The Changing NHS: Payment by Results

Left to right: Noel Staunton and Chris Doyle

The way healthcare is paid for is changing. Do you know how payment by results works and how best to show cost benefits for your products? The third in the PM Society’s ‘Changing NHS’ series of meetings, introduced by Steve Mackenzie-Lawrie, Vice-Chairman of the PM Society, examined the impact of payment by results and how it is likely to affect the way we engage customer groups and market pharmaceutical products in future.

What is payment by results?

The UK now spends the same percentage of GDP (8.5-9%) on health as the current European average. But results do not match this investment and are not as good as in Europe. Clearly something is not working. The current theory is that too much money is being spent in secondary care where it is very expensive compared to primary care. According to Noel Staunton of 3i Consultancy, most (if not all) the latest changes to the NHS revolve around spending less money in secondary care and spending more in primary care where it is cheaper: payment by results (PBR), practice-based commissioning, the GP contract, the community pharmacy contract, and the consultants contract are all drivers to treat more patients in primary care.

PBR is not new. It is a global phenomenon that is proven to work. The system used in the US has been in place for about 15 years and has been shown to reduce hospital admissions and hospital stay. A patient with asthma in the US is a quarter as likely to go into hospital as an asthma patient in the UK and those that do go into hospital will be out within half the time. At the moment PBR is being introduced only in England and does not apply to the Celtic countries. In other countries where PBR has been introduced it has led to an increase in spend on pharmaceuticals. The current NHS spend on pharmaceuticals is relatively low - the UK is still a slow adopter of new medicines and appliances and spends less than most other developed countries.

The system in place prior to the introduction of PBR in April 2005 worked on block contracts for the whole population. Consequently the actual cost of hospital care was unknown. Importantly, it was not possible to disinvest from hospital/secondary care. Pharmacoeconomic models used in the UK therefore had a fundamental flaw - block contracts meant it was irrelevant how many patients were prevented from going into hospital. Now, under the new system of PBR, the cost of hospital treatment is calculated for individual patients, based on a national tariff. A top-up is paid by the Department of Health (DOH) in more expensive areas but all PCTs pay the same amount.

Noel Staunton presented the example of a 65-year-old woman admitted to hospital as an emergency with COPD. Because her recovery is slow, hindered by pneumonia, she remains in hospital for 35 days before being discharged. The PBR software assigns this patient a code – HRG D39. There are about 600 of these HRG (health resource group) codes for inpatients, 40 for outpatients and three only for accident and emergency. The tariff covers everything that happens to the patient while in hospital (including drugs, tests, etc).

If this patient was an elective long-stay inpatient the hospital would charge £1546 for a maximum stay of 15 days. As a non-elective long-stay patient (i.e. an emergency case) the hospital would charge £2360 for a maximum of 25 days. For every day over 15 (elective) or 25 (non-elective) the hospital will add another £165 per day. This means that if this patient remains in hospital for 35 days the cost will be:

• D39 – non-elective tariff £2,360
• 10 days over trim point @ £165 per day £1,650
• Total tariff paid by PCT £4,010

If the patient were to stay for less than two days the emergency tariff is £472. An emergency stay longer than two nights will cost £2360 up to 24 nights. Only after 25 nights will the hospital receive any more money for that patient. Noel Staunton stressed that maximum profitability for the hospital in this emergency case is 48 hours and 1 second – no longer!

Overseas PBR has stimulated primary care prescribing (in order to prevent expensive hospital tariffs) but has threatened secondary care prescribing (the hospital earns the same amount regardless of which drug they use unless the drug reduces length of stay). So the threat is that hospitals choose the cheapest option.

All PCTs pay the same amount. Under the market forces factor (MFF) the cheapest area in the country (the west of Cornwall) is designated as 1.00. Everywhere else is more expensive (i.e. has a factor of > 1.00) due to differences in casemix and staff and premises costs. For example, Barnet and Chase Farm Hospitals NHS Trust has a factor of 1.219060. PCTs all pay the same but this difference is made up by the DOH.

The implementation of PBR by PCTs and hospitals should be relatively straightforward, in Noel Staunton’s, view because it is a logical arithmetic system. However it is open to differing interpretations and implementation.

PBR applies to every condition except some specialised services as well as mental health and oncology. It is planned that these will eventually be included in the tariff, though it is difficult to calculate an average price for mental disorders because of the variability in presentation and course.

A number of drugs are also excluded (e.g. anti-TNFs, growth hormones, immune response drugs, etc) for which PCTs have to pay in addition to the standard tariff. It is therefore an advantage for an expensive hospital drug to be on the exclusion list because the hospital will use it knowing that they can ask to be reimbursed by the PCT, over and above the tariff for the individual patient.

