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Complex System Architecture

Background

Contemporary British health policy is a legacy of decisions taken by a great number of agencies over

the past century. Decisions result from bargaining and negotiation among a complex constellation

of interests and most changes do not go through unopposed1

. The 60 year history of the NHS, asmall but significant part of the history of healthcare in Britain, is of an ongoing conflict between

clinically desirable quality outcomes, driven by scientific guidelines and research, and hard-headed

cost considerations that has frequently resulted in a compromise of the desirable with the

achievable. The lengthy negotiations that lead to the establishment of the NHS in 1948, for example,

saw General Practitioners opting out of national recruitment in favour of the private practice system

that sees GPs remain the single largest private entity within the health service today. The

concessions made to hospital consultants, allowing them to practice privately whilst still keeping

their NHS roles, caused Aneurin Bevan to remark that he had stuffed their mouths with gold. 2

Taking a long and superficial view of history, the challenge facing the NHS today might simply be

expressed as the result of another swing of the fiscal pendulum: the inevitable, indeed responsiblereaction to the impending funding crisis being, simply, cuts. After all, any organisation, public or

private, must make difficult and hard-headed choices at various points in its development if it means

to be effective and sustainable. Despite the Coalition government pledging to ring-fence health

spending an real increase of around 1% per annum was announced in the October 2010 Spending

Review the NHS certainly faces a challenge to drive down costs: even with the ring-fence the

management consultants McKinsey predict a funding gap of around £15-20bn due to the rising costs

of healthcare (in particular drugs and ever more sophisticated equipment), chronic conditions,

obesity and an ageing population. None of this is new: since the 1970s it has been known of

healthcare inflation that one per cent is needed to keep pace with the increasing number of elderly

people; medical advance takes an additional 0.5 per cent and a further 0.5 per cent is needed to

make progress towards meeting the governments policy objectives3. But regardless of the external

pressures on the system, any negative impact on quality will be politically unacceptable. So against a

backdrop of increasing demand for healthcare, and year on year increases in the cost of care

worldwide4, the NHS faces an interesting dual challenge: to increase care quality outcomes whilst

driving down costs. This will require a significant shift in both NHS and political culture: for the past

decade of ever-increasing funding, quantity in the NHS has sometimes been confused with quality.

The success of the health service has been measured by the public and politicians not on the

standard of treatment patients receive (especially those with long-term chronic conditions) but in

the fall in waiting times and the numbers of hospitals that have been rebuilt.

Responding to so great a challenge may seem a trick too far, but two factors give cause foroptimism. First, the unprecedented rate of real terms growth in health spending of 7% year on year

1Ham, C. Health Policy in Britain, 2009

2Abel-Smith, 1964, p.480

3From Klein, The New Politics of the NHS, 2006 p142

4Henrys world healthcare spending diagram any ideas?!



since 1999-20005 renders it reasonable to believe that efficiency gains might be realised within the

system. This will require a challenging look at whether NHS resources have been spent wisely in a

time of plenty: were billions of pounds spent on expensive PFI deals for new hospitals when they

could have been used to fund less glamorous, but equally important, improvements in community

care? If the benefits of increased funding have been properly measured and recorded, it should be a

relatively straightforward job to keep in place that spending that has improved performance, whilstreducing expenditure in areas that have delivered fewer benefits. (Notwithstanding an important

debate on whether NHS productivity can be measured in the same way that it might be for a

business, given that many of the social outputs of the organisation, such as better long-term health,

may only materialise years into the future.) A conventional analysis of reducing NHS productivity is

supported by Office for National Statistics data that shows that while inputs into the NHS have risen

consistently since 1999 (with spending doubling in real terms since that year, as shown in the table

below), outputs have failed to keep track, resulting in a decline in productivity in the NHS between

2001 and 2008.6 In fact, the ONS calculates that NHS productivity fell by 3.3% between 1995-2008

and 0.7% in 2008.7 On the other hand, commentators such as Donald Berwick of the International

Healthcare Institute question the calculations that the ONS has made8. But in any case, the Coalition

Government is committed to current spending levels, and it is worth noting that healthcare spendingas a proportion of GDP is still lower in the UK than in almost any other developed nation. OECD data

puts it at 8.7% of GDP for 2008, compared to 11.2% for France, 10.5% for Germany and 16% for the

United States9, despite a pledge by Tony Blair in the early days of 2000 to bring health spending up

the European average.

However, the rate and direction of organisational change has led to the occurrence of a series of

perverse incentives within the healthcare system: incentives that are not aligned with one or other

(or both) of the National Health Services quality and cost objectives. In the pursuit of a better focus

on local care needs, power has rightly begun to be devolved from Whitehall to more local NHS

organisations,10 the best example being the invention of NHS foundation trusts in 2002. Foundation

trusts have intended to have more incentives to drive out inefficiencies and generally provided

higher quality care than NHS trusts that have not achieved foundation status an assessment borne

out by the 2008-2009 annual health check of all NHS Trusts by the Healthcare Commission (now the

5The Kings Fund & Institute for Fiscal Studies. How cold will it be? Prospects for NHS funding: 2011-17. John

Appleby, Rowena Crawford, Carl Emmerson. July 2009. 6

http://www.statistics.gov.uk/articles/economic_trends/ET613Lee.pdf 7

ONS, Public Service outputs, inputs and productivity: Healthcare. Available from

http://www.statistics.gov.uk/articles/nojournal/healthcare-productivity-2010.pdf 8

Berwick, D. Measuring NHS productivity, in BMJ 2005:330:9759

From http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html10

Shifting the Balance of Power (Department of Health, 2001)



Care Quality Commission).11 The alignment of clinical and financial decision-making, and of

incentives with quality outcomes, will be the holy grail of health policy over the next two or more

parliaments.

In this report we highlight where incentives in the current system are misaligned. Huge spending

increases on the NHS have undeniably delivered an increase in output, but they have not delivered

an overall increase in productivity (the ratio input:output). New payment mechanisms have

delivered an increase in throughput of patients, but they have also delivered a piecework industry

where providers are paid a national average price for episodes of care individual procedures -

rather than packages of care, or better still, long-term care outcomes. In effect, provider trusts are

incentivised to focus on the quantity of procedures carried out, and not on the quality of the overall

treatment and its impact on the long-term health of the patient. This new model may yet prove a

step in the right direction if it is used as an encouragement to incentivise efficient use of NHS

resources and is reformed to remove the perverse incentives that this report will set out, but if

managed poorly could yet prove to be the defining moment when British healthcare moved towards

a fee-for-service model of healthcare provision, in which a piecework industry performs thousands

of unnecessary tests, diagnoses and medical procedures and shows scant regard for prevention orlong-term care planning. Such a system would begin to resemble that of the United States, where a

piece-meal industry consumes 16% of GDP to provide a service that is notoriously far from universal.

So the reform programme is incomplete, as the NHS architecture is still replete with perverse

incentives that adversely affect both the cost and quality of care. Before we examine them we must

first understand the system architecture and how the reforms of the last decade have changed the

way the NHS operates for better and for worse. There have been encouraging signs in recent years

of a system moving in broadly the right direction. Alan Milburns introduction of foundation trusts in

2002, with their financial independence and freedom from Department of Health interference, and

the implementation of Payment by Results in 2004 which this report will refer to as the tariff

being the two most notable contributions to developing a freer, more innovative health service.Progress is slow however, and worse than that, it is regularly contradicted by top-down

management decrees that have the potential to do serious damage to a system that simply isnt the

integrated national service that once was envisaged. Edicts from above (and pressure to meet

centrally dictated targets and blanket policies) do not sit comfortably with local health economies

that are striving to achieve a step-change in the culture of service delivery, not to mention quality,

by focusing on local demographics and adapting national health policy to meet local circumstances.

As noted in other Policy Exchange publications, the style of government that gives the impression of

doing something can be understood as a reaction to perceived public pressure.12 Yet systemic

resistance to change from a number of different fields and political protectionism around the NHS

means that any big policy announcements on the NHS are almost inevitably infused with politicalposturing, and are not in the interests of sustainability or indeed patients. The need for vision and

leadership in the NHS is as clear as it ever has been. However a convoluted debate reaching public

ears combines on the one hand acknowledgements of the paramount importance of the

independent sector in providing contestability and choice to commissioners, and on the other hand

11 http://www.cqc.org.uk/guidanceforprofessionals/nhstrusts/annualassessments/annualhealthcheck2005/06-

2008/09.cfm 12

Future Foundations



scaremongering about the Tories privatisation by stealth agenda a mantra no less popular now

than it was in the Eighties. In practice, a pragmatic combination of the two may well turn out the be

the way forward. The picture is further confused by vested interests amongst other would-be

centres of leadership, with the BMA for instance sticking steadfastly to an anti-reform agenda that

seemingly prioritises the income-to-effort ratio of General Practitioners over patient outcomes.

NHS architecture

The overriding memory of the NHS in the 1990s, before the huge increase in health spending took

effect after the year 2000, was one of lengthy waiting lists and waiting times for both GP

appointments and hospital treatments. As the graph below depicts, whilst the number of patients

waiting over a year for treatment fell during the course of the decade, waiting lists kept rising to

reach their highest level ever in 199813, when 1.29m patients were waiting for treatment. Arguably

the New Labour government was slow to respond to the need for NHS reform, despite famously

proclaiming in 1997 that there were only 24 hours to save the NHS, and a succession of difficult

winters that placed the service under seemingly intolerable strain. Eventually, a fortnight into the

new century, on January 16th 2000, Tony Blair appeared on the BBC show Breakfast with Frost and

announced that NHS spending would be increased to the EU-15 average14, a pledge which lead to

the interview being dubbed the most expensive breakfast in history.

Hospital Waiting Lists in the 1990s15

In a resource-limited system, waiting lists were commonly seen as the mechanism for rationing.

However work by Martin et al (2003) has found that NHS capacity (or the lack of it) in the 1990s (in

terms of staff levels, theatre capacity etc) had little empirical impact on waiting lists, and that

waiting lists were better seen as a composite of local problems that cannot necessarily be

13BBC News, NHS waiting lists hit record high. http://news.bbc.co.uk/1/hi/health/97925.stm, accessed 18

October 2010.14

BBC News, Blair admits NHS is underfunded. http://news.bbc.co.uk/1/hi/health/605962.stm, accessed 18th

October 201015

Adapted by the authors from House of Commons Research paper 99/60: Hospital Waiting Lists and Waiting

Times. Available at http://www.parliament.uk/documents/commons/lib/research/rp99/rp99-060.pdf

0

200

400

600

800

1000

1200

1400

J a n - 8 8

J a n - 8 9

J a n - 9 0

J a n - 9 1

J a n - 9 2

J a n - 9 3

J a n - 9 4

J a n - 9 5

J a n - 9 6

J a n - 9 7

J a n - 9 8

J a n - 9 9

Hospital waiting lists

('000s)

Over 1 year ('000s)



attributed to any obvious disparity between supply and demand16. Regardless, the doubling of

health expenditure in real terms to £102 billion in 2009-1017 coupled with the progressive waiting

time targets from 18 months to a total of 18 weeks from referral to treatment have brought average

waiting times down. As the spending taps were turned on, so the use of waiting lists as a rationing

mechanism was removed, meaning more patients treated more quickly. To an extent, this can be

explained by a shift in rationing decisions to a more scientifically-based (not to mention politicallyindependent) source, the National Institute for Health and Clinical Excellence (NICE). The coalitions

health policy sees NICEs rationing responsibilities moved to GP consortia, following the earlier

undermining of these powers by the development of a £50m cancer drugs fund. (It may be that the

consortia, wary of being seen to recreate so-called postcode lotteries, decide to buy in these

services from NICE anyway.) The time is therefore ripe to consider the impact on the structure of the

NHS that has resulted from the policies put in place throughout the last decade to alleviate the

pressures on the service, and ensure the most efficient use of the unprecedented increase in

spending that the health service has received.

