'Delivering the NHS Plan: next steps on investment, next steps on reform' report

18 April 2002

The government outlined progress against the NHS plan and introduced the concept of 'payment by results' for acute, elective activity in the document Delivering the NHS Plan, published in 2002.

New national standards had been published for cancer and older people's services. The Commission for Healthcare Improvement (CHI) had completed over 100 reviews of local NHS services and a new system of star ratings for NHS had been introduced by the NHS Executive.

The first wave of three-star trusts would be able to become foundation hospitals. These hospitals would be fully part of the NHS but would be given greater independence. 

Foundation trusts

The concept of 'foundation hospitals' for top performing hospital trusts had been first introduced in a speech by the Secretary of State, Alan Milburn, in January 2002. Foundation hospitals, or trusts, as they became known, would have freedom to develop their board and governance structures to involve patients, staff and the local community.

While the past performance of the first wave of foundation trusts had to be excellent, some, such as Bradford Teaching Hospitals (which suffered a large and unexpected budget deficit), fell apart quickly. Foundation trusts would be given freedom and flexibility to reward staff appropriately and would be given full control over assets and additional freedoms to access finance for capital investment.

Payment by results

The document reiterated the government's commitment to developing incentives which would support the delivery of better services for patients. The plan highlighted the fact that there was no national system of financial incentives to support the movement of patients between providers or to make the best use of capacity.

While the department did not have plans to change the allocation of resources to primary care trusts (PCTs) on the basis of need, it highlighted the need for reform of payment mechanisms. Instead of block contracts, providers would receive payment through the payment by results (PBR) system. PBR was based on prospective payments, a fixed level of payment calculated in advance of the care being delivered.

PBR was introduced as an alternative to block contracts. Under block contracts, hospitals were paid a fixed rate to provide a broad range of services. There was little incentive to increase activity. The aim of PBR was to ensure money could follow the patient. Its introduction coincided with the drive to decrease waiting times and PBR could reward additional activity.

The government aimed to have a new system in place for the 2003/04 financial year. The plan stated that PCTs would be able to purchase care from the most appropriate provider, regardless of whether it was a voluntary, private or public sector organisation. However, the department was clear that it would not introduce competition on price.

On that basis, there was a commitment to use health resource group benchmarking to produce standardised tariffs for the same treatment regardless of provider and avoid competition on price. The intention was that commissioners would use the tariffs to secure services, ensuring greater national consistency in the costs of treatments.

In October, the government published the consultation document Reforming NHS financial flows - introducing payment by results which outlined further details on PBR. There would continue to be caps on the level of activity that PCTs would be prepared to fund and the document outlined the need for appropriate risk sharing mechanisms to discourage growth in low priority activity. 

Commissioners and providers would agree a service-level agreement (SLA) to outline how both parties would deal with unusual and unexpected events (such as sudden high emergency admissions). Commissioners and providers would decide how they would react in the SLAs.

New regulatory bodies for health and social care

Although CHI had only been established in 2000 and the National Care Standards Commission (NCSC) in 2002, the Department of Health proposed the establishment of a single new Commission for Healthcare Audit and Inspection (CHAI), which would bring together the value for money work of the Audit Commission, the work of CHI and the work of the NCSC.

There had been well publicised tensions as to whether CHI should be a policeman or a social worker (that is, there to punish poor performance or to encourage improvement). These tensions persisted in CHAI. Regarding this new system of inspection, the report noted that:

'In order to ensure clearer public accountability we will strengthen the system of inspection for health and social services. The current system has evolved rapidly. But early experience is demonstrating that the arrangements are fragmented. This is burdensome on frontline staff and also creates a lack of clarity for the public. The Bristol Royal Infirmary inquiry recommended that the number of bodies inspecting and regulating health and social care should be rationalised. The inquiry also recommended that regulation of the public and private health sectors should be brought together. The government accepts these recommendations... Fragmentation not only makes for unnecessary bureaucracy, it weakens the system of inspection. It makes for confusion about how well the NHS is performing for those working in the NHS, for patients who use it and for taxpayers who fund it. We now propose radical change.'

CHAI would have responsibility for the inspection of both public and private providers providing health care. It would have responsibility for:

  • inspecting all NHS hospitals
  • licensing of private care provision
  • conducting NHS value audits on a national basis
  • validating published performance data
  • publishing star ratings for all NHS organisations
  • publishing reports on the performance of NHS organisations
  • providing independent scrutiny of NHS complaints
  • publishing an annual report to Parliament.

In parallel, the government proposed that there should be a new social care regulator – the Commission for Social Care Inspection (CSCI) – that would incorporate the functions of the National Care Standards Commission, the Social Services Inspectorate (SSI), and the Audit Commission's joint review team (which undertook reviews of council social service departments).

These functions enabled a single regulator to look for the first time across the whole canvas of social care, including commissioning and provision and to see the impact of the former on the latter. CSCI would:

  • inspect all social care organisations to ensure compliance against national standards
  • register services that meet national standards
  • carry out inspections of local authority social services departments
  • validate published performance data
  • publish star ratings for social service authorities
  • publish an annual report to Parliament.

Department of Health.
Delivering the NHS Plan: Next steps on investment, next steps on reform.
HMSO; 2002.

Rivett G.
NHS history: Chapter 6: Labour's decade 1998-2007.
nhshistory.net; 2019.

Department of Health.
Reforming NHS financial flows: Introducing payment by results.
Department of Health; 2002.