The Barnett Formula - Select Committee on the Barnett Formula Contents

Memorandum by the Department of Health


  The Department of Health has used a weighted capitation formula since 1977-78 to determine target shares of available revenue resources between NHS areas. The underlying principle of the weighted capitation formula is to distribute resources based on the relative needs of each area to enable Primary Care Trusts (PCTs) to commission similar levels of healthcare for populations with similar healthcare needs. Since 1999 there has been a further objective of helping to reduce avoidable health inequalities.

  The weighted capitation formula has informed the allocation of £164 billion to PCTs in 2009-10 and 2010-11. Under the formula, PCTs' target shares of the available resources are based on their share of the England population, weighted, to account for their populations' needs for healthcare services relative to that of other PCTs.

  The development of the weighted capitation formula is continually overseen by the Advisory Committee on Resource Allocation (ACRA). ACRA is an independent committee that makes recommendations to Ministers on possible changes to the formula, prior to each round of revenue allocations to PCTs. ACRA's membership comprises, GPs, academics and NHS management.

  Four elements are then used to set PCTs' actual allocations:

    (a) the target share;

    (b) the actual current allocation which PCTs receive;

    (c) the distances from target (DFTs)—the difference between (a) and (b); and

    (d) pace of change policy—which determines the level of increase which all PCTs get to deliver on national and local priorities and the level of extra resources to under target PCTs to move them closer to their target share. The pace of change policy is decided by Ministers for each allocations round.

  PCTs have been given control over an increasing proportion of the NHS revenue budget and this is reflected in the weighted capitation formula, which has three components:

    (a) hospital and community health services (HCHS—by far the largest component, accounting for over 76 per cent of the formula);

    (b) prescribing (the drugs bill); and

    (c) primary medical services.

  HCHS in turn has separate need formulas for acute services, maternity, mental health and HIV/AIDS.

  Each of the components has adjustments for age, additional need and unavoidable costs with the exception of prescribing which has no adjustment for unavoidable costs. While these adjustments necessarily differ in detail for each component, they are based on the same common principles.

  The Advisory Committee on Resource Allocation (ACRA) advises the Secretary of State for Health on the weighted capitation formula. ACRA is an independent expert body whose membership includes individuals with a wide range of expertise from within, and outside, the NHS. ACRA is supported by a Technical Advisory Group (TAG).

  ACRA's most recent review, covering the main elements of the formula—the population base, the need adjustments and the MFF—is published in Report of the Advisory Committee on Resource Allocation (December 2008).

  Further information about actual allocations, recurrent baselines, DFTs and pace of change policies is available in the PCT Revenue Allocations Exposition Books, available at


  Health services are for people and the starting point and primary determinant of weighted capitation targets must therefore be the size of the populations for which PCTs are responsible.

  The PCT responsible population for resource allocation purposes consists of:

    (a) the number of people permanently registered with the GP practices within each PCT area; and.

    (b) the number of residents within the boundaries of each PCT who are not permanently registered with any GP practice, but for whom the PCT has been defined as the responsible commissioner of health services to be funded by PCT revenue allocations. In practice, this group includes prisoners, armed forces and asylum seekers.

  PCT responsible populations are based on Office for National Statistics (ONS) sub-national population projections (SNPPs) for 2009 and 2010, adjusted for patients resident in one PCT while registered with the GP practice of a neighbouring or other PCT.


  Population is the starting point but the make-up of the population is also critical: people do not have identical needs for health care. A key difference is that need varies according to gender and age, and in particular, the very young and elderly, whose populations are not evenly distributed across the country, tend to make more use of health services than the rest of the population. The weighted capitation formula therefore takes into account the different age structures of local populations.

  Even when differences due to age are accounted for, populations of the same age distribution display different levels of need. An additional need adjustment to reflect the relative need for health care over and above that accounted for by age is necessary.

  Observing need directly has not proved possible to date. Instead, statistical modelling by academics has examined the relationship across small geographical areas between the utilisation of health services, socio-economic characteristics, health status and measures of the existing supply of health services. These models have been used to decide which characteristics to include in the formula as indicators of additional need, and with what relative weights.

  Based on research published in Combining Age Related and Additional Needs (CARAN) Report (2007), ACRA recommended an acute formula which adjusts for age and additional need in one single stage. This one stage approach, however, was undertaken separately for each age group, thus allowing the relationship between age and additional need to vary between 18 different age bands.

  CARAN also developed a separate formula for maternity services, where previously it had been combined with acute services, and a new formula for prescribing. The need formulas for mental health and for primary medical services (which reflects the GP contract) remain unchanged.

