■ The English NHS: an introduction and overview
1English health care is based on the archetypal centralised public sector system, in the form of the National Health Service (NHS). The source of most of the revenue for the NHS is general taxation. It is therefore effectively a national insurance scheme, administered by the national health ministry, the Department of Health. The Department is allocated an annual budget by the national parliament, within which it is expected to meet its expenditure needs for that year. The NHS therefore competes with other public services for its share of national tax revenues. Annual cash limits are rigorously enforced throughout the English public services, and significant overspending by a government department puts the careers of departmental ministers at risk.
2Relative to other OECD countries, the English health care system has traditionally been low spending. However, during the 1990s it became clear that the NHS was also securing poor health outcomes (in areas such as cancer survival) and poor responsiveness (in the form of very long waiting times for some non-emergency surgery). These weaknesses became a central area of political concern, and in 2000 Prime Minister Tony Blair pledged that his government would over the next five years increase spending to average European levels (8% of gross domestic product) (Ferriman, 2000).
3This pledge was conditional on the NHS agreeing to certain reforms, designed to improve clinical quality and responsiveness. To address this requirement, the Department of Health developed the NHS Plan, which set over 400 detailed targets that the NHS was expected to secure over a ten-year period in response to its increased funding. Much of the Department’s energy since then has been devoted to implementing the Plan.
4The NHS provides the bulk of health care in England. However, there is a small but significant private health care sector. This operates predominantly in the market for non-emergency surgery. About 12% of the UK population is covered by private health insurance (Matheson and Babb, 2002), purchased either by employers or individuals, and stimulated mainly by the desire to avoid long NHS waiting times. About 15% of nonemergency surgery is undertaken privately, either through insurance coverage or purchased out-of-pocket (Williams et al., 2000).
5User fees have historically been very low in the NHS, being restricted mainly to some prescription medicines for which many citizens are exempt from charges. In 2004, prescription charges in England accounted for income of £446 million, with only 8.9% of prescriptions directly attracting the full charge of £6.20 (House of Commons Health Committee, 2005). Dental charges contributed a further £452 million. In total, user charges account for only 1.3% of NHS revenue. Local government plays only a small role in the NHS, and local taxes do not contribute to its revenue.
Table 1 shows how the budget assigned to the NHS for financial year 2005/06 was spent. Around 5% is spent on capital, of which just under half represents funding for delivery of NHS Plan objectives, such as cancer, coronary heart disease, mental health and improving access and choice for patients. Over 90% of the NHS budget is spent on local services. This covers hospital and community health services (59.8%), prescribing costs for drugs and appliances (10.7%), and primary care (5.9%). It also includes centrally funded services that are managed directly by the Department of Health, such as activities in the areas of education and training (5.2%) and research and development (0.8%). The “other” category (4.1%) includes central administrative expenditure.
Planned allocation (%) of total NHS expenditure, 2005/061
Planned allocation (%) of total NHS expenditure, 2005/061
■ General institutional structure: NHS actors, their roles and relationships
6The English NHS is organised on a geographical basis. The national ministry has two broad supervisory functions: setting national standards and allocating finance to localities. It supervises the behaviour of local health areas through a network of 28 Strategic Health Authorities (SHAs), each covering regional geographical populations of about two million. The role of the SHA is to ensure that the market for NHS health care within its region secures the ministry’s performance criteria, and that financial limits within the SHA area are not in aggregate breached. SHAs therefore have a broad monitoring role on behalf of the ministry. This system is currently in the process of being reorganised, with the intention of reducing the number of SHAs from 28 to 11 (Department of Health, 2006b).
7The principal local NHS organisations, responsible for organising most aspects of local health care, are the 304 Primary Care Trusts (PCTs). These have boards of management appointed by the national ministry, and have three major responsibilities.
8• They provide primary care, mainly in the form of general practice.
9• They purchase secondary care from local providers.
10• They are responsible for local public health.
11At the time of writing, PCTs are responsible for geographically defined populations of about 150,000, and there are therefore about 12 PCTs within each Strategic Health Authority. However, a major reorganisation of NHS purchasing is currently under way, and it is expected that the populations covered will increase to about 500,000.
