UK Budgetary Systems and New Health-Care Technologies

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1 Blackwell Scence, LtdOxford, UKVHEValue n Health ISPOR6Supplement 1S64S73Orgnal ArtcleUK Budgetary Systems and TechnologesMcGure Volume 6 Supplement VALUE IN HEALTH UK Budgetary Systems and New Health-Care Technologes A. McGure, BA, MLtt, PhD LSE Health and Socal Care, LSE, and Kngs College, London, UK ABSTRACT Objectves: Ths artcle outlnes the budgetary settng wthn the UK health-care system. Methods: It s argued that whle prospectve budgets can gve rse to effcent resource allocaton outcomes, ths reles on the budget beng set at an approprate level and the accompanyng ncentve structures beng effcent. The organzatonal structures and the nterrelatonshps are crtcal. The recent hstory of UK Natonal Health Servce reforms and expendture s outlned. It s suggested that untl recently, although the budget system has the potental to promote effcency, the aggregate budget allocated to the NHS has probably been too low gven publc expectatons, technology advances, and preferences for health care. Results: The aggregate budget s due to rse consderably over the next 5 years. Whle some ncentve and regulatory provsons wll move the budget toward an effcent allocaton many mcrolevel ncentve ssues reman. Concluson: Whether effcent patterns of health-care allocaton emerge remans open to debate, however, because the exstng ncentve mechansms are not optmal. Keywords: health-care budgets, health-care technology, pharmaceutcals. Introducton Introducng new health-care technologes, for example, new pharmaceutcal products, s normally expensve. Ether the unt cost of these new technologes s hgh, partly reflectng hgh fxed research and development costs, or the volume of uptake may be hgh. The budget mpact can consequently be consderable. Conversely, budget constrants may nhbt the benefts to be ganed from a new technology as uptake s suppressed. The ssue of concern here s how a lmted budget mpacts on the dffuson of new technology wth specal reference to pharmaceutcals. It s mportant to emphasze that nterest s focused on the pursut of effcency. Economsts have a number of defntons of effcency. Of mportance, there s techncal effcency, ensurng that maxmum output s produced from nputs; productve effcency, ensurng that the maxmum output s produced at mnmum cost; and allocatve effcency, ensurng that the approprate mx of outputs s produced. These defntons of economc effcency dffer from what may be termed budgetary effcency. Budgetary effcency can be thought of as a provder of health care attemptng n Address correspondence to: A. McGure, LSE Health and Socal Care, LSE, Houghton Street, London WC2A 2AE, UK. E-mal: a.j.mcgure@se.ac.uk prncple to produce as many outputs as possble wthn a gven budget. However, stayng wthn budget s crucal. Output s of secondary concern; budgets may therefore dstort economc ncentves. It s argued here that the UK health-care system gves rse to a mxture of ncentve structures reflectng the pursut of budgetary effcency at an aggregate level and economc effcency at the purchaser/ provder level. At the ndvdual clncal level, whch s the man decson-makng level wth respect to the actual transformaton of budgets nto choces about the use of resources, t s budgets that matter and therefore expendture levels rather than outcomes that dctate behavor. The actual budget allocaton mechansm, the rng fencng of budgets, the fact that prces are set and volumes, whch are generally less flexble, must adjust as the budget changes. Thus the specfc regulatory characterstcs of the UK system all combne to place emphass on budgetary effcency rather than economc effcency. Cost levels rather than output mxes domnate. To pursue ths argument we descrbe the varous levels of expendture operatng wthn the UK health-care system, outlnng the relevant ncentve structures. UK Health-Care System The Department of Health and varous bodes wthn the Natonal Health Servce (NHS) manage ISPOR /03/$15.00/S64 S64 S73 S64

2 UK Budgetary Systems and Technologes the health-care budget n the Unted Kngdom. The NHS budget s fnanced centrally largely through taxaton, although some charges are leved most mportantly on pharmaceutcal prescrptons. Aggregate fundng for the NHS has hstorcally been determned through the Department of Health negotatng wth the UK Treasury for an annual spendng level. Recently ths process has been adapted to reflect the devoluton of responsbltes for the NHS to other bodes n Scotland, Wales, and Northern Ireland and to ncorporate longer-term expendture plans over a 3-year perod. Ths total budget s then allocated to the varous commssonng groups n the health servce accordng to a formula reflectng the needs of the local populaton. These allocatons are broadly based on standardzed mortalty rates wth some further correcton for expendture equty consderatons. Recent organzatonal changes n England have ncluded the formaton of prmary care trusts (PCTs), whch have become the purchasng, termed commssonng, agents responsble for the health care of ther populatons. These PCTs are amalgamatons of ndvdual general practtoner practces, whch wll servce the populaton on ther combned patent