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Reforming NHS financial flows: payment by results

  • Launch date:
    15 October 2002
  • Closing date:
    15 November 2002
  • Creator/s:
    Department of Health
  • Audience:
    Health and social care professionals
  • Copyright holder:

Executive summary


1. This document sets out plans for fundamental changes to the way that funds flow through the NHS. The proposals include moves towards a nationally agreed set of prices, commissioning at specialty level based on volumes adjusted for casemix using Healthcare Resource Groups and a shortlist of those Healthcare Resource Groups which should be commissioned and monitored individually. The short term focus is on the commissioning of elective care between PCTs and NHS Trusts but as new arrangements in primary care develop, it will encapsulate all commissioning arrangements within the NHS.


2. Delivering the NHS Plan set out the next steps of the programme of reforms to the NHS that will deliver the NHS Plan's vision of prompt, convenient, high quality services which treat patients as partners. These reforms take place within a context of a firm financial commitment to the NHS with an annual average increase of funding for the NHS in England of 7.4% in real terms over 5 years from 2003/4. This funding offers the NHS the opportunity to grow and to deliver improved services but brings with it the responsibility to deliver demonstrable results for patients and the public.

3. As the NHS develops its financial framework and funding flows need to change. The new financial system must help maximise the benefit to patients from the substantial growth in NHS funding. Increasingly, a financial system will be needed that:

  • pays NHS Trusts and other providers fairly and transparently for services delivered, while managing demand and risk
  • supports the introduction of patient choice by ensuring that diverse providers can be funded according to where patients choose to be treated
  • rewards efficiency and quality in providing services
  • helps match capacity to demand
  • refocuses discussion from disputes over price to the volume and mix of services that meet population need and the pathway of care for patients.

4. The move to a national tariff will be phased in over the next 5 years and our proposal is to do this in the following way:


5. In the transition to using a national tariff for each HRG, we propose three key changes for 2003/04:

a. For at least 6 surgical specialties, SLAs should be set at specialty level. For these there will be a move away from block contracts, and Service Level Agreements (SLAs) should include explicit links between funding and the volume of services provided. There will be no 'block' agreements where funding is fixed regardless of the activity provided and SLAs should set out clearly how risk will be handled. Rather than being based purely on FCEs, HRGs will be used to reflect the intensity of casemix so that providers who work through a more complex workload this year than last are rewarded fairly. For now, prices in these SLAs will be determined locally rather than by the national tariff. However, we propose that the weights used to adjust for casemix will be based on national averages using national Reference Costs as a guide. The six specialties are:

  • Opthalmology
  • Cardiothoracic surgery
  • ENT
  • Trauma & orthopaedics
  • General surgery
  • Urology.

b. Some procedures are so important to the delivery of national targets that they should be the subject of specific agreements. For 15 HRGs we propose that commissioning and monitoring be at the level of the individual HRG. For instance, for cataract extraction, a commissioner will work with its providers to determine how many extra procedures it would need for its population in order to meet waiting time targets. It would then monitor through the year and where it became clear that the required activity would not be provided by the end of the year, it would be able to move funding equivalent to the shortfall to a provider with capacity. Locally set prices would apply to activity up to the level of 2002/03 planned activity. The national tariff would apply to the extra activity commissioned to meet increases in demand and reduce waiting times. It would also apply to activity that was moved by commissioners as a result of under-delivery during the year. The list of HRGs encompassed within the scheme in 2003/4 is attached in annex 3.

c. Although greater clarity and fairness in rewarding work done are necessary conditions for increasing activity and improving waiting times, they may not be sufficient. International and previous domestic experience suggests that increasing activity alone may not be enough to improve access and reduce waiting times. PCTs and Trusts will need to manage referral and admission thresholds and the priorities for admitting patients.


6. In addition to the above

  • the number of individual HRGs included in the scheme will be extended
  • health communities will be asked to use HRGs to casemix adjust their cost- and-volume SLAs for all surgical specialties;
  • health communities will be invited to act as pilots in applying the national tariff to commissioning agreements in some or all specialties.


7. The national tariff will be applied to all activity for which HRGs or other appropriate casemix measures are available. This means that almost all NHS Trust activity will be commissioned using Service Level Agreements that:

  • At specialty level, link funding to the planned volume of services to be provided and the national tariff for HRGs, adjusted for regional differences in costs;
  • Make clear how funding will be changed where the activity actually delivered, adjusted for casemix, differs from what was agreed;
  • Manage and share volume risk so as to encourage volume growth only where it is desirable for clinical and access reasons
  • Progress to full national tariff

8. In order to manage the impact on both providers and commissioners of moving to a uniform national price tariff, it is intended that the move from a provider's current price to the national tariff will be staged, probably over three years from 2005/6. Detailed analytical work is underway to assess possible financial impact on PCTs and NHS Trusts and to inform policy on the transition path.

Support/development and information

9. Service Level Agreements will be the vehicles that ensure financial flows work, that activity requirements are understood and that arrangements for risk sharing and monitoring activity are understood and agreed. To make sure that we get this vital element right, a working group of senior NHS managers is developing standardised documents including worked examples by January 2003.

10. The OSCAR system currently being delivered to commissioners is an integral part of extending the knowledge base and making information available. In addition, we will offer support where it is needed. A framework of commissioning competencies specific to the transition of financial flows is being developed to enable StHAs to carry out a baseline assessment of readiness and to focus support where it is most needed.

This consultation document sets out plans for fundamental changes in the way that funds flow through the NHS. Views are invited on a number of specific issues raised in the document, including: implementation process, pricing of activity 2003-2005, and role of StHAs, Trusts and PCTs.

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