Audit Commission warns on real dangers in NHS changes

The introduction of payment by results- the funding mechanism that underpins Labour's new NHS market- represented "real dangers" for the NHS in the short term the Audit Commission has warned. Even amongst the first foundation trusts, which in theory were amongst the best equipped to cope, the new payment mechanism had exposed real financial problems at Bradford and elswehere.

The Audit Commission report for local authorities and the National Health Service in England Oct 2005 reviews the experiences of foundation trusts and commissioning PCTs, as early implementers of payment by results, looking at how they have responded to the new incentives and identifying important lessons for other NHS bodies.

Four key findings have emerged:

* First, the early implementers of payment by results are, on balance, positive about the change (foundation trusts slightly more so than PCTs).

The new system offers a clearer framework for planning and managing their business. The greater level of financial risk inherent in payment by results has provided the impetus to strengthen planning, financial management arrangements, information systems and overall performance management.

In addition to this, payment by results has encouraged commissioners to focus on demand management and improving clinical pathways. Both PCTs and foundation trusts report greater clarity of roles and responsibilities; a positive change in culture and accountability and improved understanding of their business and local health economy.

However, there are still concerns about certain aspects of the policy, the speed of transition and the readiness of the rest of the NHS to implement the system. Even foundation trusts that are relatively efficient, with high bed occupancy and a low cost base are pursuing cost improvements and structural change in order to be financially viable under payment by results. This raises questions about the ability of less efficient trusts to make the much larger gains required.

* Secondly, in the first year, payment by results proved to be a more complex, time-consuming and challenging process for the early implementers than they anticipated. It requires investment of time and resources – the organisations in our sample spent approximately £100,000 each, equivalent to £50 million nationally.

It also requires clinical engagement, better planning and reporting arrangements, careful negotiation and close attention to detail. All this has meant that time and energy has been devoted to the system and its mechanics, and has not yet broadened into the expected concentration on quality of care and performance improvement. The majority of NHS bodies are only just beginning to use payment by results as a lever for change.
* Three factors have influenced the relative ease or difficulty of introducing payment by results:
o the underlying financial stability;
o the complexity of the commissioning environment; and
o the degree of preparation.

Those economies with an underlying historic deficit have found that payment by results tended to increase pressure and polarise organisational interests, leading to disputes. This is likely to increase going forward, given that the number of health bodies in financial deficit increased in
2004/05 in comparison to the previous year. Commissioners in complex economies have also found implementation more challenging.

In particular, some London PCTs struggled to manage payment by results when commissioning from the larger hospitals. They felt they lacked sufficient clout as commissioners to manage in the new environment and needed stronger strategic leadership, planning and joint working within and across health economies.

And while the early implementers have a good understanding of payment by results and its impact, those that shadowed the system in previous years and put the necessary capacity and systems in place in advance found it easier to harness payment by results to achieve their objectives.

* Finally, payment by results is exposing existing weaknesses in the NHS, in health economies and in individual institutions – underlying financial difficulties, inadequate financial management arrangements and problems with data quality. It has created instability and increased tensions between organisations.

Changes to the policy framework, late or unclear guidance and lack of attention to organisational development at the national level, particularly for PCTs, have exacerbated this. Overall, the potential risks that we identified in our earlier report have been confirmed by many organisations in the first year and will likely remain an issue throughout the transition period.

Analysis of provisional hospital activity data for 2004/05 shows little difference in activity growth or efficiency between foundation trusts and other acute trusts, although foundation trusts may have marginally improved their efficiency as measured by average length of stay. This suggests that the reported growth in activity across the NHS has been driven by initiatives other than payment by results (for example, national targets) and that expected efficiency gains have not yet been realised by the early implementers.

While it is too early to draw any definitive conclusions, there is little evidence at the system level that the new incentives have generated the positive behaviours intended.

However, the potential for payment by results to destabilise finances locally (either due to weaknesses in local arrangements or volatile activity levels) has certainly been felt. Payment by results is intended to increase risk in order to spur financial discipline and improvement. But there are valid concerns that the level of risk inherent in the current policy design, particularly given the pace of implementation and the size of the change agenda, is too great.

While national policy clearly states that all activity should be funded at tariff, a number of local variations were negotiated in 2004/05 to reduce financial instability, including the use of caps and floors on activity volumes.

While this dilutes incentives for improved productivity and stronger commissioning, the organisations involved maintain that there is little point in introducing payment by results in full if it is going to destabilise the local health economy and undermine patient services. This is especially true during the transition, while organisations are still strengthening arrangements.

