Could payment system reform stifle NHS innovation and integration?

Amid a record-breaking elective backlog in England, NHS England has opted to flex its newly-granted financial powers by proposing a partial return to the Payment by Results system for acute care. But does this seemingly technical rewiring of the NHS’s financial flow have actual political and business salience? The answer is yes, and here is why. 

Within the internal NHS market, payment systems govern the flow of money between commissioners and providers, covering the cost of everything from a routine hip operation to a complex cystic fibrosis care package. Payment systems have proven to be a common lever for policymakers to pull when faced with the need for substantive operational change: most recently, block payments for providers gave local leaders a large degree of financial and operational security during the emergency response to Covid-19, while simultaneously providing the necessary financial backing for a host of healthcare organisations to collaborate and innovate at scale. 

Most famously, however, payment systems have been seen as crucial to backlog-busting campaigns. It was largely for this reason that the Blair government rolled out an activity-based payment system - Payment by Results (PbR) - in 2003, taking aim at stubbornly high elective care waiting times for patients. This “click of the turnstile” model provided a firm financial incentive for hospitals to deliver timely hospital treatment, contributing to a sharp reduction in median hospital waiting times from 12.3 weeks in 2003 to just 4.0 weeks in 2009.

PbR’s success in driving hospital activity is the primary motivation behind NHS England’s decision to return to this model in all but name. Earlier methods to drive elective activity through a loss-gain method have been reworked, with proposals released at the end of 2022 outlining that providers will receive 100% of tariff prices (i.e. prices for an episode of care, such as outpatient appointments or surgical operations) for activity that goes beyond that set out in contracts with commissioners and - should less activity be delivered - 100% of tariff prices will only be delivered for the activity actually undertaken. Early indications suggest that NHS providers will approve this proposed system, providing a much stronger financial incentive for hospitals to boost elective activity. 

In political terms at least, NHS England’s decision makes sense. The Prime Minister and Secretary of State for Health and Social Care are no doubt marshalling all the forces at their disposal to make a notable dent in current waiting times ahead of what could be an electoral wipe-out in 2024. But the drawbacks of PbR are not trivial, with real political and business ramifications.

The first of these concerns NHS financial sustainability and allocative efficiency. Part of the reason that PbR was watered down during the Coalition years was cost control: as highlighted by the Health Foundation in its 2021 report on payment systems, PbR takes a narrow view of cost efficiency, rewarding hospitals for delivering high volumes of activity and providing limited incentives to work with other players (community pharmacy, general practice, community care, social care) to provide system-wide, preventative measures. This lack of focus on ‘allocative’ efficiency sits uneasily with longer-term needs to institute firm financial sustainability within the wider health service. Can financially sustainable, collaborative care really be delivered when the system’s fundamentals are geared towards rewarding activity in the acute sector? 

The second of these concerns dynamic efficiency. PbR is limited in its ability to deliver ‘dynamic’ efficiency – the ability to introduce “innovations…that improve the quality of care, lower its cost or both” – a key incentive for innovators looking to partner with the health service. The time required to negotiate and deliver granular tariff codes for types of activity – such as online consultations and at-home monitoring – can act as a limiting factor for the roll-out of innovation, while simultaneously stifling the roll-out of digitally-supported solutions within ICSs. 

Thirdly, activity-based payment systems may be necessary, but they are not, in and of themselves, sufficient. In their response to NHS England’s proposals, NHS Providers were quick to point out that PbR “won’t magic up new staff” and that the system does not necessarily address the fundamental issues of patient flow and workforce shortages.  In fairness, neither NHS England nor the government has claimed that PbR can address these issues, but the question does remain as to whether new financial incentives can effectively deliver on their primary aim amid insufficient capital equipment, widespread rota gaps and staff burnout.  

In sum, although a PbR-style mechanism provides a stronger, politically-sound financial incentive to address record-waiting times, it nonetheless runs counter to both previous payment system reform measures and a decade-long drive towards integrated care. For businesses and policymakers, the unintended consequences will require close examination: the ability to deliver innovation across organisations with a tendency to silo could be seriously affected, as will the ability to drive a financially sustainable NHS in the context of a growing tax burden. Overall, despite its announcement being buried amid the intricacy of NHS policy, businesses and governments should be aware that payment system reform is far from a technical tinkering exercise.