Payment by results: qualified ambition?

The commentaries on our original paper are interesting and informative. That of Malcomson illustrates nicely the costing and case-mix issues that are critical to the successful design of activity-based funding arrangements. The second commentary describes some more general issues and the scope for reformers to learn from international experience. The policy documents put out by the English Department of Health (DoH) relating to Payment by Results list an array of ‘key’ objectives that the funding reform is designed to achieve (Miraldo et al., 2006), which are listed in Table 1 together with some qualifying statements. Of course, if activity-based funding was easily able to achieve all of these objectives, no country would be slow in adopting it – yet England is fully 20 years behind the United States in introducing these payment arrangements. It is also notable that many other policy initiatives cite a similar list of desirable objectives. Rarely are these objectives ranked by priority and often insufficient consideration is given to the possibility that policies that advance some objectives may frustrate others. Activity-based funding does have advantages over the alternatives of costbased reimbursement and global budgets, notably in linking hospital revenue much more closely to activity and in allowing greater transparency in funding arrangements. But the extent to which these advantages improve efficiency depends on the specific form that activity-based funding takes, and how prices are set. Prices (tariffs) could simply reflect the (average) costs of existing practice, as they do in England. In this case, activity-based funding would encourage hospitals to ensure that their costs were below average. As we have argued, this pricing rule would take the existing mix of services as given and appropriate. But tariffs could play a more extensive role, so that they are analogous to prices in most markets. Usually (market) prices provide important signals to producers about the demand for particular services – if there is under-provision,