lsts. PCTs are expected to provde prmary care to ther populatons and to enter nto long-term relatonshps wth NHS Trusts, whch are largely ndvdual hosptals provdng secondary or tertary level care, to provde any hgher-level health care for ther populatons. PCTs are now beng establshed throughout England and the fundng allocaton for 2003 to 2004 onward wll flow straght from the Department of Health to the PCTs. The current trend s for the purchasng authortes, the newly formed PCTs, to act n strategc collaboraton wth ther local Strategc Health Authorty offces, to determne purchasng prortes and strateges. These must confrm to some degree to the stpulatons of natonal gudance on prortes. Currently natonal gudance covers such areas as the reducton of watng lsts and tmes for varous secondary care servces; measures amed at reducng nequalty of care; targets amed at reducng mortalty and morbdty from specfc dseases, such as coronary heart dsease; and measures to mprove servces generally n specfc dsease areas, such as cancer. PCTs are then meant to develop ther own ndvdual plans wth specfc reference to these natonal prortes. These local responses are lkely to vary both n ther content and n ther mplementaton. There s no clear model of PCT level prorty settngs, whch can be taken as llustratve of the S65 general approach. Each group wll respond to ts own envronment. Wthn ths general framework there are also a varety of more specfc regulatory polces. Of drect concern to the pharmaceutcal sector, for example, are the regulaton of pharmaceutcal prces and products and the regulaton of treatments utlzed by the NHS. All pharmaceutcal products are regulated to ensure safety and effcacy before a lcense for ther use s granted. Furthermore the profts of the pharmaceutcal frms on NHS sales are regulated through the Pharmaceutcal Prce Regulaton Scheme (PPRS). Ths s a voluntary scheme that operates between the Assocaton of the Brtsh Pharmaceutcal Industry (ABPI) and the Department of Health, albet wth statutory backng for the government to fne companes that do not comply wth the rules. Each partcpatng company s allowed to earn a gven return on captal n the Unted Kngdom equal to profts from NHS sales mnus allowable costs. As the scheme operates on overall proftablty t s possble for companes to ntroduce new products at a premum prce whle reducng the prce of older products. Pharmaceutcal products also currently feature promnently n the gudance ssued by the Natonal Insttute for Clncal Excellence (NICE). NICE s a natonal body ntroduced to evaluate the clncal, costeffectve, and more general patent preference based arguments for NHS fundng of ndvdual treatments and servces. Budgetary Operatons Havng outlned the organzaton of the UK budget process we can consder both the conceptual bass of how any budgetary process operates, n terms of the major mpact t may have on costs and volumes of health care delvered, and the ncentve mechansms that are embedded wthn any budgetary regme. A budget defnes the total expendture avalable. Formally the budget defnes the total expendture gven over to any actvty, n ths case health-care delvery: B= Â PQ where B s the budget, P s the unt prce of the servce or product delvered (), and Q s the quantty of servce or product provded. Rembursement mechansms apply ndvdually to P, to Q, or to a combnaton of both (P Q ). The varous applcatons wll be assocated wth dfferent ncentve

3 S66 mechansms and may affect dfferent levels of the organzaton. For example, settng dfferent fxed prces for dfferent treatments wll mpact on P and nfluence the provson of ndvdual treatments. Budgets may be set at departmental levels. Constranng P Q at the departmental level wll affect the quantty of servce delvered, and f P s correlated wth the qualty of servce, the qualty also. Global budget settng constrans the aggregate across departments Ê ˆ  PQ Ë. Moreover the budget can be set retrospectvely or prospectvely. There s no consderaton gven to ndvdual prces, volumes, or total expendture. By ther nature, retrospectve regmes have no ncentve powers as they remburse fully all costs. There s no ncentve for the provder to be cost conscous, nor to provde the approprate quantty and qualty of care. If costs are fully rembursed then there s a tendency to overprovde quantty and qualty of care. As a consequence most health-care systems have moved to prospectve payment systems. Under a prospectve system the budget s predefned n one of three man ways. Frst the overall budget  PQ may be set before any servce delvery wth the understandng that all populaton requrements are to be met. In ths case a lump-sum payment s made n exchange for access to servces. Ths s a very powerful ncentve scheme wth no de facto rembursement of costs. A second approach, cost and volume contracts, combne preset volume targets Ê Ë combned wth some lmt on the cost (.e., the prce, P ) of each servce provded. Ths nvolves a fxed payment to treat patents up to a gven volume above whch there s ether no rembursement or the next form of budget agreement s mplemented. Agan ths s a hgh-powered ncentve contract. Thrd, cost per case contracts can be struck where the costs, or prces, of ndvdual epsodes of care are