Payment by results: what does it mean for mental health?

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• 'Payment by results' is a new way of paying for NHS hospital and community health services that will replace the present system of block contracts and locally agreed prices. It is planned to apply in time to all services, including mental health, and to be fully operational in 2008.

• Under payment by results, hospitals and other providers will be paid according to the quantity of work done, as measured by the numbers and types of cases treated. The amount paid for each type of case, as determined mainly by diagnosis, will be the same everywhere and fixed in advance through a national tariff.

• The introduction of payment by results will substantially change the pattern of financial incentives and associated risks in the NHS and must therefore be expected to have significant effects on the provision of care. The precise nature and scale of these effects will depend on how the system is designed.

• There are good reasons for supposing that, across the NHS as a whole, payment by results will have positive effects. It will give stronger incentives for providers to increase activity and efficiency and to respond to patient choice. Commissioners will be encouraged to seek out lower-cost forms of care, and the use of a national tariff will reduce transaction costs in the negotiation of contracts. These conclusions are supported by a body of evidence from relevant international experience going back over 20 years.

• Payment by results will be easier to apply and more likely to succeed in some parts of the NHS than others. It will work best in areas like elective surgery, where the conditions being treated and the services being supplied are such that it is relatively straightforward to classify cases into homogenous groups and to apply a uniform set of prices at little risk.

• Mental health care is at the other end of the spectrum and the design of a workable system of payment by results for these services is still some way off. Reasons include the long-term and often episodic nature of mental health problems, the diversity of services and the wide range of factors in addition to diagnosis that influence the costs of care. These and other features of mental health care all make it difficult to classify and group cases for payment purposes at acceptable risk.

• Payment by results also requires good information, particularly on activity and costs. Mental health services lag behind the rest of the NHS in the development of their information systems, in their use of IT and in the quality of information they produce.

• Payment by results is widely used in other countries for funding services in acute general hospitals, but in none is it yet applied to mental health care. Relevant work has been done on some of the building blocks, but otherwise there is no relevant experience to build on. The effects are therefore difficult to predict.

• These considerations do not invalidate the arguments for reform. They support a case for incremental change. For mental health care, there are too many unknowns to justify moving to a full-blown system of payment by results in a single step. Gradual implementation will reduce the risks of change, including possible adverse effects on the quality of care and on financial control. It will also allow time for supporting measures, including the improvement of information systems, the development of quality assurance mechanisms and a strengthening of the commissioning function for mental health services in primary care trusts (PCTs). All of these are needed to maximise the benefits of improved incentives associated with payment by results and to minimise the costs of increased risk.

Not for the first time, the mental health system is being required to implement a major reform designed primarily for other parts of the NHS. This is not to say that payment by results is inappropriate for mental health care, but rather that there remains a wide range of unresolved questions about the design of the system for this sector. The main aim of this policy paper is to highlight and discuss these questions to encourage better understanding and wider debate on a policy whose importance may not yet be fully acknowledged by those involved in mental health care.

Document Type: Research Article

Publication date: September 1, 2004

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