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

© Nuffield Trust Presentation Concepts Health and Social Care Bill Insurance risk Person-based resource allocation © Nuffield Trust

Financial 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

© Nuffield Trust Health 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

© Nuffield Trust 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

© Nuffield Trust 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

© Nuffield Trust Risk map: undesignated services NHS CB PCT clustersConsortiaPracticesPatientsFTsPractices InsuranceProvider

© Nuffield Trust Risk map: designated services NHS CB PCT clustersConsortiaPracticesPatients MonitorFTsPractices InsuranceProvider

© Nuffield Trust Insurance risk March 2011 © Nuffield Trust

Insurance risk: strategies Risk bearingRisk sharing Transferring risk Source: Ryan, J. Bruce, Healthcare Financial Management , Jan97, Vol. 51, Issue 1

© Nuffield Trust Insurance risk: some strategies (ex ante) Risk bearing Increasing the risk pool Spreading risk across years Self insurance Risk sharing Joining others’ risk pools Alliance contracts Transferring risk To providers To other insurance entity

© Nuffield Trust Insurance risk: some strategies (ex ante) Risk bearing Increasing the risk pool Spreading risk across years Self insurance Risk sharing Joining others’ risk pools Alliance contracts Transferring risk To providers To other insurance entity

© Nuffield Trust Person-based resource allocation PBRA © Nuffield Trust

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

© Nuffield Trust 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

© Nuffield Trust Expenditure i Needs i supplya Needs a Other variables a,,,( ( f Basic model

© Nuffield Trust Explanatory variablesPrediction variable 2007/ / /09 Data

© Nuffield Trust PBRA model: actual to predicted costs, 2007/8

© Nuffield Trust Comparison Observed and Expected Costs at Practice level List size

© Nuffield Trust 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

© Nuffield Trust 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

© Nuffield Trust Sampled from patients (10m) within a 20% random sample of all patients 100 replications for each consortium size Consortium size increased in units of 10,000 Upper 95% C.I. Lower 95% C.I. Average risk

© Nuffield Trust Upper 95% C.I. Lower 95% C.I. Average risk

© Nuffield Trust Upper 95% C.I. Lower 95% C.I. Average risk © Nuffield Trust

Sampled from patients (10m) within a 20% random sample of all patients 100 replications for each consortium size Consortium size increased in units of 10,000 £4 Upper 95% C.I. Lower 95% C.I. Average risk

© Nuffield Trust Sampled from patients (10m) within a 20% random sample of all patients 100 replications for each consortium size Consortium size increased in units of 10,000 £8 Upper 95% C.I. Lower 95% C.I. Average risk

© Nuffield Trust Conclusion Comprehensive strategy to manage insurance risk needs developing Recent empirical advances in risk adjustment help Ex post risk management needs to be more explicit © Nuffield Trust

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