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The Actuary The magazine of the Institute & Faculty of Actuaries
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Can we be of service to the NHS?

Joanne Buckle and Tanya Hayward ask whether the actuarial profession can add value in the NHS


12 OCTOBER 2017 | JOANNE BUCKLE AND TANYA HAYWARD



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Developing solutions to alleviate the increasing cost pressures in the National Health Service (NHS) is becoming increasingly important and an area where actuarial skills and concepts can add tremendous value. These skills are particularly relevant in the context of introducing new models of care, cost effectiveness strategies, benchmarking healthcare resource utilisation, risk-sharing arrangements and long-term population projections – all of which are critical to the sustainability of the NHS. 

In this feature, we discuss our recent experience in helping to develop an accountable care system (ACS) within a sub-segment of the NHS encompassing a small number of clinical commissioning groups (CCGs) and local councils. 

Typically, NHS England (NHSE) allocates a budget to each regional system for core CCG-commissioned and primary care services. These funding allocations vary by CCG depending on population size and other risk factors that account for inherent regional differences, for example, age/sex distribution and the relative cost of providing services in each area. Within each regional subsystem, CCGs are responsible for commissioning most of the healthcare services accessed by their registered populations. 

The ACS model differs by introducing a risk-bearing entity, referred to as the prime risk contractor (PRC), which receives part or all of the CCGs’ and local councils’ allocated budgets in a capitation-style risk-sharing arrangement. The PRC bears responsibility for commissioning healthcare services and is motivated to deliver sufficient, high-quality healthcare services more efficiently through the risk-sharing mechanism of the ACS model. 

These contracts are centred on the population and encourage collaboration, working across organisational boundaries and transforming the system to deliver high-quality care to the covered population in the most cost-effective manner. 


Applying actuarial techniques to ACS design

Actuarial skills proved to be a valuable asset for informing the design of the ACS and aiding the decision-making process along the way. For example, techniques such as performing data analytics, benchmarking, scenario testing, forecasting, risk management and structuring alternative reimbursement models were employed in this process. 


1) Data analytics

The first step was to build an actuarial cost model by collecting, processing and summarising cost and activity data at a service-category level. This provided a high-level understanding of how healthcare resource use was distributed within the system, and this model formed the basis of our follow-on analyses described below. 

2) Inpatient benchmarking

Inpatient benchmarking helps to identify potentially avoidable admissions and bed days by comparing the inpatient activity for the included CCGs against a ‘well managed’ system on a population-adjusted basis. A well managed system includes the use of evidence-based and patient-centric care, appropriate rationing of care and outcomes-based incentives. It represents a standard of what is possible and achievable with optimal infrastructure and best-practice care. Because a 100% well managed level is only achieved by a very small proportion of healthcare systems, our benchmark was adjusted downwards to represent a level that is challenging, yet achievable. Importantly, the benchmarks are based on external international systems rather than comparisons with other NHS local economies that may also have suboptimal infrastructure and constrained capacity. The benchmarks were actuarially adjusted for the age/sex mix of the relevant population. 

3) Projection model

Projection models built up an estimated cost for the ACS over a five-year time period. These estimates projected the anticipated cost and activity for each service under various scenarios and took into account anticipated changes in the population size and structure (age/sex mix) over the projection period.

4) Care management impact model

Care management is one of the strategies that a PRC will adopt to reduce activity and cost. Once we had identified the magnitude of excess admissions in the system, the impact of redirecting excess inpatient admissions to alternative settings (that is, either day-case settings or the admission did not occur at all) was modelled to generate scenarios of how the overall system could transform if the PRC’s care management initiatives prove to be successful.

5) Capitation arrangement development 

To aid the design process of the capitation-style ACS model, we participated in a series of workshops with stakeholders including the CCGs, the local council and the PRC. The workshops aimed to engage with stakeholders, discuss the key principles of capitation and how they may apply in this context, and identify potential risks associated with the proposed ACS structure. 

Capitation design usually focuses on the following key areas:

  • Define the population
  • Define the services to be covered 
  • Set a historical baseline and estimate trend factors
  • Perform risk adjustment
  • Determine the risk share/gain share provisions.


The most notable difference between a traditional capitation arrangement and a regional NHS ACS is that, within the ACS, the funding flows are fixed. Therefore, even if a particular capitation fee is calculated on a theoretical basis, the actual funding flow may not be sufficient to cover this amount. In this case, the capitation design would be revisited with potential changes to the included services/eligibility criteria being made.

This process revealed additional considerations unique to an NHS ACS. For example, defining the population was not a straightforward exercise because of overlapping boundaries between CCG and local council areas and uncertainty regarding the size of the population not registered within a particular CCG. When creating the actuarial cost model, the materiality of incomplete and inaccurate data for certain services needed to be assessed to ensure that the baseline costs and projections were reliable. 

Although it is possible to introduce sophisticated risk adjustment methodologies to the ACS design, the funding allocation that flows from NHSE to the CCGs is already a form of capitation with risk adjustment applied. Consequently, any risk adjustment approach should be consistent with the existing NHS methodology. Alternative risk adjustment could be considered to calculate a ‘theoretical’ risk adjustment factor and measure how theoretical and actual risk adjustment factors, capitation rates and overall contract performance metrics differ. 

6) Risk share/gain share model 

Lastly, a risk share/gain share model was built to consolidate the design of the capitation arrangement and understand how the ACS cashflows and risk share/gain share mechanism would operate in practice. This model took into account changes in the population size, risk profile, funding allocations, capitation fees and how savings distributed to the various stakeholders could be affected by the achievement of predetermined quality metrics. 


Internal and external risks

A key outcome from the workshops was to identify the potential risks associated with the arrangement with the purpose of: 

  • Determining which risks could and could not be absorbed by the PRC
  • Including monitoring and mitigation strategies for these risks in the capitation design where possible 
  • Highlighting how these risks may trigger a review of the capitation contract.

 

To facilitate this discussion, we began by asking the stakeholders to consider:

  • What key events/changes have happened in the past that have had a significant impact on the system?
  • Are there any events that are likely to happen in the future that may have an impact on the system?
  • What are the key drivers of cost and activity in the system?

 

The identified risks could be economic or political and could affect the payers, the local authorities or both. It is also important to note that some of the risks could exist independently of whether the contract exists or not, yet they should be considered nonetheless. Examples of key risks identified through this process include:

  • Changes to tariff rates with little notice 
  • Changes in the funding allocation formula 
  • Large increases in the cost of certain drugs. 


Actuarial skills are immensely relevant in regional NHS environments and can be used to inform the design of risk-based ACS contracts. Designing a risk-based capitation arrangement for this purpose required careful consideration of how the traditional principles of capitation may and may not apply in this context, particularly because the funding flows differ from the traditional insurance environment.

A detailed understanding of the internal and external risks (and how they may potentially trigger revisions to the contract terms), as well as clear definitions of the population and services covered, was a crucial element in setting the baseline costs, considering the options for a risk adjustment methodology and, finally, considering how contract performance would be measured and calculating any resulting risk share/gain share values.


Joanne Buckle (FIA) is principal consulting actuary at Milliman London Healthcare

Tanya Hayward (FASSA) is consulting actuary, Milliman London Healthcare