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Making payment pay

Chief economist at the Nuffield Trust, Anita Charlesworth, considers the impact of payment reform in the NHS.

The NHS is not alone in facing a severe financial squeeze over the coming years. Across Europe, healthcare systems are coming to terms with a medium-term future of rising demand and almost no prospect of meaningful budget increases. All over the continent, policymakers attempting to respond to the situation have been testing innovations in what remains an under-researched field of health policy – the way in which hospitals and health professionals are paid for the services they provide.

The aims for reform in every national payment system are similar – to incentivise efficiency, drive performance and quality, and rebalance care away from costly inpatient incidents. A new report by the Nuffield Trust, ‘Reforming payment for healthcare in Europe to achieve better value’, looks at how different payment systems have tried to meet these goals, and the challenges facing them in policy and implementation.

Lessons from history

Traditionally, most European healthcare systems have relied on either fee-for-service, or block budget models of hospital payment. Evidence has shown, though, that pure forms of both these systems incentivise providers to do exactly what patients and budgets do not need, leading to more sophisticated systems which mix or replace them.

The two opposite extremes push in opposite directions. Block budgets encourage hospitals to skimp on activity and quality, safe in the knowledge that the money will always come in.

Fee-for-service models meanwhile lead doctors to maximise activity, and therefore income, regardless of cost. Capitation on its own, often used in primary care, has a similar effect, leading to maximisation of patient numbers without pushing services towards quality and efficiency.

Diagnosis Related Groups and controlling activity

For primary care doctors, and others working outside hospitals, the trend has been to blend different approaches, trying to balance the negative incentives created by using either alone. Looking for alternatives at the hospital level, meanwhile, has led to a shift across Europe towards paying for care through casemix adjusted diagnosis related groups (DRGs), like the HRGs used by the English Payment by Results tariff. These are usually paid out up front, rather than retrospectively, giving health professionals flexibility in dealing with patients as efficiently as possible.

Rather than tariffs, some other counties – like Germany and France – use relative weightings, and some, like Austria, ‘score’ the relative likely costs of different DRGs. Evidence suggests that DRGs are effective in reducing average length of stay in hospital, and in increasing (compared to block budgets) the level of activity in care provider institutions – which has often been seen as attractive, as in the English NHS during the push to drive down waiting times.

However, leaner times have prompted a closer look at whether pushing up levels of activity, with all that it implies for costs, is always a desirable goal. Hungary, France and Spain have tried to counter this trend by combining DRG payments with an overall cap on budgets, or a block budget applied to hospitals overall. In England, a limited disincentive to excessive activity has been the decision to pay only 30% of the tariff price for emergency admissions and readmissions above 2008/9 levels. There are also concerns that the sheer number and complexity of DRGs is becoming too large in some countries: France now recognises over 2,300.

Payment for performance

Many European countries have also looked at how payment reform can be used to drive up performance using direct incentives towards particular goals, a growing trend often known as ‘Payment for Performance’ (P4P). Putting P4P into practice has involved a series of difficult decisions about what should be incentivised, who should be rewarded, and how it can be measured. It has traditionally been mainly used for independent or semi-independent primary care doctors, where it is easier to see where responsibility lies.

Recently, however, P4P has moved increasingly into the secondary sector. Germany now withholds the full DRG payment unless hospitals perform a certain volume of cases, which is based on the level of activity which seems to maximise performance. England’s Commissioning Quality and Innovations scheme, which attaches payments to achieving local priorities, is more explicitly qualityoriented. So far, the evidence for P4P shows real promise in driving up quality. Studies in the USA, however, suggest that increases in efficiency may turn out to be elusive.

Challenges in implementation

Many of these reforms are in their early stages, and evidence is still emerging about what works best. Never in doubt, though, are the serious implementation challenges which payment innovations face across the board.

One major difficulty – as for all health reforms – is institutional and informational infrastructure. Policymakers and managers need data to create and respond to incentives, and different cultures and IT systems need to be brought together to remove the limits on innovation. Even taken in isolation, many countries lack the tools and traditions to properly monitor outcomes and efficiency.

Meanwhile, there is a real chance that many of the organisations whose balance sheets will take the brunt of the risk involved in some types of payment reform – particularly those that limit payment by activity – might simply be too small to manage it.

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