An additional benefit of PBR is that if a condition/disease has an HRG code all the data pertaining to that code is available free from the DOH website. If no code exists then this information has to be purchased. For example, for the year ended December 2006 for the long-term chronic condition COPD/bronchitis there were a total of 108,798 FCEs (finished consultant episodes). Bed days were 1,152,023 with an average length of stay of 10.59 days. This data is now available right down to individual hospitals and PCTs.

Marketers and sales colleagues need to understand the basics of PBR and use both the tariffs and the free activity data that exists behind PBR to sell product. PBR offers marketing opportunities to primary care drugs but threatens secondary care drugs unless the drug reduces length of stay. Most importantly, PBR is here to stay and is top priority for the NHS.

How PBR works in practice

In the view of Chris Doyle (Brand New Concepts), PBR will affect fundamentally the way hospitals treat patients. Indeed, it may mean that patients are not treated in their own best interests. Chris Doyle also believes that the way PBR is set up in this country makes it a very ‘gameable’ system. Hospital administrators are very good at working figures and a system like PBR is open to manipulation.

To begin with, PBR only covered elective activity, but is now extended to non-elective, outpatient, A&E, adult critical care and many paediatric services. Mental health services are likely to be added in 2008 or 2009.

Under PBR each procedure/treatment assigned an HRG code has a tariff based on two-year-old financial data, factored for inflation. Any new treatment introduced in the last two years will not be considered in the calculation of the tariff for each HRG. Each hospital has a factor (market forces factor, or MFF) applied to reflect its casemix (see above). Specialist ‘top-up’ charges are also added for certain tertiary centre services.

Each treatment has a trimpoint (number of days) and a run-on cost per day. The average run-on cost is £177 per day, however the actual cost is over £400 per day. This means hospitals do not want to keep patients any longer than the trim-point, as Noel Staunton noted above.

The term ‘un-bundling’ is very much in vogue at the moment with the DOH. Un-bundling is taking an HRG and breaking it down into more specific elements. For example, myocardial infarction started out as MI and ranged from the man going to his GP feeling unwell to someone collapsing with a heart attack in the street. This has now been broken down into the following: acute MI with (and without) complications, cardiac catheterisation and angiography with (and without) complications and percutaneous coronary intervention. Each of these categories has separate elective and non-elective tariffs.

Before any percutaneous coronary intervention is undertaken a coronary angiogram is required. Best for the patient is do the angiogram and undertake the treatment at the same time – every other country does this. But this does not happen in this country because if both are done at the same time, the hospital does not get paid for the treatment. So patients are sent home after the angiogram and brought back later for the treatment. This is finance driving against best clinical practice. Chris Doyle doubts this will change, however, because who is going to drive any change?

In Chris Doyle’s view, PBR is the necessary corollary to practice-based commissioning (PBC). It is a mechanism to ensure that primary care acts as a filter to keep patients away from expensive (and dangerous) hospitals. It relates not to results but to volume and is a poor model for chronic conditions. However PBR is here to stay.

With regard to implications for hospital care, the two-year delay in HRG coding means new treatments are not taken into account in the PBR tariffs. A good example are drug-eluting stents which prevent regrowth of plaque in the artery. These new stents are formidably expensive and 90% of procedures now use these yet the tariff is based on their use in only 4% of procedures. The danger of the system is that in two years time when the cost of the new stents is taken into account, no drug-eluting stents will then be used because they are too expensive and there is growing controversy around their long-term value. There has to be a better way of dealing with new interventions. Perhaps the answer is for companies developing new therapies to start informing the NHS at least two years ahead of introducing something new.

Of course, it is always the case that some services will be more profitable than others: percutaneous coronary intervention is far more lucrative for the hospital than care of the elderly. PBR also drives down time spent in hospital. However, ‘gaming’ is rife among hospital mangers and finance can drive against best clinical practice. Between 2005/6 and 2006/7 there was a 18-20% increase in short stays in hospital following A&E admission. Why? Because there are three different payments in A&E: simple £52; standard £73; and complex £101. But there is an HRG for ‘Sprains, strains and minor open wounds’. This has a two-day trim point at £569. So admitting a patient with a sprain to the ward for a day brings in £569 – much better than the standard A&E tariff of £73. The system is therefore driving hospitals to do things differently.

As regards the implications for secondary care products, Chris Doyle questions whether pharmaceutical companies are conducting the right kind of clinical trials. How many clinical trials could support the claim ‘Our product reduces hospital stays under HRGXXX by three days’

Similarly, stating that ‘Data from the US suggest that use of hospital resources is reduced by 15%’ does not mean much to UK hospital physicians. They want to know what happens in their hospital and how the drug/treatment will affect their PBR outcomes.

Pharma should also consider whether they are selling to the right people. Stating ‘Our product means longer hospital stay but improves long-term outcomes and reduces readmission rates’ will cut no ice with hospital finance because the hospital is paid more if patients stay for a shorter time. And if the patient comes back again the hospital gets paid again. Conversely, primary care will like this particular message. The implication, according to Chris Doyle, is that the benefits of secondary care hospital products might be better sold to primary care instead.