specfed and ether the volume of each ndvdual servce s negotated as requred or there are addtonal agreements over workload. The ncentve power of ths form of contract obvously Q ˆ McGure depends on the cost levels specfed and the volume agreements. In all prospectve cases, although the ncentve mechansms dffer n specfc ways, the fnancal mplcaton s that the rsk s beng pushed back from the thrd-party payer of health care to the provder of health care. Ths s precsely what occurs wth prospectve budgetng. When budgets are allocated, the provder carres the rsk of runnng over budget; however, at the same tme they are free to allocate resources as they deem ft. Of course two problems arse. Frst, to stay wthn budget the provder may chose neffcent mxes, n economc terms, of health-care nputs to produce outputs. In terms of the defntons gven above techncal and productve effcency may overrde budgetary effcency. Second, as the budget constrant s neared actvty may slow down to stay wthn budget. In other words, whle prospectve budgets can be an effcent resource allocaton mechansm that provdes the lattude to the provder to behave n an effcent manner, ths wll only occur f the approprate ncentves are mantaned and the budget s set at an approprate level for the attanment of desred levels of output. Global Budget Aspects As noted above, n the Unted Kngdom the budget operates at the global level, but also at the regonal and ndvdual trust level. Such budgets are prospectve n each case wth the total health-care budget Ê ˆ  PQ Ë beng determned by central government expendture rounds. Ths overall global budget approach has kept the UK health expendture at hstorcally low levels compared to other ndustralzed countres. Currently the Unted Kngdom spends approxmately 7% gross domestc product (GDP) on health compared to an OECD average of approxmately 10%. Rates of growth of health-care expendture have been relatvely hgh compared to the growth rate of GDP. However, ths s not unusual. Most ndustral countres have hgher growth rates n health-care expendture than that of GDP. The 2002 UK Treasury budget, whch outlnes tax levels as well as major expendture commtments, ndcated that by 2007 to 2008 UK health spend wll rse to 9.4% of the GDP. Ths represents a growth rate of 7.4% per annum n real terms over

4 UK Budgetary Systems and Technologes the next 5 years, takng UK health expendture from 65 bllon n 2001 to 2002 to over 105 bllon n 2007 to Ths s an unprecedented ncrease n the tax fundng allocated to health care. The effcency wth whch these mones wll be allocated and spent does, however, depend on the wthn-system ncentves an ssue returned to later. The government has concentrated less on settng new ncentve mechansms than by decreeng that certan targets, especally watng lst targets, must be met. Instead of creatng ncentves to attan these targets the predomnant mechansm has been the mposton of penaltes f they are not met. Currently there s wdespread crtcsm that the targets wll not be met as, even wth the dramatc ncrease n the budget, there s not enough flexblty n the volume of resources to meet the target levels. Staff shortages reman problematc and productvty and actvty responses have been neglgble. The lack of ncrease n measured actvty may also reflect a shft n the nput mx, wth more money beng spent on pharmaceutcals n prmary and secondary care. The number of epsodes of hosptal care s the man measure of NHS output, and more effectve use of medcnes would not lead to a change n output on ths measure. It s nstructve to analyze past expendture n a lttle more depth. It s possble to analyze ths at an aggregate level by breakng down the ndvdual components of Ê ˆ Â PQ Ë. Growth n spendng could be explaned by ether rsng prces or unt costs or ncreasng volumes of health care delvered. UK health-care expendture s dsaggregated n Table 1. Ths s based on a smple decomposton of expendture as based on a statstcal dentty. The volume seres s defned by abstractng out the relatve prce seres from the expendture seres, thereby embeddng any measurement error n the volume seres resdual. The relatve prce seres states whether prces n the healthcare sector are growng at a generally faster rate than n the economy. The volume fgures ndcate whether output n the health-care sector s rsng S67 faster than n the economy as a whole. In general, the growth n relatve prces was modest, untl the 1990s. For the perod snce 1985, the expendture growth can be explaned by smlar growth n volume delvered as n relatve prces growth. Relatve prce growth does not appear to be the major explanatory factor determnng expendture. On the volume sde the accompanyng expendture growth does not appear to be due smply to demographc or technology-nduced pressures, whch are generally sad to total no more than 1% per annum. In other words, hstorcally there appears to have been real growth n the health-care budget. Ths growth s greater than that n the GDP, but may stll have been lower than necessary to attan the desred output of health care. The decomposton of pharmaceutcal expendture s partcularly nterestng. Pharmaceutcal expendture accounts for approxmately 13% of total health-care expendture and has remaned relatvely constant