The pricing mechanisms (in particular Payment by Results) that accompanied the rise in NHS

spending have also lead to system fragmentation, and it is this that arguably characterises patientexperience of the NHS in the present day. With a landscape for competition developing at multiple

stages in the patient journey (both at the acute level and increasingly at the primary care level, in

particular between GP practices), as well as with increasing financial independence for NHS

organisations, which crucially, compete with one another for patients and therefore funds it is

perhaps of little surprise to some that the handoff of patients between these organisations should

sometimes be awkward. The current system architecture and funding flows dictate that Primary

Care Trusts pay hospitals for day-to-day decisions taken by independent General Practitioners or

acute hospitals themselves. Clinical and financial decision-making are divorced, a situation that the

2010 White Paper intends to tackle by handing financial responsibilities for commissioning to the GS

who gate-keep access to the NHS. There is a cost conundrum 18 to be squared: increasing morbidity

is materialising as a burden so great it may yet threaten the health service with bankruptcy, despite

the unprecedented financial investment in health. Such a finding is not entirely unexpected:

research has shown that improvements in healthcare are not necessarily linked to increased funding.

Instead the system must be reformed to ensure that genuine competition exists to drive up

standards, at the same time as ensuring that patients receive long-term care for chronic conditions.

Organisation

The NHS in England is controlled and administered by Parliament and the Department of Health

(DH). The Secretary of State continues to take political responsibility for the service, although the

coalition agreement has promised the creation of an independent board to oversee the

commissioning process. It is, however, hard to imagine that Parliament and politicians will relinquishcontrol of a service that amounts for such a large chunk of public spending, and the situation is

reminiscent of the establishment of an NHS Management Board following the Griffiths Report of

1983 which was promised to be independent but brought back under government control within a

16http://www.bmj.com/content/326/7382/188.1.full.pdf

17House of Commons Health Select Committee (2010), Public Expenditure on Health and Personal Social

Services 200918

Atul Gawande article, from http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande



year19. Ten Strategic Health Authorities (SHAs), mostly coterminous with the nine Government

Offices Regions20, coordinate local operations through 152 Primary Care Trusts (PCTs). The SHAs are

responsible for coordinating the strategies of the Primary Care Trusts and hospitals in their regions.

However the 2010 White Paper on Health, Equity and Excellence: Liberating the NHS, will see SHAs

abolished in 2012 and PCTs the year after, to be replaced by GP commissioning consortia. Current

intelligence suggests that these GP consortia, which will not be subject to geographical limitations,will number around 200-300.

According to the NHS Information Centre, the NHS today has a workforce numbering 1.43 million

people21 a number which leads some commentators to label it the third largest employer in the

world after the Chinese Army and Indian Railways. However, this contributes to a false picture of the

make-up of the NHS as an integrated, unitary organisation. Instead the purchaser-provider split, set

in motion by the Thatcher government from the 1989 White Paper on the NHS, has seen a move

towards increasing independence for providers, a greater role for private providers and

responsibility for commissioning moving between different organisations, most recently PCTs.

All NHS services in England are either commissioned or provided (or in some cases both, such as GPpractices involved in Practice Based Commissioning) by NHS trusts. Each NHS trust is a separate

entity with its own degree of independence, with foundation trusts fully independent from the

19Klein, the New Politics of the NHS, 2006, p118

20The South-East region has two Strategic Health Authorities: South East and South Central

21NHS Hospital & Community Health Service (HCHS) and General Practice workforce as at 30 September 2009,

http://www.ic.nhs.uk/statistics-and-data-collections/workforce/nhs-staff-numbers/nhs-staff-1999--2009-

overview



Secretary of State, and other trusts less so. Some NHS services are delivered by private contractors

not least General Practitioners (40,269 28,607 of whom are GP practice partners and 7,310

salaried GPs22) and their Practice staff (206,602)23, who are counted on the official NHS staff roster.

GPs are interesting because like PCTs they can both provide and, in the case of Practice-Based

Commissioners, commission services. This means holding at least a notional budget and deciding

from where to purchase services on behalf of patients. The 2010 White Paper, Equity and Excellence:Liberating the NHS, envisages commissioning provision being moved from PCTs (which will be

abolished in 2013) to GP consortia, building on this previous experience.

Commissioning of NHS services

Commissioning is a complex business which ensures that the health services provided in an area

meet the needs of the local population. Commissioners (currently PCTs, but from 2013 GP consortia)

are funded directly by the DH to commission services for their locality from primary care (GPs, NHS

dentists, opticians, etc.), secondary and tertiary care (hospitals) and mental health services. They

receive a capitated funding allocation from the Department of Health, which is adjusted for local

needs, local labour market costs and, most importantly, demographics. In previous work24, we have

shown how this allocation is largely down to Ministerial discretion, and proposed a new simplified

funding formula based on age and postcode that could be used to incentivise providing healthcare

services to areas of deprivation where need is greatest. PCTs, in conjunction with

PricewaterhouseCoopers, have developed the commissioning cycle, which attempts to provide a

structure for the what, why and how of commissioning services. It breaks the process down into

three basic components:

y Assessing long-term population health needs and identifying gaps in services

y Confirm 5-year commissioning plan and implement provision contracts

y Monitor performance of chosen providers against key indicators25

22NHS Information Centre:

http://www.ic.nhs.uk/webfiles/publications/workforce/nhsstaff9909/General_Practice_Bulletin_1999_2009.p

df 23

http://www.ic.nhs.uk/webfiles/publications/workforce/nhsstaff9909/General_Practice_Bulletin_1999_2009.

Tables.xls 24

Which Doctor? Putting patients in control of primary care. PX 201025

Adapted from http://www.iow.nhs.uk/index.asp?record=968



Primary Care Trusts

The role of the 152 primary care trusts (PCTs) is not understood by the public they serve an

average PCT serves 330,000 people. Polling research by Ipsos MORI for the East Midlands Strategic

Health Authority showed that of 1,814 people interviewed in the East Midlands between October

2008 and May 2009, only 6% were able to give the correct name of their PCT.26 Perhaps to a certain

extent this is due to the constant upheaval such organisations have experienced over the past 15years.

But the function of PCTs is an important one. They are responsible for commissioning or otherwise

delivering health services on behalf of the local population, from other trusts or from the

independent private and voluntary sectors. Everyones PCT is responsible for both their

healthcare as a patient and for public money as a citizen. This latter point is important, too, for any

responsible citizen interested in how and where public money is spent. PCTs are responsible for

almost 20% of total government expenditure.27 Over the two years from 2009-2011 PCTs will receive

a total of £164 billion, which also equates to 5.3% of GDP over this period.28 The 2010 White Paper

for the NHS proposes the abolition of PCTs by April 2013, with their commissioning function moved

over to GP clusters. This is not an entirely new development: the use of clusters to administerpractice-based commissioning means that selected GPs and practices already have experience of

commissioning services using a notional budget. It may be, however, that in practice commissioning

support to GP consortia is provided either by private firms or redeployed staff from the disbanded

PCTs.

26 http://www.bassetlaw-pct.nhs.uk/images/stories/IPSOS%20MORI%20EM%20survey%20July%202009.pdf

27HM Treasury Public Expenditure Statistical Analyses, 2000, 2007 & 2009

28Department of Health, 2009-10 and 2010-11 PCT recurrent revenue allocations exposition book, Dec 2009



Setting out priorities for the NHS in the period up to 2008, T he NHS Improvement Plan (Secretary of

State for Health, 2004) highlighted the role of primary care trusts in commissioning care for their

populations, and made the argument for the greater involvement of GPs in commissioning services.

The importance of commissioning in the overall health reform programme was underlined further in

subsequent policy documents, most importantly Commissioning a Patient-Led NHS, which indicated

clearly that as PCTs emerged as the custodians of the health of their populations so they shouldcease to be direct providers of care, in order to focus more closely and effectively on commissioning

the right services from the best providers.29 Research has shown that PCTs are getting stronger in

commissioning ability, although in many cases the quality of commissioning talent remains below

expectations.

Even coming some twenty years after the original introduction of the purchaser/provider split,30

opposition from trades unions, born of fear of privatisation, prevented a clean split between the

purchaser and provider arms of the PCTs from occurring.31 Ministerial withdrawal from this position

left the dual commissioner-provider role intact, and commissioners faced with a conflict of interest

in the decision whether to procure services internally from colleagues and employees, or externally,

from potentially more cost-effective or better quality providers. Despite these achievements inimproving the quality of commissioning in the NHS, there is health sector consensus and cross-party

agreement that commissioning needs to improve and that power needs to be shifted away from

providers such as acute hospitals, and towards commissioners as patients representatives, thereby

enhancing the quality of care.32 GPs may prove to be more obvious candidates for this role than

faceless bureaucrats detached from the public they service, but conversely they may also be

unwilling to make difficult decisions about the future provision of popular local services, in particular

hospitals. The commissioning capability of PCTs was identified as the weak link in the NHS by the

House of Commons Health Select Committee in 201033, with weaknesses including passivity against

the strength of acute providers, a failure to improve the quality of services and a failure to change

patterns of service provision where necessary. The identified reasons for these weaknesses included

shortcomings in data collection, data analysis, and other skills, and an imbalance of power and lack

of influence levers between organisations namely between PCTs and hospital trusts.

Provision of NHS services

NHS hospital trusts

There are 169 NHS hospital trusts which are currently commissioned by PCTs to deliver secondary

care services. Some acute trusts are regional or national centres for more specialised care. Others

are attached to universities and help to train health professionals. Acute trusts can also provide

services in the community, for example through health centres, clinics or in people's homes.

However, the full service offering of hospitals varies significantly from one hospital to the next. Theymay have acute services such as an accident and emergency department, specialist trauma centre,

surgery, burns unit or urgent care unit. They may also have more specialist units such as intensive

29http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_41167

16 30

http://www.publications.parliament.uk/pa/cm200910/cmselect/cmhealth/268/268i.pdf 31

Ham, HPIB, p.6732

http://www.publications.parliament.uk/pa/cm200910/cmselect/cmhealth/268/268i.pdf p.533

Ibid.,



care, cancer centres, obstetrics and gynaecology departments and cardiology units. Some hospitals

will have outpatient departments and some will have chronic treatment units such as physical

therapy wards, psychiatric wards, behavioural health services, dentistry and dermatology. Finally,

these services will usually be backed up by a pharmacy, and often by other support units including

pathology, radiology, and non-clinical support services such as the medical records department.

Together with mental health NHS trusts, acute NHS trusts oversee approximately 1,600 hospital

buildings and specialist care centres, with many trusts running multiple hospital sites. Apart from the

fact that they all deliver a uniquely different collections and quantities of care services, all that non-

foundation NHS hospital trusts have in common is that they are all regulated by the Care Quality

Commission and report, through their regions strategic health authority (SHA), to the Department

of Health.

NHS Foundation trusts

Foundation trusts, established in 2002, deliver similar services to standard NHS hospital trusts, but

differ significantly from hospital trusts in that they are independent of the Department of Health.

Instead foundation trusts are accountable directly to Parliament, and are regulated by Monitor, theindependent financial and economic regulator. The Care Quality Commission continues to regulate

for care outcomes. The scandal around deficient levels of care at the Mid-Staffordshire Foundation

Trust will hopefully strengthen regulation of foundation trusts, preventing a focus on financial gain

and targets at the expense of patient care. Foundation Trusts can be acute hospital trusts or mental

health trusts and as of October 2010, there were 131 NHS foundation Trusts: 91 were hospital trusts

and 40 were mental health trusts34.

This independent status must be earned, and so FTs are seen as the elite group of NHS providers.