12In order to fulfil their responsibilities, PCTs are given fixed budgets by the Department of Health, with which they are expected to purchase
13health care for their population, including primary and community care, hospital care, pharmaceuticals and public health interventions. The budgets are allocated largely according to a national capitation formula, based on the demographic and socio-economic characteristics of the locality, and further adjusted for variations in local labour and capital costs. This resource allocation mechanism is described in more detail below. PCTs are expected to contain their annual expenditure within the set budgetary limits.
14PCTs purchase primary care from local general practitioner (GP) practices, which are an important feature of the NHS. Every citizen must be registered with a GP practice, and except in emergencies cannot secure access to secondary care without a referral by the GP to a specialist. GPs therefore perform an important gatekeeping role in the NHS, and the restraint exercised by GPs in making such referrals has been an important reason for the historically low health care expenditure in England.
15There are two broad mechanisms for funding GPs. About two thirds of GPs are independent practitioners, employed under the terms of a national GP contract negotiated between the Department of Health and doctors’ leaders (the British Medical Association). This traditional GP contract specifies detailed terms and conditions for GP remuneration. It includes a large element of capitation payments for basic services, such as daily clinics, and additional payments for extra services. There is also a major bonus scheme for securing higher quality primary care, described in more detail below. The remaining one third of GPs are salaried employees of the local PCT.
16PCTs purchase secondary care from a local market of public, private and not-for-profit sector providers. In the hospital sector, providers have traditionally been what are known as NHS Trusts (hospitals or groups of hospitals under common management). These are public organisations, with boards appointed by the national ministry. However, they are independent of the local PCT, and compete for business from local PCTs. NHS Trusts are expected to operate within their budgets “taking one financial year with another”, which is usually interpreted to mean that they should balance expenditure with revenue over a three year period.
17An increasing number of NHS Trusts are being converted into Foundation Trusts, once they satisfy certain performance criteria, such as good financial management and low waiting times. Like NHS Trusts, Foundation Trusts compete for local NHS business, but they enjoy more freedom from national control. In particular, they are able to set their own local clinical priorities, borrow capital, pay staff above the rates agreed nationally, and they are not required to “balance the books” in any one financial year. Instead, they must exhibit long-term financial viability, along the lines of a conventional long-term business model. Unlike other NHS Trusts, Foundation Trusts are not accountable to the health minister, but are regulated by an independent financial regulator known as Monitor. 
18There has recently been a major policy drive to increase the role of the private sector in the provision of health care for the NHS, in order to increase local competitive pressures and patient choice. A notable development is the introduction of independent sector treatment centres, medical organisations that provide routine diagnostic and surgery procedures to day-case and short-stay patients. None of the four big UK private providers won any of the five-year contracts tendered for the first centres, which went instead to overseas providers, some working in partnership with UK organisations (Timmins, 2005b). Providers were offered favourable payment levels in recognition of their high start-up costs (around 15% above NHS prices), but these are expected to fall when the next round of contracts is finalised (Timmins, 2005a). By the end of December 2005, the NHS had bought around £2 billion of activity from the independent sector treatment centre programme, including services from treatment centres, mobile magnetic resonance imaging scan units, and commuter walk-in centres as well as conventional inpatient services. 
19The contracts negotiated with local PCT purchasers are the major source of funding for NHS and Foundation hospital trusts. Until recently these have largely taken the form of annual “block” contracts, under which PCT and provider negotiate an agreed volume of hospital care for the coming year for a fixed budget. Indeed, many budgetary allocations have traditionally been adjusted by Strategic Health Authorities during or at the end of the financial year in order to ensure that NHS organisations (purchasers and providers) did not exhibit large divergences from budgets. However, block budgets are now being replaced by a new system of diagnosisrelated group (DRG) payments known as Payment by Results (PbR), described in more detail below. These remunerate providers according to a fixed national tariff of case payments. Foundation Trusts are already fully funded by this case payment mechanism and the intention is that all 90% of hospital activity should be so by 2008. The PbR approach removes the flexibility for Strategic Health Authorities to manipulate budgets, and has in its early implementation given rise to very large budgetary surpluses and deficits amongst some NHS organisations (National Audit Office and Audit Commission, 2006).