over tme. In contrast the volume of pharmaceutcal use, as measured by communty prescrpton, has grown from mllon n 1992 to mllon n 1999, a growth of just below 80%. Recent evdence s that prescrpton volume s growng at a hstorcally hgh rate, 5% per annum compared wth around 3% per annum durng most of the 1990s, possbly reflectng mproved treatment gudelnes n some major therapy areas [1]. Yet the growth n total prescrpton costs fell n 2000 to 2001, largely reflectng ncrease use of generc compounds. It has been suggested about 50% of ths growth s attrbutable to growth n volume, whle 50% s due to product mx changes reflectng the use of newer more expensve medcnes. Indeed, aggregate prce growth s negatve, reflectng PPRS constrants on prce ncreases and ncreasng use of genercs. Therefore, a general concluson may be reached then that the pressure of the UK aggregate budget s felt on the volumes of health care delvered. Gven a negotated natonal level of health-care expendture and negotated prces for most categores of healthcare nput, for example, labor and pharmaceutcals, then the only scope for manpulaton s through local pay negotatons that supplement, to a very Table 1 Prce and volume growth Real health-care expendture growth Expendture growth Relatve prces growth Volume growth

5 S68 lmted degree, the natonal agreements or, more mportantly, through the volume of nputs used n the delvery of health treatments. In short, budgets are set and prces are set, so volumes are the adjustng factor. Even wth ncreasng budgets, as s currently beng experenced by the NHS, fnancal dffculty may occur f output targets are set at levels that requre even larger budgetary ncreases. Ths s what appears to be currently occurrng wthn the NHS as the government sets, for example, watng lst targets, whch are ncompatble even wth the large ncreases n budget recently announced. Regonal Budgetary Aspects Over to PCTs The aggregate health-care budget, under the current reforms of the UK NHS, wll be allocated to PCTs. These are merged prmary care groups that wll be responsble for the provson of prmary care and purchasng of health care from secondary provders for ther populatons. The allocaton of budgets to PCTs s largely through captaton payment. That s, the populaton served by the PCT s estmated, weghted based on standardzed mortalty ratos (SMRs) and deprvaton ndces, such that the fnal captaton payment takes account of populaton health as proxed by SMRs and deprvaton. At ths level, there s lttle ncentve structure mbedded wthn the budget allocaton. Proposed changes n the near future wll retan the captaton bass of payment but ths wll be weghted by volume, deprvaton, and a qualty-of-servce ndex. The major form of treatment n prmary care s the prescrpton of drugs. Unless the ndvdual s exempt through age, ncome level, and pregnancy or as they have a chronc llness, a patent charge s leved on the prescrpton. Approxmately 75% of patents requrng prescrptons are exempt. The charge has rsen steeply snce Hughes and McGure [2] examned the mpact of the ncrease n prescrpton charge fndng that the mpled prce elastcty was -0.37, whch had become more elastc over tme. In other words a 1% ncrease n the prescrpton charge leads to a 0.37% fall n the demand for prescrptons. Out-of-pocket costs thus do have an mpact on the demand for prescrpton-based treatments. The prmary care physcan s constraned n ther choce of prescrpton treatment through the operaton of a selected lst of unapproved medcatons although ths has not been extended recently s further nformed of ther choce of prescrpton drug for ndvdual dsease areas by natonal nformaton on the volume and branded or generc type of prescrpton delvered by McGure each practce. The budgetary mpact of general practtoner (GP) practce prescrbng can therefore be seen mmedately. However, ths expendture nformaton s not ntegrated wth health outcome data. In choosng where to purchase secondary care for ther patents t s lkely that PCTs wll opt to mantan hstorcal referral relatonshps wth hosptals, although t s possble that ncreasng nformaton on the qualty and cost of treatments provded by the secondary care provders wll mpact on ths decson. Ths pont s taken up later, although t should be noted here that there are fnancal ncentves beng ntroduced at the PCT level to ncrease servce qualty and reduce watng tmes. Unt of Delvery Budgetary Aspects At the level of health-care delvery the PCT acts as a purchasng agent for ts populaton, both provdng n-house health care and purchasng secondary care from hosptal trusts. It s antcpated that there wll be a degree of competton among secondary provders at ths level. Delvery of the optmal volume of health-care output requres optmal nput. It s envsaged that an evolvng payment mechansm wll relate nputs to outputs. An objectve of any payment mechansm s to provde ncentve sgnals to ensure optmal effort, essentally optmal quantty and qualty of care, s delvered under specfc condtons. In the case of health care the delvery of optmal effort s dffcult as there are several nformatonal problems, for example, over qualty and cost of servce, whch render the contracts between purchasers and provders dffcult to specfy. Ideally such contracts