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Continuity is key

Understanding the funding allocation formula is essential to fully exploit the new contract, says Dr Peter Stott

Since the day of its foundation, the NHS has been obsessed with fair allocation of funds. In 1948, this was done on a historical basis and resulted in regions with high numbers of hospital beds like London and Manchester receiving the most.

In 1970, when a large capital investment programme was planned, the then Labour health minister, Richard Crossman, created the 'Crossman Formula' and moved to a system in which funding was based upon population weighted for age and sex.

In 1976, this was further refined by the Resource Allocation Working Party (RAWP) which attempted to introduce some measure of 'need' by using death rates ­ standardised mortality rates (SMRs).

This was the first 'weighted capitation formula' which now, in a much more sophisticated way, has become the basis for all NHS resource allocation. RAWP also introduced a market forces factor to allow for regional differences in care costs.

But debate continued as to whether death rates were the most appropriate measure of need. Death is, after all, the point at which need ceases. So in 1985, measures of illness (morbidity rather than mortality) and measures of social deprivation were included.

Carr-Hill 1985-style

Until 1985, all allocation had been done on a regional basis, but in 1993, a team at the University of York lead by the now infamous Roy Carr-Hill developed ways to project the formula on to smaller populations. This formula introduced measures of acute care, psychiatric need and special rural needs.

The formula we have now is extremely complicated and relies on data from many sources. The resulting allocations are published in three-year planning cycles.

John Reid announced those for the next three years in Parliament in February this year.

Funding for local health services is to increase by 8.1 per cent from 2006. PCTs will have an average of £1,388 per resident. The highest PCT allocation is £1,710.

Despite the apparent sophistication of the formula, there are still major disparities and continual arguments as to whether the formula sufficiently reflects the needs of rurality, deprivation and areas where there are high concentrations of elderly people.

And there are other complications. Under a 1998 modification called the Barnett formula which was intended to allocated increases in public expenditure on the basis of population size, Scotland receives higher per capita funding than England for all public expenditures. Because funding works on averages, the Barnett formula thereby penalises English PCTs.

And generally there are big differences in funding per capita ­ note the difference in the box between South Worcestershire and North Lincolnshire, to take just two regions.

Five funding streams

Until 2004, the financial allocations to PCTS (known as the unified allocation) reflected four separate cash-limited components. The fifth funding stream was the important bit for GPs and was not cash-limited ­ general medical services.

This open-ended budget came direct from central government, had a percentage equivalence of around 7-8 per cent and paid all costs of care by GPs. But this all changed with the new GP contract and from April 2004, GMS expenditure (which includes PMS as well) became cash-limited.

At the moment, allocations are based upon historic spending. But as a result of the QOF data from GPs, the next few years will see major improvements in the sophistication of morbidity mapping.

A new allocation formulae (Carr-Hill) will be used to target resources to high-morbidity areas and to relatively under-resourced areas of the UK.

The problems

The current problem for PCTs is that in 2004/5, GP practices earned significantly more from the new contract than was expected and a lot more than was allocated to them by the historically-based, newly cash-limited GMS allocation. As a result in 2004/5, and probably in 2005/6, many PCTs will be overspent on GMS, particularly those that allowed GPs to earn even more through innovative enhanced service schemes.

There will have to be major changes to accommodate these deficits. My own PCT, for example, has, among other things, reneged on the prescribing incentive scheme.

Understanding funding formulae may seem complicated, but is essential if we are to make the most of new contract opportunities. In particular, we must ensure the large HCHS budget remains flexible enough not only to fund hospital activities, but also those services transferred from hospital into the community and which GPs may ultimately find themselves providing.

Peter Stott is a GP in Tadworth, Surrey

1. Weighted capitation formula that

governs cash allocations to PCTs

A: Primary denominator: population on GP lists

B: This is modified by:

·socio-economic variables from PCT database

·births and deaths


·absent population: armed forces, students, prisoners

·trends in population demographics

·Hospital and community health service component

·age-related need (weighed towards the young and elderly)

·additional need over and above that accouted for by need

·variations in unavoidable costs (eg market forces, ambulances)

·inpatient and day-case statistics

·estimates for community health service activity (historic activity)

·outpatients and day care (data from the General Household Survey)

·Additional needs

·acute care and maternity (estimates from standard tables)

·mental health (estimates from standard tables)

·Geographical cost (market forces factor)


·non-pay costs

·capital costs (land, buildings, equipment ­ from Valuation Office)

·Emergency ambulance cost adjustment


·age- and sex-related need (developed by Prescribing Support Unit)

·additional need because of social factors and circulatory morbidity

·General medical services discretionary component

·age-related need

·social and morbidity factors

·geographical variation in unavoidable costs

·HIV/AIDS based upon actual need and geographical market forces

·General medical services non-discretionary component

·intended to compensate PCTs with higher deprivation so as to recruit and retain GPs

Source: DoH 2003. Resource Allocation:

weighted capitation formula

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