20Associated with the PbR system is an increased emphasis on patient choice. Under the block contract system, patients were restricted to the
use of hospitals with which the PCT had negotiated a contract. PbR is intended to facilitate a wider choice of providers being offered to patients. In January 2006, the “choose and book” system became operational. Once their GP has decided that a referral to a hospital or other specialist service is required, patients needing elective treatment are offered a choice of four or five providers. These could be NHS Trusts, Foundation Trusts, treatment centres, private hospitals or practitioners with a special interest working within primary care. A national electronic booking programme enables patients to choose a date and time for their appointment. Appointments can be made at the GP practice surgery, by calling a contact centre, online, or by telephoning the hospital directly. 
The other major sources of revenue for local providers are payments for medical research and clinical education made by the Department of Health (see Table1). These are allocated to institutions largely on a historical basis, although there are proposals in hand to concentrate research funds in a smaller number of centres where they can have most benefit (Department of Health, 2006a). Around £4 billion is spent on education and training, with over £600 million allocated for research and development (Department of Health, 2005). In addition, the national Higher Education Funding Councils contribute about £850 million towards education and research (Department of Health, 2006a).
■ Regulation: assuring NHS performance
21The NHS is subject to a complex set of regulatory and supervisory arrangements that are under review at the time of writing. This section summarises some of the more important elements of the present regulatory regime.
22One of the prime roles of the national ministry is to define national standards of health care. It does this in a number of ways. For example, it has specified a set of National Service Frameworks (NSFs) for broad disease areas, such as coronary heart disease. These include guidelines on how health care should be delivered. Although many of the National Service Frameworks have been broadly welcomed, there have been concerns that the guidelines have not always been adequately informed by cost-effectiveness considerations, that clinicians are not always aware of their content, and that they are not always satisfactorily updated in the light of new evidence.
23Another important source of standards is the National Institute for Health and Clinical Excellence (NICE). The role of NICE is to promote effectiveness and cost-effectiveness in the use of health technologies, including public health interventions. It produces three types of guidance:
24• Technology appraisals: these offer guidance on the use of new and existing treatments within the NHS. To date (March 2006), 97 technology appraisals have been published, of which 11 are reviews of previous appraisals. Topics include medicines, medical devices (e.g. inhalers), diagnostic techniques (e.g. cervical cytology), surgical procedures (e.g. use of coronary artery stents), and health promotion activities (e.g. ways of helping people with diabetes manage their condition).
25NICE makes its judgement through an independent Appraisal Committee, constituted of individuals drawn from a range of professional backgrounds. The Committee considers the evidence from an academic assessment group and from company submissions. After a careful consultation process, the guidance is published (National Institute for Clinical Excellence, 2004a). All guidance is reviewed at regular intervals and recommendations reconsidered in the light of any new evidence.
26• Clinical guidelines: these offer guidance on the appropriate treatment and care of people with specific diseases and conditions within the NHS. Clinical guidelines are based on the best available evidence and are intended to help health care professionals in their work, but do not replace their knowledge and skills. Topics include the management of chronic heart disease, dyspepsia and hypertension. Settings covered include primary, secondary and tertiary care. There are currently (March 2006) 47 guidelines. The clinical guidelines interpret and provide detail about how to implement the National Service Frameworks. For example, the NICE guideline on the “Management of Type 2 Diabetes” describes the treatment of renal disease, for which the broad aims of management are identified in the National Service Framework on Diabetes.
27• Interventional procedures: these offer guidance on whether interventional procedures used for diagnosis or treatment are safe enough and work well enough for routine use in the NHS. They generally cover new procedures, although existing procedures may be reviewed if there are safety concerns. Topics include radiotherapy for age-related macular degeneration and dynamic cardiac monitoring. To date (March 2006), guidance on 156 interventional procedures has been issued. The Interventional procedures Advisory Committee, an independent body of 24 members with a range of expertise, considers procedures only in terms of safety and efficacy, but does not take into account clinical or cost-effectiveness (National Institute for Clinical Excellence, 2004b).
