Procurement consultant: Dr Colin Connolly on PbR

The move to standardise clinical costs across the health service through Payment by Results is likely to run into problems because of continuing inaccuracies in costing clinical activities Dr Colin Connolly.

Payment by Results (PbR) is a natural progression of a whole series of reforms in both the funding and related clinical activity levels in the NHS health delivery system. Integral to the reforms is the dictum that money follows patient’s.

It is a philosophy that was first embedded in the NHS when allocations were switched from being made directly to NHS hospital trusts on an historical cost plus inflation basis through to channelling revenues through primary care trusts (PCTs). NHS hospitals in the secondary care sector now receive their income from the PCTs buying clinical services using the so-called clinical contract system.

The problems in delivering this admirable philosophy is that both the measurement of clinical activity and its associated costs have been and are still subject to wide errors. Problems are numerous, not least of which is that costing anything with the accounting system currently in use is at the very least difficult and probably impossible with any accuracy. The current system is both loaded with overheads and clinically nonspecific.

The study group attempting to cost specific clinical activity and its associated costs in diagnostic related groups (DRGs) or health resource groups (HRGs), has been engaged in its Herculean labours for fifteen years at least. Efficiency of frontline clinical services, supporting clinical diagnostic services as well as supply and hotel services on which the NHS relies have been subject in this period to continuous revolution sweating the asset’s, efficiency savings and Samuel Smiles initiatives, value for money, market testing, outsourcing, PFI/PPP and resource allocation to PCTs to buy hospital services via clinical contracts. This is in addition to the ongoing reorganisation of NHS bureaucracy.

The new systems to be imposed in 2006 under the stirring motto of PbR assumes that the problems of costing clinical activity have been largely solved. Allegedly, the inaccuracies are small enough at 2% to be addressed within the financial flexibility available to NHS trusts as they are reformed as stand alone NHS foundation trusts.

The assumptions made to support the introduction of PbR are based on models of standardisation for costing clinical procedures. Everyone will be required to have the same costs for the same procedures. This will pervade the whole of the internal management of clinical and nonclinical departments in trusts of whatever type, creating consequences for the supply costs of drugs, clinical and nonclinical disposables and equipment of all kinds which account for 20-25% of the total costs of clinical and diagnostic procedures.

The impact of the cost standardisation models adopted will be significant throughout the health services delivery system but particularly on clinical freedom and choice and the costs of supply. As far as supply is concerned, the Henry Ford philosophy that you can have any colour as long as it’s black seems appropriate. No wonder both the activities of the NHS Purchasing and Supply Agency (PASA) and the NHS Logistics Authority are currently being market tested.

Cost standardisation initiatives will also impact on the specifications for market testing of both NHS Logistics and PASA, since the focus will be on the supply of consumables and disposables. The models for PbR for NHS trusts include the cost of supply of consumables and disposables as overheads on the standard patient cost models adopted. Because of the volume of cost involved in supplies, it is the standard cost profile of supply that will inevitably cause supply cost to be used as a regulator of NHS trust cash flows.

The use of supplies as a cost regulator for the NHS in delivering its cash flow has a long history and it is this that has always created volatility in the associated volume of supply.

The need to match the cost of supply to the standard models of care to support the implemention of PbR will inevitably drive the supply cost profile down by far more than the cost errors of 2% allowed as a risk in the PbR accounting systems adopted.

Further still, as NHS trusts and PCTs realise the risk to cash flows, there will be growing pressure on one of the few costs that can be cut in the short term for which the cash limit needs to be delivered and for accounts to be balanced.

Finally. since the cost of supply has always been used as a cost saving in delivering trust cash limits at the end of every financial year, it is inevitable that suppliers will come under cash flow pressures of their own from the variation in supply delivery demanded. PASA and NHS Logistics or the new purchasing consortium will need to take into account the variation in supply delivery volumes.

But one issue that is not figuring loudly in the new initiative is the cost of quality, which will involve the freedom to use an intensity of diagnostics applied to patients which currently varies enormously within the NHS. The effects of the uncertainties created by PbR will emerge as the initiative is applied but in my view will lead to major risks to service delivery. My comment on yet another new initiative is: Forgive them for they know not what they do.


Leave a Comment