There is an ongoing need to review the policy in light of the experience of the early implementers and, in particular, the approach to funding non -elective care. While there may not be a strong argument for caps on elective activity in an era of patient choice, if policy objectives are to be realised then the DH should consider alternative payment models for non-elective activity that provide incentives to control growth and enable individual bodies to better manage their risks, for example, funding capacity and paying for activity at marginal cost.

Not all of the concerns about payment by results can or should be addressed through changes to the policy framework – there are other mechanisms. The required improvements in data quality (particularly clinical coding) and the potential for ‘gaming’ or manipulation of the system for financial gain necessitate a robust framework to provide assurance on payments and behaviour and promote stability across the system. We are currently working with the DH and other stakeholders to develop such a framework.

Further, payment by results is being applied to organisations that are still developing and a clear mechanism needs to be in place to identify and deal with potential failure of either a service – for example, under payment by results a service becomes unviable and the trust wishes to close it, but the service is vital for emergency patients – or the entire organisation, where this will impact on access to and quality of patient care.

Meanwhile, the DH’s decision to defer full implementation of payment by results for non-foundation trusts until April 2006 has given trusts and PCTs more time to prepare during the current financial year, with the prospect of better risk management.

These potential advantages will be lost, however, unless trusts, and PCTs in particular, give a high priority to adequate preparation. Payment by results is as much about a change in culture as it is about incentives and payments. It requires a holistic organisational response.

Clinical engagement is particularly important and this takes time and effort. NHS bodies should actively seek to learn from the early implementers of payment by results and others that have relevant knowledge and expertise – the findings and case studies included in this report are intended to support this. NHS bodies should explore opportunities for collaboration (particularly across PCTs) in order to strengthen their capacity to manage in the new environment.

There also needs to be greater stability in the policy framework, with clear and balanced guidance communicated early. Although the tariff and overall policy design will inevitably be refined continually over the next few years, the instability of the national framework during 2004/05 and into 2005/06 created additional difficulties for foundation trusts and PCTs. Further large-scale changes will undermine planning and management in the new environment. The impact of these changes on NHS bodies needs to be assessed fully and likely changes should be communicated early.

Our key recommendations for NHS bodies and the DH are set out below. Additional recommendations are made throughout the report and a set of questions for boards to assess the readiness of their organisations for payment by results can be found in Appendix 1.

Recommendations

PCTs and trusts should:

* Review their arrangements in the areas of: organisational development, planning and analysis, data quality, partnerships, demand management and service redesign, contracting and monitoring in light of our findings and detailed recommendations . Boards should use the questions in Appendix 1.
* Ensure that there is a common set of expectations across the health economy locally, based on joint planning, agreement on high-level clinical pathways and a clear understanding of business arrangements (for example, reporting, monitoring and dispute resolution).
* PCTs should prioritise the development of robust local monitoring arrangements, recognising that the introduction of the Secondary User Service (SUS) and other developments under Connecting for Health (formerly the National Programme for IT) will not remove the need to have local arrangements in place for reporting and analysis.

Strategic health authorities should:

* Continue to review the financial impact of payment by results on each organisation and on the health economy as a whole and assess the preparedness of individual organisations in light of this report.
* Facilitate joint planning, skills transfer and organisation development across the health economy and support health economy-wide demand management and service redesign initiatives.

The DH should:

* Continue to refine the policy framework in light of early experiences, avoiding increases in complexity, keeping large-scale changes in the policy framework to a minimum and communicating intentions well in advance, to enable the system to bed in.
* Focus on organisational development to support the implementation of payment by results over the period to 2008/09, particularly to strengthen commissioning, and commit to the timely release and communication of balanced guidance and tools to NHS bodies.
* Clarify its stance on the use of local risk management strategies that are not in line with national policy, but have been negotiated locally in order to promote stability, and review the design of payment by results for non-elective care.
* Develop a comprehensive and robust strategy and framework, which meets the needs of local and national stakeholders, to provide assurance on payments and behaviour under payment by results.
* Work with Connecting for Health to review arrangements for the education and training of clinical coders and prioritise the development of coding tools that are up to date and that support the provision of good-quality data.
* Develop a strategy to identify and address potential failure of services or organisations if they become unviable in the new environment, in order to safeguard access and patient care.

http://www.audit-commission.gov.uk/reports/NATIONAL-REPORT.asp?CategoryID=ENGLISH^574&ProdID=B502F0FC-E007-4925-AD24-529C4889AD02&SectionID=sect1#