Currently a three-stage assessment seeks to establish that applicants are financially sustainable and

have strong management. Among a foundation trusts main advantages are the freedom to retain

operating surpluses, freedom to plan how it will invest to meet national targets, freedom to borrow

commercially and freedom to retain the proceeds from the sale of assets. The corollary is of course,

that a foundation trust must also be free to fail, and the DH has a failure regime in place. Trusts can

also lose foundation status. A membership, recruited from the trusts patients, staff and members of

the public, elects a board of governors whose responsibility it is to ensure this does not happen. The

result is an organisation free to pursue local efficiency savings and innovations that can subsequently

be reinvested in providing better care for patients. According to the Care Quality Commission

annual health check, foundation trusts provide higher quality care than NHS trusts that have not

achieved foundation status.35 The 2010 White Paper envisages all NHS provider trusts becoming

foundation trusts by 2013-4, with those that fail vulnerable to hostile takeovers by stronger

foundation trusts. Foundation trusts are given greater freedom to expand in the White Paper,perhaps branching out into other businesses or countries to earn more money which can then be

invested back into NHS care.

NHS Mental health trusts

34Taken from www.monitor-nhsft.gov.uk

35 http://www.cqc.org.uk/guidanceforprofessionals/nhstrusts/annualassessments/annualhealthcheck2005/06-

2008/09.cfm



Seventy-three mental health trusts provide mental health and social care services in England.

Services range from psychological therapies to specialist medical services for people with severe

mental health problems. These mental health services are delivered through GPs, community

services or through more specialist care in dedicated units. Mental health trusts by nature display a

high degree of integration between primary and secondary care services. The complexity of

providing mental health treatment has so far lead to delays in developing Payment by Results forpsychiatric treatment.

Instead of being paid through the tariff by HRG (Healthcare Resource Groups), mental health

services will be reimbursed through treatment clusters, following practice in other countries. The

South West Yorkshire Mental health trust has developed a system of 21 clusters which can be used

by trusts and commissioners. These clusters divide mental disorders into non-psychotic,

psychotic and organic clusters. In New Zealand, a large-scale exercise to study episodes of care

in mental health identified the patient characteristics that explain both the use of resources in

treatment and the costs of care, and lead to the identification of 42 HRGs (20 inpatient and 22

community) which could be used for reimbursement36. In this country there may be a move towards

each cluster attracting a national tariff price, however this will need to happen gradually in order toavoid provider financial insecurity. Over time, we believe that a move towards this method of paying

for mental health treatment should be adapted and adopted to incentivise long-term treatment of

chronic conditions, rather than through the tariff.

36CHE, Payment by Results in Mental Health. Avai lable from http://www.york.ac.uk/che/pdf/rp50.pdf

Payment clusters in the Netherlands

The CRE report considers the Dutch system of payment for healthcare in some detail and we

believe that it has the most to offer policymakers in the UK. Dutch citizens are obliged by law to

buy benefits packages from a choice of private health insurance providers, who commission

services on their behalf and are obliged in turn to provide services to every resident of their area.

A risk equalisation fund spreads the risk of expensive treatments in order to facilitate the

creation of genuine competition between insurers, which in turn is intended to drive

improvements in healthcare. On top of this, an Exceptional Medical Expenses Act (AWBZ in

Dutch) requires mandatory payment into a national social insurance scheme, which funds long-

term payment for the treatment of chronic and long-term conditions (including mental health),

the first year of which is paid for by private insurance. Inpatient psychiatric care is reimbursed

through 19 categories of care, and providers are paid a fixed price set both by the type of

intervention chosen and the length of care.

One disadvantage with this system is that whilst acute care is paid for by the private insurance

firms, long-term care is paid for by the AWBZ scheme. Such a divide could lead to a separation of

care when acute admissions and long-term conditions are in fact often closely linked.



Care trusts

Care trusts are another recent creation in the NHS. They bring together health services with

delegated local authority services, to commission and/or deliver integrated health and social care.

Under the Health Act 1999 and the NHS Act 2006, health authorities and local authorities have a

duty to work in partnership. These Acts laid the groundwork for new flexibilities involving pooled

budgets, lead and joint commissioning, and integrated provision. Care trusts are statutory bodies

formed when primary care trusts or NHS trusts apply jointly with local councils to fully integrate

health and social care services for the groups they serve.

NHS Community Service trusts

NHS Community Services Health Service Trusts are a new phenomenon, with the provider arm of

Cambridgeshire Primary Care Trust becoming the first community services NHS trust on 1 April 2010

after separating from the commissioning side of the organisation. These organisations provide

community services such as district nursing and physiotherapy. The PCT was one of six taking part in

the Department of Health community foundation trust pilot. While the DH guidance on transforming

community services proffers community foundation trust status as one option, NHS chief executiveDavid Nicholson has previously suggested that it should be the norm.

Independent Sector Treatment Centres (ISTCs)

Since 2003, there have been a number of Independent Sector Treatment Centres (ISTCs) contracted

to provide NHS treatment. There are 53 ISTCs providing simple diagnostic or surgical procedures, for

example hip replacements. The establishment of ISTCs has not been without controversy. Major

criticisms have been against the block contracts negotiated centrally by the Department of Health,

which contradicts the move away from block contracts implicit in the introduction of PbR. These

contracts have seen ISTCs paid regardless of the volume of activity that they have carried out.

Information provided by the Department of Health to the Health Select Committee in 2008 showedthat across the first wave of ISTCs, the cost of work carried out was 12% more expensive than the

same work carried out by the NHS.37 This is due in large part to below capacity utilisation rates. In

some cases utilisation has hit 100%, but for the period February 2008 to January 2009 total contract

utilisation in wave one ISTCs was 87 per cent of contracted volume. With a total contract value of

£275 million, it has been argued that the NHS was effectively left some £35 million out of pocket.38

Perhaps more important however, is the system effect of ISTCs. A Parliamentary Select Committee

on Health report in July 2006 identified the following objectives of ISTCs all of which relate directly

or indirectly to an increase in capacity: 1) to increase capacity; 2) to reduce spot purchase prices in

the private sector; 3) to increase choice; 4) to introduce best practice and innovation and diffuse

these through the NHS, and; 5) to stimulate reform and improve efficiency in the NHS (the grit inthe oyster argument).39

NHS Ambulance Service Trusts

37 http://www.publications.parliament.uk/pa/cm200708/cmselect/cmhealth/1190/1190w118.htm

38Ibid.

39 http://www.publications.parliament.uk/pa/cm200506/cmselect/cmhealth/934/93406.htm



Emergency medical services are provided through local ambulance services, or trusts. In England

there are twelve NHS Ambulance Service Trusts with boundaries again broadly coterminous with the

regional government offices. Demand for ambulance services across England has increased

significantly in recent years, from 2.61 million callouts in 1994/5 to 6.3 million in 2006/7. There are

currently no ambulance foundation trusts, although the London Ambulance Service is actively

working towards foundation trust status. It believes that attaining this status will allow it morefinancial independence and be able to plan for the long-term rather than work to annual targets.40

Payment Mechanisms in the NHS

Ten years ago, the NHS Plan of July 2000 introduced a direct link between the allocation of funds to

hospitals and the actual amount of activity they undertake. It stated that in order to get the best

from extra resources being introduced into the NHS there would be differentiation between

payments for routine surgery and those for emergency admissions, the impact of which will be

explored later in this report. The system of Payment by Results (PbR) is better understood as a

system of payment by volume or activity, since it introduced a standard price for many procedures

and negotiation below tariff was not permitted. This new financial system aimed to produce better

incentives to reward efficiency, to support sustainable reductions in waiting times for patients and

to make the best use of available capacity. Previously, hospitals were (and still are in some instances,

specifically certain procedures such as chemotherapy) paid according to block contracts a fixed

sum of money for a broadly specified service, with no incentive for providers to increase

productivity, because they received no additional funding for additional work.

40http://www.londonambulance.nhs.uk/about_us/plans_for_the_future/foundation_trust/why_we_want_to_

become_an_ft.aspx



(Adapted from Audit Commission & N AO , Report on the NHS Summarised Accounts 2006-07:

Achieving Financial Balance, 11 December 2007, Figure 1: NHS Expenditure in England,

Parliamentary Library Note, 2nd

June 2009)

The Payment by Results system underpinned the NHS reform agenda as a new way of reimbursing

hospitals for their work. There were three main reasons for introducing a standard price tariff, which

were:

y to enable PCT commissioners to focus on the quality and volume of services provided

y to incentivise NHS Trusts to manage costs efficiently

y to create greater transparency and planning certainty in the system.41

By 2005-06 the PbR system covered most inpatient, day patient and outpatient activity, including

both elective and non-elective services in surgical and medical specialties. Implementation in areas

such as services for patients with chronic illness and services with a strong community service

component, such as mental health and learning disabilities, has proved particularly challenging.

PbR attaches a fixed tariff to a vast number of hospital procedures, using data gathered from all NHS

hospitals. The prices for individual procedures, reference costs, were originally set at the national

average. From 2010-11 only 4 best practice tariffs have been introduced hip replacements,

cataracts, gall bladder removal, and stroke care 5 years after the Tariff was introduced.42

Payments

41http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_40053

00 42

T he NHS operating framework for England for 2010/11, Department of Health, 2009



for these treatments will now reflect the performance of the most efficient providers, in an attempt

to drive more efficiency. Such a system, applied to all procedures, would allow provider trusts to

specialise in particular procedures that they know they are able to provide at high quality and low

price.

Before PbR came into force in April 2005 for elective activity in NHS hospitals in England, financial

flows between health authorities and the NHS were dominated by block contracts. Despite the

perverse incentives fostered by block contracts, such as the lack of incentive for trusts to specialise

and reduce costs, some PCTs still revert to block contracting for a set-list of services such as

chemotherapy and renal dialysis. Under the block contract hospitals received a flat payment to care

for a patient population, based on the previous years spend and regardless of quantity or quality of

care. Budget holders are incentivised to use their whole budget, or even to exceed it, in order to

avoid budget reductions in the following year or to make spending subsequent reductions in

spending a more achievable target. If PbR is to be understood as outcome-based, or more

accurately in this case activity-based commissioning, block contracts can be understood as

process-based commissioning, whereby what is costed and sold is infrastructure and process,

regardless of the quantity or quality of care provided.

The latest Operating Framework for the NHS, for the year 2011/2012, postulates the expansion of

best practice tariffs, which are planned to continue being expanded into the following years. Tariffs

will also be set at 1% below the average, as well as having a five-ay trim point floor introduced in

order to ensure that short stays in acute services dont attract a long stay payment, which is

intended to build in a 2% efficiency requirement.

30 years of reform

In the past thirty years the National Health Service has undergone considerable changes in its

organisational structure: particularly in 1989-1991 with the creation of the Internal Market and from

2000 with the NHS Reform Programme. Significant changes to the management of the NHS were

also introduced in this period, with the 1983 Griffiths Review introducing the concept of general

management to the service. The National Health Service & Community Care Act (in England) of 1990

defined the internal market in which Health Authorities ceased to run hospitals and instead became

purchasers of care from their own or other authorities hospitals the so-called purchaser-provider

split. The providers became independent trusts, a move which encouraged competition but also

increased local differences in health outcomes. Despite promising to abolish two of the platforms of

Conservative health policy prior to the 1997 election, the Labour government under Tony Blair later

announced plans to strengthen the internal market and pursue modernisation of the NHS. An

unnamed cabinet minister has described how Blair wanted the NHS to be like the private sector

where patients could choose

43

.

The influences that lead to the Thatcher government introducing an internal market to the NHS is

subject to a number of different interpretations, all of which the historian of the NHS Rudolf Klein

has suggested played a part in the policy-making process: these range from Mrs Thatchers anger at

intense criticism of her governments stewardship of the NHS, to the large scale change processes

43Anthony Seldon, Blair Unbound, 2007 p69



implemented in large private sector organisations and facilitated by the introduction of IT theory44. A

review of the health service was chaired by the Prime Minister herself, and whilst the introduction of

alternative forms of payment was ruled out Mrs Thatcher was known to be keen on using tax relief

to encourage private involvement in healthcare (later overruled by the Treasury)45. This review was

also the first to encourage the idea of GPs acting as fundholders to purchase services from

providers.

