memorandum by Professor Andrew Street
(COM 113)
COMMISSIONING
Commissioning and "system reform":
how does commissioning fit with Practice-based Commissioning,
"contestability" and the quasi-market, and Payment by
Results?
EXECUTIVE SUMMARY
Primary Care Trusts should be given the means
to negotiate on an equal basis with hospitals or simply released
from having to deal with hospitals, leaving them free to concentrate
on improving care in the primary and community care sectors.
BRIEF INTRODUCTION
Professor Andrew Street is director of the Health
Policy team at the Centre for Health Economics, University of
York. He has published extensively on productivity measurement,
organisational efficiency, and Payment by Results. He serves as
a board or committee member for the NHS Workforce Review Team,
Connecting for Health, Payment by Results, and the NIHR Health
Services Research programme.
FACTUAL INFORMATION
1. It is difficult for Primary Care Trusts
(PCTs) to control the volume of hospital activity, a task made
more complicated under Payment by Results (PbR).
2. In the past, block contracts ensured
tight expenditure control but limited the amount of activity hospitals
provided. Once the volume of services specified in the contract
had been reached patients were added to the waiting list because
hospitals had no financial incentive to treat them.
3. Cost & volume contracts provided
more flexibility, allowing PCTs to pay for additional activity
at a lower price once a pre-specified volume had been reached.
4. Under PbR these constraints on activity
have been removed and prices ("tariffs") are fixed nationally.
Hospitals have strong incentives to increase activity because
they are paid a fixed national tariff for each patient treated.
5. While some extra activity is to be welcomed,
it has to be appropriate and affordable. Under PbR it is more
difficult for PCTs to live within their budgets because they can
no longer negotiate prices nor can they impose volume controls.
6. Instead, PCTs have two main strategies
to manage demand for and expenditure on hospital services.
7. First, they can substitute hospital care
for services provided in primary or community care settings. PbR
gives them the financial means to do this, and this is a key advantage
of these arrangements. Nevertheless there are limits as to what
services can be substituted from one setting to another.
8. Second, they can set Practice based commissioning
(PBC) budgets to encourage GPs to reduce their referrals to hospital.
However, it would be inadvisable to rely heavily on PBC to restrain
referrals. The benefits of fundholding, the predecessor to PBC,
were modest. The savings resulting from reductions in admissions
were cancelled out by the management allowance that practices
received to manage fundholding. Moreover, the incentives for GPs
to manage their PBC budgets are not as strong as they were under
fundholding.
RECOMMENDATIONS FOR
ACTION
9. Either PCTs should be given the means
to negotiate on an equal basis with hospitals or—more radically—they
should be released from having to deal with hospitals altogether.
10. PCTs would have more negotiating power
if they had discretion over what PbR tariff to pay.
11. If the national tariff was a maximum
price, this would allow PCTs to negotiate lower prices with hospitals.
But there is unlikely to be much variation from the maximum, given
the relative weaker bargaining power that PCTs have relative to
hospitals.
12. An alternative is to re-introduce a
form of cost & volume contracting. Hospitals are paid the
national tariff up to a "planned" level of activity,
after which the "marginal" price for additional activity
is lower than the national tariff.
13. Both the national tariff and the marginal
price could be set by the Department of Health, leaving PCTs and
hospitals to agree the planned level of activity.
14. This will moderate—but not eliminate—the
incentive for hospitals to perform more activity and expose PCTs
to less financial risk than at present.
15. The disadvantage is that, particularly
when patients have the choice of many hospitals, it is difficult
for PCTs to predict activity levels for each hospital.
16. The more radical option would involve
the Department of Health funding hospitals directly instead of
having payments pass through PCTs. This is typical of PbR-type
arrangements that operate in other countries, where "local
commissioning" does not feature.
17. The arrangement combines the best feature
of block contracting—certainty of expenditure—with
the incentive properties of PbR since an individual hospital will
receive more money if it treats more patients.
18. Again hospitals might be paid the national
tariff up to a planned level, with a marginal price applying thereafter.
Crucially, though, the planned level need not be negotiated between
hospitals and PCTs but can be specified for the hospital as a
whole.
19. The transfer of responsibility would
allow the Department of Health to sharpen the incentives of PbR,
using the tariff more effectively to control volume, and it would
better facilitate free patient choice of hospital.
20. Freed from having to deal with hospitals
directly, PCTs could then concentrate on improving care in the
primary and community care sectors.
21. The arrangement requires a change to
resource allocation, with PCTs receiving funds to pay for primary
and community care only, with payments for hospital care made
directly to hospitals by the Department of Health.
22. PCTs that are successful at keeping
patients out of hospital would receive a proportionately greater
budget for primary and community care. This proportion would increase
over time if strategies to reduce referrals and to substitute
hospital care for primary or community services prove successful.
23. Which of these options is to be preferred
in the English context has not been established and it is recommended
that they are subject to careful consideration.
December 2009
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