System finance: a brave new world for NHS hospital business?

Oli Hudson, content director at Wilmington Healthcare, explores what new ‘system’ financial arrangements will mean for doing business with NHS Trusts.

Here’s a new phrase for you: “system level allocations”. If you’ve not heard of them yet, they form the lynchpin of a new financial regime within the NHS, where funding and incentive payments to hospitals are tied solely to system level performance.

We’ve already seen an abrupt end to payment by results - hospital activity has been covered for most of 2020 by block contracts to ensure trusts have an adequate baseline for their operations during the pandemic. Now, not only do we seem to have moved on from paying individual organisations for activity, but the financial settlement calls for Trusts to share the risk together to increase activity – which may involve several NHS hospitals and trusts and other providers.

Under the regime there will be incentive payments for exceeding expected activity levels and financial penalties for falling short, but these incentives and penalties will depend solely on system level performance, as opposed to that of individual organisations.

The move will support local integration, and population health, the approach driven by the NHS Long Term Plan.

How will it work?

Systems will be expected to reach at least 90% of their 2019-20 activity for overnight electives and outpatient/daycase procedures.

If they fall short of those expected activity levels, their baseline income will be reduced by 25% of the tariff value of the shortfall. In effect, any shortfall will be paid at 75% of the tariff value.

For those that exceed it, they will receive additional funding worth 75% of the tariff value of the extra procedures.

The moves underlines concerns at the highest levels about the potentially crippling effect of the NHS elective care backlog, and a need to deal with it as quickly as possible.

How has this been received by Trust leaders?

The move has not gone down well in all quarters. Glen Burley, who leads a group of three acute trusts in the West Midlands, and speaking to HSJ, called the new architecture ‘a very risky tactic in a very risky year’, and suggested that a more traditional tariff system – based on units of activity - would be better to help trusts clear the huge expected backlog of elective cases.

“The population health approach probably needs to be phased, linked to improvement trajectories, but I’d leave elective care out of the model whilst we deal with the COVID-19 problem.”

Another trust director said getting to 90 and 100% of activity would almost certainly be too ambitious, and warned that in extreme circumstances some trusts might even be disincentivised by the move, writing off the incentive payments and ‘banking’ the 75% of funding for planned care without doing any extra activity.

However, NHS England have said, “we expect all organisations to work together to ensure resources are used to deliver maximum benefit for patients and value for taxpayers across the system as a whole.”

Systems will be expected to submit their operational plans, incorporating the new parameters, by 5 October.

What does it mean for medtech?

There will be a premium on hospitals – as a system – clearing the backlog and massively upping their elective and outpatient activity – this particularly applies to MRI/CT and endoscopy procedures and high-flow areas such as orthopaedics and ophthalmology.

Firstly, this means that products and services that can help patients deal with this backlog – either by improving patient flow, speeding up theatre and procedure time, or assisting swift diagnosis – have added impetus to their business case.

Secondly, it will require an understanding of system finance and what the pinch points are – and the subsequent operational response – for all the Trusts within that system. With procedures now not done on conventional PBR tariff this could mean looking at the value proposition for the device under a much wider lens.