Are you delivering the right message? Rather than stating ‘For my product, used in HRGXXX, cost per QALY is below £30,000’, the better approach might be to un-bundle the HRGXXX to include a separate tariff for patients pre-treated with that particular product. If the cost of a procedure can be reduced by the inclusion of a particular product this is probably better for the product than being on the exclusion list.

PBR only operates between primary care commissioners and hospitals. However commissioners can commission services from anyone. If as a company you sell pain products, then why not establish a pain service for the PCT? The PCT then commissions the pain service from you, bypassing the entire hospital system (which does not work well for chronic diseases). PCTs have to look at these kind of private sector options.

A claim such as ‘In this PCT population the use of our product reduces hospital admission by X% compared to another product or service’ is very powerful. However, in order to make such a claim it is vital to find out how the drug works in the particular PCT population. Often the cost of producing the requisite level of segmentation and proof in particular locality is actually less than doing randomised controlled trials across many countries. Local proof is important. This has implications for pharma clinical trial design and the future of large-scale randomised controlled trials. UK clinical trials now need to be designed around the primary endpoints demanded by PBR/PBC.

The un-bundling of HRGs also represents an opportunity for genuine segmentation based on patient groups. This means that hospital sales forces will have to sell their products where they actually add value and GP sales forces will have to develop new skills – e.g. developing localised clinical trials.

Talking points

Asked whether GPs are allowed to keep any of the money that they save, Noel Staunton noted that national guidance on practice-based commissioning states that if a practice holds the prescribing budget and the hospital budget and if they make a saving on those two budgets combined then the practice can keep 70% of the savings to spend on patient care. However PCTs do not want GP practices holding the budget for prescribing and for hospitals and are doing their utmost to prevent this from happening. As a result the BMA have told doctors not to start managing these budgets unless the PCT signs a contract guaranteeing that the practice can keep 70% of any savings.

Shafiq Choudhary of Archimedes felt that the point of Foundation Trusts was to save on national tariffs and reinvest those savings back into the hospital. Chris Doyle agreed, but noted that Foundation Trusts face greater financial risk. However, like all Trusts now, they do have the autonomy to ‘resolve internal financial issues’, which allows them to offset overspending in one department against savings in another. Noel Staunton added that if it costs hospitals less to treat the patient than set out in the tariff then they keep the profit.

Ivor Eisenstedt (MGP Ltd) remarked that within three months of a positive NICE assessment for a drug, funds should be made available for that drug and asked how that fits with the two-year gap in the HRG tariff. Chris Doyle explained that, in theory, the legal requirement to make these funds available supersedes everything else.

Asked who actually benefits from this astute and clever management, Chris Doyle noted that at the moment GPs are doing very well under the new contract but this door will begin to close next year. QOF points will be introduced by some health authorities for cost-effectiveness of prescribing. Without these ‘golden QOF points’ GPs earnings could be seriously affected.

It was pointed out that PBR tariffs must be based on fixed costs. To attract private providers in to the market they have to be able to deliver at lower costs than the NHS. Asked why the tariff costs should not come down as the price of treatment reduces Chris Doyle stated that indeed costs are meant to come down over the time as hospitals get better at it. Trimpoints will also come down.

Ivor Eisenstedt asked what effect the new Prime Minister might have on all of this. Chris Doyle felt that Gordon Brown will set up an independent health board to run the NHS. He also thought there would be more spurious targets and bean counting.

Steve Mackenzie-Lawrie asked who PBR works for? Chris Doyle noted that since it was set up in 1948 the NHS has never really worked in the best interest of the patient. It was set up to get the workforce back on its feet after six years of war and is actually a ‘national sick service’. If it was a health service people wouldn’t get sick!

Asked what implications the trend towards greater centralisation has for pharma, Chris Doyle stated that with global marketing in local companies have no control over pricing and are restricted to communications. Pharma should therefore wise up to the fact that they need to communicate better in local environments.

Bill Kelly (Atos Consulting) asked how the huge amount of administration in PBR (invoicing between hospitals, etc) plays out on the ground. Chris Doyle said that some hospitals are very good at this, with clerks installed to do the coding, mechanisms to collect the money, etc. Others are quite laggardly, but will get there in the end. Noel Staunton added that on the whole the hospitals are beating the PCTs because they are used to playing the finance game. However, some PCTs (Dorset for example) are refusing to pay hospital bills, and asking why all patients are staying in for two days exactly, and why outpatient numbers are diminishing and inpatient numbers increasing. The Strategic Health Authority has had to intervene and it is now recognised that upcoding and playing the system is a real problem. There is little guidance as to what should happen if one side accuses the other of not playing fair.

Held on: 27/06/2007