The administrative costs of payment by results

EXECUTIVE SUMMARY

This report was commissioned by the Department of Health to look into more detail into the administrative costs of Payment by Results (PbR). Costs were estimated to have increased by around £100k-£180k in hospital trusts and from £90k to £190k in Primary Care Trusts. Most of the additional expenditure is due to recruitment of additional staff.

We use an established economic framework to provide an analytical structure to understand how administrative – or transactions - costs have been affected by the change in contracting arrangements following the introduction of PbR.

The move to PbR is expected to have reduced the costs associated with price negotiation but increased the effort required to manage activity and the costs of collecting and verifying the more highly specified (patient-level) data upon which PbR is founded.

Moreover, the introduction of PbR in England is likely to have increased administrative costs by a greater amount than that experienced in other countries, because of England’s relatively low costs of general management and administration and less sophisticated clinical coding and costing systems.

We undertook interviews in three hospital Trusts and three Primary Care Trusts in London and South Yorkshire in order to gain greater understanding of the impact of PbR on administrative costs.

The six organisations incurred additional costs of between £90k-£190k. Most of the additional expenditure is due to the recruitment of additional staff. As such, the cost increase is unlikely to prove temporary.

Some organisations have also invested in improved information systems, but whether this should be attributed solely to PbR is questionable. Organisations are required to make ongoing investments in information technology, though PbR may have provided greater impetus for such investment.

The main types of activity that account for increased administrative costs are:

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