would be complete contngent contracts, n whch all concevable contngences are prespecfed and strctly enforced. Ths s also partcularly dffcult to accomplsh n the health-care sector because t s dffcult to both fully observe and verfy the relatonshp between effort and outcome. The fundamental problem s that the health outcome s to a sgnfcant degree stochastc. That s, there s consderable uncertanty over the mpact that treatments may have n each ndvdual case. Ths uncertanty may be assocated wth ndvdual characterstcs, for example, treatment complance, or wth nherent characterstcs of health-care delvery. As dagnoss and treatment become more complex then the uncertanty over outcome ncreases. Dfferent cases treated n the same manner, wth the same nputs, may have dfferent outcomes; those

6 UK Budgetary Systems and Technologes treated dfferently may have the same outcomes. As extreme examples consder that exactly the same surgcal nterventon may lead to ether recovery or death or that myocardal nfarcton patents treated medcally or wth surgery may have smlar prognoss. In such crcumstances t s dffcult to specfy at the ndvdual level the relatonshp between healthcare nputs and health-care outputs. In aggregatng up to the populaton level ths problem remans. Gven that the relatonshp between health-care nputs, that s, the optmal combnaton of staff, captal, and materals, s also not well understood, the optmal manner of producton and organzaton s also to some extent stochastc. All of whch results n the specfcaton of approprate cost levels beng extremely complex. The desgn and mplementaton of health-care budgets s thus clearly a dffcult ssue. As noted prevously, settng the budget to remburse a healthcare provder for ts total costs, or expendture, creates no ncentve to mnmze costs. Such a rembursement mechansm wll encounter techncal neffcency the quantty of care suppled wll be greater than s optmal as well as productve neffcency qualty may be hgher than optmal. Costsavng measures are unlkely to be ntroduced. Acknowledgng all of the problems outlned above, t s stll the case that rembursement must be related to the costs of producton n some manner. A typcal scheme remburses costs through the followng general approach: Â Â PQ = a + b[ TC], where PQ s agan the budget, whch may now be thought of as the rembursement revenue, a s a fxed fee, and b represents a proporton of the costs (TC) rembursed. Two extremes exst. Frst, there s the cost plus fxed fee or cost-plus contract (b = 1). The provder bears no costs. Ths creates low-level ncentves. Alternatvely, there s the fxed-prce contract (b = 0). The provder s responsble for and clamant of all cost savngs. No costs are rembursed. A fee s pad, creatng a hgh-powered ncentve. Lnear contracts (where b has a slope of between 0 and 1) are called ncentve contracts as they share the degree of rsk taken by the provder and the rembursed. Obvously costs must be observable and some noton of mnmum cost must be pad. Dffculty n specfyng the producton/cost relatonshp s a further complcaton n havng the optmal rembursement level be specfc. S69 One of the major problems n ths area s that of moral hazard; agents may have better nformaton than the prncpal over ther performance. In partcular, unobservable behavor/hdden actons may be present. A health-care provder, be t a doctor or a hosptal, therefore may not be cost-mnmzng n producng health care. Because the health-care producton technology s dffcult to specfy t may be mpossble for those fundng to observe whether behavor s effcent. A second major problem s patent selecton and cream-skmmng. GP practces and hosptals may seek only to treat those patents for whch they know cost s below the rembursement level. In both types of cases t s dffcult to specfy optmal rembursement to ensure that the most effcent outcome s attaned. The problem can be stated n a more general manner. The prncpal, n our case the commssoner cannot fully observe or verfy the agents, or healthcare provders, actons. The outcome of the agents actons may be well observed, but the relatonshp between the actons and the observed outcome are stochastc; n other words, the agents actons do not fully determne the observed outcome. In such crcumstances the prncpal must desgn the rembursement package n such a way that t ndrectly gves the approprate ncentve to the agents to undertake actons, whch are compatble wth an effcent outcome. That s, the rembursement package must move the agents to take actons that would be contracted for f ther actons were observable. Even n theory t s dffcult to specfy optmal ncentve contracts n such crcumstances. It has been shown that f rembursement s lnked to the quantty of health care delvered, quantty of health care delvered correlates postvely wth qualty, and commssoners can observe ths correlaton, an optmal ncentve contract wll nclude a fxed cost rembursement element and a varable cost element, to vary wth quantty of care delvered, rembursed at some proporton of full cost. If the quantty qualty correlaton s not easly observed, for example, f there are many dmensons of qualty, or the quantty qualty correlaton s not postve, then the optmal ncentve contract s unknown [3]. In such crcumstances, gven no undermnng of competton among hosptals through the formaton of cartels or selecton of patents, basng rembursement on yardstck competton may be best. Ths s the basc prncple behnd dagnostc-related group (DRG) rembursement and s also the underlyng prncple behnd average cost prcng and healthrelated group (HRG) prcng, whch s currently beng mplemented n the Unted Kngdom. The

