Unbiased Analysis of Today's Healthcare Issues

How does England’s NHS pay for hospital stays?

Written By: Jason Shafrin - Feb• 22•16

They use a system similar to the American DRG system.  A paper by Pananicolas and McGuire (2015) report:

…the English NHS introduced case-based payment system in 2003/4, where they linked individual case groupings – or Health Related Groups (HRGs)4– to specific reimbursement rates derived from treatment costs. This case-based payment system is essentially a form of Diagnostic Related Group(DRG) reimbursement, and is referred to as Payment by Results (PbR). The PbR reimbursements are nationally agreed tariffs, set by the Department of Health and used in England by purchasers of health care to reimburse individual providers – mainly hospitals –for the provision of treatment.

In 1999, NHS decentralized care to allow each nation (e.g., Engand vs. Scotalnd) to run its healthcare systems as it saw fit.  Whereas England moved more towards a market-based approach, Scotland’s reforms moved towards global budgets.

Prior to 1997, England and Scotland funded inpatient care in broadly the same way; health care purchasers and providers negotiated the services that would be provided through bulk con-tracts (Ham, 2004). Scotland has moved away from this funding system and since 2004 has funded inpatient care through the allocation of global hospital budgets (Scottish Parliament, 2004).England on the other hand has further supported the internal mar-ket by moving away from the bulk contract system of funding hospital episodes to a fix-priced activity-based payment system,of DRG-type reimbursement, known as Payment by Results (PbR), introduced in 2003/04.

How did these reimbursement systems affect care?  The authors look at the case of hip replacement surgery.  They perform a difference-in-difference analysis using the English implementation of PbR as the key change that occurred in England but not Scotland.  They find:

Our results suggest that the English NHS experienced much higher, relative uptake rates of the more generously reimbursed, and presumably more profitable uncemented Hip Replacements than Scotland, once PbR had been introduced in England. This increase ensued, despite the fact that clinical guidance recommending cemented HipReplacements had been produced by NICE, which is considered a benchmark for regulating English hospital activity.

As an economist, I am hardly surprised that financial incentives matter to health care provision, even in the supposedly world of “socialized’ medicine in the UK.

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