28One aspect of NICE guidance on technology appraisals is supported by statute. If NICE produces guidance on a technology appraisal to say that a new medicine should be made available to NHS patients who meet
particular criteria, then PCTs, who are responsible for providing funding for that treatment, are under a statutory obligation to ensure that the technology “…is, from a date not later than three months from the date of that Technology Appraisal Guidance, normally available” (Secretary of State for Health, 2001).
29The Healthcare Commission is the independent national regulator responsible for ensuring that national quality and safety standards are adhered to. It undertakes inspections of individual NHS and independent (private and voluntary) health care organisations, and has a wide range of functions, of which the main ones are to:
- assess the management, provision and quality of NHS health care and public health services
- review the performance of each NHS trust and award an annual performance rating
- regulate the independent health care sector through registration, annual inspection, monitoring complaints and enforcement • publish information about the state of health care
- consider complaints about NHS organisations that the organisations themselves have not resolved
- promote the coordination of reviews and assessments carried out by the Commission and others
- carry out investigations of serious failures in the provision of health care Regulation by the Healthcare Commission includes assessments of compliance with standards. Until July 2005, the annual assessment of every NHS organisation involved the award of a “star rating”, ranging from zero (lowest level of performance) to three stars (highest). These ratings were determined predominantly by the performance of the organisations in satisfying the national government’s waiting time targets. In this respect they have been undoubtedly successful in dramatically reducing the long waiting times traditionally experienced by some patients. However, clinical quality has played little role in the determination of ratings, leading to criticism that they are distorting clinical practice.
The Healthcare Commission also checks that clinicians in health care organisations participate in regular clinical audit, defined as: “A quality improvement process that seeks to improve patient care and outcomes through systematic review of care against explicit criteria and the implementation of change. Aspects of the structure, processes, and outcomes of care are selected and systematically evaluated against explicit criteria. Where indicated, changes are implemented at an individual, team, or service level and further monitoring is used to confirm improvement in health care delivery” (National Institute for Clinical Excellence, 2002).
A range of disease areas and procedures are currently covered by such clinical audits, some of which are specified by National Service Frameworks (e.g. the NSF for Coronary Heart Disease). However, implementation is at an early stage and there are questions over how the national strategy will develop.
The independent organisation responsible for supervising financial management of the NHS is the Audit Commission, which appoints auditors to check on the financial standing of NHS organisations, and inspects their financial management arrangements. It produces detailed local and national reports on the financial performance of the NHS. The financial performance of Foundation Trusts is supervised by the separate regulator known as Monitor.
■ Allocating finance and purchasing health care
31The national Department of Health gives each PCT an annual budget, based on a complex capitation formula that reflects the nature of its local population. The most important influences on the formula are demographic data, additional indicators of health care need (such as mortality and morbidity rates), variations in input prices, and previous levels of expenditure. PCTs are expected to adhere to these budgets, and PCT senior executives’ pay and jobs are at risk if serious breaches occur. Although individual NHS organisations sometimes exceed their budgets, this strong financial discipline has traditionally secured close adherence to the national cash limit for the NHS, and is one of the important reasons for the historically good cost control in the English NHS.
32PCTs clearly have a strong incentive to moderate demand for health care through preventative measures, such as encouraging use of cost-effective treatments. This purchasing role is however a formidable managerial challenge, and the capacity of most PCTs to fulfil this role has traditionally been weak. Instead, the main focus of PCT cost control has historically been in negotiating block contracts with providers that ensure budgetary limits are respected.
33This approach has been superseded by the introduction of Payment by Results. PbR radically changes the NHS funding mechanism, and requires higher standards of financial management in Primary Care Trusts, NHS Trusts and Foundation Trusts (Department of Health, 2002). It is intended to stimulate greater quality of hospital care, increase efficiency and promote increased patient choice (Street and AbdulHussain, 2004). In common with other DRG systems, it offers major opportunities and incentives, but it also carries “major risks, which if not well managed will lead to financial instability and service difficulties” (Audit Commission, 2004).
