Transaction reform: the balance between demand-side and supply-side reform
Background
The NHS plan published in 2000 introduced a 10-year programme of reform to improve the quality and efficiency of the NHS. As part of this programme NHS funding in England has grown by about seven per cent per annum in real terms. This growth effectively ends in 2008, reverting to inflation level increases.
At the beginning of the reform period, the main targets were focused on improving hospital capacity. The Government focus then shifted somewhat, with the NHS Improvement Plan, published in 2004 setting out an ideal where less health care would be delivered in the traditional hospital setting and more care delivered in the community. This was further reinforced by the White Paper, Our Health, Our Care, Our Say published in 2006, which set out a picture of more choice and control for patients, with emphasis on prevention of disease and a drive to provide services closer to people's homes.
Key areas of reform
The NHS framework for health reform updated in 2006 has divided healthcare reform into four areas:
- Demand side reforms: introducing a greater choice for patients
- Supply side reforms: introducing a greater diversity of providers into the NHS
- Regulatory/system management reforms: Better systems to support decision making
- Transaction reforms: Enabling money to flow more freely around the NHS
These areas are all intrinsically linked, with system management reform probably the least developed. As we are now nearing the end of increased NHS funding, the pressure for reforms to deliver is growing as the Government needs to demonstrate return on its investment, in the form of higher quality, patient centered, responsive services that are seen as value for money.
What is transaction reform?
Simply put, transaction reform refers to the measures introduced to enable money to move much more freely around the NHS. The aim of transaction reform is to support patient choice and reward good quality healthcare providers, whilst simultaneously encouraging improvement. What this means in reality is that money can now follow the patient, based on patient (and PCT) choice, to whichever NHS or non-NHS organisation that provides healthcare services.
For clinicians, transaction reform signifies a move from an NHS based on collegiate relationships where referral and advice form the transaction to one based on contracts. This change means expectations and treatment are determined by a contractual obligation determined outside the care nexus. This is still a change that many clinicians are finding difficult to comprehend and is the source of much opposition to the reform programme.
Why is transaction reform important?
With the introduction of demand and supply side reforms, the NHS is slowly moving from an essentially provider organisation to a purchasing organisation, buying care based on patient choice for an increasing variety of organisations.
Transaction reform is vital in the delivery of supply and demand side reforms as it makes this financially possible. In DH terms transaction reform is seen as a `critical enabler'.
Links to demand-side reforms
A patient centred NHS requires patients to be at the heart of reform and the introduction of patient choice is intended to empower patients, who can vote with their feet, and choose where there care is delivered. The idea is that free movement of patients will increase pressure on hospital providers to attract patients by improving quality and improving the overall patient experience.
But an intrinsic effect of the new system is the creation of a powerful incentive to draw patients into hospital to attract fees for service. PCTs are already seeing an effect on clinical decisions at the margin - patients arriving at A&E are more likely to be admitted under the new system than they would in the past. Minor procedures that used to be carried out as part of an outpatient appointment now warrant a day case admission attracting a fee of several hundred pounds.
Practice-based commissioning (PBC) is needed to counter this. Whilst the commissioning framework enables PCTs to deliver national and local priorities in a way that is appropriate to the local health economy, PBC has been introduced, primarily to manage demand and reduce unnecessary hospital referrals through the provision of alternative services providing care closer to home.
Links to supply side reforms
Supply side reforms have provided competition through the introduction of a greater diversity of flexible and responsive providers of traditionally NHS healthcare services. New suppliers include:
- Foundation Trusts
- Independent sector treatment centres (ISTCs)
- Social enterprise organisations
- Independent and private sector
PbR: The key element of transaction reform
The centrepiece of transaction reform is the introduction of a rules based pricing system called Payment by Results (PbR). PbR was launched in 2004 to provide a transparent system for paying providers of traditional secondary care services. PbR has begun to move the NHS away from the complicated and often impossible-to-break-down block contracts, where PCTs paid hospitals a fixed sum regardless of the work carried out, to a system that matches payment to the healthcare provided.
This means that the PCT pays a fixed price regardless of where the patient chooses to receive treatment and means that is now much easier to track and analyse the costs of specific procedures and the treatment of certain conditions.
Although the amount of care purchased still has to ultimately fit into the overall NHS budget, a fixed tariff provides more transparency and sets out how much of each type of treatment can purchased by each PCT. This in theory should make it much easier for PCTs to plan treatment and stay within budget. Importantly for the pharmaceutical industry - for most tariffs drug costs are included.
Quality
The NHS has searched long and hard for an effective method of quality management, resulting in regular changes, systems and monitoring agencies.
The National Tariff provides the NHS with fixed prices, enabling greater focus to be on quality and access rather than local price negotiation (as per the days of block contracts). However, is this really the case? In reality PbR is only focused on the quantity of care delivered. PbR sets a prices, but does nothing to guarantee outcomes. Therefore it could be argued that it is low cost average quality that is being incentivised.
The theory behind the system reform is that patient choice, supported by stronger commissioning (eg PBC and PCT reform) will drive quality, but it is a giant leap from monopolistic, expert-led service to competitive, consumer-driven service and it is likely that quality will need to be rigorously policed for many years to come. We also need to remember that at least at the moment, choice is only about surgical care and not medical, primary or community care.
Through the commissioning framework, how to strengthen incentives and improve quality of care is being reviewed. However, in the short-term, many providers of hospital care may prioritise the need to achieve financial balance and this may in turn impact on quality and efforts to increase it.