  The new formulas capture need better than the previous formulas. However, as they are based on utilisation of health care, they capture the NHS's response to current patterns of health inequality. ACRA felt that they did not adequately address the objective of contributing to the reduction in avoidable health inequalities. ACRA therefore recommended a separate formula for health inequalities. This uses disability free life expectancy (DFLE), which is the number of years from birth a person is expected to live which are free from limiting long-term illness. It is applied by comparing every PCT's DFLE to a benchmark figure of 70 years.

  It is not currently possible on a technical basis to determine the weighting for this health inequalities formula. Ministers decided to apply it to 15 per cent of 2009-10 and 2010-11 allocations (with the exception of mental health, which already includes an adjustment for unmet need, and HIV/AIDS).


  The weighted capitation formula has to take account of the fact that the cost of commissioning healthcare is not the same in every part of the country due to the impact of market forces on local costs. The market forces factor (MFF) is included in the weighted capitation formula to allow for these unavoidable geographical variations in costs. Under Payment by Results (PbR), a MFF is also paid to NHS providers.

  The HCHS MFF consists of separate indices for staff, medical and dental, London weighting, buildings and land. The majority of HCHS spending is on staff.

  The staff MFF is based on the General Labour Market based on the premise that the private sector sets the going rate for a job in a given area, even though NHS wages are determined nationally. If these wages are below the going rate in a given area, this leads to higher indirect costs in the form of a poorer quality workforce, recruitment and retention difficulties, increased reliance on bank and agency staff, and lower productivity.

  Some of the differences are quite marked between neighbouring PCTs. These "cliff edges" are unlikely to represent accurately the true underlying differences in wages, not least near the borders of PCT areas, but instead are likely to reflect to some extent the effect of using a geography of administrative boundaries which are not self-contained labour markets. A smoothing technique was applied to remove artificial cliff edges.

  The staff MFF is not applied to expenditure on medical and dental staff because their indirect costs do not vary differentially across the country as they do for other NHS staff. Instead, there is a separate index for medical and dental staff based on London weighting.

  Each PCT's final MFF is a weighted average of the MFFs of the providers from which it commissions for acute activity, calculated using a purchaser provider matrix (PPM), and the PCTs' own MFFs for community programmes and maternity.

  The primary medical services component of the formula also has separate MFFs for practice staff, buildings and land, and a GP pay MFF which is intended to compensate deprived PCTs which face greater GP recruitment and retention difficulties. The prescribing component does not have an MFF.

  The emergency ambulance cost adjustment (EACA) within the HCHS component reflects the unavoidable cost variations of delivering emergency ambulance services in different areas.


  There is one supplement to the formula. The ONS SNPPs that form the basis for calculating weighted capitation targets are based on past trends for births, deaths and migration, and do not take into account Government policy on expanding the housing supply in parts of the country. The Growth Area Growth Points adjustment therefore uses dwelling led population projections provided by the Department for Communities and Local Government (DCLG) which forecast the impact on population of additional housing for PCTs in the Growth Areas and Growth Points.


  One of ACRAs objectives is to help to reduce avoidable health inequalities through resource allocation. ACRA concluded that it is not currently possible to ensure both equal access for equal need and help reduce health inequalities in a single formula. Therefore, it has recommended a separate formula based on differing levels of healthy life expectancy that shifts resources to those places with the worst health outcomes.

  The health inequalities formula targets funds at places with the worst health outcomes, recognising that these areas require more funding than other areas to address the issue of health inequality.

  The health inequalities formula is a transparent way of contributing towards the reduction in health inequalities through resource allocation, and highlights the commitment to tackling the issue of health inequality.

  ACRA were unable to find any evidence to inform the proportion of allocations to apply the health inequalities formula to and left it to Ministerial decision. Ministers decided to target 15 per cent of spending at health inequalities to ensure the most deprived areas have the resources they need to tackle this issue.

  ACRA is undertaking further work on how to address health inequalities through the resource allocation formula.


  PCT allocations are determined by pace of change policy—the level of increase given to all PCTs and the level of extra resources given to under target PCTs to move them closer to their weighted capitation targets. The government are commited to moving PCTs towards their target allocations as quickly as possible.

  The pace of change policy for 2009-10 and 2010-11 ensures that:

    (a) average PCT growth is 5.5 per cent each year;

    (b) minimum growth is 5.2 per cent in 2009-10 and 5.1 per cent in 2010-11;

    (c) no PCT will be more than 6.2 per cent under target by the end of 2010-11; and

    (d) no PCT will move further under target as a result of above average population growth in 2010-11.

April 2009

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