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The new funding system for hospitals threatens to cut spending on primary care, a report by the public spending watchdog has concluded.

The Audit Commission said community and mental health budgets were in danger because primary care trusts faced 'significant financial risks' implementing Payment by Results.

Under the initiative, PCTs pay hospitals according to a national tariff for the actual number of procedures they have carried out. The change means PCTs cannot strike deals with hospitals or negotiate block contracts.

Uncertainty over levels of demand for elective and non-elective care, due to inaccuracies in data used to set the prices for operations, could leave PCTs cash-strapped, the Audit Commission concluded.

It also warned of problems if activity increased and said 'gaming' by hospitals could increase the pressure on PCTs.

Trusts will have 'no control over 75 per cent of their funds', the commission added.

'One of the risks is that expenditure left to the PCT will get crowded out,' said Andy McKeon, managing director for health at the Audit Commission. 'They can't dip into the GMS contract but there are questions about how much they invest more generally in primary care. This is potentially very bad news for PCTs.'

GPC deputy-chair Dr Laurence Buckman said Payment by Results was 'one of the most stupid ideas the Government has ever had'. The proposals were 'bereft of evidence' and would lead to 'tons of gaming', he added.

'If you spend money on secondary care you de-fund 90 per cent of health care and GPs won't be able to co-operate,' Dr Buckman said.

NHS Alliance new contract lead Dr David Jenner agreed there were significant financial risk to PCTs and warned managers against cutting enhanced services. He said: 'It puts more pressure on secondary care and GPs will leave or practices will close.'

The Department of Health said PCTs had had two years to prepare for the scheme: 'The department has developed model contracts and service agreements to assist PCTs and is working to identify and resolve remaining issues.'

By Ian Cameron

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