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Models for paying providers: The national tariff

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.

  • How are prices determined?

    Diagnosis-related groups (DRGs) are a classification system often used to determine pricing for health care services. Payment systems based on DRGs may also be referred to as ‘payment for activity’. Other uses of DRGs include hospital activity benchmarking – for example to compare length of stay – planning and management.

    DRGs were developed initially in the United States within the Medicare programme, but have since been widely adopted in most high-income countries across the world. In England DRGs are known as health resource groups (HRGs).

  • How does it apply to the NHS?

    HRGs are the basis of the national tariff for acute care in England, also known as ‘payment by results’ (PbR). There are currently over 1,400 mandatory tariffs representing around 60% of payments made to hospitals and other acute providers.

    Many services such as mental health, some specialised services and community services remain outside the scope of tariff, despite attempts to include them. These services are still paid for through block contracts.

    DRGs/HRGs are not used in the NHS in Scotland, Northern Ireland or Wales, where block contracts remain the dominant payment system.

    Find out more about block contracts

    The (phased) introduction of the national tariff in England from 2003/04 enabled NHS funding to follow patients, rather than vice versa. It was one of many reforms introduced by the then Labour government in order to promote choice and competition in the NHS.

    The dominance of the national tariff/PbR in England may diminish due to the implementation of new models of care proposed in ‘the five year forward view’. To facilitate the ‘multispecialty community providers’ (MCPs) and ‘primary and acute care systems’ (PACS) models, NHS England have developed a new payment approach that is based on a capitated, whole population budget, along with an improvement payment scheme and a gain/loss share arrangement.  

    For more information on this approach see our briefing on Payment models for integrated care: A capitated payment approach

    Find out more about capitation

    For more information on MCPs and PACS, see our briefing on Integrated provider models

    Where these new payment approaches do not apply, existing payment systems will be refined and/or continued.

  • What are the pros?

    There are a number of positive incentives inherent in DRG-based payment systems, in theory at least. As providers are paid according to levels of activity, it encourages them to treat more patients, which can lead to reduced waiting times.

    In practice, there is evidence from England to show that hospitals have increased their activity and reduced waiting times since the introduction of the national tariff/PbR.[i]

    However, the impact on waiting times cannot solely be attributed to the payment system, given other relevant initiatives such as waiting time targets.[ii] And whether or not all increased activity can be considered clinically-appropriate or necessary has not been studied.

    Another theoretical advantage is increased efficiency and system-wide cost containment. DRG-based payment systems are calculated using average costs and so this encourages those hospitals with above average costs to become more efficient, for example by reviewing and changing their clinical processes. [But they may also discourage hospitals with below-average costs from becoming more efficient.] While there is international evidence from Sweden[iii],[iv] and Portugal[v] to show increased efficiency and productivity, in England the evidence has shown improved efficiency only in line with existing trends.[vi]

    As already mentioned, the national tariff/PbR allows NHS funding to follow patients. As a result patients are able to choose between different providers. The combination of this payment system and patient choice policies should, in theory, encourage providers to improve quality, in order to attract patients. Although in practice, the evidence is inconclusive on the impact that the national tariff has had on quality.

    [i] Street A & Maynard A (2007). ‘Activity based financing in England: the need for continual refinement of payment by results’. Health economics, policy and law, (2) 419-427.

    [ii] Ibid.

    [iii] Karolinska Institutet (2012). DRGs in Sweden – A transparent and performance based payment system?  Last accessed 26 May 2015.

    [iv] Charpentier C & Samuelson LA (1998). Effekter av en sjukvårdsreform – En analys av Stockholmsmodellen [The Effects of the Stockholm Model]. Stockholm: Nerenius & Santérus Förlag.

    [v] Mateus C (2008). Casemix implementation in Portugal, In Kimberly JR, de Pouvourville G, D’Aunno T, (eds). The Globalization of Managerial Innovation in Health Care. Cambridge: Cambridge University Press.