46

The 1989 White Paper,W

orking for Patients, proposed an NHS Policy board and an NHSManagement Board. Services would be commissioned by GP fundholders and District Health

Authorities (DHA), with units on the supply side invited to become independent trusts and bid for

contracts. The NHS and Community Care Bill was passed into law in 1990, setting into motion the

move to an internal market within the NHS.4748 As seen in the table below, the number of new trusts

and GP fundholders increased each year between 1991 and 1996.

Year NHS Trusts GP Fundholders

1991 57 306

1992 99 288

1993 136 600

1994 140 800

1995 21 560

1996 - 1200

Taken from Ham, Health Policy in Britain, p41

On coming to power the New Labour government took 6 months before publishing their own White

Paper, T he New NHS: Modern-Dependable, in December 1997. The internal market was disbanded,

although the divide between providers and commissioners would remain. GP fundholding was

abolished, although the role of GPs as purchasers was expanded to a universal level49. Around 500

Primary Care Groups (PCGs), which brought together the GPs and other primary care providers in

the area, were established: these would become freestanding trusts with devolved commissioning

commitments and responsibilities to provide community services. The first such PCTs came into

being in April 2000. 28 Strategic Health Authorities were set up to replace the 95 health authorities

later reduced to 10 in 2006: the 5th

restructuring of the regional tier of management in 14 years50

. In

2002, the first plans for the development of foundation trusts were set out by Alan Milburn.

Another important change in the NHS over the period was the introduction of modern management

processes. In the 1980s, the predominant management system, such as it was, was one of

consensus management, whereby individuals (and organisations) were afforded little incentive to

take responsibility for planning service delivery or indeed for monitoring their success. This was

highlighted in the Griffiths report of 1983, which identified the absence of a clearly defined general

management function as the main weakness of the NHS.51 The report recommended that general

managers should be appointed at all levels in the NHS to provide leadership and a focus on change

44Klein, The New Politics of the NHS, 2006 p140

45Baggott, Health and Health Care in Britain, 3

rdEdition, p105

46Ibid, p107

47Ibid

48Ham, Health Policy in Britain, 6

thedition

49Klein, The New Politics of the NHS, p194

50Ham, Health Policy in Britain, p209

51Griffiths Report, 1983 p.12



for cost improvement. The paper also recommended that clinicians take more responsibility for

management decisions, recognising that up to 80% of NHS costs arise directly from clinical

decisions.52 A further move towards increased managerial influence in the NHS came with the 1989

White Paper, which put forward plans for general managers to have more say in making doctors

accountable for their performance.53

Perverse Incentives

Background

In Bill Brysons A Short History of Nearly Everything, the author describes how 19th century

paleontologists travelling to China used to pay local peasants for each fragment of dinosaur bone

that they produced. It was only after several years of making these payments that the

paleontologists discovered the wily locals were digging up the bones and smashing them into

multiple pieces, in order to maximise their payments.54 By seeking to incentivise positive actions, the

paleontologists had unwittingly incentivised behaviour with very different perverse outcomes.

Centralised economies are full of such perverse incentives, largely because they are also full of

positive actions, but they are also common in market economies. In the United States fee-for-service healthcare system, the perverse incentive for healthcare providers to ignore preventative

care is near-ubiquitous.

This isnt to say that caregivers anywhere would seek to create more business for themselves by

subjecting patients to pain or short-term care: as George Halvorson puts it, screw-ups arent

deliberate. 55 The point is that incentives should be aligned to provide joined-up, co-ordinated and,

as much as possible, preventative care and to prevent the provision of piecemeal, episodic or

reactive care. The NHS reforms in England in the early 2000s such as PbR, the 4 hour A&E Target and

the 18 week Referral to Treatment Target have been acknowledged as instrumental in reducing

waiting times. Leaving aside for a moment the near-doubling of healthcare spending over the last

ten years however, from £52 to £103 billion, what other effects have these reforms had on the

system and on patients experiences of care in England?

Increase in Hospital Admissions

In order to bring down waiting times for elective admissions, it was necessary either to drive up the

rate of throughput in the overall acute sector, expand the acute sector, or to find other ways, and

other places, to treat patients. More than 90% of patient contacts with the NHS occur outside

hospital, but 60% of the NHS budget56 more than £60 billion per annum is spent on hospitals. So

hospital admissions matter where NHS expenditure is concerned, and the challenge of relocating

treatments to less costly settings is fundamental to the question of the NHS future sustainability.

52Bury, E. et al (2007), How service-line management can improve hospital performance, Health

International, Vol.7, pgs. 54-6553

Ham, Health Policy in Britain, p3754

A Short History of Nearly Everything, Bill Bryson55

Health Care W ill Not Reform Itself, George C. Halvorson, 200956

CBI (2010), Best of health: Improving lives through smarter care.



Moving care away from the acute setting and into the community is, then, a stated priority of recent

health policy, such as the Darzi Review in 2008. Yet hospital admissions in the UK are increasing:

673,000 nationally in the year to March 2010 alone an increase of over 6%. As the graph below

shows, the five-year trend is at an annual average of 4.45%, representing an increase in total

hospital admissions of over 2.5 million since 2004. Are we getting that much sicker? That quickly?

Annual hospital admissions were 14.15 million in 2008-09, leading commentators to remark that if this trend remains unchecked the NHS is threatened with bankruptcy. 57

Source: Adapted by the authors from HES online58

The political decision to bankroll the NHS and drive down waiting lists has naturally contributed to

an increase in overall acute sector activity. In international comparisons however, the systems

displaying the greatest degree of care co-ordination tend to have the lowest levels of hospitaladmissions.59 At the core of the philosophy of Kaiser Permanente, the Californian integrated

healthcare provider, is the view that hospital admissions, particularly unplanned hospital admissions,

represent a failure of care. Incentives are aligned to promote preventative care both as the best

form of care and ensure that patients have no need to be admitted to hospital for treatment.

Admissions do still occur of course, but levels are significantly lower than in other healthcare

systems: in their 2002 BMJ paper, Feachem et al calculate an average of 270 bed days per 1000

population compared to 1000 bed days per 1000 population for the NHS (although, as we will

discuss later, this statistic has proved controversial)60. This guiding philosophy is something that

motivates all staff, underpins all processes, systems and care pathways in the organisation. It is not

something that merely influences every individual decision made by clinical staff, but is the guiding

principle of the organisation.

57Robinson, P, Are hospital admissions out of control? 2010

58 http://www.hesonline.nhs.uk/Ease/servlet/ContentServer?siteID=1937&categoryID=193 59 Feacham, R et. al, Getting more for their dollar: a comparison of the NHS with California's Kaiser

Permanente, BMJ 19 January 200260

Feachem et al 2002. Getting more for their dollar, in BMJ 324;135-43



Payment by Results may have incentivised an increase in activity in those forms of diagnosis and

treatment at which hospital Trusts know themselves to perform at below reference cost (tariff), but

it is important to note that neither has it created a fee-for-service landscape such as exists in the US.

Nevertheless, it has shifted the location of care towards the acute setting in a huge way. This is not a

sustainable trend indeed it runs contrary to stated government policy to pull care away from

hospitals and into the community.

Increase in Planned Admissions: Waiting lists and the 18 week Referral to Treatment Target (RTT)

Because healthcare in the NHS is distributed free at the point of care on the basis of need, those

with urgent needs should receive immediate attention, while those with less urgent needs are given

lower priority and wait longer most obviously as in A&E departments, where minor injuries are

commonly only treated once serious cases are dealt with. For example, most people would expect

that someone requiring cataract surgery might have to wait longer than someone needing heart-

bypass surgery. But the target-driven policy on reducing waiting lists to 18 weeks regardless of the

urgency of the procedure has led to instances of less urgent procedures being prioritised over

patients with urgent needs. The policy has also been criticised by doctors, healthcare professionals

and others as diverting resources from more serious conditions to achieve politically-motivated

goals.

From 1997 to 2000 the focus was on reducing waiting lists, while continuing at the same time

to abolish any waits in excess of 18 months. The Labour election manifesto commitment - to reduce

the total waiting list for inpatient treatment by 100,000 - was achieved in early 2000. With the NHS

Plan in 2000, the focus of the target shifted from the size of the waiting list to maximum waiting

times for treatment. The stated goal of the NHS Plan was for no one to wait more than three

months for an outpatient appointment, or six months for inpatients, by the end of 2005. 61

From 2005 to 2008 attention moved to the entire patient pathway as previously time spent waiting

for diagnostic tests such as CT scans had not been included within the target. The 18 week referral

to treatment target, announced in the NHS Improvement Plan in 2004, applied to the time patients

waited from being referred by their GP to receiving hospital treatment: By 2008, no one will have to

wait longer than 18 weeks from GP referral to hospital treatment. The deadline for meeting the

target for treating 90 per cent of inpatients within 18 weeks was December 2008. A patient right to

be treated within 18 weeks of referral came into force in April 2010.

The shift in focus, from reducing waiting lists to maximum waiting times for treatment, was widely

considered a positive step. However, this was to overlook the law of unintended consequences so

often invoked when positive actions are instigated. As the graph reproduced below clearly shows,

by forcing hospital clinicians and managers to ensure that everyone even those with the most

trivial of complaints was treated within an apparently arbitrary three month time limit, the number

of patients waiting up to 3 months with complex, high mortality specialities such as neurosurgery

and cardiothoracic surgery was actually increased . These high mortality specialities account for 97%

of inpatient deaths and 73% of all patient episodes. Operations in high mortality specialities tend to

be more complex, requiring more theatre time and a longer stay in hospital. The target then,

provides a clear perverse incentive for care providers to focus on the more numerous, less complex,

61The NHS Plan, Department of Health, 2000



less time and resource intensive specialties, in order to improve their performance statistics for

waiting times. On the flipside, the targets may lead individual acute trusts to proactively specialise in

these complicated procedures knowing that they will be able to provide high-quality care at below-

tariff prices. Such a policy would benefit world-class specialist trusts, such as the Royal Marsden

cancer hospital, at the same time as driving care out of less sustainable general hospitals.

Source: Department of Health KH07 data returns. Analysis by Professor Sir Brian Jarman, Imperial

College, London.

By effectively according the treatment of high mortality specialties the same or less priority than

lower mortality specialties, the target has caused more patients with these complex conditions to

have to wait.

Specialties are divided as below:

200,000

220,000

240,000

260,000

280,000

300,000

320,000

340,000

1 9 9 8 Q 2

1 9 9 8 Q 3

1 9 9 8 Q 4

1 9 9 9 Q 1

1 9 9 9 Q 2

1 9 9 9 Q 3

1 9 9 9 Q 4

2 0 0 0 Q 1

2 0 0 0 Q 2

2 0 0 0 Q 3

2 0 0 0 Q 4

2 0 0 1 Q 1

2 0 0 1 Q 2

2 0 0 1 Q 3

2 0 0 1 Q 4

2 0 0 2 Q 1

2 0 0 2 Q 2

2 0 0 2 Q 3

2 0 0 2 Q 4

2 0 0 3 Q 1

2 0 0 3 Q 2

2 0 0 3 Q 3

2 0 0 3 Q 4

2 0 0 4 Q 1

2 0 0 4 Q 2

2 0 0 4 Q 3

2 0 0 4 Q 4

2 0 0 5 Q 1

2 0 0 5 Q 2

2 0 0 5 Q 3

2 0 0 5 Q 4

2 0 0 6 Q 1

2 0 0 6 Q 2

2 0 0 6 Q 3

2 0 0 6 Q 4

2 0 0 7 Q 1

2 0 0 7 Q 2

2 0 0 7 Q 3

N u m b e r o

n w a i t i n g l i s t u n d e r 3 m o n t h s

Number of patients waiting less than 3 months in high and low mortality specialties,

England 1998 - 2007

High mortality specialties Under 3 months

Low mortality s pecialties Under 3 months

March 2000:

Maximum waiting

time for treatment

18 months.

