Payment system will need to evolve

by Anita Charlesworth

12 October 2021


Next year’s move to an aligned payment and incentive system is a step in the right direction, but more ambition will be needed in future.

NHS England and NHS Improvement recently issued health service planning guidance for the next six months, confirming that the normal rules governing how NHS trusts are funded remain suspended.  

NHS providers will receive block budget payments until April 2022. But work is also underway to engage with the healthcare sector about proposals for a reformed payment system beyond next April that isn’t simply a return to the tariff.

Overhauling the payment system matters, as it needs to align with the goals of the post pandemic NHS where integration and recovery are key objectives. Before the pandemic, the NHS was already considering replacing payment by results (PBR) with a ‘blended’ approach to payment.  This remains the right approach and has broad support.  A blended payment should have three core components:

  • a fixed payment element to secure adequate supply of healthcare services
  • a variable component to adjust payments to reflect actual levels of activity
  • a quality component to incentivise and fund quality of care.

NHS England and NHS Improvement have signalled that they want to begin to move towards a blended, three-part payment system from 2022/23 with the introduction of the aligned payment and incentive (API) system to sit alongside the increasing capacity framework. Although a blended payment system is the right direction of travel, detailed design work in the coming months needs to address some important issues as the legacy of Covid poses new challenges.

The NHS needs greater resilience and flexibility. That means the payment system must weigh the risk of failure due to insufficient standby capacity against the cost of strengthening the system’s resilience to external shocks by paying for beds and equipment that are not used to full capacity all of the time.

The fixed element of the API offers the potential to target resources on those areas that need more resilience, not just on activity. But increased capacity will require capital and revenue funding and it’s not clear either will be available on a sufficient scale over the next few years.

In fact, the pandemic leaves a legacy that may require a larger element of activity-related payment than previously being considered.  Covid-19 has caused a significant backlog of care. The NHS waiting list is at 5.6 million people, with almost 300,000 waiting more than a year.  Reducing the backlog is a key priority and activity-based payments could support providers’ efforts to tackle the waiting list. 

While the activity-based element must be attractive enough to encourage providers to deliver more care, if too large, it risks diverting too much attention and resource to the detriment of other services.

The new API system will cover all sectors – not just acute hospitals.  This is a potentially important development. In the past, one of the key issues has been that mental health and community providers had block budgets that didn’t respond to increased demand while hospitals were on activity related tariff.  

But for 2022/23 the proposal is for non-acute providers to effectively receive a fixed payment and a small quality element. Not a huge leap forward – and there still isn’t an agreed currency for an activity related element for community services – but a step forward none-the-less.

A third fundamental issue is ensuring the quality payments are sufficient to incentivise high quality services as well as high volume services. While quality in the NHS is encouraged and ensured by factors that go far beyond payment systems, it is nonetheless important that where financial incentives are deployed, they are of a sufficient size and well enough targeted to get the desired result.

But as things stand, the quality elements would be restricted to reflecting the previous best practice tariffs and Cquin. This means that the proportion of the payment dependent on quality is low and quality is defined narrowly. This may be understandable next year, but beyond that NHS England needs to be more ambitious. A key question for it to consider is whether the payment system focuses on whole population outcomes.

A sustainable health system needs to use public funds efficiently, to adapt to changing patient needs and to respond to public expectations. Critically, incentives in the payment system must be designed to encourage all parties to work towards the same goals. The good news for the NHS is that there appears to be a growing consensus that a new approach is required.  

The API is a start in the right direction, but it is not the end state. The payment system will need to evolve significantly to put in place a system that really reflects the needs of both recovery and integration.


Ms Charlesworth is also director of the Real Centre (Research and Economic Analysis for the Long term) at the Health Foundation