    [vi] Audit Commission (2008). The right result? payment by results 2003-2007. Last accessed 28 April 2015.

  • What are the cons?

    There are also a number of theoretical, negative or perverse incentives inherent in DRG-based payment systems, some of which have been found in practice. The potential for providers to skimp on quality in order to reduce their costs, thereby maximising profit, is one such negative incentive.

    The ‘quicker but sicker’ phenomenon, where hospitals discharge patients too early has been found in the US[i],[ii] and Australia.[iii],[iv] The evidence does not suggest that this has happened in England however.[v]

    Another negative incentive is ‘cream skimming’ where providers seek out healthier and/or lower-risk patients, or focus on certain conditions or procedures. As with quality skimping, this is in order to reduce costs, thereby maximising profit. The scope however for cream skimming to take place in the NHS in England is limited due to referral arrangements.[vi]

    Despite the inclusion of some best practice tariffs and the ‘commissioning for quality and innovation’ framework (CQUIN), the connection between the national tariff/PbR and patient outcomes remains poor. For more information on best practice tariffs and CQUIN, see our briefing on Payment for performance

    The national tariff/PbR alongside the ‘any qualified provider’ policy enables many different providers to treat patients for different conditions or procedures, including from the independent sector, which can lead to fragmented services and care.

    In addition, by focusing on specific procedures carried out in the acute setting, the national tariff does not facilitate a more coordinated approach to health care delivery, across other sectors or parts of the NHS. This creates divisions between secondary and primary/community care and discourages the treatment of patients in out-of-hospital settings. As such it is seen as a major barrier to the development of integrated care.

    Divisions between primary and secondary care can also be created by the issue that ‘payment by results’ funding will increase in line with activity levels. Over time lead this can lead to a reduction in the health care budget going towards primary care, which primarily uses a capitated approach.

    The downside of increased hospital activity, which has followed the introduction of the national tariff/PbR, is greater financial risk and uncertainty for NHS commissioners. Finally the administrative costs associated with this payment system are high (although some view these increased costs as justified given the perceived benefits of the system).[vii]

    [i] Kosecoff J, Kahn KL, Rogers WH, Reinisch EJ et al (1990). ‘Prospective payment system and impairment at discharge. The “quicker-and-sicker” story revisited’, The Journal of the American Medical Association, 264: 1980-3.

    [ii] Qian X et al (2011). ‘“Quicker and sicker” under Medicare’s prospective payment system for hospitals: new evidence on an old issue from a national longitudinal survey’. Bulletin of economic research, 63(1): 1-27.

    [iii] WHO (2007). Provider payments and cost-containment, lessons from OECD countries. Last accessed 26 May 2015.

    [iv] Hunter C (1994). ‘DRGs and Australian psychiatry’. Australian and New Zealand Journal of Psychiatry, 28(1): 114-120.

    [v] Farrar S, Sussex J, Yi D, Sutton M et al (2007). Report to the Department of Health: national evaluation of Payment by Results. Aberdeen: Health Economics Research Unit, University of Aberdeen.

    [vi] Farrington-Douglas J (2006). From payment by results: the future for tariff setting. Last accessed 28 April 2015.

    [vii] Marini G & Street A (2006). The administrative costs of Payment by Results, research paper 17. York: Centre for Health Economics, University of York.

  • What are the implications for doctors?

    At present there are no immediate implications for individual doctors. But were there to be a significant departure from the national tariff/PbR as the predominant payment system for the acute sector in England, then this would have implications for some hospitals or other provider organisations, which could then have knock-on effects for their employees/workforce.

  • What’s the BMA’s policy on this?

    The BMA does not support the national tariff/PbR as the main way for paying acute providers in England. 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.

    We have lobbied heavily on transforming the tariff, including calling for an end to the punitive financial policies that have been applied through the tariff in recent years. These include the efficiency factor and the marginal rate rule for emergency admissions.