Implementing payment by results in the English NHS: changing incentives and the role of information.

Purpose. The English National Health Service is introducing a new activity based funding system for paying hospitals and other providers for the work they do. The key differences to previous financing arrangements are that prices are fixed nationally in the form of a tariff, hospital revenue is directly proportional to activity and activity ceilings have been relaxed. This paper draws on economic theory and empirical evidence to explore the role of incentives and information in the successful implementation of the new hospital funding system in the NHS. Methodology. Case studies in two Strategic Health Authorities comprising in-depth interviews with key stakeholders and analysis of background statistics and documentation. Findings. The structure of tariffs under Payment by Results (PbR) provides high powered incentives for providers to increase activity because they are rewarded for hospital activity, and payments for increases in activity are made at full average cost. However, there is a danger that hospitals will increase activity beyond affordable levels and possibly induce demand inappropriately. Although many interviewees were positive about PbR and some cited specific examples of how PbR had enabled them to engineer changes in services, there is a real danger that PbR could induce a range of negative responses such as increases in unplanned readmissions to hospital and a worsening in provider – commissioner relations and joint planning. Practical implications. In future, as PbR is extended, it will be important to monitor its intended and unintended effects. Such evaluation should consider the extent to which commissioners are able to live within their budgets and whether hospitals are engaging in opportunistic behaviour and gaming the new funding system.