March 2002:

Maximum waiting

time for treatment

15 months.

March 2005:

Maximum waiting

time for treatment

6 months.

September 2008:

Data no-longer

collected.



High mortality specialties

(specialties with greater than 1% inpatient

mortality in 2004/05)

Low mortality specialties

(specialties with less than 1% inpatient mortality

in 2004/05)

General surgery

Trauma & orthopaedics

Neurosurgery

Cardiothoracic surgery

Critical care medicine

Gastroenterology

Infectious diseases

Haematology

Palliative medicine

Cardiology

Clinical oncology

Ear nose & throat surgery

Urology

Plastic surgery

Ophthalmology

Oral surgery

Surgical dentistry

Dermatology

Rheumatology

Paediatric dentistry

Orthodontics

Oral and maxillo facial surgery

By March 2005, the number of patients waiting up to three months with high mortality speciality

conditions under the 3 month target was higher than when the Government began its war on

waiting in 1997. This number continued to rise until March 2007, at which point the Department for

Health ceased to collect data by specialty, releasing this statement: the change has taken place in

order to reduce the overall burden to the NHS of submitting data centrally. Waiting time data by

hospital speciality had been collected and published by the Department of Health since 1987.

Increase in Emergency Admissions

An unplanned or emergency admission represents the unexpected and usually sudden

destabilisation of a patients condition to such an extent that they require immediate hospitalisation.

Emergency admission to hospital represents a very unwelcome disruption to daily life, and to the

lives of the patients families. People admitted into hospital in this way usually have little time for

choice, nor the control, autonomy and self determination that go with it. So from the patients

perspective, unplanned admissions are highly undesirable. They are also costly to the NHS more so

than elective admissions. So from the perspectives of both quality and cost, unplanned admissions

are to be avoided. And yet they are going up: unplanned admissions increased by 11.8% to 5.01

million between 2004/2005 and 2008/200962.

The 2010-11 Operating Framework seeks to address this with a reduced, marginal 30% tariff for

readmitted patients over the number that trusts performed in the same period two years previously.

Building on this, the 2011/2012 framework sets out that acute trusts will not be paid for emergency

readmissions within 30 days of discharge. All other readmissions will be the subject of locally-agreed

62 H ospital Episode Statistics 2004/5, Department of Health http://www.hesonline.nhs.uk



targets to reduce them by 25%. However it is too early to say what effect this measure will have, or

indeed what new perverse outcomes might develop from this latest intervention. The latest research

from the Health Service Journal in October 2010 estimated that acute trusts lost out on £90m of

funding from the reduction in funding for emergency admissions, with some trusts seeing a rise of

over 20% and therefore losing out on £1.5m during the quarter from April 2010, compared to an

average of £750,000

63

.

Admissions through Accident & Emergency

On a personal basis, emergency admissions to hospital are by definition unpredictable and

unexpected. However at a system-wide level there is an extent to which emergency admissions can

be predicted; the question is whether the system has been properly set up to cater for them. Such

admissions account for approximately one third of all admissions. As discussed in the preceding

pages, it is vital that the NHS gets a firm grip on the increasing trends in emergency acute

admissions. The graph below shows that a majority of such admissions come into acute trusts

through A&E departments, and anecdotally staff in A&E departments will know when these are

more likely to happen (Friday and Saturday night, for obvious reasons, with Monday often being the

busiest day of the week due to patients not seeking help over the weekend). In 2008-09, there were

13,794,072 attendances recorded in A&E HES. Of these, 3,379,694 (25%) arrived by ambulance,

compared to 2007-08 when 2,867,180 (23%) of patients arrived by ambulance an increase of over

half a million (512,514) attendances by ambulance64.

63HSJ , 28 October 2010

64 A&E Attendances England Experimental Statistics, HES Online.



Adapted by the authors from Department of Health65

and HESonline66

statistics

The above graph clearly demonstrates that admissions through A&E are the driver of the increase in

overall emergency admissions. But what is driving the increase in admissions through A&E? The 4

hour A&E target has played a significant part. The A&E target charges hospitals with ensuring that

patients attending A&E departments should be admitted, transferred or discharged within four

hours. It was introduced in the NHS Plan of 2000 and came fully into force in England at the end of

2004. A hospital is deemed to have met the target if 98 per cent of patients are dealt with within

four hours. Studies have shown that the target causes a huge flurry of activity for each individual

patient as they approach the four-hour threshold, with a substantial proportion of patients being

dealt with in the last 20 minutes. The NHS own figures suggest that 96% of patients were seen

within the four hour target, with 6% of patients leaving the A&E department within the 10 minutes

before breaching the target.67

The graph below clearly shows the spike in admissions in those final

ten minutes. Since the election, the Coalition government has announced that such targets will be

officially scrapped, although they will remain voluntary.

65http://www.dh.gov.uk/en/Publicationsandstatistics/Statistics/Performancedataandstatistics/Accid

entandEmergency/DH_087977 66

http://www.hesonline.nhs.uk/Ease/servlet/ContentServer?siteID=1937&categoryID=40067

http://www.ic.nhs.uk/news-and-events/press-office/press-releases/admissions-from-aande-

peak-ahead-of-governments-four-hour-wait-deadline-new-figures-show

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

T o t a l a d m i s s i o n s

Emergency admission episodes 2002-2010

Total Emergency

Admissions

Total Emergency

Admissions through A&E



Adapted by the authors from HESonline statistics68

Between 2002/2003 and 2008/2009 emergency admissions to English hospitals rose by 21 per cent,

a total increase of 1,060,000. As we have seen, rising emergency admissions through A&E

departments (which rose by 920,000 in the same period) accounted for 87% of this rise, so it is clear

that what is happening in A&E is having system-wide impact. Data by the analysis firm CHKS shows

that more than a quarter of emergency admissions are discharged from hospital the same day. The

majority of these are patients admitted through A&E. Their data also shows that same daydischarges after admission through A&E rose by 65 per cent between 2001 and 2005, when the

target was being introduced in England. This figure suggests, as does the graph on the previous page,

that the stigma surrounding the 4-hour target being breached is leading to patients being admitted

for further treatment when this may not be clinically justified.

It is extremely difficult to disaggregate the effects of the four hour target from the effects of

payment by results on admissions through A&E, not least because both were introduced

concurrently. In practice however, Trusts have been under such enormous pressure to balance

books that an element of gaming cannot be ruled out. A&E tariffs are, per admission, considerably

higher than the standard inpatient tariff currently £117 for the high tariff, £87 for the standard

tariff and £59 for the minor tariff 69. The focus of Monitors Foundation Trust criteria on financialmanagement adds an additional professional incentive and pressure on top of these financial

incentives.70 Moreover, the achievement of the A&E target is a cornerstone of the star rating system

for assessing the performance of acute trusts by the Care Quality Commission. Failure to meet the

68http://www.hesonline.nhs.uk/Ease/servlet/ContentServer?siteID=1937&categoryID=1271

69DH website

70 http://www.cass.city.ac.uk/research/featuredresearch/RI005.pdf

-

100,000

200,000

300,000

400,000

500,000600,000

700,000

800,000

900,000

1,000,000

0 0 : 0 0 t

o 0

0 : 1 0

0 0 : 1 1 t

o 0

0 : 2 0

0 0 : 2 1 t

o 0

0 : 3 0

0 0 : 3 1 t

o 0

0 : 4 0

0 0 : 4 1 t

o 0

0 : 5 0

0 0 : 5 1 t

o 0

1 : 0 0

0 1 : 0 1 t

o 0

1 : 1 0

0 1 : 1 1 t

o 0

1 : 2 0

0 1 : 2 1 t

o 0

1 : 3 0

0 1 : 3 1 t

o 0

1 : 4 0

0 1 : 4 1 t

o 0

1 : 5 0

0 1 : 5 1 t

o 0

2 : 0 0

0 2 : 0 1 t

o 0

2 : 1 0

0 2 : 1 1 t

o 0

2 : 2 0

0 2 : 2 1 t

o 0

2 : 3 0

0 2 : 3 1 t

o 0

2 : 4 0

0 2 : 4 1 t

o 0

2 : 5 0

0 2 : 5 1 t

o 0

3 : 0 0

0 3 : 0 1 t

o 0

3 : 1 0

0 3 : 1 1 t

o 0

3 : 2 0

0 3 : 2 1 t

o 0

3 : 3 0

0 3 : 3 1 t

o 0

3 : 4 0

0 3 : 4 1 t

o 0

3 : 5 0

0 3 : 5 1 t

o 0

4 : 0 0

0 4 : 0 1 o

r a b o v e

A&E attendance disposal method 2008-2009, by 10 minute intervals

Admitted / became a lodged patient Discharged - GP follow up

Discharged - no follow up Other (inc. referred)



target can have a significant effect on the reputation of a trust, as well as the financial resources that

might be available to it in the future. It had been feared that acute trusts might up-code patients

into reclassification as emergency cases, in order to benefit from higher tariffs, however a report 71

by the Audit Commission found no proof that this was happening in practice.

A second concern with the 4-hour A&E target is that Accident and Emergency Departments have

sought to bring down the target by shifting a significant amount of the patients wait elsewhere on

the patient pathway be it pre-admission to A&E (leaving patients waiting in ambulances) or by

redesignation of patients to a Medical Assessment Unit or Surgical Assessment Unit. This tallies

with emerging evidence to suggest that the role of A&E doctors has also undergone a cultural shift

from diagnostic and treatment to a more triage-centred role. An opinion piece published in the BMJ

argued that ascribing too much importance to the four hour rule may, instead of benefiting

patients, as is intended, actually harm them and thus contradicts the first ethical principle of

medicine.72

An academic analysis of A&E waiting times by the Cass Business School noted that as A&E

completion times have improved so demand has increased73. Is there a link between this

improvement in completion times and increasing admissions to acute services? It may be that some

of this additional demand will be genuine, but some will be demand diverted from other medical

centres. GPs whose attitude might be Ill send the patient to the hospital they will get paid for it.

Emergency Readmissions

An emergency readmission occurs when a patient is admitted to hospital as an emergency within 28

days of being sent home after previous treatment. While the factors involved can be varied and

complex, readmission is considered an indicator of the quality of care in the hospital. 74 A significant

proportion of discharged patients (the national variance is substantial at 3% - 11%) return to hospital

within this period because complications have arisen since their discharge. This is typically a

consequence of acquiring infection during their hospital stay, dislocating or infecting a joint post-

discharge, or rehabilitation not progressing as planned. Around a quarter of emergency readmissions

patients are readmitted with the same Healthcare Resource Group as they were for their original

admission.75 The NHS Institute suggests that emergency readmission rates can be reduced by

tackling the key causes through planning, measuring and monitoring performance, improving

cleanliness practice, and co-ordinating with post-discharge care services.76

A major concern with Payment by Results is that until 2010 it not only provided little incentive to

pursue these care-coordination measures, but that it doubly incentivised the early discharge of

patients, first through encouraging ever greater levels of activity and throughput, and second by

rewarding hospitals with emergency admission tariffs that outweigh those of standard, elective

admissions. Emergency admissions bring trusts a higher level of remuneration that standard

admissions for similar conditions, for example. This is not to say that hospitals have actively sought

71http://www.audit-commission.gov.uk/health/audit/paymentbyresults/Pages/Default.aspx

72BMJ 2008:337:195

73 http://www.cass.city.ac.uk/research/featuredresearch/RI005.pdf

74http://www.drfosterhealth.co.uk/hospital-guide/

75Emergency readmission rates: Further analysis, Department of Health 2008

76 http://www.institute.nhs.uk/scenariogenerator/tools/reduce_readmissions.html



to game this perverse incentive, but there has clearly been enough concern at its effect for the

Department of Health to see fit to address the problem in the latest NHS Operating Framework.

