Covid-19 could accelerate reform of payment system

16 September 2020 Steve Brown

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Over the summer, NHS England and NHS Improvement finally confirmed that the block contract arrangements put in place during Covid were being extended to cover August and September. A revised financial framework would then cover the remainder of the year.

There are two key differences in this revised framework. First is the removal of the retrospective top-up payments, which supplemented block payments to trusts in the first six months to cover providers’ exceptional Covid-related costs. And the block payments will also be adjusted based on providers’ performance against activity restart goals.

The tariff will feature in calculating the size of any adjustment – which will see providers lose 25% of the value of any shortfall in elective activity and receive 75% for overperformance (20% and 70% for outpatient attendances).

Beyond this year, the guidance is silent. However, there are increasing calls to rule out a return to simply paying for activity using national tariff rates. NHS England and NHS Improvement were already moving away from the old payment by results system, which is recognised as not supporting the move to system working and integrated care, before the country became consumed by the Covid crisis.

The switch to block contracts and the suspension of the contracting round has been welcomed by much of the finance community. It has encouraged collaboration and allowed people to focus on delivering outcomes.

Inevitably, some of this will be a response to the availability of funding – the government committed to finance not being an obstacle to the Covid response.

That largesse is clearly not sustainable and, even for the remainder of this year, budgets will again start to feel far more restricted. Even so, finance directors are keen that next year’s payment system should build on the core elements of this year’s temporary arrangements. The message appears to be: keep it simple and move forward not back.

So what might the service expect next year? The original plan for 2020/21 was to extend the use of blended payments to cover outpatients and (optionally) maternity services. In 2019/20, blended payment was set as the default mechanism for emergency care and adult mental health services, although it was not clear how much of the NHS had actually implemented these new approaches.

Chief executives told the NHS Confederation during the summer that there were concerns over a reversion to previous arrangements. Future funding mechanisms should encourage collaboration, not competition, they said. And a new system should incentivise population health rather than organisational health.

In June, the HFMA published The future NHS financial regime in England, in which it called for the introduction of aligned incentive contracts from April 2021. Under aligned incentive contracts, commissioners and providers agree objectives and a block value. They may also agree risk and gain share mechanisms to deal with changes in demand, activity or costs.

There are a number of such contracts already in place around the country – with slight variations in approach and different names – and NHS England and NHS Improvement are understood to see aligned incentive contracts as falling within a blended payments framework.

Under such an approach, the role for a tariff might reduce to informing the initial value of any block amount and supporting payments for activity that crosses system boundaries.

In line with the Confederation’s call for payments to support population health, NHS England and NHS Improvement have said that they see blended payment as a stepping stone towards population-based funding.

But it is not clear what a population-based end goal might look like. In theory, it could involve capitated budgets set for systems to deliver all care for whole populations. Or it could cover sub-segments of populations.

Blended payments move towards this. With fixed payments based on realistic forecasts of activity using better cost data, this would be an improvement on block contracts based on historical spend, while avoiding the bureaucracy of detailed tariffs and in-year reconciliations.

Further downstream, there may be options to introduce more specific approaches for segments of the patient population – perhaps involving year-of-care or pathway-style payments.

The big change would be in setting overall objectives in terms of outcomes and allowing systems to pursue these in ways that make sense locally. However, it is a major leap from payment by results, which enabled the centre and ministers to drive specific responses by changing individual prices, adding in CQUIN quality incentives or introducing best practice tariffs.

NHS England and NHS Improvement are expected to engage with the service about payment system reform this autumn. Payment by results evolved over nearly two decades, but its demise could be much more rapid. There is agreement over direction of travel away from the tariff system. And with Covid-19 having made the break from activity-based payment, there is an opportunity to move rapidly to a new system.