This blog post was written by Jacque Mallender, co-founder and director of Economics By Design.

Jacque has been working with us as part of our strategic partnership with the NHSX AI Lab, helping to set-up the AI Award evaluation approach with NHSX and the AAC. We also recently invited Jacque to speak about the topic of Economics in the NHS to the FutureGov team.

In the halcyon days before COVID-19, I was asked to provide a seminar to the Green Templeton College, Oxford, Management in Medicine Programme. “Do your economics thing” was the general ask. I was told that the students wanted to know “how the money flows”. Thinks: “How do you describe a tangled web that is our payment model system?”.

You can’t really explain how the money flows now, and how that’s likely to change in the near term, without a basic grasp of the last four decades of health and care in England, and how we went from a centrally driven system of allocation and budget setting to .. ah wait…a centrally driven system of tariffs and funding flows.

I started my career before the birth of the “internal market”. When there was no separation between commissioning and providing. When we would try to allocate funds “fairly” to regional and district health authorities and hope it would generally be enough to pay for those resources needed to provide a reasonable level of health services to local populations. When efficiency was not really even measured.

I remember, as a young health economist, finding myself at a policy think-tank event one evening, and a pamphlet being shoved into my hand, written by an American. Alain Enthoven “Reflections on the management of the National Health Service: An American looks at incentives to efficiency in health services management in the UK”. He used words like “incentives” “efficiency” “competition”. I realised how radical it was, but little did I appreciate at the time how influential it would become.

Only 4 years later, the Government published a White Paper, January 1989, entitled “Working For Patients”, which proposed the creation of an “internal market” for the NHS. The internal market, initiated in 1991, involved the separation of the payers (to become known as commissioning) from the providers of care — well at least for hospital and community health services.

Why such a radical redesign? As Alan Enthoven said at the time, there was a perception that the NHS lacked any incentive to improve efficiency, it was over-centralised, it was dominated by the interests of the providers of care, there was little accountability, management information was poor and customer service was “not good”. It was expected that if we could take some of the good features of a market and reflect it in the design of the NHS, we would improve the allocative and technical efficiency of the system in line with good old neoclassical economics. The problems Enthoven had articulated would go away.

This was no mean ambition. There’s a reason we don’t leave healthcare entirely to the market, mainly because all of the preconditions necessary to make markets work “fail” in the context of healthcare. So, policymakers set about the task of designing this new system to overcome all these complex barriers and introduce incentives and competition within the NHS.

If anyone can point me to the original 1989 working papers I would be grateful, just for the fun of reading them. I remember various jokes doing the rounds about whether the message had truly been received when the paper on the development of “commissioning” was working paper number 20 (or was it working paper number 22?).

So much has been written about this period I won’t attempt to even summarise it here. Suffice to say, it was a very interesting time for health systems economists and system design. From a value design perspective, the most interesting series of events I recall were the “Rubber Windmills”. Led by the wonderful Alasdair Liddell, these were a series of “market simulation exercises” the outcomes of which went on to inform successive design tweaks/improvements to the internal market operating model.

The basic design of the operating model for the internal market was to give money to local payers on a fair shares’ basis and then allow them to buy services from local providers. This would encourage competition between providers. Patient choice later became a core part of this: in theory, the patient would be allowed to choose between providers based on their experience of care including, for example, waiting times for surgery.

The development and use of national tariffs were intended to make sure that competition would be based on quality and performance and those successful providers would attract more income than unsuccessful providers. There was a double incentive for providers in that they could also deliver more services by being more efficient than the average. If they’re able to deliver services at a cost lower than the national tariff then they could use the efficiency savings to invest in better services. In my experience, national tariffs were equally effective at obstructing the effective development of prevention services, community-based services, integrated health and social care, and pan-provider network service pathways (e.g. cancer).

Clearly, this system would work best in areas where there were choices in terms of local providers, where services were relatively separable (such as planned elective surgical treatments), and where there was some flexibility in provider capacity. For example, where private providers could provide planned surgery to complement the local NHS resource. It was certainly the case that waiting times for surgery came down to levels unimaginable before the creation of the internal market; when the percentage of people waiting more than one year for surgery was anywhere between 20% and 30%.

All good so far? Except that here we are now, three decades later and, while we have seen some huge improvements in quality and efficiency, and some amazing innovations, we still face some really fundamental challenges including:

  • systemic health inequalities
  • continued insufficient focus on population health and under-funding of health promotion and illness prevention activities
  • seriously fragmented services across clinical pathways for people living with chronic disease, multi-morbidity and/or frailty
  • continued over-reliance on hospital as the setting of care
  • poor integration between health and social care
  • an overly “lean” system which has little innate flexibility for individual providers to adjust capacity quickly, as has been experienced during the pandemic.

In January 2019, the NHS Long-Term Plan was published. It contained lots of ambitious plans and programmes to address these current challenges and aimed to link the plan to long-term funding. It does rely to some extent on the issues relating to social care funding to be addressed, and at the time of writing this, we await the much-promised Green Payer on that issue.

The NHS Long-Term Plan is trying to push forward a new operating model involving integrated care systems and a closer alliance between payer and provider at a system level. This is tough to do, partly because we have “re-organisation” fatigue, and partly because the most recent legislation has created a fragmented legal structure which places some rusty handcuffs around the system. Nonetheless, the NHS Long-Term Plan does effectively involve the dismantling of at least some of the features of the internal market.

Fundamentally, the goal of an effective operating health system remains to optimise the distribution of a limited pot of resources to deliver the maximum possible health gain. The publication of the consultation on the 2020–21 National Tariff system marked a move away from payments based on activity and a commitment to move towards population health payment models. The proposals are to move to more “blended payment models” which combine a quality or outcome component, a risk-sharing element, and a variable component. The outcome of the consultation is delayed on account of COVID-19.

The experience of the system in dealing with COVID-19 has probably accelerated the move away from the internal market, represented by the development of Integrated Care Systems and the interim use of fixed budget block contracts. But there’s a risk that as we move towards a new normal, we will revert to some form of pre-internal market centralised approach.

I suggest that instead, we need ICS leaders to incorporate some crucial design principles into their operating models and give them the flexibility to use whatever payment mechanisms they need to use to deliver their goals. These are:

  • recognise explicitly, that healthcare is a complex adaptive system and a static command and control operating model will be obsolete before it’s implemented
  • recognise that in health and care, citizens, patients and staff are all customers and users of the operating system
  • recognise that whilst NHS health care professional behaviours are not driven by financial incentives, they can be negatively impacted by a dysfunctional operating model
  • recognise that decisions about the allocation of resources across and between programmes of care are probably best made strategically, at the level of the ICS
  • recognise that decisions about the use of resources to deliver services on the front-line are often best made at the front-line
  • recognise that payment models should allow financial flows to follow resource needs, rather than the other way around

We should try to make sure the new payment systems we design for this new era (which could include blended payments) allow money to flow through the system to explicitly support these design principles.

Will we still have a tangled web of payment models in this new system? Hopefully not. It will probably still be complex because the system is complex. We certainly need to monitor and evaluate on an ongoing basis how well the payment models, and resulting funding flows are aligned with system goals and ultimately the achievement of the NHS quadruple aims.

Jacque is a respected international health and public policy economist and health evaluation practitioner. Over the last 35 years, Jacque has worked across health and social care with a focus on evaluation and health economics.


Designing value into the operating model of our healthcare system was originally published in FutureGov on Medium, where people are continuing the conversation by highlighting and responding to this story.

Original source – FutureGov

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