The Barnett Formula - Select Committee on the Barnett Formula Contents

Annex 2


  This document provides background information on the basic principles applied to resource allocation in Scotland plus additional detail on the methodology adopted for the new NRAC formula due to be implemented in the calculation of the 2009-10 allocations.

1.  Q:  How does the new NRAC Formula work?

  A:  The Formula assesses each Health Board's relative need for funding, using information about its population size and characteristics that influence the need for healthcare in terms of hospital services, community services and GP prescribing. The main drivers of the Formula are:

    (i) the share of the Scottish population living in the Health Board area;

    (ii) the age structure of the population and relative number of males and females;

    (iii) the additional needs due to morbidity and life circumstances (eg deprivation); and

    (iv) the unavoidable excess costs of delivering healthcare in remote and rural areas.

2.  Q:  What is the underlying principle of the new NRAC Formula?

  A:  The main objective of the NRAC Formula is to ensure equity among those receiving funds and provide a logical framework for decision making. Target shares are calculated for Health Boards on the basis of relative need for health care services within that population group, where use of services has been used as a proxy for need. Scotland uses an indirect approach to measure healthcare needs. The indirect approach relies on health service utilisation data to measure those needs based on (i) the demographic profile of the populations, taking into account the national average costs of providing services based on age and sex, and (ii) relative levels of deprivation, and its' estimated relationship on the greater use of services within each care programme. In addition to these two factors, the relative need for resources in each Health Boards is also influenced by the unavoidable additional costs of providing services in remote and rural areas. Also refer to Question 14.

3.  Q:  What are the care programmes and diagnostic groups used in the new Formula?

  A:  The table below sets out the care programmes and diagnostic groups that are utilised in the new NRAC formula being implemented from 2009-10.

Care Programme
Diagnostic Group(s)

Acute Services
Digestive system
Injuries and poisoning
Care of the Elderly
Mental Health and Learning Disabilities
GP Prescribing2
Mental illness

1  Practice Team Information data (PTI) and data from other sources are used as a proxy for all community services.
2  Prescribing programme was disaggregated into the top five British National Formulary chapters

4.  Q:  My Health Board provides healthcare services for 10 per cent of the Scottish population, yet may only have a target share of 9 per cent—why is this?

  A:  Each Health Board's share of the population forms the basis of its allocation. However, this is then adjusted for factors that affect relative need for healthcare resources (age/sex, additional needs and unavoidable excess costs of delivering healthcare in different geographical areas). For example, elderly people tend to make more use of health care services and are more costly to treat. Therefore, a Board with a greater elderly population will require more health care resources than one with a relatively younger population base. Similarly, deprived people are recognised to have a greater need for healthcare than relatively affluent people and it is recognised that there are additional costs in providing services in remote and rural areas and so Boards with a larger deprived or rural population will require more healthcare resources than an affluent urban Board. The impact of these factors is combined to create an overall index of need for each Health Board, and this will determine the level of funding that a Board receives.

5.  Q:  How do you estimate the population?

  A:  For hospital and community health services (HCHS), the Formula uses re-based population projections. These are simple adjustments made to the GROS Health Board level population projections by updating them using population mid-year estimates (MYEs) that have been published since the Health Board level projections were published. It is a development of the method used in the formulae for allocating Local Authority Grant Aided Expenditure (GAE) in Scotland.

  For GP prescribing the population source is the Community Health Index (CHI) which contains every person registered with a GP in Scotland (deflated to the same total population as the HCHS re-based projections).

6.  Q:  Why is population calculated differently for hospital services and GP prescribing?

  A:  For hospital services the population is based on the Health Board of Residence, however, for GP prescribing the population base is Health Board of Management. So for GP prescribing the relevant population is the number of patients on the lists of GP practices managed by each Health Board.

7.  Q:  Why is it important to take into account the age/sex profile of the population?

  A:  The Resource Allocation Formula uses this information to take account of the use of different specialities by each age/sex group (eg for maternity services), and also in calculating the costs of treating patients of different ages. It makes the Formula more "sensitive" to the healthcare requirements of the different population groups.

