© Nuffield Trust Annual Health Strategy Summit Managing financial risk in the NHS March 2011 Twitter: #NTSummit Jennifer Dixon (with thanks to Sian Davies)

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Annual Health Strategy Summit

Managing financial risk in the NHS

March 2011 Twitter: #NTSummit

Jennifer Dixon (with thanks to Sian Davies)Nuffield Trust

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PresentationConceptsHealth and Social Care BillInsurance riskPerson-based resource allocation

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Financial risk: conceptsFinancial risk: concepts

• Risk of a unit overspending due to circumstances beyond its control

• Insurance risk

• Provider risk

• Ex ante risk management

• Ex post risk management

March 2011

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Health and Social Care Bill: Insurance riskHealth and Social Care Bill: Insurance risk

• SoS specifies resources to NHS CB in annual mandate

• NHS CB allocates resources to consortia

• NHS CB commissions specialised services for rare conditions (SoS decides)

• NHS CB and consortia can set jointly or each up a pooled fund

• NHS CB can set up a contingency fund

• NHS CB can provide financial assistance

• NHS CB specifies matters in standard commissioning contracts

• NHS CB sets structure of pricing

• NHS CB can set up a failure regime for consortia

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Health and Social Care Bill: Provider (FT) risk; designated services

• Monitor sets prices

• Monitor: core function of setting up a ‘special administration regime’ in event of provider failure to preserve ‘designated services’

• Commissioners apply for a service to be ‘designated’ (Monitor provides guidance on criteria)

• Monitor can impose additional licence conditions on the designated.

• Can be local modifications of prices for designated services

• Corporate insolvency procedures (undesignated services)

• Special administration regime (designated)March 2011

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Health and Social Care Bill: Provider (FT) risk

• Financial assistance for failing FTs providing designated services could be through:

- providers and commissioners being required to set up a risk pool (powers by Monitor to require commissioners or providers to pay a levy)

- providers being required to purchase their own insurance to cover liabilities as specified by Monitor.

• Taxpayer investment in FTs managed through operationally independent banking function.

March 2011

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Risk map: undesignated services

InsuranceInsurance ProviderProvider

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Risk map: designated services

InsuranceInsurance ProviderProvider

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Insurance risk

March 2011 © Nuffield Trust

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Insurance risk: strategies

Source: Ryan, J. Bruce, Healthcare Financial Management 07350732, Jan97, Vol. 51, Issue 1

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Insurance risk: some strategies (ex ante)

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Insurance risk: some strategies (ex ante)Insurance risk: some strategies (ex ante)

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Person-based resource allocationPBRA

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Policy context

• NHS Commissioning Board responsible for allocations to GP consortia

• Cover: secondary care, prescribing, community health services• Allocations based on aggregating up practice level budgets

(allows practices to move between consortia)• First allocations to be made for 2013/14• Shadow allocations in 2012/13

14

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Person-based resource allocation

• To develop a person-based formula for resource allocation to practices for commissioning

• To promote equity of access for equal need

• Provide advice on risk sharing

March 2011

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Needsa Other variablesa, , ,((f

Basic model

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Explanatory variables Prediction variable

Data

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PBRA model: actual to predicted costs, 2007/8

Table 4 Actual compared to predicted cost for the basic set of models, predicting costs for 2007/08 -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Model Set of variables Validation sample 2 Individuals=5,445,559 Practices=797 -------------------------------- -------------------------------- Percentage of practices where (actual-predicted)/predicted cost -------------------------------- -------------------------------- -10<%<0 -5<%<0 -3<%<0 0<%<3 0<%<5 0<%<10 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Model 1: age and gender 21 10 5 7 12 21 Model 2: age and gender morbidity markers 26 14 8 8 14 25 Model 3: age and gender morbidity markers 152 PCT dummies 34 16 11 11 18 31 Model 4: age and gender morbidity markers 152 PCT dummies 135 attributed needs & 63 supply 37 22 13 12 19 31 Model 5 age and gender morbidity markers 152 PCT dummies 7 attributed needs & 3 supply 35 19 11 12 19 33

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0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

0 5000 10000 15000 20000 25000 30000 35000 40000

Comparison Observed and Expected Costs at Practice level

List size

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Risk sharing

Measures include: (actual-predicted)/predicted cost

Size of practice/group of practices/consortia

Various ‘risk’ arrangements:• Service ‘carve outs’ eg specialised commissioning• Per capita limit per annum (stop loss)• Extended ‘break even’ period

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Approach: Pseudo-Monte Carlo simulation

• Dataset of 10million patients with all relevant information to predict expenditures (for 2006/07) using

Nuffield model

• Randomly sample from dataset repeatedly for a given GP consortium size to assess risk:

• Example

• start with GP consortium of size = 10,000

• Sample 10,000 from the available 10m

• Generate the model predicted level of expenditure for each individual

• Compare predicted expenditure to known actual expenditure

• Compute difference (risk) at individual level and at aggregate consortium level

• Repeat above for different sizes of consortia from 10,000 to 500,000 in increments of 10,000

• Summarise results - done graphically

• Can repeat for different assumptions about composition of consortia and/or risk sharing arrangements

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Sampled from patients (10m) within a 20% random sample of all patients100 replications for each consortium sizeConsortium size increased in units of 10,000

-40

-20

020

40C

onso

rtiu

m r

isk

per

capi

ta(£

)

0 100000 200000 300000 400000 500000Consortium list size

Average risk Lower CI

Upper CI

Simulations from all data

Risk smoothed over time - predicted versus actual expenditure

Consortia risk profile

Upper 95% C.I.

Lower 95% C.I.

Average risk

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-40

-20

020

40C

onso

rtiu

m r

isk

per

capi

ta(£

)

0 100000 200000 300000 400000 500000Consortium list size

Average risk Lower CI

Upper CI

Simulations from all data

Risk smoothed over time - predicted versus actual expenditure

Consortia risk profile

Upper 95% C.I.

Lower 95% C.I.

Average risk

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-40

-20

020

40

Consort

ium

ris

k p

er

capita(£

)

0 100000 200000 300000 400000 500000Consortium list size

Average risk Lower CI

Upper CI

Simulations from all data

Risk smoothed over time - predicted versus actual expenditure

Consortia risk profile

14

-13.5

Upper 95% C.I.

Lower 95% C.I.

Average risk

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Sampled from patients (10m) within a 20% random sample of all patients100 replications for each consortium sizeConsortium size increased in units of 10,000

-40

-20

020

40C

onso

rtiu

m r

isk

per

capi

ta(£

)

0 100000 200000 300000 400000 500000Consortium list size

Average risk Lower CI

Upper CI

Simulations from all data

Risk smoothed over time - predicted versus actual expenditure

Consortia risk profile

£4

£4

Upper 95% C.I.

Lower 95% C.I.

Average risk

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Sampled from patients (10m) within a 20% random sample of all patients100 replications for each consortium sizeConsortium size increased in units of 10,000

-40

-20

020

40C

onso

rtiu

m r

isk

per

capi

ta(£

)

0 100000 200000 300000 400000 500000Consortium list size

Average risk Lower CI

Upper CI

Simulations from all data

Risk smoothed over time - predicted versus actual expenditure

Consortia risk profile

£8

£8

Upper 95% C.I.

Lower 95% C.I.

Average risk

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ConclusionComprehensive strategy to manage insurance risk needs developingRecent empirical advances in risk adjustment helpEx post risk management needs to be more explicit

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© Nuffield Trust

Thank you

March 2011© Nuffield Trust