The Operating Framework 2010-11 indicates significant changes to the hospital payment system, the

most significant in relation to shifting activity out of the hospital sector being the decision to limit

payment for emergency activity: trusts will receive only 30 per cent of the tariff payment for any

emergency activity beyond a threshold based on 2008/9 activity levels.77 More than 35 per cent of

inpatient episodes of care were classified as emergency cases last year (just over five million

episodes) and in some hospitals emergency cases make up more than 50 per cent of their activity.

The change is designed to force PCT commissioners and providers to collaborate to reduce

emergency admissions. However, it is unclear what incentives there are for PCTs, as any savings are

retained by SHAs.

Before the latest Operating Framework introduced 30% tariff payments for emergency readmissions,

incentives can be said to have been aligned with the interests of the Department of Health, which

wanted to bring down waiting times, but not quite so well aligned with the interests of patients, or

indeed the financial interests of the NHS and taxpayers. Readmissions within 28 days for adults aged

16 and over grew 50% between 1998 and 2008, and now account for almost 10% of total hospital

admissions (up from 7.3% in 1998)78.

Adapted by the authors from NCHOD data79

What is more, the time between discharge from the original admission to the emergency

readmission has also shortened, with the number of instances of a 0-1 day period between discharge

and readmission having risen from 22,109 nationwide in 1998-1999, to 43,560 in 2006-2007 an

77 T he NHS operating framework for England 2010-11, Department of Health, 2009

78www.nchod.nhs.uk

79Ibid.

0

50000

100000

150000

200000

250000

300000

350000

Emergency readmissions (16-74 years)

Emergency

readmissions (16-74

years)



increase that cannot be said to be a function merely of the increase in total admissions, as it far

outstrips this increase. If admission to hospital can be seen as a failure to co-ordinate care for

prevention, emergency re-admission can be seen in part as evidence of the failure of a system to

coordinate community services (and the patients family where relevant) to safely take on the care

of the person being discharged. But where are the incentives in the system to do so?

Currently the incentive under PbR is to increase activity, so if anything the incentives are aligned

towards re-admission, not to prevent it. This isnt to suggest that hospital trusts are cynically using

the discharge/readmission process as an income generation stream. Rather, this is a systemic

problem that whilst the focus of hospital managers is on a) achieving targets and b) keeping down

costs, this is an all-too-predictable systemic outcome. The other part of the equation concerns

carers, community care workers, social services and even GPs who may simply be unable to cope

with the volume of patients now being churned through the system. A further complication arises

when we consider that these may also be people concerned about hospital and ward closures, and

view themselves as doing their local hospitals a favour providing them with the revenue they know

the hospital will be able to claim under PbR.

Adapted by authors from HES Online data80

80 http://www.hesonline.nhs.uk/Ease/servlet/ContentServer?siteID=1937&categoryID=193

0

1000020000

30000

40000

50000

60000

70000

1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

Number of total emergency readmissions (England)

by Length of Stay (LoS) of original admission

0 days 1 day 2-5 days 6-10 days 11+ days



Integrated care: Case studies

The late historian Tony Judt observed that in the peak years of the modern European welfare

state...a remarkable consensus was achieved. The state, it was widely believed, would always do a

better job than the unrestricted market: not just in dispensing justice and securing the realm or

distributing goods and services, but in designing and applying strategies for social cohesion, moral

sustenance and cultural vitality.81

Since the Griffiths Report in 1983 began the introduction of

general managerialism into the NHS, this consensus has begun to break down in the health service.Successive governments have attempted to introduce an element of choice to the health service,

with John Major introducing an internal market into the NHS in 1991 (withdrawn by Labour in 1997

and then re-introduced) and Tony Blair attempting to encourage a private sector-style emphasis on

consumer choice. He wanted the NHS to be like the private sector where patients could choose, an

anonymous minister is quoted as saying82.

To cope with the increasing costs of chronic diseases such as diabetes and obesity, it has become

increasingly clear in recent years that a new structural system needs to be introduced to the NHS.

The perverse incentives set out in the previous chapter have contributed to a system in which the

ongoing cost of healthcare provision to an unhealthy and ageing population the consultancy firm

McKinsey estimates a gap of £10-£15 billion pounds between necessary and actual funding in the

next five years83

threatens to bankrupt the NHS as a whole. A future structure has to be found that

will take into account the benefits of patient choice (which, as will be explored further, can be

81 Postwar: A History of Europe since 1945.

82Seldon, A (2007). Blair Unbound . London: Simon and Schuster

83Available from

http://www.dh.gov.uk/en/FreedomOfInformation/Freedomofinformationpublicationschemefeedback/FOIrele

ases/DH_116520



realised in different ways) whilst also removing the perverse incentives that exist between primary

and secondary care providers.

For the moment, much of the focus on integrated care in the United Kingdom has focused on the

integration of primary care and social services, rather than on breaking down the perverse incentives

(often in the form of tariffs) that prevent the efficient transfer of care between the primary and

acute sectors. At a superficial level, the monolithic National Health Service is the prime example of

integrated health care, providing everything for the countrys citizens free of charge and under the

same name. But as explained earlier, the increasing independence of foundation trusts and the

divide between primary and secondary care means that this connection is becoming weaker. Some

commentators see the NHS shrinking to a brand-name under which a multitude of operators will

provide services84.

Since Feachem et al published their results of a comparison between the Kaiser Permanente system

in the United States and the NHS85, the Californian healthcare system has become a popular

foundation stone for debating the efficacy of integrated health systems. The Feachem article is

quoted favourably, for example, in the Wanless Report Securing our future health: taking a long-

term view86, the first evidence-based assessment on how the NHS can meet future health needs.

These claims, much debated, will be considered in the relevant section, but overall consideration of

the available evidence suggests that while each system has a specific context that may be impossible

to translate directly to the NHS, there are lessons from each that the health service in this country

can put into practice.

Integrated healthcare in the United States

Much of the focus on possible systems for integrated healthcare has been on the United States, in

particular selected systems such as Kaiser Permanente, Geisinger and the Mayo Clinic. As Kodner

points out, there is little agreement on what the definition of integrated healthcare actually is: like

a Rorschach test, the term is often used by different people to mean different things87. Shih et al

have identified four different models of integrated care in the United States:

y integrated health system with a health plan

y integrated health system without a health plan

y Private networks of independent providers (or a virtual network)

y Government-facilitated networks of providers88

This report will study four different integrated systems three in the United States and one in Spain.

84J Tudor Hart, The NHS will exist only as a brand name available at

http://www.guardian.co.uk/society/joepublic/2010/sep/01/nhs-political-economy-healthcare-brand-name85

Feachem et al . Getting more for their dollar: a comparison of the NHS with Californias Kaiser Permanente

BMJ 2002:324:135-4386

Available from

http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_400929387

Kodner, D. All together now: A conceptual exploration of Integrated Care. Healthcare Quarterly Vol. 1388

Shih et al. Organizing the US health Care Delivery System for High Performance. The Commonwealth Fund

2008



On top of this, integrated healthcare systems are often rooted in a particular location, ethos and

context, suggesting that it may be difficult to transfer such systems to other contexts. For example, a

brief survey of the top 20 integrated health systems89 in the US shows that nearly a third are explicit

in their religious origins and ethos, including the top-ranked Intermountain Healthcare in Utah. They

also differ in structure: some fully integrate insurance plans (commissioning) with the provision of

care, others have a specific institution (such as the University Hospital of Cleveland, a teachinghospital) around which community and acute outreach services are clustered.

Kaiser Permanente

Kaiser Permanente, the most studied of integrated health systems, has its origins in a system set up

by Dr Sidney Garfield to provide healthcare to workers on two large construction sites in California

during the 1930s. After running into financial difficulties by refusing to turn sick workers away from

his hospital, Garfield arranged for insurance firms to pay 5c a day per worker, with the option for

workers of paying an additional 5c per day to cover non-work related illness. As a result, Garfield had

an incentive to emphasise well-being and not just treat the sick and injured. He was later invited to

provide a similar service to Henry Kaisers wartime shipyards, and once the war had ended opened

his scheme to the public90.

The organisation today is made up of eight regional bodies of which the most studied is Kaiser

Permanente Northern California, which is made up of three separate bodies: the for-profit

Permanente Medical Group, of which all practicing clinicians are employee members (due to

Californian law requiring clinicians to be managed only be other clinicians), a Health Plan and a

Hospitals Foundation, which are both non-profit and share a board of directors. This in turn creates

a system in which payer (the patient via their choice of insurance plan), doctors and hospitals are

intermeshed in one structure. Patients with Kaiser insurance can only be treated within the system,

providing an inbuilt incentive for the organisation to focus on keeping patient out of hospital. In fact,

it is often commented that Kaiser sees unplanned hospital admissions as a systems failure.

KPNC patients are generally treated in out-patient primary care centres with a full range of facilities

such as clinical specialists, nurses and an A&E department. Where admission to hospital is necessary,

this is followed by subsequent care in a Skilled Nursing Facility, which is provided by independent

centres contracted to KPNC.

From the beginning, Kaiser has been incentivised to provide integrated care. In the face of great

opposition to its prepaid budget model, it had to build its own hospitals due to KP clinicians being

barred from other facilities. It has benefited from the recruitment of clinicians who are attracted to

its model of care, and has focused on preventative care to ensure patients stay out of acute services.

For example, KP has implemented Disease Management programmes for chronic diseases such as

asthma and diabetes. This service encompasses disease management, outreach and care teams,

with care backed up by a unified IT system which allows a specific focus on patients with chronic

89SDI Health LLC: 2010 SDI Top 100 IHNs. Available at

www.sdihealth.com/IHN/SDI_2010_Top_100_IHN_National.pdf 90

A History of Kaiser Permanente, available at http://xnet.kp.org/newscenter/aboutkp/historyofkp.html



conditions91. The Chronic care model that Kaiser and other HMOs have put into place involves six

steps:

y Drawing on external support for patients

y Improving quality of care in line with best practice

y Better self-care

y Proactive team working in the provision of care

y Helping patients make decisions

y Using information systems to support chronic conditions92

As part of its focus on the care of patients with chronic conditions, the organisation has developed

the Kaiser Pyramid, which charts the care approach relevant to these patients. It divides them into

three groups: the 70-80% of patients who can self-manage their conditions with access to the usual

levels of health care, those who need regular contact with a multi-disciplinary team to ensure that

their treatment is progressing effectively (High risk members), and finally a smaller group (Highly

complex members) who may require specialist support perhaps from an allocated case manager

to cope their condition, any co-morbidities and an increased risk of the condition deteriorating tothe point of needing specialist acute treatment93.

Controversy over comparisons with the NHS

In 2002 Feachem et al94 published a controversial article in the BMJ which purported to provide a

sound comparison between costs at Kaiser Permanente and the NHS. Adjusting for the different

costs and reach of healthcare in California and the UK, they claimed that healthcare costs per capita

in Kaiser and the NHS are similar to within 10% but Kaiser members spend one third of the time in

hospital compared to NHS patients95. The adjustments made included taking into account special

circumstances, the relative costs of the medical environment and the demographics of the area

served. To explain the drastic difference between bed stays, the authors put forward a number of

factors:

y Achieving real integration between clinicians and administration, allowing it to exercise

control throughout the patient pathway and thus care for chronic conditions where

appropriate

y Using this integration to reduce length of stay in acute settings

y The additional benefits of competition between providers acting as a spur to patient

satisfaction, as patients can choose to go elsewhere if they feel they arent receiving a

satisfactory service from their insurance plan or the healthcare facilities they can access

91See for example Strandberg-Larsen et al, Kaiser Permanente Revisited Can European health care systems

learn? in Eurohealth Vol 13 No 492

OECD Working Paper 30: Improved Health System performance through better care co-ordination.93

See Ham, The ten characteristics of the high-performing chronic care system, in Health Economics, Policy

and Law 5:71-90 2010.94

Feachem et al, Getting more for their dollar: a comparison of the NHS with Californias Kaiser Permanente,

BMJ 2002:324:135-4395

Ibid.



y Advanced and sophisticated use of IT96

Comparing health services in different countries is notoriously difficult, both in costs and

demographics covered and in taking into account more nebulous factors such as the social context

behind the health systems development97

. Even with this in mind the Feachem article came in for

severe criticism from BMJ readers, who submitted 75 letters responding to the article (27 in favour,

48 against)98. One of the most severe criticisms was that the notion of comparing Kaisers costs with

what the NHS would be if it was operating in the United States was invalid99

, as the costs of drugs,

staff and services in the US for example without a sense of public duty to keep clinical staff wages

down distorted this comparison and increased the NHS costs to the point of making the

comparison invalid.

