Improving health service - using the reimbursement system to encourage innovation and promote integration

Ian Wootton talks to NHS Confederation Chief Executive, Mike Farrar and PwC’s Ed Bramley-Harker about how the reimbursement system could improve health services.

The current tariff-based system, which prices individual episodes of care, has worked for the past decade – providing the right incentives to reward efficiency and better performance. But if the NHS wants reimbursement to encourage innovation and promote integration, then it needs to adopt new strategies and approaches to pricing.

So what are the challenges of the current system? Our report for Monitor revealed that the information that underpins tariff decision-making is inadequate. The result is that providers don’t believe in the pricing system and there are multiple inconsistent local funding streams that emerge. Also, over time, half of all tariffs move up or down by more than 10% each year - creating an incredibly complex situation for providers to respond to.

Any changes to the system will have a profound impact on the ground. Financial incentives are needed to provide high-quality care for patients. But providers need to understand tariffs, understand their costs, and ensure their voice is heard as the tariff system is restructured  if they are to ensure they are not financially penalised.


Over 40 billion pounds of tax payers money is reimbursed to health care providers through a tariff system. So, any changes that come about through the health reform bill will have a profound effect on healthcare providers and more importantly on patient care.

Mike, how does the tariff system work today?

I think it is work going back to where we started when we created the tariff. Essentially, it was put together to try and support acute providers generating more activity, and in order to do that you had to price individual episodes of care. For the last decade it has worked well. We have generated more and more activity. For the next decade it is simply not fit for purpose. But it was built on historic costs, or a historic understanding of costs, and now we are trying to do something different with it. And I think for the future, if we are trying to encourage use of the tariff for promoting innovation and integration, we are really going to have to do something very different.

And Ed, you have been working with Monitor recently, and looking at the tariff system, what have you found.

Well, I think one of the biggest things we have found is that the information that underpins the assessing of tariffs is not particularly good quality and the consequence of that is that providers do not really believe the prices that come out of tariff. If they do not believe the prices, then they are not really responding to the incentives that we are trying to drive through tariffs with the efficiency and the quality alternatives. One of the other issues we have found when we have looked at the reimbursement system as a whole, is whilst we talk about it as a reimbursement system, it is actually lots of individual funding streams that flow through to providers. You start to get issues where these different funding streams knock up against one another, and each funding stream starts to undermine the alternatives that we are trying to drive through another funding stream. For me, one of the biggest surprises I had when we have been looking at the tariff system is actually the instability of tariff over time. So, we found that about 50% of tariffs move up or down by more than 10% each year. If you think about that from an organisation perspective, if you are a trust trying to respond to 1,500 prices, and they are all 50% of them are moving up or down by that order of magnitude – it is not surprising they find it very difficult to respond to the incentives that you are trying to drive through the tariff system.

And the analysis raises many questions. Mike, what do you think the system needs to do to respond?

I think there are some big choices. The first is, what are you going to do to get the tariff into a better position? If we want that to be pure, if we want it to be the real, single driver of behaviours in our provider side, then actually that is quite a profound set of changes and small shifts can have big impacts on individual providers; sometimes affecting their viability. So, I think nationally, there needs to be some real clarity and transparency about how we are going to move forward. My view is there are two options: they either make a pure tariff; in which case then they are going to compensate around the edges with some transitional funding; or they just iterate this and they move it towards a pure tariff, perhaps over a decade even, by adding in components like innovation or integration incentives to try and bring it closer to the kind of thing that we know will accurately reflect costs and incentives properly.

Now, you raise a very important point in terms of integration being a key element of the reforms. It would be useful to get your view on how does the tariff system work for integration currently, or how might it have to work in the future?

Well, I think it is important to understand that I do not think the tariff system, in itself, should be forcing integration but I think we should look to the reimbursement systems to enable integration. And what we find at the moment is that the reimbursement systems are probably blocking the integration of care. And I think the reason for that is that we talk about reimbursement systems along the administrative boundaries that the NHS has grown up with – so mental health, [cue]acute trusts in the community. Whereas, when you are talking in a world if integration, you want hand-offs between those different elements of the pathway to work properly. And frankly, at the moment, the reimbursement systems are not really supporting those hand-offs effectively.

So, there is quite a lot going on at the system level that we need to be thinking through but what does it mean at the coalface for both providers and for CCGs?

Well, I think Ed has put his finger on it in the sense of -this is going to have a profound impact locally. If we start changing the tariff to change the way in which people operate around those handovers points, then they have to be financially incentivised with the rewards that they get to do the right thing for patients. And tariff has really then got to follow organisations who are trying to get seamless care. And I think that the key thing from my perspective is that each of these individual NHS organisations needs to understand tariff, they need to understand their costs, they need to work collaboratively with their partners in this journey, and they also need to be heavily influencing government now as it starts to restructure tariffs to make sure that, in transition, they are not financially penalised.

Mike and Ed, thank you.

Thank you.