Models for paying providers
1 DRGs (the national tariff)
2Capitation
3 Block contracts
4 Payment for performance
Introduction
This series of briefings has been designed to help
members understand the different ways in which
providers can be paid for seeing and treating patients.
Block contracts have been widely used throughout the
UK, and continue to be the main payment system for
hospitals in Scotland, Wales and Northern Ireland.
In recent decades NHS payment systems have evolved,
particularly in England, where the national tariff
(‘payment by results’) currently dominates payments
made to the acute sector. But increasing emphasis
on new, integrated models of care means that other
ways to pay providers, such as through capitated
budgets, may become more dominant in the future.
Be informed.
1
British Medical Association
bma.org.uk
2
British Medical Association
Models for paying providers – DRGs (the national tariff)
DRGs (the national tariff)
What are DRGs?
Diagnosis-related groups (DRGs) are a classification system often used to determine pricing for health
care services. Payment systems based on DRGs may also be referred to as ‘payment for activity’. Other
uses of DRGs include hospital activity benchmarking – for example to compare length of stay – planning
and management. DRGs were developed initially in the United States within the Medicare programme,
but have since been widely adopted in most high-income countries across the world. In England DRGs are
known as health resource groups (HRGs).
How does it apply to the NHS?
HRGs are the basis of the national tariff for acute care in England, also known as ‘payment by results’
(PbR). There are currently over 1,400 mandatory tariffs representing around 60% of payments made to
hospitals and other acute providers. Many services such as mental health, some specialised services and
community services remain outside the scope of tariff, despite attempts to include them. These services
are still paid for through block contracts.
DRGs/HRGs are not used in the NHS in Scotland, Northern Ireland or Wales, where block contracts
remain the dominant payment system. For more information on block contracts, see another
briefing in this series.
The (phased) introduction of the national tariff in England from 2003/04 enabled NHS funding to follow
patients, rather than vice versa. It was one of many reforms introduced by the then labour government in
order to promote choice and competition in the NHS.
The dominance of the national tariff/PbR in England may diminish as Monitor and NHS England plan
to reform the way providers are paid in the NHS over the next five years. These reforms are specifically
in order to support implementation of new models of care proposed in ‘the five year forward view’.1 To
facilitate the ‘multispecialty community providers’ (MCPs) and ‘primary and acute care systems’ (PACS)
models, capitated payments for primary, secondary, community and mental health, and where possible
social care will be developed. The ‘urgent and emergency care network’ model will be facilitated by a
new, 3-part payment approach focusing on capacity, activity and quality, sharing risk between providers
and commissioners. Finally the ‘specialised care’ model will use ‘a mix of payment approaches, including
payments for episodes of care linked to best practice and year of care payments for looking after patients
with… life-long conditions’. For more information on capitation, see another briefing in this series. For more information on MCPs, PACS and urgent and emergency care networks, see our briefing
on ‘integrated provider models’.
Where these new payment approaches do not apply, existing payment systems will be refined and/or
continued. This includes the national tariff/PbR, which in the future will include further mental health
services, specifically ‘for episodes of care that follow established treatment pathways’, as well as ‘targeted
areas of community health…and specialised services’.
What are the pros?
There are a number of positive incentives inherent in DRG-based payment systems, in theory at least.
As providers are paid according to levels of activity, it encourages them to treat more patients, which
can lead to reduced waiting times. In practice, there is evidence from England to show that hospitals
have increased their activity and reduced waiting times since the introduction of the national tariff/
PbR2. However the impact on waiting times cannot solely be attributed to the payment system, given
other relevant initiatives such as waiting time targets.3 And whether or not all increased activity can be
considered clinically-appropriate or necessary has not been studied.
Another theoretical advantage is increased efficiency and system-wide cost containment. DRG-based
payment systems are calculated using average costs and so this encourages those hospitals with aboveaverage costs to become more efficient, for example by reviewing and changing their clinical processes.
[But they may also discourage hospitals with below-average costs from becoming more efficient.]
While there is international evidence from Sweden4,5 and Portugal6 to show increased efficiency and
productivity, in England the evidence has shown improved efficiency only in line with existing trends.7
British Medical Association
Models for paying providers – DRGs (the national tariff)
As already mentioned, the national tariff/PbR allows NHS funding to follow patients. As a result patients
are able to choose between different providers. The combination of this payment system and patient
choice policies should, in theory, encourage providers to improve quality, in order to attract patients.
Although in practice, the evidence is inconclusive on the impact that the national tariff has had on quality.
What are the cons?
