The Barnett Formula - Select Committee on the Barnett Formula Contents


Memorandum by the Scottish Government

INTRODUCTION

  1.  The 14 territorial Health Boards in Scotland are responsible for providing high quality healthcare services to the populations they serve. It is crucial that resources are distributed fairly across Scotland, taking account of the many factors that influence the need for healthcare in particular areas and the costs of supplying those services.

BACKGROUND

  2.  Prior to 1978, the funding for NHS Scotland was based on the distribution of NHS facilities across the country. Following the publication of the Scottish Health Authorities Revenue Equalisation (SHARE) report, the principle of using a weighted capitation formula to distribute funding according to the needs of the population and the costs of providing services to them was adopted. The SHARE formula ran for over 20 years until the National Review of Resource Allocation under Sir John Arbuthnott conducted their review. This review led to the establishment of the Arbuthnott formula which sought to provide fair shares to all Health Boards based on the guiding principle of the NHS that people should have equal access to services according to need.

  3.  The Arbuthnott formula assessed each Health Board's relative need for funding, using information about its population size, characteristics that influence the need for healthcare, and costs of delivery, in terms of hospital services, community services and GP Prescribing. The main drivers of the formula were:

    — share of the Scottish population living in the Board area;

    — age structure of the population and relative number of males and females;

    — morbidity and life circumstances; and

    — unavoidable excess costs of delivering healthcare in different geographical areas.

  4.  The publicly appointed NHS Scotland Resource Allocation Committee (NRAC) was established in 2005 to review the Arbuthnott formula. The aims of NRAC's review were primarily to improve and refine the Arbuthnott Formula for resource allocation for NHS Scotland. To fulfil this remit, NRAC undertook an extensive programme of research and consultation Health Boards and other experts/stakeholders resulting in the Final Report (http://www.nrac.scot.nhs.uk/research.htm ) being published in September 2007.

  5.  The basic structure of the formula has remained the same as under Arbuthnott, but NRAC recommended a number of changes to the individual components of the formula. The bases for these adjustments are supported fully by evidence and peer reviewed research results. The proposals were presented to the Cabinet Secretary, who then engaged in further consultation before accepting the proposals in full.

BASICS OF THE NRAC FORMULA

  6.  The NRAC formula is used to allocate funds for Hospital and Community Health Services and GP prescribing to Health Boards. The formula allocates approximately 70 per cent of the total NHS Scotland budget. Other formulae are used to distribute some other funding streams such as General Medical Services and capital allocations.

  7.  As in most resource allocation formulae, the main driver is the population size of each area. However, this on its own would not be a fair way of distributing resources as there is clear evidence that some groups, for example older populations, those with particular morbidity and life circumstances characteristics, need a higher amount of resources than average. For this reason adjustments are made to the base population of each area to account for:

    — The Age/sex composition of the population.

    — The relative additional needs due to morbidity and life circumstances (MLC) and other factors.

    — The relative unavoidable excess costs of providing services to different geographical areas.

  8.  The adjustments to the base population result in what is known as a weighted population. Calculations are initially carried out on the populations of small geographical areas and GP practices and then aggregated up to provide Health Board level shares. The small areas utilised within the formula are "data zones" which are key small-area statistical geographies in Scotland introduced by the Scottish Government for use in Scottish Neighbourhood Statistics. The use of this small area geography within the NRAC formula is seen as one of the key improvements on the previous formula, as it allows the characteristics, needs and costs of small areas to be better reflected in the formula.

  9.  Further details on the improvements to the formula which have been made as a result of the NRAC Review can be found at http://www.nrac.scot.nhs.uk/

FORMULA STRUCTURE: HOSPITAL AND COMMUNITY HEALTH SERVICES (HCHS) AND GP PRESCRIBING

  10.  The four steps to creating a weighted population are:

    — Take the base population of each Health Board at small area (data zone or GP practice) level by age and sex;

    — Predict the expected resources required in each small area based on national average costs per head by age and sex (age/sex cost curves) to create an age-sex cost-weighted population index;

    — Apply the Additional Needs (MLC) index to the above at each small area, and;

    — Finally apply Unavoidable Excess Costs index to create the final overall index for each small area.

  11.  The small area indices are amalgamated to Health Board level, and applied to the population share to give the final output of the formula. This is then used to determine the target share of funding for each Health Board.

APPLYING THE NRAC FORMULA IN PRACTICE

  12.  The NRAC formula does not determine the total amount of resources required to meet all the needs of a Health Board. The funds available to Scotland's 14 Health Boards are determined during the Spending Review process. The formula allocates this set amount on a basis that is fair and equitable, and reflects the relative need of each Health Board. It is then up to Boards to decide how to spend their allocation in a way that best meets the needs of their resident population.

  13.  The results of running the NRAC formula give "target shares" which are used only as a guide to the actual share of funds allocated to each of the 14 Health Boards. The budgets that the Health Boards receive are subject to a "parity" process which was introduced to ensure that the movement from the previous allocation formula (known as the SHARE formula), to the then "new" Arbuthnott Formula, did not result in any Health Board receiving a reduction in their funding while moving towards their new shares over a period of years.

  14.  In practice, this means that the revised formula will be phased in by way of "differential growth" whereby all Health Boards will receive a minimum resource uplift, with additional funding being allocated to those Health Boards who are below their NRAC share. Thus, each Health Board will receive a standard uplift each year to meet inflationary pressures whilst those Boards whose actual funding remains below their target level, as indicated by the NRAC formula, would receive an additional parity uplift from within the remaining resources available.

FURTHER INFORMATION

  15.  More details on how the formula works and answers to frequently asked questions are contained in Annexes 1 and 2 to this note.

Health Analytical Services

Scottish Government Health Finance Directorate

February 2009



 
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