2. Delivering the NHS Plan: Changes to Financial Flows November 2002

3. The Context The Budget Settlement Largest ever sustained increase in NHS funding over 5 years Average7.4% real growth per year On course to match European average by 2008 But...need to expand capacity and restore incentives to increase productivity

4. The Context Aims and Objectives of System Reforms Move from NHS which is a: monopoly provider of health services, accountable to DH To a greater diversity and plurality of services, more responsive to patients, managed according to transparent, common standards that are inspected and regulated against by an independent body that reports nationally and locally

5. The Context Objectives & Developing Reforms NHS Plan NSFs NICE Star ratings Franchising NHS Plan Earned autonomy StHAs PCTs receive 75% total funding NHS Plan Workforce changes NHS Plan Booked appointments More information for patients Delivering the NHS Plan Regulated price tariff open book relationship CHAI & CSI PCT prospectuses Delivering the NHS Plan Transparent, rules based system 3 year planning and allocations Foundation Trusts NHS Bank Delivering the NHS Plan Incentives for good performers Financial tools to support development of commissioning Delivering the NHS Plan Financial flows that support patient movement & choice to increased range of providers STANDARDS AND ACCOUNTABILITY DEVOLUTIONFLEXIBILITYCHOICE

6. Patient choice Requires a financial system that: is flexible enough to allow money to move as the patients do allows patients choices to be made on the basis of quality and responsiveness not price ensure choices are affordable for PCTs and good VFM

7. Diversity Requires a financial system that: works for new as well as traditional providers minimises transaction costs sets a common national framework and contracting arrangements for all providers of services to NHS patients

8. Issues With Current Financial Flows System Does it facilitate patient choiceX Does it incentivise good performanceX Does it reward efficiencyX Does it support effective planning & delivery? Does it work with different providersX Does it demonstrate value for moneyX

9. Objectives of New Financial System A transparent, rules based system for paying Trusts Rewards efficiency Supports patient choice & diversity Encourages activity for sustainable waiting time reductions

10. A consensus is emerging internationally... DRGs first developed in the USA to measure activity. Basis for paying for acute care in Medicare programme Australia, Norway, Austria, Finland, Sweden and Canada have developed their own casemix tools We are beginning to look a bit anomalous! Italy uses modified version of US DRG system France uses US DRG tool and relative DRG cost in determining budget growth From 2003 Germany & Netherlands plan to use casemix payment system for hospitals

11. Learning from other countries Most OECD countries use casemix payment methods or are planning this Most OECD countries use standard tariffs, not competition, to pay for most healthcare Casemix payment increases productivity, reduces use of inpatient care Researchers have not found adverse effects on quality

12. Key Elements of the Future Financial Incentive Regime Payment linked to activity Developing commissioning tools for all elements of care pathways Pressure to address higher cost provision

13. Some terminology that will be important... HRGs: Healthcare Resource Group - grouping cases that are clinically similar and require similar resources for treatment and care RVUs: Relative Value Units - a number indicating the relative difference in cost between different HRGs (i.e. cost weights) Weighted FCEs – Measure of activity level in finished consultant episodes adjusted for complexity of casemix, using RVUs

14. Financial Flows: end-point for medium term cost and volume agreements adjusted for casemix using HRGs & other standard service classification tools standard tariff prices prices apply to all providers of services to NHS patients HRG issues: mental health; chronic care; community services; PSS interface pricing issues: secondary care provided by PCTs or GPs; development costs

15. Expanding Scope of Scheme

16. Transition Path: 2 years to transition –new payment basis only applies to proportion of hospital activity in 2003-4 & 2004-05 –unintended effects: perverse incentives – interaction with other funding streams (training & research, development funds) – revision of HRGs and casemix weights – simulation, modelling, consultation

17. Financial Flows 3 years of transition –cost and volume agreements adjusted for casemix using HRGs for most acute activity beginning in 2005/06 –convergence to tariff prices by 2008/09 transition support: issues for PCTs &Trusts –independent sector: prices set by tender or other VFM process during transition; tariff applies by 2008/09

18. Financial Flows 2003-04 system Main features –develop experience with using HRGs and tariff prices in commissioning –focus on services with high volume, high cost, long waits, and link to choice pilots –cost-and-volume commissioning agreements, casemix-adjusted using HRGs, for 6 specialties –15 HRGs commissioned on an individual basis

19. Financial Flows 2003-04 system Extent of introduction: –for 15 HRGs standard tariff applies to extra elective activity over 2002/03 plan –for 6 specialties price is locally determined but national HRGs cost weights used to adjust for casemix –failure to deliver agreed elective volumes leads to withdrawal of funds at full cost –risk sharing for non-elective activity

20. Financial Flows 2004-05 Next steps in roll-out: –extend coverage of tariff prices to additional volume for 30-45 HRGs –extend coverage of cost and volume commissioning to all surgical specialities –pilots for wider coverage of cost and volume commissioning and tariff prices –Foundation Trust contracts

21. Need to Manage Risks Carefully Risk Implementation challenge PCT & Trust capacity Financial instability Unintended effects Transaction costs Management Pace of change and pilots Development programme, SLA, implementation support Transition path Modelling/simulation Scenario planning, simulation, consultation International experience Align with IT developments, shared services, standard tools

22. Next Steps 2002/03 November - December 2002 - Feedback on consultation document -Price tariff and final details for 03/04 scheme - Seminars/workshops in most StHAs - HRG version 3.5 revision begins January 2003 - Model SLA, implementation support Summer 2003 - Consultation on medium term scheme, transition path, recosting/rebasing issues

23. Implementation StHAs roles -Identify implementation responsibilities and support needs in your patch -Identify 3-4 people who can support implementation - Coordinate consultation feedback DH project team resources -Model SLA, worked case study, presentation materials - Implementation support team, in liaison with MA - www.doh.gov.uk/nhsfinancialreforms