If you are going to develop an incentive plan to encourage NHS trusts to do more work, first make sure it actually incentivises.

Two posts this week on financial incentives within the NHS.

I mentioned the first, payment by results (originally from 2002), a couple of weeks ago.

The second, to be posted later this week, will be much more contemporary and was recommended in the review of Integrated Care Systems by Patricia Hewitt in the spring. How do you develop a financial flow that will help investment in prevention?

When it was first introduced in 2002, payment by results (a more precise  definition would be payment for activity) was seen by the NHS as very radical. But the idea of paying an organisation for the work it does – and paying it more for doing more, is hardly revolutionary in modern society.

But compared to way in which hospitals were paid previously it was very different. ’Block Grants’ paid the hospital a sum of money for its annual costs irrespective of the amount of work they did. What the NHS system liked about the Block Grant was that everyone knew their budget. The people granting the budget and the trust getting it all knew what it would be. It provided the thing that everyone called – and longed for – “stability”.

(Actually, in practice the block grant was different. When I started working as a special adviser in 2001 this was not true. There were supplementary grants – usually made in late January or February called ‘waiting list initiatives’ grants. These would supplement the block grant and were calculated by some mystical way for different trusts. I remember visiting a trust in late winter 2001/2 and being shown around by the CEO before going to their office. Here they asked me how much ‘waiting times initiatives’ grant they were going to get. Being new to this munificence I said I didn’t think we were going to continue that. But what did I know? The trust got its waiting times money later that month!)

When – at about that time – the NHS Plan started talking about paying organisations for doing the work they did, it was quite rightly pointed out that we didn’t in fact know what activities cost. If you paid organisations a grant for the entirety of of their work, there was no real incentive to work out the cost of each activity – and how did you compute what every called the ‘sunk costs’ as a part of each operation. Sunk costs are what any large organisation has. A hospital is an especially large and complex organisation. Before you do anything to earn money for any activity you need power in the  building and some very expensive machinery. Like a factory or any complex set of offices – or indeed like any large charity – you have to find a way of meeting these central costs. So the final NHS price (which came to be called the tariff) has to include some of those fixed costs.

When the NHS first set a price, they calculated – very roughly – what was spent on a procedure across the whole organisation – and then divided that by the number carried out (yes, very crude). But what this gives you is an average cost of the procedure across a wide range of organisations. Given the novelty of such a specific costing exercise you discover a considerable variance in expenditure for the same procedure across different trusts.

Those spending less than average on every procedure, make a surplus from each one, while those spending more make a loss.

There will be some readers who think that it is in some way wrong for NHS trusts to bother about this detail of expenditure. Shouldn’t they just be worried about safety and let the money look after itself?

There is however a limited amount of public expenditure available . When they pay taxation, people forgo expenditure in their own lives. Many – perhaps most – feel that taxation taken from their pockets to spend on the NHS is money well spent. It is therefore, our collective responsibility to ensure that it is well spent.

If one trust spends 5 times as much resource replacing a hip than a similar operation in another – that is not a good use of public money. And that ratio in one trust would result in 4 other people are not having their hip replaced.

This is one way in which long waits develop.

Waste – all waste  of NHS public expenditure holds it back and increases long waiting times.

Later, staff from the state of Victoria in Australia came over to help the NHS find the price of certain activities.

Recently the Government and NHSE have reintroduced payment by results (You will have to ask them yourself why they felt it was a bad idea a few years ago. I suspect that it’s pretty obvious that long waits make it a good idea now).

However, there are a number of important characteristics required for a payment system to incentivise more activity.

First, and this may seem obvious but is often not done, if you think an incentive scheme is going to encourage organisations to do more work – first check that the detail of the scheme actually does that. If the scheme doesn’t really incentivise then, well, it’s not reallyan incentive scheme.

Second if you want complex organisations like NHS trusts to gear up to do more work, they probably need a good few months before the start of the financial year – and preferably a couple of years running – to plan. Introducing something after the year has started – and changing it a bit through the year encourages organisations to sit on their hands rather than do the very hard work of planning for increased productivity.   This is payment for activity.

In my next post I will really be ppushing my luck because I am going to outline another payment scheme which could incentivise prevention. And the luck I am pushing is that I am pretty sure the NHS can work with both schemes at once!