Financial flows: change of direction

The government has accepted that the NHS needs increased funding in a long-term financial settlement. Recent weeks have seen the long-awaited debate about exactly how much funding is needed finally get under way. But new research from PwC, carried out in conjunction with the HFMA, suggests that the NHS needs more than just more money – it also needs a major overhaul of the way money moves around the system.

There is general recognition that the current system of funding flows does not support the proposed new models of more integrated care proposed by Five-year forward view. Payment by results, for example, was introduced to drive reductions in waiting times by incentivising greater throughput from providers.

It does not support current moves to work as systems or to re-engineer patient pathways so that patients are supported more in the community and helped to avoid more serious hospital-based treatment.

Former health secretary Alan Milburn (pictured), chair of the PwC Health Industries Oversight Board and closely involved with the new report, believes change is urgently needed.

‘More resources will fail to deliver results unless there are major reforms to the current NHS financial system,’ he says. ‘It is caught in a time warp and needs to catch up with the new policy imperatives. They need to move from competition towards collaboration; towards systems and away from institutions; towards more services in the community and less in hospital; away from rewarding activity and towards outcomes. 

‘Unless the way money moves around the system is changed, the government will not get the biggest bang for its buck.’

Making money work in the health and care system identifies a number of problems with the current financial system:

• Current payment approaches incentivise treatment rather than prevention
• The flow of money is overly complex and not fit for purpose
• The separation of local health, social care and public health budgets compounds fragmentation
• Debt owed to the Department of Health and Social Care to fund hospital deficits is becoming unmanageable.

More than 200 finance leaders were surveyed as part of the research and they provided further support for change.

Some 78% of respondents felt there should be a single budget for health and care, while 77% believed that outcomes would improve if there was greater certainty on funding over a longer period and 83% identified a conflict between long-term financial sustainability and short-term efficiency savings.

Using these views, further interviews and roundtable discussions, the report’s authors argue that three areas should be given more focus in current thinking. First, financial flows should be aligned with the emerging place-based architecture. They argue for a balance between national levers and local accountability and ‘an urgent shift towards system-wide capitated budgets, combined with appropriate governance, to help break barriers to integrated working’.

Second, systems should be given more clarity through longer term funding, adding that the financial mechanisms in the acute sector have also become excessively complex. Third, money should be focused towards achieving better outcomes.

Key pointers

The report makes a number of detailed recommendations, broken down into changes that are needed in the short and longer term (see box below). Short-term recommendations include changes to the capital funding regime, ensuring capital funding is not sidelined to ease short-term financial pressures, and overhauling the current mechanisms for funding provider cash shortfalls.

Over the longer term, the report argues for the payment system to be refocused on the delivery of outcomes rather than activity and for a big step to be taken in bringing together health, social care and public health budgets.

The vision of health systems given capitated budgets with elements of payment linked to outcomes and risk/gain sharing mechanisms in place between different providers is not new. As long ago as 2014, NHS England and Monitor (NHS Improvement’s predecessor) published a paper exploring capitation as a new payment model to enable integrated care. ‘Rather than paying providers for particular treatment or inputs, capitation allows commissioners to reimburse providers for making available specified services and possibly delivering specified outcomes for a defined target population,’ the 2014 paper said.

The focus subsequently has been more sharply on capitated budgets for whole populations, but progress has been slow – reflecting the difficulty in moving to a new payment approach and the significant financial challenges facing the service.

Integrated system

The report envisages integrated care systems being paid on a whole system capitation basis. This might be a single organisation assuming accountability for the provision of all care, including primary care, via direct provision or by subcontracting some services.

The report also considers three levels of financial flow that need to be considered once the system is aware of its financial envelope – organisation, pathway and individual levels. Under the recommendations, the accountable body would be free to choose its preferred contractual mechanism to commission services from other bodies within the system. These could involve different mixes of tariff-based, block and capitated-budgets and risk and gain share agreements would be needed.

Under one option put forward for consideration, GPs ‘buying into’ an ICS might receive dividends based on the performance of the health economy. Where organisations are given responsibility for co-ordinating patients along a particular care pathway, an outcome-based approach is preferred, with top-ups for adherence to best practice pathways and processes. The report also considers how NHS staff and patients could be incentivised to support the improvement in outcomes and engage more in their own health and care.

HFMA chief executive Mark Knight believes the priority for the NHS is to put new models of care in place. ‘However, to sustain these into the long-term, we need to have the right payment systems in place,’ he says.

‘While local health economies have been given the freedom to develop their own local financial flows to support new integrated models of care – for example, by exploring capitation-based budgets and outcome-based payments – it is important that we share the learning from these approaches and accelerate their development.

‘Changing the way the money flows around the NHS and an increase in NHS funds are both now urgently required to put the NHS on a sustainable financial footing and support the development of urgently needed new models of care.’

The report acknowledges that the proposals imply some ‘quite profound consequences for systems’, including an end to the purchaser-provider split as it currently exists and different roles for clinical commissioning groups and those working in them.

The focus would also move away from foundation trusts and nationally negotiated contracts – such as that for general medical services – would need greater flexibility. However, it says that not acting now would represent a ‘huge missed opportunity and could be highly detrimental to the service.