34The PbR case payment tariffs are classified by the English DRG system, under which activity is defined by Healthcare Resource Group (HRG). A patient’s HRG is determined by diagnosis and complexity. The associated tariff is based on the historical national average of all hospital costs (including capital) for that procedure, known as the HRG “reference cost”. For example, a procedure that can be offered as either a day case or inpatient case receives a single tariff, based on a weighted average of the day case and inpatient reference costs. Adjustments from historical costs are made for wage and price inflation, as well as the expected cost impact of any new national clinical guidance from NICE or NSFs.
35The Payment by Results system was applied first to Foundation Trusts from April 2004, covering all types of care. The intention is that tariffs should be applied to all providers and 90% of specialities by 2008. Unavoidable regional variations in input prices will be funded nationally. However, there is otherwise a strong commitment to retention of a uniform national tariff, with limited scope for local negotiations on reimbursement. All increases or reductions in activity will therefore be charged at national average rather than marginal cost. Early experience suggests that this lack of flexibility may give rise to very severe financial difficulties for some NHS organisations, and there may be a need for a more gradual implementation and greater local purchasing flexibility (Audit Commission, 2005).
36General practitioners clearly have a vital role to play in determining how NHS finances are spent. A new national contract for GPs was introduced on 1 April 2004. At its core is a system of capitation payments, with some adjustments for the age and social circumstances of patients. However, an important innovation to the contract was an ambitious system of incentives to secure enhanced clinical quality in general practice, known as the Quality and Outcomes Framework (QOF) (Department of Health, 2004).
37The framework seeks to measure adherence to best practices in health care provision using about 150 performance indicators. Practices can accumulate quality “points” according to their performance on these indicators, up to a maximum of 1,050 points, as summarised in Table 2. Within each of the clinical domains shown in Table 2, points are awarded for a set of performance indicators. As an example, the indicators used in the 2004 QOF for the hypertension domain are given in Table 3. Points can start to be accumulated once some threshold level of attainment is reached, up to a maximum for each performance indicator. For example, a practice that can demonstrate that the notes of 90% of registered patients with hypertension contain at least one record of smoking status (BP 2) will receive the full 20 points. Bonus payments were expected to account for about 20% of GP income in the first year. However, performance far exceeded expectations, with 90% of practices securing all available bonus points, so payments in the first year have been closer to 25%. In light of early experience and new clinical evidence the QOF has been adjusted for 2006 (White, 2006).
About one third of GPs are salaried employees under the Personal Medical Services (PMS) contract, the local alternative to the national General Medical Services (GMS) contract.  Although there are local variations in the terms of PMS contracts, many PCTs have also implemented the QOF in the local implementation of the PMS contract.
An important innovation designed to secure better purchasing of health care, and adherence to budgets, is the implementation of “practice-based commissioning” (Department of Health, 1997). This gives each participating general practice an indicative annual budget within which it is expected to purchase all necessary health care services for its patients, including most secondary care and pharmaceuticals. By moderating demand for expensive inpatient services, practice-based commissioning is intended to act as a counterbalance to the strong incentives for increased hospital activity inherent in PbR (Smith et al., 2005). It is too early to judge the effectiveness of practice-based commissioning, but the continued strong financial control of the NHS may depend on its success. It is hoped that by the end of 2006 100% of practices will be participating in the scheme (Harding, 2006).
Table 2. Quality and Outcomes Framework (QOF)
Table 2. Quality and Outcomes Framework (QOF)
An example: Construct of the hypertension indicators (QOF, 2004)
38The English health system is undergoing a period of extreme turbulence. Indeed that turbulence has to some extent been introduced deliberately in order to stimulate what one former advisor to the Prime Minister has described as “constructive discomfort” (Stevens, 2004). Underlying the wave of English reforms has been the wish to spend increased amounts of money on health care, but to do so in an effective fashion, by securing higher quality standards and better responsiveness.
39At the heart of the reforms is the promulgation of clinical guidance, in the form of National Service Frameworks and NICE guidance. This seeks to identify “best” clinical practice, but the criteria for the design of guidelines are not consistent. In the case of NICE guidance, cost-effectiveness usually plays an important role. However, economic considerations have to date not played a central role in the development of National Service Frameworks.
40The chosen guidance is reinforced by a number of mechanisms intended to encourage adherence. The most ambitious of these is the Quality and Outcomes Framework of the new GP contract. In the specialist domain, patient safety has become a central policy concern, requiring the development of safety guidelines. However, other less ambitious innovations include mandatory relicensing of doctors every five years, and independent scrutiny of clinical practice.
