Memorandum by the Department of Health
REVENUE ALLOCATIONS
TO PCTS
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:
(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
www.dh.gov.uk/allocations.
POPULATION
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.
NEED
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).
UNAVOIDABLE COSTS
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.
SUPPLEMENTS TO
THE FORMULA
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.
HEALTH INEQUALITIES
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.
PACE OF
CHANGE POLICY
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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