The claims in the Feachem paper were subject to further academic analysis, both from a hostile and

supportive background. Even the Chief Economist at the Department of Health weighed in, to argue

that to suggest that NHS per capita costs are 60% of those in Kaiser is to give the comparison a

spurious accuracy that is not warranted by the data presented. The relative costs are highly sensitive

to assumptions made about a large range of factors.100

A highly critical paper by Talbot-Smith et

al 101102

emphasises the importance of care for the over-65s, who are more likely to place pressure on

health resources, and contends that Feachem et al were wrong to suggest that Kaiser and the NHS

provide similar services to the over-65s103

. Ham et al found in support of Kaiser with regards to care

for the over-65s, and found that total bed day use in the NHS is three and a half times that of

Kaisers standardised rate104.

Such a debate is in danger of going round in circles. There will always be objections to the use and

adjustment of cross-border data, but as the graph below shows whatever the increased costs and

limited reach of Kaisers service, there must be lessons for the NHS in how to reduce bed stays. For

example, an estimated 150,000 people a year suffer a stroke in the UK105, of whom 75% are over the

age of 65. With an estimated cost per acute bed day of £250, reducing the over-65s length of acute

96Ibid.

97Blank and Burau, Comparative Health Policy . Basingstoke: Palgrave Macmillan p.33

98BMJ 2002:324:1334-1335

99ibid

100BMJ Rapid Response, 2 February 2002. Available at

http://www.bmj.com/content/324/7330/135.full/reply#bmj_el_19161101

Talbot-Smith, A et al (2004), Questioning the claims from Kaiser, in British Journal of General Practice

54:415-421.102

One of the authors of this paper was Prof. Allyson Pollock, a well-known and sometimes hyperbolic critic of

the perceived privatization of the NHS. In her book NHS plc (London:Verso, 2004, p.73), for example, Pollock

wrote that unglamorous, complex, costly kinds of care will inevitably lose out. What foundation trust will

choose to specialize in mental health? (The foundation trust regulator Monitor says there are currently 38

mental health foundation trusts.)103

Talbot-Smith et al point out that even if many patients in this age range choose Kaiser treatment as part of

the government-funded Medicare scheme, they in fact have to pay $420 per year subscription plus the first

$250 of all drug charges plus 25% of further drug charges up to $2250, while UK citizens receive this for free

from the NHS.104

Ham C et al , Hospital bed utilisation in the NHS, Kaiser Permanente, and the US Medicare programme:

analysis of routine data. BMJ 2003:327:1257105

The Stroke Association, available from

http://www.stroke.org.uk/media_centre/facts_and_figures/index.html



stay (27.1 days) for stroke treatment to Kaisers standardised average (4.26 days) would save an

estimated £645m annually.

Length of hospital stays (days) for people over 65106

Kaiser Beacons in the NHS

There are three Kaiser Beacon trusts identified by the NHS Modernisation Agency, which have

been given support to further develop the lessons from the Kaiser system in introducing an

integrated care system, as well as facilitating visits to California and from Kaiser employees: these

sites are at Torbay, Eastern Birmingham and Solihull and Northumbria. Currently these pilots are

focusing on different services primary, acute and social care working together to ensure that

patients receive joined-up care and are only admitted to hospital where necessary.

In Torbay this project has resulted in the local PCT seeing a reduction of 10% in the mean length of

acute stay and a 6% decrease in bed days occupied, compared to a rise 3% in length of stay and a

17% rise in bed days occupied for patients from Devon PCT (outside the area covered by the pilot) 107.

However, there is little academic evidence that the decrease in bed days is causally related to the

implementation of integrated care108, or much obvious analysis of these pilots overall from the DH. A

recent study from the Nuffield Trust found that Torbay had slightly lower emergency admission

ratios and emergency admissions that resulted in zero-stay days, when compared to its nearest PCT.

However it also found that rates for the Isle of Wight (which as an island has much more leeway to

integrate its services vertically PCT, acute, ambulance and mental health trust and has done so)

were noticeably lower than its nearest neighbour109. The Birmingham and Solihull trial has also

started the process of mapping care pathways and appointing case managers for chronic conditions

106Adapted from Ham et al , Hospital bed utilisation.

107Wade, L. Integrated hospital discharge in Torbay: Results from a pilot project. Journal of Integrated Care

18:3, p37-42108

Thanks to Prof. Jon Glasby at HSMC, University of Birmingham, for this point109

Nuffield Trust, Trends in Emergency Admissions

0

5

10

15

20

25

30

NHS

Kaiser (standardised)

Medicare California

(standardised)



such as diabetes and asthma, which has seen the area receive the highest rating in their SHA under

QoF ratings110.

Geisinger

The Geisinger system provides healthcare for over two million people throughout rural

Pennsylvania, covering a deprived and ageing population in an economy depend on coal mining.Founded in 1915 by a wealthy widow, like Kaiser it was originally founded on providing integrated

care to local citizens. From the beginning it was based on the idea of group practice different

specialists working together to offer the best possible care which is the model it still operates

today. (Unlike Kaiser Permanente, however, access to its services is not linked to choice of insurance

plan its own plan only has around 235,000 members.) The organisation employs 650 clinicians (of

whom 200 work in community practices and the remaining 450 are specialist doctors), and its main

facilities are a primary care centre, two hospitals and numerous community clinics. Uniquely among

US healthcare organisations, Geisingers clinicians are paid salaries pegged to 80% of the national

average, and then paid 20% more through bonuses not for the amount of patients they see

(creating an incentive to see more patients) but for the quality of care they provide to patients111.

This provides an incentive for clinicians to provide the right care rather than that which will allow

them to bill the most, but also means that doctors pay is in effect linked to keeping costs down.

Perhaps even more than Kaiser, Geisinger has become recognised as a model of efficient and joined-

up healthcare. In his speech on healthcare reform in June 2009, President Obama explained the

need to ask why places like Geisinger Health systems...can offer high-quality care at costs well

below average, but other places in America cant112. The system focuses on care for chronic

conditions as well as an innovative flat-fee, high-quality tariff for certain operations, allowing for the

bundling of care. It is also a national leader in using an integrated and accessible IT network to

provide back-up to clinicians. Its innovations havent cost it financially: it makes $1.5bn a year from

premiums and has a solid AA credit rating.

As T ime magazine noted in a story on Geisinger, Americans buy health care the same way they buy

furniture, clothes and food: one item at a time...physicians bill by the visit; radiologists bill by the X-

ray; hospitals bill by the day. That drunken spending has led to the familiar horror-story numbers: a

health-care system that gobbles up 16% of gross domestic product, compared with 9% in other

industrialized countries, yet leaves the U.S. trailing those countries in such critical metrics as life

expectancy and infant mortality.113 Geisinger instead focused on providing a continuous and quality

service to patients admitted for particular operations, the first example being coronary artery bypass

grafts (CABG). A planning group of clinicians turned existing guidelines into 1 or more verifiable,

actionable care processes with unequivocal definitions...each care process change was designed to

be consistent with best practices, be practical ad measurable, and be accountable to a specific

110Ham http://www.hsmc.bham.ac.uk/documents/KaiserbriefingpaperMay2006.pdf

111Anna Fifield, Financial Times, 7 Jan 2010. Innovative hospitals offer model for reforms, available at

http://www.ft.com/cms/s/0/8837e026-fbbc-11de-9c29-00144feab49a.html112

From http://www.whitehouse.gov/blog/A-Town-Hall-and-a-Health-Care-Model-in-Green-Bay/113

Kluger, J. Is there a better way to pay doctors? Available at

http://www.time.com/time/magazine/article/0,9171,1930501-2,00.html



individual.114 40 such guidelines were introduced, to ensure that all patients received the highest

care possible in all instances.

Of course, the NHS isnt affected by a piecemeal payment system driving up insurance costs. What

Geisingers focus on procedure does show is that a large, integrated healthcare delivery

system...can successfully reengineer complicated care processes to reliably deliver consensus-

derived and evidence-based best practice115. A similar focus on acute care in the NHS could use this

example to overcome the perverse incentives that exist for hospitals to focus on quantity as much as

quality. The NHS, with high levels of readmission, would also do well to home in on Geisingers

strongly-held belief that if a patient is readmitted to a hospital after a procedure or an in-patient

stay, we believe we have failed that patient.116

By changing the incentives available to primary care clinicians, Geisinger has also been able to work

to keep patients with chronic conditions out of emergency acute care. As in this country, where GPs

arent provided with the right incentives to work with patients suffering from chronic conditions117,

Geisinger found that primary care clinicians were being forced to see as many patients as possible

and not having the time to provide health management to patients. It therefore took the long-term

view that preventative care would save money through reduced acute admissions in the long-run,

and funded nurses in private primary care clinics who could work with patients. It also incentivised

doctors to take part by offering to share half of the money saved from preventing acute

readmissions. One clinic, with 900 Geisinger patients, received $320,000 in one year 118. A similar

system in the UK could see the savings made from reduced admissions moved into the primary care

sector and shared between GPs and the patient, to encourage the patient to take long-term care of

their chronic conditions. Geisinger reports that its bundling of care for chronic conditions has lead

to a 25% drop in admissions, a 23% drop in length of stay and a 53% drop in emergency

readmissions119.

Finally, Geisinger is acknowledged as a leading user of integrated IT systems to provide continuity of

care to its patients. It has had an Electronic Health Record (EHR) system in place for 14 years, with

the records of three million patients available, and has also developed the local information sharing

platform, the Keystone Health Information Exchange. Patients records can be assessed by Geisinger

employees, non-Geisinger clinicians in the community and the patients themselves. This means

patients can see their records, including lab results, email clinicians and nurses and book

appointments themselves120. This has lead to a 40% DNA rate being reduced to 5%121.

The Veterans Health Administration

114 Casale A. et al (2007). Proven Care: A provider-driven pay-for-performance program for acute episodic

cardiac surgical care, in Annals of Surgery 246:4: 613-623115

ibid116

See http://www.geisinger.org/about/healthier/index.html117

See A Spoonful of Sugar, PX report118

Abelson, R, A health insurer pays more to save, New York Times 21 June 2010. Available at

http://www.nytimes.com/2010/06/22/business/22geisinger.html?pagewanted=1119

See http://www.geisinger.org/about/healthier/62520-1%20SenateFinance%20Tstmnl-ReaderSprds.pdf 120

Ibid.121

Fifield, A. FT article



Until the mid-1990s, the Veterans Health Administration was widely seen as a failing organisation,

providing substandard care to American army veterans. However, a sustained focus on quality

improved both its mortality rates and its levels of customer satisfaction, which are now among the

highest for US healthcare services. Not only this, but it is the section of the US health system which

can be most easily compared to the NHS. The branch of the United States department for Veterans

Affairs that is responsible for providing healthcare to veterans, it runs hospitals, clinics and long-term facilities such as nursing homes across the US. Due to the demographics of the patients it

provides for (although veterans access to VHA is not a legal right), the VHA treats a more indigent

population than self-selecting private systems such as Kaiser are obliged to. One example of this is

the fact that 40% of Americas homeless men are ex-veterans, and so the VHA finds itself treating up

to 65,000 homeless patients a year122. VHA patients also suffer from much higher rates of substance

abuse and mental illness, and have a higher disease burden than the general population123.

