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Models for paying providers: Block contracts

This series of briefings has been designed to help you understand the different ways in which providers can be paid for seeing and treating patients. Block contracts have been widely used throughout the UK, and continue to be the main payment system for hospitals in Scotland, Wales and Northern Ireland.

In recent decades NHS payment systems have evolved, particularly in England, where the national tariff (‘payment by results’) currently dominates payments made to the acute sector. But increasing emphasis on new, integrated models of care means that other ways to pay providers, such as through capitated budgets, may become more dominant in the future.

  • What is a block contract?

    A block contract is a payment made to a provider to deliver a specific, usually broadly-defined, service. For example, a hospital could be given a block contract to undertake acute care in a particular geographical area.

    Block contracts are paid in advance of the service being undertaken and the value of the contract is independent of the actual number of patients treated or the amount of activity undertaken. Payments are made on a regular, usually annual, basis.

    How the value of a block contract is calculated varies widely. It can be set through a measure of patient need or it may be simply based on the historical expenditure on a particular service.

  • How do block contracts apply to the NHS?

    Since the NHS was established, block contracts have been the dominant payment system across the UK. This continues to be the case in Scotland, Wales and Northern Ireland, and is unlikely to change in the near future.

    In England, the main payment system is the national tariff also known as ‘payment by results’ (PbR), which currently covers around 60% of secondary care activity. Block contracts continue to be used in some areas of secondary care in England, such as mental health services, and are widely used in community care.

    However some trusts are moving away from the payment by results system and implementing block contracts as their choice of payment system. There has been an increase in the use of block contracts in England for NHS elective care in recent years. For example, NHS Partners Network and NHS Federation found a 53.1% increase in the number of block contracts held by 89 CCGs in England between 2013/14 and 2015/16.

    Find out more about the national tariff and capitation

  • What are the pros?

    Block contracts are a timely, predictable and relatively flexible payment system. Payments are made on a regular basis, usually annually, for a set time period. Most providers of a service will be able to predict in advance what they will be paid, based on historical expenditure or through a measure of patient need.

    Block contracts also allow some flexibility as service providers know in advance how much they have to spend and the funding is not restricted to certain activity being undertaken.

    Furthermore some commissioners and providers favour block contracts because of the low transaction costs associated with the system. Block contracts are also often used where other payment methods, such as activity-based payment systems, would not be financially viable because of low activity levels or budgetary constraints.

  • What are the cons?

    An overarching concern about block contracts is the lack of transparency and accountability after a payment has been made to a provider.

    As block contracts are made in advance of a service being delivered, unexpected pressures such as increased patient demand or cost of care are not taken into account. Providers have very limited mechanisms to mitigate these pressures. An increase in patient demand or cost of care could result in providers rationing services or a decline in the quality of care as they try to manage resource constraints.

    Block contracts have also been critiqued for not incentivising improved clinical care or efficiency. Perversely block contracting means that by performing less well, and thereby attracting fewer patients, providers are able to reduce their financial pressures.

    In addition, block contracts allow no flexibility for capital finance or innovation where upfront investment is required, as this would directly take away from delivering a service.

  • What are the implications for doctors?

    At present there are no immediate implications for individual doctors. Planned reform of payment systems in England will lead to even less usage of block contracts than at present.

    In general, if payment models change significantly across the NHS, then this would have implications for some hospitals or other provider organisations, which could then have knock-on effects for their employees/workforce.

  • What is the BMA’s policy on this?

    The BMA does not have specific policy on block contracts. But we do have policy on the national tariff/PbR in England, which we do not support as the main way for paying acute providers.

    We would prefer to see a new payment model introduced that facilitates and encourages closer working between different parts of the health service, around the needs of patients.