The system – a way of paying a fixed price for each individual case treated – is being implemented gradually until it is fully operational by 2008.
The essential change is that hospitals are now paid for the activity that they undertake per patient rather than being commissioned for work through block agreements.
This means that primary care trusts now commission the volume of activity required to deliver service priorities, adjusted for case mix (i.e. the mix of types of patients and/or treatment episodes); from various providers; and on the basis of a standard national price tariff (price list), adjusted for regional variation in wages and other costs of service delivery.
By creating a national tariff, this removes prices from being negotiated locally so the focus is more on improving patient choice, better quality, shorter waiting times and more efficiency.
NHS foundation trusts started using the tariff in 2004 and all trusts have used it since 2005 for elective care. From 2006-2007 it is also being used for non-elective, outpatient and A&E care, but plans to use it from next year in mental health and other community services are on hold.
The aim is to provide a transparent, rules-based system for paying trusts. More importantly the PbR system is meant to ensure there is a fair and consistent basis for hospital funding rather than being reliant on historic budgets and the local negotiating skills of individual managers.
However, the system has many critics and some believe PbR has helped to reintroduce competition to the NHS, which will mean hospitals may have to merge or start cutting back to deal with surplus capacity.
The changes could lead to excess numbers of hospital beds and some hospitals could seek to compete aggressively to fill their beds. PbR creates opportunity to move money out of hospitals to the independent sector and create new relationships such as mergers and acquisitions under which hospitals could take over neighbouring providers.
There has also been criticism of the tariffs set as not being a genuine reflection of the actual activity involved and the PbR system seems to be exposing existing weaknesses in the NHS such as inadequate financial management arrangements.
Others believe that it offers perverse incentives such as hospitals selecting only patients who are easier to treat and preferring to admit chronically ill patients.
Updated: September 2006