Reforming NHS financial flows – introducing payment by results (2002)

The government published the consultation document Reforming NHS financial flows – introducing payment by results. The government intended to reform the way in which money moved around the health system and set out proposals including the introduction of tariffs and payment by results (PBR).

Instead of block contracts, providers would be paid by commissioners through PBR for the activities and services they had delivered on the basis of a standard, national tariff. The standardisation of costs and prices was intended to help improve national consistency and enable commissioners to focus on quality and volume of services rather than price. 

PBR was introduced as a way of reimbursing hospitals for services delivered and was intended to drive improvements in efficiency, value for money, patient choice, innovation and quality. A standard tariff would be used to let PCT commissioners focus on quality and volume of services rather than on price. The development and introduction of the tariff based on health resource groups was progressive and subject to change. 

This approach resulted from the government’s view that price competition was generally ineffective for hospital services. 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.