7 S70 basc dea works as follows: f total revenue for each hosptal s set equal to the average cost of a sample of smlar hosptals plus a lump sum transfer to cover fxed costs, ths provdes an ncentve to each hosptal to cut costs to below the average, through ncreasng ther nvestment n cost-reducng technology, to generate a surplus. Ths brngs the sample average cost down over tme and ths ncentve contnues untl p = MC. If the number of other dentcal hosptals s large there s lttle effcency loss from smply settng prce equal to the average across all hosptals. As stated by Schlefer [4], who frst proposed the dea, consders the case when transfers are allowed and shows that even here prospectve payment based on observed average cost s second best. Of course the payment can be related to smlarly defned treatments, for example, DRGs, rather than operated at the aggregate hosptal level. Ths s the bass of Medcare payments n the Unted States. Thus, a fxed prcng rule based on observable data can lead hosptals to effcent producton. In other words, prospectve prcng based on DRGs, wth some addtonal adjusters that are not patent-specfc, s close to optmal. In the context of prmary care t s harder to apply these prncples. DRGs or ther UK equvalent have not been developed for epsodes of ambulatory care actvty. Nor s t clear that there s enough measurement of health outcomes or a strong enough evdence base to enable commssoners to draw clear conclusons between actvty and lkely qualty of health outcome. More work needs to be done developng dsease-based gudelnes usng evdence of cost-effectveness and of cost before a DRG equvalent can be put n place. In the meantme, an emphass on comparng GP practce pharmaceutcal expendture wth local and natonal averages, n the absence of evdence on the qualty of outcomes, could create slo effects, achevng budgetary effcency at the expense of economc effcency. Indvdual Actor Incentves Below the purchaser/provder level s the myrad of decsons taken by the most mportant sngle agent wthn the health-care sector the medcal specalsts. UK NHS hosptal specalsts are pad through salares lnked to natonal scales. These salares are not lnked to workload, although there are expectatons about tme commtment and caseload volume, whch are mplct to ther contracts and may be explctly stated at the departmental level. Each McGure specalst or team manages the departmental or team allocated budget wthn the hosptal. Ths budget s normally decded by hstorcal precedent, poltcal concerns, and maneuverng by the ndvdual specalsts wthn the hosptal. Fnancal ncentves are therefore nonexstent and ndeed budgetary ncentves are largely nadequate. Indeed the ncentves may be perverse n some nstances; consultants who ncrease ther workload may not be provded wth extra resources and ndeed may be curtaled. For example, surgcal volume may be negotated at the begnnng of the fnancal year wth the PCT purchaser and a prospectve payment put n place; f the surgcal team meets the negotated target they can be asked not just to slow workload down but to stop takng patents altogether. In choosng treatments nformaton s drected to the commssoners and provders by a number of central bodes ncludng the Department of Health and the NICE. Both bodes are concerned wth the effectveness and the cost of treatment. NICE recommendatons must be funded by ndvdual commssoners but ther employed specalsts need not follow recommendatons dogmatcally. It s also true that the data on both costs and effectveness of ndvdual treatments, whle mprovng, are far from satsfactory. Informaton on costs s mprovng, but often the nformaton relates to tarff prces rather than the true costs and s not joned wth effectveness data. The latter s dffcult to collect, as t s dffcult to measure health outcome. Budgetary management therefore tends to be domnated by expendture flows and the requrement that hosptals mantan fnancal solvency. Indeed NHS hosptals are requred to break even. Centrally mposed rates of return on captal restrct access to and movement of captal tself, and most mportantly, after allowng for captal adjustments prces for cost per case payment must be set equal to average cost. As Propper et al. [5] note, such a regulatory framework makes the hosptal vulnerable to short-run changes n ncome, thereby provdng an ncentve to break the regulatory requrement that prce equal average cost. Where there are jont costs, and the apportonment of costs to any ndvdual servce s not clearly specfed, t s dffcult to verfy that the regulaton s beng mantaned and consderable cross-subsdzaton of costs s lkely, all of whch weakens the ncentve structure at the ndvdual departmental and specalst level. If the fnancal solvency of the hosptal s paramount, then t s unlkely that ndvdual ncentves, ncludng reward for good practce, wll be allowed to undermne ths.