There are also a number of theoretical, negative or perverse incentives inherent in DRG-based payment
systems, some of which have been found in practice. The potential for providers to skimp on quality
in order to reduce their costs, thereby maximising profit, is one such negative incentive. The ‘quicker
but sicker’ phenomenon, where hospitals discharge patients too early has been found in the US8,9 and
Australia.10,11 The evidence does not suggest that this has happened in England however.12
Another negative incentive is ‘cream skimming’ where providers seek out healthier and/or lower-risk
patients, or focus on certain conditions or procedures. As with quality skimping, this is in order to reduce
costs, thereby maximising profit. The scope however for cream skimming to take place in the NHS in
England is limited due to referral arrangements.13
Despite the inclusion of some best practice tariffs and the ‘commissioning for quality and innovation’
framework (CQUIN), the connection between the national tariff/PbR and patient outcomes remains
poor. For more information on best practice tariffs and CQUIN, see our briefing on ‘payment for
performance’.
The national tariff/PbR alongside the ‘any qualified provider’ policy enables many different providers
to treat patients for different conditions or procedures, including from the independent sector, which
can lead to fragmented services and care. In addition, by focusing on specific procedures carried out
in the acute setting, the national tariff does not facilitate a more coordinated approach to health care
delivery, across other sectors or parts of the NHS. This creates divisions between secondary and primary/
community care and discourages the treatment of patients in out-of-hospital settings. As such it is seen as
a major barrier to the development of integrated care.
The downside of increased hospital activity, which has followed the introduction of the national tariff/PbR,
is greater financial risk and uncertainty for NHS commissioners. Finally the administrative costs associated
with this payment system are high (although some view these increased costs as justified given the
perceived benefits of the system).14
What are the implications for doctors? At present there are no immediate implications for individual doctors. But were there to be a significant
departure from the national tariff/PbR as the predominant payment system for the acute sector in
England, then this would have implications for some hospitals or other provider organisations, which could
then have knock-on effects for their employees/workforce. What’s the BMA’s policy on this? The BMA does not support the national tariff/PbR as the main way for paying acute providers in England. We would prefer to see a new payment model introduced that facilitates and encourages closer working
between different parts of the health service, around the needs of patients. We have lobbied heavily on transforming the tariff, including calling for an end to the punitive financial
policies that have been applied through the tariff in recent years. These include the efficiency factor and
the marginal rate rule for emergency admissions.
3
4
British Medical Association
Models for paying providers – DRGs (the national tariff)
Further reading/references
1 Monitor (2014). Reforming the payment system for NHS services: supporting the five year forward view.
NHS England. http://www.england.nhs.uk/wp-content/uploads/2014/12/reforming-payment-s.
2 Street A & Maynard A (2007). ‘Activity based financing in England: the need for continual refinement of
payment by results’. Health economics, policy and law, (2) 419-427.
3 Ibid.
4 Karolinska Institutet (2012). DRGs in Sweden – A transparent and performance based payment
system? Available: http://www.rn4cast.eu/attachments/Lindqvist_S.pdf. Last accessed 26th May 2015.
5 Charpentier C & Samuelson LA (1998). Effekter av en sjukvårdsreform – En analys av
Stockholmsmodellen [The Effects of the Stockholm Model]. Stockholm: Nerenius & Santérus Förlag.
6 Mateus C (2008). Casemix implementation in Portugal, In Kimberly JR, de Pouvourville G, D’Aunno T, (eds).
The Globalization of Managerial Innovation in Health Care. Cambridge: Cambridge University Press.
7 Audit Commission (2008). The right result? payment by results 2003-2007. Available: http://www.
uquebec.ca/observgo/fichiers/13281_GSS-3.pdf Last accessed 28th April 2015.
8 Kosecoff J, Kahn KL, Rogers WH, Reinisch EJ et al (1990). ‘Prospective payment system and impairment
at discharge. The “quicker-and-sicker” story revisited’, The Journal of the American Medical
Association, 264: 1980-3.
9 Qian X et al (2011). ‘“Quicker and sicker” under Medicare’s prospective payment system for
hospitals: new evidence on an old issue from a national longitudinal survey’. Bulletin of economic
research, 63(1): 1-27.
10 WHO (2007). Provider payments and cost-containment, lessons from OECD countries. Available: http://
www.who.int/health_financing/documents/pb_e_07_2-provider_payments.pdf. Last accessed 26th
May 2015.
11 Hunter C (1994). ‘DRGs and Australian psychiatry’. Australian and New Zealand Journal of Psychiatry,
28(1): 114-120.
12 Farrar S, Sussex J, Yi D, Sutton M et al (2007). Report to the Department of Health: national evaluation of
Payment by Results. Aberdeen: Health Economics Research Unit, University of Aberdeen.
13 Farrington-Douglas J (2006). From payment by results: the future for tariff setting. Available: http://
www.ippr.org/get-pdf.php?pdf=assets/media/uploadedFiles/research/events/Health_and_Social_
Care/PbR%20briefing%20note%202.pdf. Last accessed 28th April 2015.
14 Marini G & Street A (2006). The administrative costs of Payment by Results, research paper 17. York:
Centre for Health Economics, University of York.
Health policy and economic research unit
British Medical Association, BMA House, Tavistock Square, London WC1H 9JP
bma.org.uk
© British Medical Association, December 2015
BMA 20150489