Transparency
Whilst transparency in pricing is essential and key to supporting a less centrally controlled and more patient driven service, there is still debate and uncertainty as to how "transparent is transparent?" Firstly, the tariff is set by the DH - but there has been debate and discussion as to whether the tariff should be independently developed and managed? Is there opportunity within the tariff for the DH to drive attention on areas where nationally there is a desire to encourage activity?
Regardless of this and many criticisms of the way that the National Tariff has been set up, transaction reform has enabled NHS organisations to see a much clearer picture of the true cost of treating certain conditions and procedures.
A natural crollary of this transparency on the provider side would be for hospitals to identify the services and treatments on which they can make a profit and concentrate on these, similarly not offering those that are unprofitable. The rules of engagement for PbR are meant to prevent hospitals from limiting the procedures or treatments offered, however one can envisage that waiting times for less rewarding procedures will be allowed to grow to the maximum. This action, which is termed `gaming' by some, could be seen as a logical and rational response by others.
Interestingly, if hospitals can't offer limited procedures within a clinical speciality, there is nothing to stop them from withdrawing a service altogether. One hospital in East London has already signalled its intention to withdraw from providing both rheumatology and dermatology services, with the local PCT currently running a process to find new providers.
As already discussed, transparency is certainly helping in the development of supply and demand side reforms like PBC. Tim Jones, a commissioner for Milton Keynes PCT states that: "PbR is crucial. Without PbR we wouldn't have PBC. It's one of the pillars and without it the whole reform process centred on patient choice becomes impossible to implement."
The introduction of transparency into the NHS also throws into relief those areas of opacity: for example moving services into primary care, throws up the question of whether costs are already covered within GMS or whether GPs need to be paid separately, highlighting that the GMS contract is quite inflexible.
The National Tariff does not cover everything so not all costs are getting clearer. The main areas excluded from the Tariff are:
- Community services
- Mental Health
- Specialist services
- Chemotherapy
- Ambulance services
- Critical care
- Continuing/intermediate care
- Regular attenders
- Radiotherapy
- Radiology/pathology
- Renal dialysis
For these areas costs are not set, although indicative tariffs have been published and some of these are covered by local tariffs. For many of these services block contracts and poor information about services provided are still the norm.
Cost and value for money
The National Tariff is set by linking price to the `average' costs and in February 2006 the new 2006/7 PbR tariffs, which apply to approximately two-thirds of all hospital activity were published. However - there are many arguments that tariffs do not accurately reflect costs and therefore cost efficacy or value for money is questionable.
The potential to `unbundle' the Tariff has been introduced with the aim of supporting service re-design. The aim of un-bundling is to incentivise the delivery of care closer to the home, by allowing certain elements of care to be commissioned separately and for the portion of funding to support this element to be withdrawn from the Tariff bundle. For example, this provides the opportunity for diagnostics and treatment to be split. In the area of osteoporosis this could mean that DEXA scanning could be delivered locally via one provider and any resulting treatment or intervention delivered by another.
Impact on care
As we can see there is a trong incentive within PbR that encourages hospitals to admit patients to provide them with income. This discourages co-operaton with practice based commissioners and PCTs looking to re-design services by shifting elements of care into the community. The tariff however does not reward best clinical practice and hospital admissions only where appropriate, so until reviews and amends are made for some patients and PCTs - care will be compromised.
The question also needs to be asked as to whether the Tariff incentivises all innovation or only that which can be delivered for a lower cost (relative to the tariff). It could be argued that it does not encourage innovation that may increase costs or encourage investment in overall quality imptovements alone. However, providing a level of clarity around costs allows the impact of care and cost improvements in one part of the pathway to be realised within a different part of the pathway and within the same budget.
For areas covered by the National Tariff, without block contracts or price negotiation, PCTs and PBC groups need to carefully plan what activity they can afford to commission and when.
Will the patient suffer? There has been a wealth of media articles in the press this year highlighting the plight of patients who are allegedly being made to wait for procedures and treatments until the new financial year because PCTS are reaching their annual budget ceilings. So under PbR - the improved transparency allows for more exact planning but this ends up impacting on patients in a negative way by causing patients to wait longer - a phenomenon known as `elective stretch'.
What measures are in place?
Although there are many measures in place, with the exception of the quality and outcomes framework (QOF) in the GMS contract and via standard organisational review, there are few metrics around to measure quality. Traditional quality metrics are quite clumsy and weakly related to risk of patient experience e.g. QOF and complaints.
Within transaction reform there is a focus on driving costs down and reliance is that patient choice and stronger commissioning will `kick in' and drive quality. For patient choice to enforce quality, as patients chose to go where quality is highest (as cost is no barrier), information on quality needs to be provided to supplement patient's own experiences. In this light initiatives have been put in place to support this including:
- Healthcare Commission reports
- Ratings systems e.g. Dr Foster
- Waiting times
What does this mean for marketers?
While all four areas of reform are linked, transaction reform means that PCTs and Trusts have, and must continue to develop more sophisticated approaches to financial and performance management.
Transaction reform is helping to focus attention on cost. Whilst its impact and encouragement of cost cutting is clear, the transparency associated with it provides significant opportunities for those who can effectively position their product within this environment. Treatments that can offer cost savings, or show a decrease in referral, hospital stays or follow ups will be increasingly favoured.
Transparency, it could be argued makes it easier to justify increased expenditure on a treatment in the short term for a return later on in the patient pathway - for example initiating a more expensive antibiotic in hospital, may be seen as beneficial if there is an oral formulation that enables patients to be discharged back into the community quickly.
In a cash-limited NHS cost has always been key. With increased NHS funding ending in 2008, the National Tariff expanding and the OF report highlighting an estimated overpricing in the industry, the focus on cost is only going to increase and the industry needs to be able to appropriately manage drug acquisition costs within this environment.