Activity Based Funding in the English NHS: Measuring the Effect on Quality

Abstract

In April 2003 a new payment system for hospitals called Payment by Results (PbR) was introduced in England. The new system is a fixed tariff case-mix based prospective payment system which reimburses hospitals for the type and amount of care they provide. By linking provider income more closely to the volume of care, the tariff is expected to provide incentives for higher output and lower costs. In addition using a fixed national pricing system precludes the opportunity for Trusts to attract extra patients through price competition. It is intended that this will encourage hospital Trusts to compete on the basis of quality, which will have a positive effect on the quality of care. However, given that hospitals are required to break even, they may try to reduce their costs through reductions in quality rather than the intended mechanism of efficiency savings. The policy has been phased in over a number of years, applied to a subset of treatments in its early years of implementation and applied more widely by some types of hospital Trust.

Objectives: This study uses individual spell level data to examine whether changes in the quality of care in during the first two years of the policy are associated with tariff funding and what direction those changes have taken.

Data: We used hospital level data for the period 2001 to 2005 to construct a panel dataset from the Hospital Episode Statistics (HES) data. HES data provide details on hospital admissions within England on an annual basis.

Methodology: Our evaluation problem is to measure the effect of PbR on hospital behaviour. We want to measure the effect of the policy on the targeted HRGs and Trusts. We create a counterfactual using a 'difference-in differences' framework. We use 30-day surgical mortality and probability of death on discharge as two proxy measures of quality of care. Fixed effects are used to control for unobserved heterogeneity.

Results and conclusion: the early application of the tariff appears to be associated with lower mortality rates both on discharge and within 30-days of discharge following surgery.

Keywords: activity based financing, quality of care, payment by results