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How ready are CCGs for a new funding formula?

The task of carving up the NHS's annual £120bn budget is by no means a simple one. Much has been happening behind the scenes recently on the commissioning budget for hospital care, which accounts for a third of the NHS budget.

The Nuffield Trust has been commissioned to work on a new person-based resource allocation formula and at the end of last year published the results of its work. The most enhanced model of several it worked up was found to be 85% accurate in predicting future spend. With CCGs expecting shadow indicative allocations any time now, with the official line being ‘early 2012', it is worth summarising how resource allocations based on practice lists will put CCGs in new territory.

The biggest departure is that rather than allocating funds based on historical hospital spend, the new allocation formula predicts costs based on the direct health needs of individual patients.

The Nuffield formula uses age, sex, ICD-10 codes, seven ‘attributed' needs – such as the number of people in social rented housing and the number of adults with no qualifications – to take into account socioeconomic factors and three ‘supply variables'.

In short, the focus of the budget setters is shifting from what's ‘coming out' of hospitals to what patient lists can predict is going to incur hospital costs.

Dr Martin Bardsley, head of research at the Nuffield Trust, says because of the new focus on practice populations, practice lists will need to be as accurate as possible. Onlookers might predict that practices with the cleanest lists may have a disadvantage compared with practices in areas with very transient populations, but

Dr Bardsley says mechanisms can be built into the formula to account for such variation. He also admits the level of morbidity currently being captured will not be perfect, but that over time primary care data can be added to boost accuracy.

‘What the formula does is make the most of the information we can get at the moment. It is not driven directly by the number of events someone has, but the number of different diagnoses that person has, building up a picture where someone has a disease that would have future cost requirements.

‘This is about distributing funds by need of the population rather than supply locally.'

Winners and losers

Exactly who the winners and losers will be can't be predicted until the numbers are published.

The Nuffield Trust predicts that if the formula was implemented in full immediately, a third of practices would exceed or undershoot their allocation by 10% or more.

An important point to remember, though, is that while budgets are calculated at the practice level, they will be apportioned at the CCG level. This moves the debate on from practices to how CCGs would cope should practices overspend on this third of the overall budget.

The issue of CCG size comes into the picture again as CCGs work to come within budget. Bigger CCGs will obviously find it easier to absorb variation, while budget shocks are harder to take in small CCGs.

And while the budgets are held at CCG level, what responsibility will individual practices have for their allocation?

But in practice, CCGs are likely to be moved to the new allocation over a number of years, through use of differential annual uplifts.

Dr Shane Gordon, national co-lead for the NHS Alliance clinical commissioning federation, says how this smoothing is done will be key: ‘Under fair shares we saw 10-15% swings in the practice budget, and that's difficult to communicate to the practice. You are told you are doing well and all of a sudden it changes and you are told you need to work even harder.'

Get the pace of change wrong, he says, and you can completely demoralise practices, which then become cynical about how much effort to put in when the goalposts keep moving. But how much time have CCGs got?

Pace of change

David Stout, deputy chief executive of the NHS Confederation, says the pace of change is the most important factor in the implementation of the formula. He points out that the NHS has never managed to get to a situation where everyone is on their target budget and, while practices should look closely at what their practice budget is, they shouldn't get hung up on it as an issue.

Mr Stout says: ‘The formula does matter because it tells you theoretically what you should be funding, and people will want to look very carefully at whether they have been given a doable target. But the thing I would look for is the pace of change of policy – how you move towards that target.'

Dr James Kingsland, national clinical lead for the Department of Health, says a pragmatic approach is needed.

He warns trying to make the model fairer could take many more months and that discussions around fair shares started five years ago.

He says: ‘The NHS is going to have to function on 15-20% less resource and we have known that for a long time. We cannot afford to wait. We duplicate work a lot and we are not as efficient as we could be – it would probably be better to focus efforts on that issue rather than saying we are 2% down.'

Time will tell whether the formula becomes a big issue for CCGs and their member practices.

As Dr Johnny Marshall, until recently chair of the NAPC, puts it: ‘We are on a bit of a journey – we can't just adopt it and say it's sorted. This is a tool that explained 85% of the variance – if you can come up with something that addresses the other 15%, that has to be a good thing. But this is a good place to start.'