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Hospital payment system is causing unhealthy figures

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Originally published in the Financial Times on 27 September 2011

By James Barlow, Colin Gray and Steve Wright

Is it fair for Andrew Lansley (“Lansley promises to help ease hospitals’ debts”, September 23) to blame the private finance initiative so roundly for the funding problems NHS hospitals in England currently face? We would suggest the payment system for English hospitals is actually a bigger problem than PFI, flawed though that programme is.

Take, for example, the Shelford Group of 10 of the most prestigious English teaching hospital groups. As it happens, most of the Shelford hospitals have sizeable PFIs. However, their complaint is about the payment system which, they say, fails to take into account the complexity – the “case-mix” – of the patients they treat. They implicitly raise question marks too about the sustainability of medical education given the payments they receive and, indeed, the country’s future ability to pay for biopharmaceutical research.

The payment system problem concerns not only PFI hospitals but many other new hospital developments, simply because they have built afresh in recent years. New hospitals funded by public dividend capital will not face continuing PFI costs but they do experience much higher depreciation charges than hospitals that have not had new investment. Yet, they are subject to the same payment system (based on their level of activity) as non-invested hospitals. So, just like PFI hospitals, this is likely to lead to financial/accounting losses, unless they are correspondingly more cost-efficient than those facilities without new capital stock. This is unlikely because the recent hospital building programme was not designed to reduce service costs.

All this raises the need for a plan to manage such difficulties. Proposed changes to the health bill would retain the health secretary’s power to inject public dividend capital into foundation trusts in financial distress. He may have to do a lot of this in coming years. Simply augmenting the tariff will not resolve the problem, in that the public sector would still be funding the difference, and nor will tweaks on a case-by-case basis.

However, Mr Lansley should reconsider the structure of the tariff, as well as its level, to push the English hospital system towards an appropriate type and volume of both capital and capacity. Otherwise, we’ll be left with less than healthy results for years or decades to come.

Professor James Barlow and Professor Colin Gray are Co-Directors of HaCIRIC. Steve Wright is Executive Director, European Centre for Health Assets and Architecture.

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