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