8.  Q:  Why doesn't GP prescribing have an adjustment for remoteness?

  A:  The GP prescribing element of the Formula covers the cost of prescribed drugs which are reimbursed at nationally fixed prices. Therefore, there is no need to build in a remoteness adjustment.

9.  Q:  Does the Formula give enough emphasis to deprivation or remoteness?

  A:  The weights attached to different elements in the Formula are based on the best available evidence at the time, depending on how each factor influences the need for healthcare. The weights were not chosen, but based on empirical analysis. The adjustment for morbidity and life circumstances therefore takes account of the need for services within diagnostic groups over and above the affect of the age and sex profile of the population. The adjustment for the unavoidable excess costs of supply then takes account of the additional costs of delivering services to meet the needs that are predicted by the age and sex and morbidity and life circumstances adjustments.

  It should be remembered that the target shares for each Board are influenced not only by the different adjustments within the Formula but also by the profile of Boards. Most Boards are very variable, containing a mix of remote/urban areas and affluent/deprived areas, and this is taken account of when the results are presented at Board level.

10.  Q:  How do you weight the different components of the Formula?

  A:  The Formula has the following basic structure:

    Population x age/sex x additional needs (MLC) x unavoidable excess costs

  The aim of the modelling is to explain the current overall need for resources of each Health Board in terms of a percentage share.

  An index is calculated for each element of the Formula and for each care programme in such a way that it compares each Board's position with the national average. For example, if the levels of additional needs (MLC) in a Board are higher than the national average its index will be more than one to reflect that its population will need more healthcare resources. By calculating each index in this way, the values can then be multiplied by the population share to determine how much more (or less) resource each Board requires compared with its basic population share due to age/sex, additional needs and unavoidable excess costs.

  In order to determine the overall adjustment for each Board, each of the care programme formulae are weighted together by the national average expenditure on those care programmes.

11.  Q:  How does the NRAC Formula take account of cross-boundary flows?

  A:  The Formula allocates resources on the basis of Health Board of Residence and not by Health Board of Treatment. It is up to individual Boards to recover costs for patients treated from other Health Boards, and this has traditionally been done through Service Level Agreements (SLAs).

12.  Q:  Are community hospitals covered in the hospitals section or the community services section?

  A:  The costs of community hospitals are included under the appropriate care programme of the Formula eg acute, care of elderly, maternity etc depending on the activities that are carried out, rather than the location. They will not be included in the community section of the Formula as this only covers activity outside of hospital eg in the patients home.

13.  Q:  How are temporary residents dealt with in the Formula?

  A:  There are two aspects to healthcare provision for temporary residents—hospital admissions, and prescribing.

    (i) Hospital Admissions—Health Boards are able to claim back the costs of treating non-resident populations through the finance mechanisms that are in place. This applies to either residents in other Scottish Health Boards, or visitors from other countries—the latter is achieved through UNPAC (unplanned activity) provisions.

    (ii) Prescribing—there is no capacity in the financial system to claim back the time spent with, or prescription costs of, visitors. Inter-board costs (or "cross-border flows" as they are known in Prescribing) are dealt with as part of the conversion of a Gross Ingredient Cost based formula modelled on Health Board of Management to a Net Ingredient Cost based allocation on Health Board of Residence in the finance system. For visitors, we therefore need to make an adjustment to the Formula—starting with the population base.

14.  Q:  Why do the relative ("target") shares as calculated by the Formula differ from the actual shares that Health Boards receive in the final allocations?

  A:  This issue relates to the movement towards parity. The policy of the Scottish Government Health Directorate is to phase in the target shares calculated by the NRAC Formula by way of "differential growth". Under this methodology, all Boards continue to enjoy real-terms growth in their allocations year-on-year, with those above parity (ie above their target share) receiving less growth than those below parity until the new distribution is achieved over time. In this way no Board receives a reduction in funding. This process is still ongoing.

15.  Q:  The NRAC Formula does not provide us with sufficient resources to cover the healthcare needs of our population, yet it is supposed to be needs-based. Why is this?

  A:  The Resource Allocation 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 territorial Health Boards are determined by Ministers during the Spending Review process. The Formula suggests how to allocate this amount on a basis that is fair and equitable, and reflects the relative need of each Health Board. Health Boards to decide how to spend their allocation in a way that best meets the needs of its resident population.

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