The administrative costs of payment by results

This report was commissioned by the Department of Health to look into more detail into the administrative costs of Payment by Results (PbR). Costs were estimated to have increased by around £100k-£180k in hospital trusts and from £90k to £190k in Primary Care Trusts. Most of the additional expenditure is due to recruitment of additional staff. We use an established economic framework to provide an analytical structure to understand how administrative – or transactions - costs have been affected by the change in contracting arrangements following the introduction of PbR. The move to PbR is expected to have reduced the costs associated with price negotiation but increased the effort required to manage activity and the costs of collecting and verifying the more highly specified (patient-level) data upon which PbR is founded. Moreover, the introduction of PbR in England is likely to have increased administrative costs by a greater amount than that experienced in other countries, because of England’s relatively low costs of general management and administration and less sophisticated clinical coding and costing systems. We undertook interviews in three hospital Trusts and three Primary Care Trusts in London and South Yorkshire in order to gain greater understanding of the impact of PbR on administrative costs. The six organisations incurred additional costs of between £90k-£190k. Most of the additional expenditure is due to the recruitment of additional staff. As such, the cost increase is unlikely to prove temporary. Some organisations have also invested in improved information systems, but whether this should be attributed solely to PbR is questionable. Organisations are required to make ongoing investments in information technology, though PbR may have provided greater impetus for such investment. The main types of activity that account for increased administrative costs are: • higher costs of negotiation. While there are lower costs in negotiating prices and volumes, this is offset by difficulties PCTs have in managing activity levels, because Trusts no longer have to get approval to expand their activity, thus making it more difficult for PCTs to live within their budgets. • higher costs of data collection, due to PbR’s requirement for accurate patient-level data. Some of these costs are down to IT investment, but many are driven by organisations taking on staff to ensure better extraction of data directly from case notes rather than summary forms. • higher monitoring costs, because the financial consequences of changes in activity are more significant and because PCTs need to verify that the type of activity – particularly the HRG allocation – is accurate. • higher enforcement costs, with the sharper relationship between activity and income / expenditure giving rise to more disputes between Trusts and PCTs Interviewees were unanimous that the higher administrative costs of PbR were justified by the benefits of this form of contracting arrangement, including greater clarity of payment rules and sharper incentives. PbR had also enhanced the amount and accuracy of patient-level data. There were reports of this leading to greater data analysis and, consequently, improved decision making. Examples include shifts in the locus of provision and investments in care processes. It will be important to demonstrate the benefits of PbR more formally in future. Based on our study, we make the following recommendations: Centralise more data cleaning Some of the data cleaning, such as stripping out of duplicate HES records, might be undertaken centrally. Hospitals should improve their internal costing Much of the effort to date within trusts has been directed at improving clinical coding. We found less evidence that there had been as much emphasis on improving internal costing processes. In other countries that have PbR-type arrangements hospitals have better patientlevel costing systems than are in place in England. Such systems provide more information about resource use and the areas of activity that are likely to be profitable. Failure to understand costs may lead hospitals to expand activity in unprofitable areas, which will undermine their financial position. English trusts need both to invest in costing systems and also to make better use of resource data that they might already collect on a routine basis. For example, many hospitals record information in PAS about such things as diagnostic tests or theatre time, but this information is not always extracted by finance departments to inform their internal costings. For this to happen, trusts needs to forge closer integration between information and finance departments. The DoH needs to be more prescriptive in its requirements. There is currently too much scope for trusts to interpret activity and costing requirements differently, which then impacts on consistency and on the overall usefulness of reference costs as a means for deriving tariffs. Correct the imbalance of power between purchasers and providers A number of interviewees – both in Trusts and PCTs – felt that PbR was currently weighted in favour of Trusts, a situation that may have been exacerbated by the form in which legally binding contracts had been introduced, not just PbR. Power imbalances under PbR arise partly because of the difficulty PCTs face in controlling volumes, particularly when Trusts had waiting lists and with the introduction of Choose & Book. Active engagement by GPs in Practice Based Commissioning may alleviate matters, but more attention needs to be given to demand management mechanisms in general. The other major reason for any imbalance is due to problems that PCTs have in verifying the information they receive from Trusts. PbR introduces incentives for gaming of information, and rather than placing the onus on PCTs to validate claims, greater centralisation of the auditing function might be considered.