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What will capitated budgets mean for NHS spending?

Sue Thomas and Paul Midgley assess the implications of a single budget covering all the physical, mental and social care needs of patients in an STP


Evidence from Spain, Germany and the US shows that capitated budgets – which involve one provider or a group of providers covering all the healthcare needs of a defined population – improve outcomes and reduce costs.

This system is now increasingly being viewed by NHS England as the best way to manage the complex healthcare needs of the nation’s ageing population and the associated burden of chronic diseases.

The Lakeside Vanguard in Corby was an early adopter of this Accountable Care philosophy and around 50 percent of Sustainability and Transformation Plans (STPs) are currently considering introducing capitated budgets.

In this article, we will explore what capitated budgets involve, how they will change the way that NHS services are provided and how these new commissioning structures are likely to affect pharma.


How do capitated care budgets work?

Administered by Accountable Care Organisations, capitated budgets represent a radical departure from the current system whereby different commissioners pay a large number of different providers to deliver a variety of health and social care services to patients.

Since patients often use several different NHS services at the same time, especially if they have more than one health problem, the current system does not always serve them in an integrated and patient centric way.

With capitated budgets, the physical, mental and social care needs of a defined population are handled by a single entity or group of providers, which receive a regular lump sum from each of the other providers in their network.

Care must be provided in line with agreed quality and outcomes standards that have been specified by patients and written into a contract, and service providers are financially incentivised to maintain them.

This means that commissioners within the wider network scrutinise the delivery of ACO contracts for particular therapy areas and will only hand over the final part of their budget to the lead provider when performance measures show that it has fulfilled its responsibilities.

If the provider delivers the desired services more cost effectively than anticipated, some of the money will go back to the commissioners and the rest will go to the lead provider to invest in further improving services.

Evidence from other countries, such as Spain, Germany and the US, shows that providers in capitated budget networks keep costs down by investing more in prevention, and thereby helping people stay healthy and out of hospital, where possible.


Single budgets will shine a light on hidden costs

Under the capitated budgets system, the finance director in the lead provider will be required to sign off all the bills for all the care provided to its designated population. This means that costs that were once hidden away among a variety of different providers for everything from lighting and food in hospitals to the costs of specific drugs, will suddenly become more visible.


This is a positive move since, in the past commissioners were often afraid to spend money because it was tied up in different budgets for drugs, nurses, consultants etc, which were more difficult to quantify and control.


If everything comes out of the same budget and someone has oversight of all the expenditure across the entire patient population, then they can make financial decisions in a very informed way. Furthermore, the contracts will be long-term arrangements of five to 10 years, as opposed to one year, which will encourage more investment in appropriate areas.


It should be noted that there is a cash limit for every disease and the NHS is not expected to receive more than an inflationary increase each year in its budgets. This means that money will have to be recycled within the system as a result of proactive changes such as disease prevention, earlier diagnosis, and more effective and integrated intervention.


The use of biosimilars, instead of original brands, for conditions such as rheumatoid arthritis, Crohn’s Disease and psoriasis, is one way of freeing up money within the patient pathway, which could be diverted to specialist nurses and late stage drugs.


Capitated budgets and Optimal Patient Pathways

To realise these changes, patient pathways will have to become far more efficient in order to reduce pressure on the budget. This will require a more integrated approach to disease prevention, early diagnosis and effective management of conditions in order to keep patients stable for as long as possible and avert unnecessary hospital admissions.


In a bid to demonstrate what efficient patient pathways look like, NHS Rightcare has already formulated Optimal Patient Pathways for a number of conditions including frailty, osteoporosis, wound care and cardiovascular disease.


When looking at frailty, for example, the Rightcare pathway, compares a sub-optimal, but typical, scenario against an ideal pathway. At each stage, the costs of care have been modelled, regarding the financial cost to the commissioner and also the impact on the person and their family’s outcomes and experience.


This helps commissioners and providers understand the implications – both in terms of quality of life and costs – of shifting the care pathway for older people living with frailty from a reactive approach (primarily based on an acute response) to a proactive approach, e.g. providing an integrated primary care and community-based response, with support from the voluntary sector.


Providing care in the community and at home

To help reduce transactional (activity) costs, there will be no incentives for people to stay in hospitals, and clinicians will be encouraged to provide as much care in the community and at home as possible.


Technology will be a key enabler of this change, hence artificial barriers that currently prevent it from being fully utilised will have to be removed and a lot of specialist knowledge will have to be filtered down through the NHS to enable care to be provided effectively outside of hospitals. These changes will see more high tech and high cost drugs being administered in the home supported by specialist nurses and consultants.


Delivering services in this way can save money in terms of VAT on hospital care and reduce pressure on hospitals which often have limited infusion capacity. Also, it’s often safer for drugs to be administered at home because there is a low risk of infection compared to hospital and this is vital for immune-suppressed patients.


There is already a clear move towards providing more specialist services in the community and in patients’ homes. For example, in renal care, people used to go into hospital for dialysis, but now this procedure can be done at home. Similarly, many high cost drugs, including some prescribed for cancer care, are now being administered at the patient’s home rather than in hospital. The use of homecare for specialist services and treatments, allied to new technology, will increase under Accountable Care Organisations.


Pharma needs to continue to support changes in the NHS by ensuring that its treatments can be easily administered in the home, where possible, e.g. tablets rather than injections; that they help to prevent diseases from worsening and are affordable in the cash strapped commissioning climate.  We will explore how this can be achieved in a follow-up article in the next edition of PharmaTimes.


As health and social care providers are united within STPs, it is likely that capitated budgets will be adopted within many footprints. This will radically change the way that the NHS operates – encouraging it to move away from a transactional system to one that supports transformational care in the form of disease prevention, early intervention and integrated services that help to keep patients stable and out of hospital.  Pharma needs to identify the early adopters of accountable care and take a thoughtful approach to dovetailing its products and services with the major changes that these organisations will bring to bear on NHS spending.