Activity-based payments and reforms of the English hospital payment system.

In their introductory article to this debate series, Andrew Street and Alan Maynard (2007 – henceforth SM) appropriately argue that in England it is faulty to base hospital payments solely on the weighted average of hospital inpatient and outpatient costs. They also highlight some of the many challenges in revising and updating the current hospital payment formulas. We agree with much of their discussion, but there are also further issues to consider. From an outsider’s view of the UK system, we agree that the English reforms to hospital payment are a step in the right direction; they improve incentives and are likely to reduce waiting times and expand access to care. In this invited comment, we draw upon the experience of the US, Australia, and Spain, and elaborate on a few further concerns that deserve more attention: centering on incentives across different settings, capturing patient severity, and rewarding quality of care. The key objective of the English hospital payment reform is to create incentives for high quality, maintaining cost control and encouraging appropriate allocation of patients among different types of facilities. The challenge is how to do this. Based on Ellis and McGuire (1986), Laffont and Tirole (1993), and others, economists typically assert that payments are a price that can be used to adjust incentives and achieve a desired balance between multiple competing objectives. Price signals about the cost and value of different activities were missing in England until 2004 when the NHS made an important transition in hospital payments from a system based largely on block grants to a system based on activity-based payments. In this new scheme, hospital payments are based on relatively coarsely defined payment clusters called Healthcare Resource Groups – HRGs – which are similar conceptually to the Diagnosis