Delivering the NHS Plan: Changes to

Financial Flows

November 2002

The Context

The Budget Settlement

Largest ever sustained increase in NHS funding over 5 years

Average7.4% real growth per year

On course to match European average by 2008

But...need to expand capacity and restore incentives to increase productivity

The Context

Aims and Objectives of System Reforms

Move from NHS which is a:monopoly provider of health services, accountable to DH

To a greater diversity and plurality of services, more responsive to patients, managed according to

transparent, common standards that are inspected and regulated against

by an independent body that reports nationally and locally

The Context Objectives & Developing Reforms

NHS PlanNSFsNICEStar ratingsFranchising

NHS PlanEarned autonomyStHAsPCTs receive 75% total funding

NHS PlanWorkforce changes

NHS PlanBooked appointmentsMore information for patients

Delivering the NHS Plan

Regulated price tariff‘open book’ relationshipCHAI & CSIPCT prospectuses

Delivering the NHS Plan

Transparent, rules based system 3 year planning and allocationsFoundation TrustsNHS Bank

Delivering the NHS Plan

Incentives for good performersFinancial tools to support development of commissioning

Delivering the NHS Plan

Financial flows that support patient movement & choiceto increased range of providers

STANDARDS AND ACCOUNTABILITY

DEVOLUTION FLEXIBILITY CHOICE

Patient choice

Requires a financial system that:• is flexible enough to allow money to move

as the patients do• allows patients’ choices to be made on

the basis of quality and responsiveness not price

• ensure choices are affordable for PCTs and good VFM

Diversity

Requires a financial system that:• works for new as well as traditional

providers• minimises transaction costs • sets a common national framework and

contracting arrangements for all providers of services to NHS patients

Issues With Current Financial Flows System

Does it facilitate patient choice X

Does it incentivise good performance X Does it reward efficiency X

Does it support effective planning & delivery ?

Does it work with different providers X

Does it demonstrate value for money X

Objectives of New Financial System

A transparent, rules based system for paying Trusts

Rewards efficiency

Supports patient choice & diversity

Encourages activity for sustainable waiting time reductions

A consensus is emerging internationally...

DRGs first developed in the USA to measure activity. Basis for paying for acute care in Medicare programme

Australia, Norway, Austria, Finland, Sweden and Canada have developed their own casemix tools

We are

beginning to

look a bit

anomalous!

Italy uses modified version of US DRG system

France uses US DRG tool and relative DRG cost in determining budget growth

From 2003 Germany & Netherlands plan to use casemix payment system for hospitals

Learning from other countries

• Most OECD countries use casemix payment methods or are planning this

• Most OECD countries use standard tariffs, not competition, to pay for most healthcare

• Casemix payment increases productivity, reduces use of inpatient care

• Researchers have not found adverse effects on quality

Key Elements of the Future Financial Incentive Regime

Payment linked to activity

Developing commissioning tools for all elements of care pathways

Pressure to address higher cost provision

Some terminology that will be important...• HRGs: Healthcare Resource Group -

grouping cases that are clinically similar and require similar resources for treatment and care

• RVUs: Relative Value Units - a number indicating the relative difference in cost between different HRGs (i.e. cost weights)

• Weighted FCEs – Measure of activity level in finished consultant episodes adjusted for complexity of casemix, using RVUs

Financial Flows: end-point for medium term

• cost and volume agreements adjusted for casemix using HRGs & other standard

service classification tools • standard tariff prices prices apply to all

providers of services to NHS patients• HRG issues: mental health; chronic care; community services; PSS interface • pricing issues: secondary care provided by PCTs or GPs; development costs

Expanding Scope of Scheme

Elective inpatient £6.7bn

Non elective inpatient £10bn

Outpatient £3.3bn

A&E and Ambulance £1.4bn

Community Health £3.3bn

Scheme starts witha small proportionof inpatient activity& expenditure

Note: this diagram isnot to scale

The above uses 2000-1 HCHS figures to illustrate thescope of NHS activity accounting for almost £25bn NHSexpenditure (excludes general practitioners, dental,pharmacy, drugs).It is intended that enhanced/additional GP services will alsoeventually be covered by the scope of the scheme.

Gradual rollout of scope

Aim to cover as much NHS patient care activity as possible

Transition Path:

2 years to transition

– new payment basis only applies to proportion of hospital activity

in 2003-4 & 2004-05– unintended effects: perverse incentives– interaction with other funding streams (training & research, development funds)– revision of HRGs and casemix weights– simulation, modelling, consultation

Financial Flows3 years of transition

– cost and volume agreements adjusted for casemix using HRGs for most acute

activity beginning in 2005/06– convergence to tariff prices by 2008/09

transition support: issues for PCTs &Trusts

– independent sector: prices set by tender or other VFM process during transition; tariff applies by 2008/09

Financial Flows 2003-04 system

Main features– develop experience with using HRGs and tariff prices in commissioning– focus on services with high volume, high cost, long waits, and link to choice pilots– cost-and-volume commissioning

agreements, casemix-adjusted using HRGs, for 6 specialties – 15 HRGs commissioned on an individual basis

Financial Flows 2003-04 system

Extent of introduction:– for 15 HRGs standard tariff applies to

extra elective activity over 2002/03 plan – for 6 specialties price is locally determined but national HRGs cost weights used to adjust for casemix – failure to deliver agreed elective volumes leads to withdrawal of funds at full cost– risk sharing for non-elective activity

Financial Flows 2004-05

Next steps in roll-out:– extend coverage of tariff prices to

additional volume for 30-45 HRGs – extend coverage of cost and volume

commissioning to all surgical specialities – pilots for wider coverage of cost and

volume commissioning and tariff prices– Foundation Trust contracts

Need to Manage Risks Carefully

Risk

Implementation challenge

PCT & Trust capacity

Financial instability

Unintended effects

Transaction costs

Management

Pace of change and pilots

Development programme, SLA, implementation support

Transition path Modelling/simulation

Scenario planning, simulation, consultation International experience

Align with IT developments, shared services, standard tools

Next Steps 2002/03November - December 2002

- Feedback on consultation document

- Price tariff and final details for 03/04 scheme

- Seminars/workshops in most StHAs

- HRG version 3.5 revision begins

January 2003

- Model SLA, implementation support

Summer 2003

- Consultation on medium term scheme, transition path, recosting/rebasing issues

Implementation

StHAs roles

- Identify implementation responsibilities and support needs in your patch

- Identify 3-4 people who can support implementation

- Coordinate consultation feedback

DH project team resources

- Model SLA, worked case study, presentation materials

- Implementation support team, in liaison with MA

- www.doh.gov.uk/nhsfinancialreforms