8 UK Budgetary Systems and Technologes Clncal Effcacy, Cost-Effectveness, and Budgets S71 The general envronment defned by the NHS s one of tenson between central bodes such as the Department of Health and NICE gvng strategc advce and the day-to-day expendture flows beng controlled by a myrad of dfferent channels: ndvdual clncans, ndvdual hosptal trusts, and ndvdual PCTs. Although the system of ntegrated or unfed budgets mean that PCTs can move money between health-care provders to produce the most effcent mx of servces to delver health outcomes, ths does not appear to be happenng n practce. Moreover, once money s dstrbuted, there s lttle ncentve for ndvdual actors n the system to consder the systemwde effects of ther expendture decsons. There s stll lttle scope and less ncentve to ve across budgets. The result s that systemwde effcences tend to be lost. Seen n aggregate, the NHS system appears to be a low cost n a budget sense, and some mght even argue a relatvely low qualty system of hgh watng lsts for certan procedures and restrcted access to some treatments, but n a budgetary effcent system, n that the global budget s not exceeded. Whether ths wll change n the near future as the NHS experences a dramatc rse n ts budget and the new commssonng arrangements develop s an open queston. The ncreased budget wll be accompaned by the ntroducton of the HRG payment system, ncreased qualty control through bodes such as NICE and CHI, and ncreased ndvdual autonomy. Whether the centralzed regulatory bodes and a hosptal payment system based on averagng rembursement wll end up beng compatble wth ndvdual consultant and PCT expendture decsons remans to be seen. As the cash gets closer to the health delvery pont, neffcences do currently materalze. To be crude, the system of expendture determnaton n the Unted Kngdom s volume led at the hosptal level wth the volume determned through negotaton between commssoners and provders, but really largely reflectng hstorcal trends, wth total payments reflectng the amount of health care to be delvered at predefned average cost. At the prmary care level payment s through captaton and therefore does not even reflect volume delvery, but s constraned by the captaton payment. Gven that the overall health budget s constraned at the central government level and prces set by average cost or captaton rates, then the volume of delvery s lkewse constraned. At the prmary care level, ndvdual GP ncome to treat patents s gven determned largely through the captaton payment less any costs. Gven these payment systems, there s lttle ncentve to ntroduce new health-care technologes or prescrbe effectve therapes f these result n heavy budgetary mpact. There has been a strong emphass on constranng expendture on pharmaceutcals, wth the GPs frst recevng nformaton on the costs of ther prescrbng n the late 1980s. Ths was followed n 1990 by the ntroducton of ndcatve prescrbng budgets for GP practces. All health authortes were requred to ntroduce prescrbng ncentve schemes provdng extra money for GP practces that underspent ther drug budgets. More recently there has been more emphass on the qualty of prescrbng. In addton to the requrement to fund NICE recommendatons, prescrbng schemes set by PCTs typcally reward GPs for mprovng the qualty of prescrbng as well as reducng cost [6]. The new government contract wth GPs, whch s about to be fnalzed, ncludes proposals to pay GPs addtonal salary, as opposed to makng money avalable to the GP practce, for httng evdence-based qualty prescrbng targets. How the new emphass on qualty, and by mplcaton on the use of new expensve technologes when they are cost-effectve, can be made compatble wth the contnuaton of the tradtonal budget constrants s not yet clear. Recent work on coronary heart dsease has documented the low level of take-up of new health-care technology n ths area by the Unted Kngdom n comparson to a number of other countres [7]. Fgure 1 s representatve of the fndngs from ths study. Usng lnked data on Scottsh patents wthn the NHS who have suffered a myocardal nfarcton, t was shown that the numbers havng catheterzaton, angoplasty, or bypass surgery were low compared to most other countres, reflectng a late uptake of these procedures and slow growth rate after uptake. There s no reason to suppose that these fndngs are specfc to ths partcular treat- Fgure 1 Trends n bypass surgery wthn 1 year after heart attack.

