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05

Healthcare: NHS in critical condition?

Open-access content Monday 30th April 2012 — updated 5.13pm, Wednesday 29th April 2020

As the National Health Service prepares to undergo a potentially life-changing restructure, Joanne Buckle and Simon Moody assess the intensive care that might be needed from actuaries and insurers

2
From April 2013, when you visit a GP to complain about your bad back, spare a thought for the difficult task they face. Not only will they have to diagnose what is wrong and suggest treatment but they will also have to make a decision about the cost of that treatment versus alternatives. They will need to have been clairvoyant, because they must also have a contract in place with another health service provider if the treatment path is something they can't provide.

—

Despite this, they are unlikely to have had any training in procurement, predictive modelling or financial risk management. Tell them you are an actuary; they might be glad of your advice.

The Health and Social Care Bill has received Royal Assent and is now the Health and Social Care Act 2012. This comes after nearly two years of parliamentary debate and a plethora of modifications.

What will it mean?
The rhetoric around the bill highlights improved quality and choice for patients as a result of 'clinically led commissioning', along with greater provider market competition to drive up quality without the distractions of price competition (see 'Key provisions' panel).

Key provisions of the Health and Social Care Bill
- To replace part of the functions of primary care trusts (PCTs) with clinical commissioning groups (CCGs). These will comprise groups of general practitioners (GPs) and other health professionals, which will be authorised by, and receive budgets directly from, the new NHS Commissioning Board. CCGs will be responsible for buying most care for their communities, while some services will continue to be commissioned at a regional or national level.
- A limited opening up of provider markets to ensure a more level playing field for competing services from NHS providers, charities and 'independent' (aka private-sector) providers, which will all receive the same NHS reimbursement for similar services, allowing them to compete on quality rather than price.

- To enshrine certain NHS bodies - in particular the National Institute for Health and Clinical Excellence (NICE) and the NHS Information Centre - in primary legislation, so that they can't be created or abolished at the whim of the health minister of the time.

- To pass responsibility for public health to local health authorities, rather than the NHS.


The bill may create much excitement among lawyers who can debate the meaning of specific phrases but, from a practical point of view, it is more interesting for its omissions than for its inclusions. Part of the reason it has created so much resistance is because it contains few specifics in its 334 pages. Much of the detail is left to the discretion of the NHS Commissioning Board, which will potentially have a huge amount of power.

 A significant part of the infrastructure being created to implement the bill is not mentioned at all in the legislation, including the 20 to 30 commissioning support services (CSS) organisations, which will help Clinical Commissioning Groups (CCGs) in managing contracts with providers, providing procurement, IT, management information and consulting services. This recognises that CCGs will be too small to commission care effectively: there are 253 CCGs, with an average population of 200,000 each, compared with the 152 PCTs that commission care currently. In the long term, CSS organisations are likely to be run by semi-autonomous NHS companies or private companies and are being encouraged to take a 'commercial' approach to their tasks.

On the ground, the actual passage of the bill and amendments has almost become irrelevant, because the pace of real change has necessarily been faster than the legislative process. In many parts of the country, CCGs have been operating for a while, with shadow budgets being given by PCTs to these groups in readiness for the April 2013 deadline.
  
NHS reform chart - Buckle Moody
Risk management
CCGs will get a smaller proportion of the overall NHS budget than their PCT predecessors - more like 65% than 80% to 85%. This is some recognition of the practical inability of CCGs to manage significant amounts of insurance risk given their size. For example, many of the services for rare and expensive diseases will be commissioned at a regional or national level. The NHS Commissioning Board will also continue the practice of 'top slicing', namely keeping back some budget from all CCGs as a risk pool to bail out overspending groups.

CCGs face two main financial risks:
- Insurance risk: uncontrollable and random fluctuations in a population's healthcare needs.
- Service risk: typically arising from mismanagement of controllable activities, including poor prescribing or referral practices.

They will be required to minimise exposure to uncontrollable insurance risk and there will be incentives to encourage and reward those CCGs that manage overall financial risk successfully. There are likely to be penalties for groups that fail to keep financial risk under control, particularly if they also fail to control service risk.

The bill sets out the statutory duty of CCGs to break even, but does not specify a failure regime. Thus, the penalty for a CCG with poor financial results is likely to be limited to removal of management rather than insolvency.

As actuaries, we recognise that service risk can be managed directly by GPs and other clinicians, while insurance risk is better mitigated through the use of risk pooling or insurance solutions. While the NHS Commissioning Board will perform a risk pooling function, CCGs are still likely to be left with some residual risk - especially the smaller ones. Some are forming consortia with neighbouring CCGs to pool risk; others may look to the external reinsurance market for solutions.

The challenge for CCGs, and, ultimately, any private (re)insurance market, will be to separate out true insurance risk from service risk. But insurance companies understand financial risk, using risk management techniques to contain controllable risks and various risk transfer solutions to mitigate uncontrollable risks. Think of the employer's liability insurance market as an example. In the healthcare market, this will require a deep understanding of when healthcare spend is inappropriate and out of line with clinical best practice and when it truly is an unforeseen and insurable risk.

Using actuarial risk-adjusted data, it is possible to pinpoint inappropriate usage in specific clinical areas by population segment and identify whether the issue is admissions, length of stay, avoidable visits to the emergency department, use of expensive drugs or overuse of advanced imaging tests and so on. By correcting for the underlying burden of illness of the population and combining actuarial cost models with clinical guidelines, population health management can be improved, with risk better controlled and excessive use of health services reduced.

One of the positives that may emerge is that data is likely to be more accessible and integrated. Previously, primary care data was the preserve of GPs and was often unavailable to PCTs. So even if they had good hospital data, it was difficult to build a complete picture of patients' use of the health service. However, CCGs will own all the data and will have an incentive to maintain integrated data for analysis if it helps them understand the health needs of their populations.

We have seen some moves in this direction already, with pathfinder CCGs providing data for risk-adjustment modeling that helps identify high-risk sub-populations. This is a step forward for actuaries, who have often struggled to add value in this area because of a paucity of comprehensive and robust data.

There remain many unanswered questions about the new NHS. For example, how will CCGs or individual GPs be rewarded for good outcomes and quality? What will be the failure regime for CCGs or providers? Will the NHS Commissioning Board simply replicate the current functions of the Department of Health, or will it be more politically independent and make CCGs truly accountable for financial and clinical outcomes? Will CCGs have the freedom, incentives, time or even awareness to find innovative (and potentially private-sector) solutions for risk management?

Nobody knows yet whether the bill represents a sea change in the way the NHS operates, or simply a shuffling and renaming of existing infrastructure with no real improvements in clinical quality or efficiency. But the next time you visit your GP, ask them how they feel about managing financial risk and explain what actuaries do.
Joanne Buckle Milliman
Joanne Buckle and Simon Moody are principal consultants in Milliman's London healthcare practice. They work with private healthcare organisations and NHS payors and providers
Simon Moody Milliman
This article appeared in our May 2012 issue of The Actuary.
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