The Wider View

Hospital Payment Reform for England's NHS

Average ED income per patient in one hospital was $184

Robert Royce, PhD

Until the mid-1990s, hospitals in England primarily got paid by block contracts, so history was the major determinant of the income a hospital could expect. This was somewhat akin to a capitated contract — without an underlying methodology.

Unsurprisingly, there was plenty of criticism of this, and when policymakers wanted to encourage a more market-orientated approach, it became important to develop a contracting currency that reflected case mix issues.

One option was to adopt and adapt DRGs. Instead, England opted to develop its own methodology, known as health care resource groups (HRGs). This created a mini-industry and HRGs are now on Version 4. They have been used as the payment mechanism for an increasing amount of acute hospital care since 2004, and there are now more than 2,500 different HRGs in use. For the most part, the reimbursement for each HRG is set nationally, with every hospital across the country paid the same amount, aside from an adjustment called a market forces factor meant to recognize the different costs of providing care across England.

Conceptually HRGs are similar to DRGs and essentially have the same virtues and flaws. Paying hospitals via HRGs is known as payment by results (PbR), but a more accurate title would be payment for recorded activity. This probably sounds familiar, but one key difference is that a National Health Service (NHS) hospital has no opportunity to charge different rates to different purchasers. There is one rate and no opportunity for cross subsidization.

In England, the average emergency department income per patient in one of the hospitals I recently worked in was about £115 ($184). In contrast the average bill for an A&E visit in the U.S.A. has been reported at $2,168. Neither number feels sensible.

Moreover, any emergency activity that exceeds that delivered by a hospital in 2009–2010 is paid at only 30% of the usual rate. The ostensible reason for this policy was to provide hospitals with a financial incentive to avoid admitting patients unnecessarily. Despite this, emergency admissions increased by a further 3% from fiscal year 2009–2010 to FY 2012–2013. The money saved is supposed to be reinvested in admission-avoidance programs; however, evidence that reinvestment has happened is often lacking.

Tariffs, even when paid in full (payers are increasingly proactive in denying payment and imposing contract penalties) have been subject to a deflator since FY 2011–2012 to take account of efficiencies that the acute care sector is expected to deliver. In other words, the reimbursement levels for HRGs, after inflation is taken into account, are generally dropping. Yet despite the attention that is given to the pressure that PbR subjects the acute care sector to, a surprisingly large amount of care in hospitals — about 40% — relates to activity and income (e.g. teaching, research, charity, and private patients) that is not covered by PbR ( With rates subject to a continuous squeeze, the financial viability of hospitals increasingly depends on the robustness and extent of these sources of income.

Further developments

There are in essence two strands of payment reform discernable in England. One relates to the further refinement of PbR through development of best-practice payment levels for care delivered to a higher standard, and additional money for hospitals via a scheme known as CQUIN (Commissioning for Quality and Innovation), which aims to encourage the adoption of national/local policy objectives such as ensuring medical coverage and access to diagnostic services on weekends that is similar to Monday–Friday access, and provision of venous thromboembolism (VTE) and dementia screening of patients.

Currently a hospital delivering on all its CQUIN targets can expect them to provide about 2.5% of its income.

The other strand looks to move away from PbR in favor of a variety of other contract mechanisms, ranging from the development of bundled payments (as per the U.S.A.) to contracts based on clinical outcomes and even to capitation. U.S. readers will probably be unsurprised to hear that progress has been slow at best and that advocates of this approach face considerable resistance from providers to any changes that threaten their income, as well as formidable practical obstacles in terms of the data underpinning such contracts.

Resistance would probably be less if there were a more evident upside for providers in these new arrangements. Unfortunately these proposals are being made at a time of financial austerity for the NHS, and providers suspect that purchasers’ motives are less about improving outcomes than about saving money. The fate of such a potentially disruptive contracting change is made more uncertain by the desire of the government to maintain stability in the NHS — and avoid negative news headlines — in the run-up to the next election.

Another obstacle to both integrated care and innovation in the way services are contracted for has been the longstanding separation of primary care from acute care payment mechanisms. Primary care physicians (known as general practitioners in the U.K.) occupy a unique — and generally envied — space within the NHS. Most primary care is delivered by small numbers of GPs operating together as a self-employed business. They are not NHS employees. They are paid by a mixture of capitation and fees, with rates set by a national contract.

Most of their income comes from one source — the NHS. In that respect, they are part of the NHS family, with most of their income essentially guaranteed, but legally (and as far as the taxman is concerned), they are independent small businesses. Given these circumstances, it is unsurprising that many primary care physicians look unfavorably on moving to new contract arrangements with uncertain income streams that potentially involve greater work and are subject to renewal every couple of years!

There is interest being expressed by a small number of acute care hospitals in moving into primary care service provision, employing primary care physicians and setting up the U.K. equivalent of integrated health care organizations.

Whatever the direction that payment mechanisms take, the core problem is likely to remain that for many organizations, payment is going to be less than income.

Currently 14 NHS Trusts (the name for the organizations that run hospitals), which constitute about 10% of the acute care sector in England, are officially in special measures. Special measures most likely has no counterpart in the U.S. health care system. It’s the name given for placing these hospitals under an intensive external supervisory system because there is significant concern about the quality of care being delivered, the financial situation — or both. If they don’t improve, there is a threat that the organizations that run them will be disbanded and other parties invited to run the hospitals.

Hospitals in the red

Many more trusts are running an in-year deficit, although determining how many is not easy as often the true financial position is disguised by a variety of government bailouts and “support” funding. I estimate that around 50% of acute care hospitals in England have an underlying deficit. As I have previously noted in Managed Care, the government shows periodic enthusiasm for getting the private sector involved in the running of NHS services, including hospitals. The latest example would be to take over such hospitals in special measures.

In considering the commercial opportunities and risks of running an acute care hospital in England, one might want to take into account that the average emergency department income per patient in one of the hospitals I recently worked in was about £115 ($184). In contrast the average bill for an A&E visit in the U.S.A. has been reported at $2,168 ( Neither number feels sensible, and in England, fines will be imposed if a hospital cannot meet national performance standards — including £200 ($320) every time it takes longer than 30 minutes to accept the clinical handover of a patient brought in by ambulance, rising to £1,000 ($1,600) should that handover take more than an hour. You also will not get paid should the patient be re-admitted within 30 days of discharge.

Robert Royce, PhD, is European correspondent for Managed Care and an independent health care consultant.


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