9 S72 ment area, partcularly as the emprcal evdence of effectveness n ths area s strong. There s also ndcatve evdence that the uptake of effectve pharmaceutcal technologes has been slow. Growth n prescrbng rates was relatvely steady at around 2% to 3% over the past decade. Ths has now doubled and s projected to reman at 5% to 6%. There s no epdemologc ratonale for ths general jump. It appears to ndcate that the rates of growth n prescrbng at least, f not the absolute levels, were lower than optmal. A major area of growth s prescrptons relatng to cardovascular treatment. Prescrpton volume rose by 15% n ths category over the years to , wth statn prescrptons alone ncreasng by 32%. Gven that t s unlkely that patent volume has changed dramatcally, t can only be concluded that untl recently there was underprescrbng n ths area, despte the long recognton of the effectveness of pharmaceutcal nterventons. As the Prescrpton Prcng Authorty states, most of ths growth may be attrbutable to the ntroducton of treatment gudelnes: The man drver for the growth n volume and cost of prescrbng n general practce s the mplementaton of the Natonal Servce Frameworks for Coronary Heart Dsease, Mental Health, Older People and Dabetes. Coronary heart dsease was the second of these NSFs to be publshed and t appears to have had a large mpact on prescrbng of lpd regulatng drugs, antplatelets, beta adrenoceptor blockng drugs and angotensn convertng enzyme nhbtors [1]. That sad, t s almost certanly the case that the ncreased use of statns s assocated wth secondary preventon, even though there s overwhelmng evdence that ths nterventon s also effectve n prmary preventon and the NSF gudelnes suggest usng statns f coronary heart dsease 10-year rsk s greater than 30%. Ths may reflect the fact that there s ncreasng utlzaton of generc compounds to reduce costs and statns are not yet avalable genercally. Prescrbng n ths area clearly suggests that gven the lack of budgetary ncentve to prescrbe effectvely, GPs requre clear treatment gudelnes. Even then they may be wary of the budgetary mpact, gven that expensve prescrptons are not rembursed drectly and that captaton payments provde an nducement to underprescrbe and to gear prescrpton toward generc compounds. Conclusons At an aggregate level, as Barr [8] ponts out, the NHS appears to operate rather well wth regard to McGure some aspects of effcency. Gven that the budget s funded through general taxaton the general dffcultes that arse wth prvate nsurance markets are overcome. Ths s a concluson recently endorsed by the Wanless Commttee Report [9]. Problems relatng to rsk ratng and excluson, for example, through adverse selecton and hgh probabltes of requrng treatment, smply do not arse. Publc fundng of health care based on taxaton means that nformaton concerned wth rsk ratng and utlzaton s not necessary to the budgetary process. Ths s, however, a cost as well as a beneft. In partcular, there s lttle ncentve nherent n a tax-funded system to provde nformaton on costs and ther lnkage to health outcomes. As such treatment costs are not lnked to ether epsodes of care or to the health outcome acheved. The system s largely volume-constraned, gven that the aggregate budget s set centrally, that prces are largely set, and that prmary sector provders, GPs, gan ncome through a captaton system, currently unrelated to volume of servce delvered. In spte of the ntroducton of unfed budgets, the budgetary system stll does lttle, or ndeed nothng, to ad ncentve structures, whch would ensure the promoton of cost-effectve treatments. Indeed the effectveness of the system appears to be determned despte the expendture system. In partcular, the role of the ndvdual clncan and the varous treatment gudelnes ssued through Natonal Servce Frameworks, the Natonal Insttute for Clncal Excellence, and the Royal Colleges all support the delvery of effectve treatments. The budgetary constrants act as a lmtaton on the volume of treatment delvered, but the mx of treatment delvery s not optmal, as fnancal ncentves do not exst that promote the effcent delvery of care at a mcrolevel. Even wth the ncrease n the budget that the NHS s currently wtnessng, gven the contnued relance on a budget mechansm coupled wth penaltes to allocate resources, t s not ensured that economc effcency wll be attaned. Prospectve budgets can be effcent allocatve mechansms but they have to be set at the approprate level and be accompaned by a compatble ncentve structure. Over the recent past there has been a growng recognton that the UK health-care budget has been set at levels that are too low to attan desred levels of output as determned by the publc s expectatons and preferences. Ths s changng. The NHS budget s set to grow dramatcally. Whether ths rse n aggregate budget gves rse to ncreased effcency n both the mx of health-care nputs and the level of outputs delvered remans open for debate, how-

10 UK Budgetary Systems and Technologes ever, as t s not clear that the approprate ncentve mechansms are yet n place. I thank Adran Towse and the edtors of ths supplement for ther helpful comments and addtons. References 1 Pharmaceutcal Prcng Authorty. Update on Growth n Prescrpton Volume and Cost Year to March London: NHS, Hughes D, McGure A. Patent charges and the utlsaton of NHS prescrpton medcnes. Health Econ 1995;4: Chalkey M, Malcolmson J. Contractng for health care wth unmontored qualty. Econ J 1998;108: S73 4 Schlefer R. A theory of yardstck competton. Rand J Econ 1995;16: Propper C, Wlson D, Soderlund N. The Effects of Regulaton and Competton n the NHS Internal Market [Department of Economcs Dscusson Paper]. Brstol: Unversty of Brstol, Mason A, Towse A, Drummond M, Cooke J. Influencng Prescrbng n a Prmary Care Led NHS. London: Offce of Health Economcs, The TECH Research Network, Technology change around the world: evdence from heart attack. Health Aff 2001;20: Barr N. The Economcs of Welfare. Oxford: Oxford Unversty Press, Wanless Commttee Report. Securng Our Future Health: Takng a Long-Term Vew The Wanless Revew. London: HM Treasury, 2002.