Two-year payment scheme to enhance planning certainty

In an engagement webinar this week, NHS England’s head of payment policy Gary Andrews (pictured) said the two-year approach would answer calls for greater certainty and would support parallel proposals for systems to develop two-year operational plans for 2023/24 and 2024/25.

After the material change in the current year to an aligned payment incentive approach, and away from the earlier payment by results system, Mr Andrews said changes proposed for next year would be relatively minimal. ‘There are a few enhancements and a few proposals that we believe will streamline the approach and reduce the burden on the sector,’ he said. ‘And we are trying to proactively use some of the products we are developing from patient-level cost information that will help systems in implementing these national payment rules.’

Matthew Marsh, NHS England payment policy manager, stressed that the proposals were not set in stone and the centre was keen to get feedback from the service before finalising its proposals for formal consultation, currently planned for October or November this year.

Having the payment scheme rules in place for two years would involve prices being set up front for the second year using a formula that takes account of inflation, efficiency and any other factors.  This would ensure prices were based on up-to-date information and would eliminate the need for a separate consultation for 2024/25.

The ability to set payment rules and prices using a formula has been introduced by the Health and Social Care Act 2022, which also replaces the national tariff with the NHS payment scheme.

The proposed payment approach is likely to look very similar to that in operation in 2022/23, with a fixed element covering the vast amount of funding from systems to providers. This would be supplemented by a variable element, which currently is used to support elective recovery for acute services. In 2022/23, £2.3bn has been included in systems’ allocations to fund 104% of 2019/20 elective activity levels and this should have been incorporated into fixed payments.

The variable element of API then adjusts this payment based on the actual activity delivered – paying 75% of tariff price for activity above the 104% threshold and taking back 75% of tariff price for activity under the threshold. There have been concerns in the first quarter of the year that providers are falling short of the 104% requirement and could face a clawback of funds if changes are not made to the scheme in year.

However, current thinking suggests the variable element will continue in a similar format next year. ‘We anticipate there will be some form of focus on elective recovery next year, but we don’t know what that looks like at the moment,’ said Mr Marsh. This is likely to depend on progress with waiting lists this year and whether there is any additional funding to support further recovery. ‘But if everything remains the same, we think it would function in a similar way next year,’ he added.

The new legislation has enabled NHS England to simplify the presentation of the payment scheme. Essentially there will be three main payment mechanisms. The API scheme would cover almost all NHS provider/commissioner relationships. Block contracts would be used for low volume NHS activity. This currently kicks in where the annual contract value is below £0.5m. And unit prices would be used in contracts with the independent sector. There could also be local agreements outside these three mechanisms where systems apply for a variation from the national approach.

There are no proposed changes to the process for funding high-cost drugs and devices. All devices listed on the exclusions list should be paid for outside of API fixed payments or prices. For drugs, anything included on the list is excluded from unit prices. Most of these drugs (currently 376) are also excluded from the API fixed element. But some 55 drugs are deemed to be more predictable in their use and so can be included in the fixed payment. All other drugs are included in both the fixed element and unit prices.

However, the exclusion lists will continue to be reviewed each year so these could change from April 2023.

For API, NHS England is proposing to remove the £30m threshold that exists this year for contracts between providers and commissioners in different integrated care systems. Along with intra ICS contracts and specialised commissioning activity, this would mean the vast majority of NHS services would be covered by API.

Outside of API, the arrangements for low volume activity payments are also being reviewed. In particular, this will consider if the ‘below £0.5m’ threshold is appropriate and whether payments are pitched at the right level. Currently providers receive a set amount from commissioners based on a three-year rolling average of previous payments – significantly reducing transactional burden by cutting out large numbers of small value invoices.

Systems will not be required to follow any particular method when calculating fixed payments other than a general requirement to assess the payment needed to deliver the activity included within the system plan. However, NHS England is developing tools that it believes will help systems with this calculation. These will include a patient-level costs (PLICS) analysis, which will benchmark costs with peers to identify potential efficiencies. It will also look to highlight best practice in pathway transformation.

For variable payments, NHS England is considering simplifying out-of-system arrangements and will also explore moving to a 100% variable rate. There are no current plans to include a variable payment for non-elective acute services, especially given the overarching aim to reduce this demand. However, NHS England is keen to explore how a variable element could work for mental health or community services.

NHS England wants to retain an element in the payment system to incentivise better quality services. This is currently achieved by considering actual CQUIN and best practice tariff performance compared with planned levels when calculating the variable payment. However, most systems have submitted requests to NHS England in the current year to disapply some or all of the CQUIN and BPT schemes. Many in the service suggest that the costs of demonstrating compliance with these quality metrics outstrip the financial reward. And there continue to be concerns that the CQUIN initiative recycles the same funds each year into different targets, effectively adding a further efficiency requirement.

NHS England engagement webinars for 2023 finance and payment arrangements