Under the new Undersecretary for Health for the VHA (essentially the CEO) Kenneth Kizer, the VHA

began a move towards implementing a system of integrated care. The organisation was restructured

in 22 Veterans Integrated Service Networks (VISNs cheesily pronounced visions), with nearly half

the systems inpatient beds closed and a large increase in outpatient visits. VISNs were designedaround the idea of funding care for populations rather than facilities, and are typically made up of

7-10 hospitals, 25-30 primary care clinics and 4-7 nursing homes. 124This was complimented by a

move to capitated budgets125, a move to performance-related pay for top managers and a right to

fire incompetent doctors126. The administration employs around 300,000 people and has a budget in

2010 of $48bn127

.

One commentator observed that inflation and lack of funding due to efforts to reduce the federal

deficit have reduced the VA dollar to a value of 82c128. To prevent this lack of resources translating

into reduced care, the VHA has had to focus on quality management and procedure. It seems to

have worked - transplant patients using the VA have better survival rates than private and Medicare

patients despite VA treatment being much cheaper129

. As part of its focus on quality healthcare, theVHA put into place a prevention index listing 9 important checks to diagnose early major illnesses.

The graph below shows how in only a year VHA performance on these issues improved drastically

from its own performance the year before, but also lead it to overtake the national averages for

other healthcare providers.

122Kizer, K (1999). The New VA: A national laboratory for health care quality management, in American

Journal of Medical Quality 14:1:3-20123

Ibid.124

Ibid.125

Gardner, J (1998). VA on the Spot, in Modern Healthcare 28:5:39-41126

http://www.washingtonmonthly.com/features/2005/0501.longman.html127

Taken from http://www1.va.gov/VETDATA/Pocket-Card/4X6_summer10_sharepoint.pdf 128

Gorman, D. (1999). VA needs funding, not privatization in Modern Healthcare 29:5:25129

Ibid.



Adapted from Kizer, The New VA.

Effect of the reconfiguration

A number of academic papers written in the decade or so since the reform programme at VHA

suggest that the quality of medical care provided by the organisation has improved drastically. A

paper written in 2003 found that the VHA performed better than the government Medicare system

in 12 out of 13 indicators of quality of care130, a performance it put down to the principles adopted

by the VA in its quality-improvement projects, including an emphasis on the use of information

technology, performance measurement and reporting, realigned payment policies, and integration

of services to achieve high-quality, effective, and timely care131

. It has also become a national leader

in the use of information technology to back up: The Institute of Medicine notes that the VHA's

"integrated health information system, including its framework for using performance measures toimprove quality, is considered one of the best in the nation."132

Alzira

Public-private partnerships in the United Kingdom have been controversial. Private Finance

Initiatives (PFI) funding of new hospital buildings has been seen as burdening the NHS with

exorbitant costs, and as noted earlier some commentators believe that the health service has had a

raw deal from the funding of ISTCs (Independent Sector Treatment Centres), for which they believe

the NHS has negotiated inefficient contracts and lost money as a result.

In Spain, the Valencia Health Department (VHD) has trialled a new PFI model which contracts a

private company to provide primary and acute care for a set amount of money. Spanish health care

has been decentralised in recent years, down to the countrys 17 regions, which allows an element

130Jha, A et al (2003). Effects of the transformation of the Veterans Affairs Health Care system on the Quality

of Care, in New England Journal of Medicine 348:2218-27131

Ibid132

http://www.washingtonmonthly.com/features/2005/0501.longman.html

0

10

20

30

4050

60

70

80

90

100

Influenza

immunisation

Breast cancer

screening

Colorectal

cancer

screening

Tobacco

conselling

VHA 1996

VHA 1997

Non-VHA 1997



of freedom between regions as long as healthcare falls within a national legislative framework.

These regions are then divided up into health areas, which provide healthcare facilities and planning

for populations of around 200-250,000 people. One of these areas, the Alzira department, lacked a

local hospital despite commitments to build one dating back to the early 1980s. To rectify this, the

VHD explored different methods of funding the new facilities and settled on what has since become

known as the Alzira model. In effect, provision of the entire health system was contracted out to acompany founded by a private insurance company and two savings banks, called UTE-Ribera. It was

originally contracted to provide only acute services, but in 2003 the contract was renegotiated to

hand the company responsibility for primary and acute care.

Funding

The Hospital de la Ribera is paid an annual capitated budget per citizen, which is adjusted each year

to reflect the annual increases in the regions health budget. This meant that the annual fee in 2008

was 578133, which is about 20% less than the equivalent costs in directly-run public services. The

firm is allowed to keep profits of up to 7.5% of turnover, after which the remaining profits are

returned to the government, and in return has invested 68m in new facilities 134. Furthermore, if

patients choose to go elsewhere for treatment the private company is required to pay 100% of their

treatment costs, but is only reimbursed for 80% of the cost of treating non-departmental patients in

its hospitals this acts as a deterrent to the company using its facilities to attract patients from

elsewhere. As a result of the new contract, the VHD has effectively organised a risk transfer to UTE-

Ribera, meaning that its budgets can be pre-determined (as money follows the patient) and

therefore controlled. A commissioner from the VHD is based in the hospital full-time, to retain public

control over the healthcare offered.

Facilities

UTE-Ribera has built a new 301-bed hospital in the area, as well as a new primary-care centre. Once

the concession is up after 15 years, the company is required to hand the buildings and equipment

that it inherited over to the VHD, in the same audited condition as it was given them: this

incentivises the company to keep them updated. The money follows the patient ethos gives the

company an incentive to invest in ensuring that patients receive the best level of care possible (as it

may have to pay for more expensive care if they seek to go elsewhere). It also encourages direct

investment in preventative care, as the company will not receive extra payment for patients who

require expensive healthcare due to poor health. The companys investments include:

y No barriers between primary and acute care

y Investment in facilities such as MRI scanners and diagnostic equipment which a state-run

facility may not have been able to afford

y Reduced waiting lists and choice of surgery times (from 8am to 10pm, compared to many

public hospitals where operations end at 3pm)135

The purchaser-provider split in Spanish healthcare occurred in the early 1990s, when a report

commissioned by the national parliament reported that the health service suffered from a lack of

133Hospital de la Ribera

134From http://www.ribera10.com/english/alzira_model/02.htm

135http://www.ribera10.com/english/alzira_model/03.htm



efficiency and administrative rigidity, excessive centralization and staff apathy and lack of

involvement in formulating health policies136. The Alzira model allows the private company to bring

a number of advantages to the provision of healthcare, such as management expertise, patient

choice and a focus on patient satisfaction. 80% of the systems staff are directly employed by the

company and it is able to pay higher salaries than the state system, allowing it to employ the best

doctors.

To flatten the link between primary care and acute services, the company has attempted to

implement a flat structure in which there is no step between the two, in particular by creating

unified patient pathways and integrated medical processes. There has been an investment in

primary care facilities and specialist doctors are used as a link between primary care and acute.

Primary care centres provide specialized tests that may have been done in an acute setting, and the

companys IT system is fully integrated.

Customer satisfaction with the system is extremely high: the hospital was voted the best large

hospital in Spain five times between 2000-2005, 91% of patients considered themselves happy with

the service received and 95% said they would return to use the companys services137. On top of this,

80% were unaware of how the system was funded, suggesting there has been little controversy

about this new method of funding public services.

IT Case study: Heartland Health

Heartland Health is an integrated health system and insurance plan which provides services to an

area covering around 300,000 people, across 22 counties in Missouri, Nebraska and Kansas. It

provides a range of services, including a regional medical centre with 350 beds, 65 regional specialty

clinics, a hospice, a community health Foundation and different Community Health ImprovementSolutions. Collectively the system has 3,000 annual admissions, 60,000 emergency doctor visits and

500,000 outpatient visits. It employs around 2,700 staff including 110 physicians.

Following the implementation of an IT system by Cerner, Heartland is seen as having one of the most

advanced integrated Health IT systems in the United States. It aims to spend around 4% of its

136Taken from Euro Observer Vol 12: Number 1 Spring 2010

137Ribera presentation



operating budget and 32% of its capital budget on IT, which amounts to a total of around $16m per

year.

One of the most important driving forces behind the implementation of such an integrated system

was the need to cut down on adverse drug events, of which it is estimated there are around 2-7 per

every 100 admissions, amounting to 770,000 per years in the United States and a cost in litigation of

around $5million for every hospital. Heartland has identified where the errors involved in the

administration of medicine are taking place and identified IT solutions to ensure they are reduced:

Location of error Action

Ordering (49% of errors) Provider Order Entry system (POE)

- Point of care matching of

patient/problem/medication/dose

- Offering other advice where appropriate

Pharmacy (14%) Pharmacy IT system and robotic dispensing

system to ensure:

- Right medication

- Right dose

- Right order for the correct patient

- Controlled distribution

Administration of medicine (26%) Bar coding at bedside to ensure correct medicine

for the right patient

- Documentation system to ensure right

patient/dose/medicine/route

The aim of such a large investment in IT systems is not only to reduce clinical errors but also to join

up the patient pathway throughout Heartlands services, so improving care for patients with chronic

conditions such as diabetes. Research has shown that installation of a commercially-sold

computerised Provider Order Entry (POE), as long as the IT system is modified to fit local contextsand has clinical buy-in, can reduce the mean monthly adjusted mortality rate by 20% 138.

The goals of Heartland Health in implementing this IT system included:

y Improving patient care

y Improving working conditions for clinicians through making their jobs less complicated

y Reducing unnecessary costs which can be invested back into patient care

y Ensuring that regulatory standards are met

y Supporting research through being able to provide required information

The best IT systems are built around a clear process which begins with a set vocabulary of

standardised, structured and codified clinical concepts (such as SNOMED in the NHS), which then

feeds into providing a real-time system which allows clinicians to feed in data quickly in support of

patient care, and also supports research and analysis where necessary. With the added incentive in

the United States of healthcare providers being private companies and thus having an interest in

ensuring that chronic conditions are treated efficiently and patients kept out of expensive hospitals

138Longhurst, C.A et al (2010). Decrease in Hospital-wide mortal ity rate after implementation of a

commercially sold computerized physician order entry system, in Pediatrics



(as discussed in the previous case-studies chapter), modifying treatment patterns is one of the prime

uses of integrated health IT systems.

All staff are able to access a modified version of the patients records as appropriate, which provides

them with the relevant useful data at the point of care not just access to the patients medical

history but also information such as compliance with medication, diagnostics, test results, key events

and tracking of the patients condition over the previous 24 months. Such information is also

available to the patient, both whilst they are in inpatient surroundings and when they are at home,

and the software allows them to communicate directly with their doctor. One obvious benefit to

such a system is that patients are able to access their test results at home, another that they are

able to book appointments themselves, which reduces the number of missed appointments.

Furthermore the organisation took the decision to extend its systems to community-based surgery,

allowing it to contribute to the overall health of the area.

IT and integrated care

One of the most integrated health economies in the US has been developed in Kansas City over the

past five years. Joining up care records on a one person, one record basis between 16 differentproviders offers both challenges and benefits that can be applied to the NHS in a move towards such

integrated systems. If implemented properly, everyone will benefit: providers will have access to the

information needed to offer co-ordinated care, patients will be able to contribute to their own

healthcare and the wider economy will benefit from a healthier workforce.

Among the issues that need to be resolved are establishing who owns the records (often it is seen as

a result of an interaction between patient and doctor, resulting in access rights for both) and making

intelligent use of the mass of data available to health care providers. Used wisely, however, IT

systems can use data to force through the development of a system in which better use of

information can provide healthcare providers with the incentive to ensure that patients are treated

in the most suitable setting. Such investments are also long-term the financial benefits of

integrated care may only materialise years into the future.

Recommendations

Integrated healthcare systems have not happened overnight: as Ham quotes in his briefing paper

the key to achieving successful change is to build momentum rather than speed139.

finished report - v1 (5)

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