41The organisation charged with monitoring adherence to standards is the Healthcare Commission, set up in 2004. In its early stages, the Commission has published the controversial “performance ratings”, which rank all NHS organisations on a four point scale. The intention is that the ratings should offer a balanced assessment of organisational performance, although to date their main emphasis has been on waiting times rather than clinical performance. The Commission is planning to alter radically the form of assessment to embrace a broader range of performance criteria, and to raise the importance of clinical aspects of patient care. Whether the undoubted successes of the ratings system in reducing waiting times can be replicated in the clinical domain remains to be seen.
The finance system has been central to the English reforms. Local purchasing organisations (PCTs) are given fixed budgets with which they must meet virtually all the health care needs of their localities. However, much of their expenditure is largely outside of their control, such as emergency hospital admissions. Moreover, PCTs are unable to bargain over the price paid for hospital care because the Payment by Results tariffs are set by central government. National clinical guidelines also limit the scope for active management of demand. The major financial difficulties currently experienced by some PCTs reflects
- the weakness of the capitation formula,
- poor financial management,
- low levels of influence over the actions of GPs in prescribing or referring patients to specialists,
- and uncontrollable random fluctuations in demand for health care.
43Two strategies have been implemented to improve the local purchasing function: the merging of PCTs into larger organisations covering populations of about 500,000, and the introduction of practice-based commissioning. The reorganisation of PCTs seeks to concentrate managerial experience into a smaller number of organisations, and reduce the importance of imperfections in the capitation formula. However, in the short term the reorganisation is creating severe instability by diverting the attention of managers from the promotion of a more cost-effective health care system to a more prosaic concern with retaining their jobs. The long history of NHS reorganisations suggests that it will take two years for the new system to recover from the changes.
44Practice-based commissioning is intended to promote more active control of patient demand by general practitioners. It is based on previous NHS experience in the 1990s with fundholding general practice. Under this arrangement, GPs who chose to become fundholders were given a budget with which to purchase routine non-emergency hospital care and pharmaceuticals for their patients. The experiment was abandoned in 1998, largely, it seems, for ideological reasons, at a time when over 50% of patients were registered with a fundholding practice. Subsequent evaluation has suggested that fundholders did appear to reduce waiting times and the volume of specialist referrals compared to their non-fundholding counterparts (Dusheiko et al., 2006). This evidence may have stimulated the reintroduction of the fundholding model, in the form of practice-based commissioning.
The principal reason for the current financial instability in the NHS is the introduction of a pure DRG payment system for almost all forms of hospital treatment, in the form of Payment by Results. This is a very extreme form of DRG scheme, with few of the safety nets available in other health systems, such as the ability to vary local taxes (Finland), separate funding of capital expenditure (Germany), mixed block grants and DRG payments (Norway), variations in payments from the national tariff, and cost sharing for expensive patients (many systems) (Busse et al., 2006). It has led to very large deficits (and surpluses) in some hospitals, the seriousness of which is exacerbated by the need to secure financial balance within a very short time horizon. At the time of writing, PbR has been temporarily abandoned (in its pure form) in some parts of the country, and it remains to be seen whether it is a sustainable policy.
In short, the English health system can be considered an interesting laboratory for numerous health system reforms. Unfortunately, most of the reforms have been implemented piecemeal, and it is difficult to evaluate their impact – indeed the Department of Health has often modified or abandoned initiatives before their impact can be properly measured. Furthermore, the fundamental structural reorganisation of the NHS currently under way is diverting managerial energy, and will probably make it very difficult for the full benefits of the reforms to be secured in the near future. We would therefore suggest that observers wishing to learn from the English experience should examine the reforms as a fertile source of ideas for their own health systems. However, they should, in our view, implement any reforms that seem relevant to their own situation in a much more cautious manner than has been the case in England, so that the innovations can be properly monitored and evaluated.
Anne Mason : Research Fellow at the Centre for Health Economics, University of York. Peter C. Smith : Professor of Economics and Director of the Centre for Health Economics at the University of York (UK).
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