Financial Resource Allocation

Health Economics: 3 - Financial Resource Allocation

This section discusses the way in which National Health Service (NHS) funding is allocated from the NHS England to Clinical Commissioning Groups (CCGs) in England. It does not cover any other means by which financial resources are allocated, for example from parliament to the Department of Health, from the Department of Health to NHS England or from CCGs to providers. It also does not cover the NHS financial resource allocation mechanisms in Scotland, Wales or Northern Ireland, which are different to that of England, although some principles remain the same.

NHS England allocates financial resources directly to CCGs for them to spend on health care. The allocation for each CCG is a share of the resources available nationally, which is decided during the Treasury’s annual Spending Review. Each CCG’s share is determined by a process that includes a needs-based formula. This formula calculates what funding CCGs should receive so that they are all able to commission the same level of services for a given level of need.

The government has allocated resources to different areas of England using a formula since 1971, and has used a needs-based formula since 1976. It is worth noting that as well as being a means of distributing resources, it is also a means of redistributing resources, since allocations to different areas are not equal with respect to need. The resource allocation process does not aim to achieve such equality every year; rather it seeks to get closer to equality. Historic inequalities between areas that the NHS inherited when it was founded in 1948 remain, though of course they are not as large as they were and have continued to diminish over time.

The resource allocation process starts with a calculation, using the national resource allocation formula described below, of what the CCG should receive given the size of its population, the age and sex distribution of its population, any additional need factors, unmet need and health inequalities, and unavoidable variations in the cost of providing services. This is referred to as the target allocation. This is then compared with the CCG’s current funding, called the recurrent baseline, to see if the CCG is above target or below target. Depending on the outcome of the spending review and therefore how much is available for the NHS in total, the next year’s allocation is calculated from the recurrent baseline. All CCGs will get a percentage increase, though CCGs that are below target may get an additional percentage amount. The extent to which under-target CCGs get extra funding, and therefore inequalities are reduced, will depend on several factors, including how much of the additional funding available should be given to all CCGs because of national priority spending commitments. The precise details of these changes are called the pace of change policy. They may include aims such as ensuring that CCGs do not go further above or below their targets, or that there will be a minimum increase for all.

The targets are derived from a weighted capitation formula. CCGs get a certain amount of funding for each member of their population. However that amount will vary depending on the characteristics of that population and of the area in which the CCG is based. The formula calculates a weight for each CCG that determines the actual amount.

There are three separate formulae for each type of service that the CCGs are responsible for: CCGs core responsibilities, specialised services and primary medical care. The core responsibilities element is by far the largest; for 2016-17 was £70.54 billion, compared with £7.34 billion for primary medical care and £14.51 billion for specialised services. For the core responsibilities formula, services are divided into Acute, Maternity, Mental Health, and prescribing. These are combined according to weights reflecting shares in national expenditure – in 2016-17, 72.3% for Acute, 3.7% for Maternity, 11% for Mental Health and 13.1% for prescribing.

Each formula has the same structure, but has different weights. They start with the resident population in the CCG area, calculated as the sum of the numbers on the registered lists of all member GP practices of the CCG, and adjust this for six factors, which are the age and sex distribution, other need factors, unmet needs and health inequalities, unavoidable costs and, for the core responsibilities formula only, two ‘remoteness’ factors, emergency ambulance costs and unavoidable smallness.

The age and sex distribution

The rationale for this is that different ages and sexes have different needs and therefore demands for health care. In particular, if there are many older or very young people then needs and demands will be high.

Other need factors

The rationale for this is that in addition to age, socioeconomic factors may affect the need and demand for health care.

Unmet need and health inequalities

The rationale for this is that the age and sex distribution and other need factors assess currently met need and may not capture unmet need or inappropriately met need. One of the responsibilities of NHS England is also to reduce health inequalities. The specific indicator used is the standardised mortality ratio for those under 75 years of age.

Unavoidable costs

The rationale for this is that even if the same amount of funding is given for equal need, this may not enable CCGs to purchase as much care for their population if the costs of providing care are higher in their geographical area. This therefore attempts to even out the different purchasing power in different CCGs. It is referred to as ‘unavoidable’ costs because not all differences in costs are out of the control of CCGs. If costs are higher because of inefficiency, then there is no justification for compensating for them; in fact this gives an incentive to be inefficient. Unavoidable costs are mainly dealt with by the Market Forces Factor (MFF), which takes account of geographical differences in factors such as wages in the private sector and land and buildings valuations.

Emergency ambulance cost adjustment

The core responsibilities formula has an emergency ambulance cost adjustment (EACA) to take account of geographical variations in the cost of delivering emergency ambulance services. The rationale is that sparsely populated areas may result longer distances being travelled and therefore unavoidably higher costs.

Costs of unavoidable smallness

The core responsibilities formula also adjusts for the fact that larger hospitals can achieve economies of scale with respect to A&E departments, but in remote areas it may be necessary to provide 24-hour A&E coverage in small hospitals, leading to unavoidably higher costs.

The index numbers that are derived from this weighted capitation formula are, of course, expressed in terms of populations, not funding. However, the index numbers are then used to calculate target allocations using information on the total resources that are available for spending on the NHS nationally.

This resource allocation process has been subject to much debate. One view is that it has been one of the most long-lasting and consistently successful policy initiatives that UK governments have ever produced in terms of distributing and redistributing public funds. It has certainly reduced geographical inequalities and, just as importantly, may have prevented greater inequalities from developing. However, the formula has been heavily criticised, not always simply by those who believe that they lose out because of it, on the technical grounds that the data within the formula are not always appropriate for the purpose for which they are used and that the weights are not based on sound statistical principles. Unfortunately, because data are never perfect, it is probably the case that it is not possible to create a perfect formula, so that there will always be grounds for criticism. Unless a viable alternative to the formula approach is developed, it is likely that it will continue, and continue to attract criticism.