How PbR works in practice – Fundamental features, Currencies, Tariffs

This post is one in a series on Payment by Results in mental health, written for both professional and personal reasons. The full series is introduced and linked to here, including a post with all references in it.

Fundamental features

There are three fundamental features of Payment by Results: (1) classification; (2) currency; and (3) costing (DH, 2011a:18; CHE, 2009:45; NDTi, 2012:8).

Classification systems are based on the diagnoses of patient conditions and the medical interventions that are made. There are two classification systems that have been developed that cover diagnoses (ICD-10) and medical interventions (OPCS-4) respectively (DH, 2011a:18).

A currency is the unit of healthcare for which a payment is made.

Tariffs are the price to be paid for each currency.

Thus, for any person receiving any treatment in certain settings, the following process is followed:

  1. Treatment occurs
  2. Treatment is coded – done by clinical coders. Separate classification systems for diagnoses (ICD-10) and interventions (OPCS-4)
  3. Grouping of treatment – a Healthcare Resource Grouping (HRG) is allocated based on clinical codes and other patient data
  4. Tariff – The tariff price depends on HRG and type of admission, and there are a variety of tariff adjustments made
  5. Payment – standard monthly payments are made in advance, based on activity plan. Actual activity transmitted from provider to commissioners adjusts these payments up or down

The fundamental features of PbR are discussed in more detail below.


A currency is the unit of healthcare for which a payment is made (DH, 2011a:18). The currency for Payment by Results in the health service is Health-Resource Groups (HRGs) (sometimes called Diagnosis-Resource Groups (DRGs) in other countries). These are groupings of clinically meaningful groups of diagnoses and interventions that use common levels of healthcare resource (DH, 2011a:8; MHN, 2011b:7). They include both interventions and diagnoses because funding isn’t always based purely in the diagnosis of a medical issue (CHE, 2009:45).

They are Health-Resource Groups because there are some 26,000 codes which describe specific diagnoses and interventions. Thus, grouping these into HRGs allow units to be set at a sensible and workable number, which is currently some 1,500 (DH, 2011a:8). When it comes to working out the groupings, interventions and diagnoses have a hierarchy: if significant interventions take place then the HRG generated will be based on the intervention. However, if this isn’t the case then the HRG will be based on a diagnosis (DH, 2011a:24).

There are a number of significant features of the HRG system. The most important is that they are setting independent: it doesn’t matter if an intervention takes place in a hospital or in a community setting; the HRG remains the same (DH, 2011a:23).


The tariff is simply the set amount of money paid for each currency. For example, the tariff for cataract surgery is £961 and for a coronary artery bypass graft is £7,318.

Producing the tariff is a long and complex process. To do so requires considering its ‘scope’ and its ‘structure’ (DH, 2011a:28). By scope is meant the range of services that a tariff covers; by structure is meant the design of the tariff so that it creates the right incentives (DH, 2011a:28).

To develop tariffs, a wide range of calculations are made and views sought. The tariffs are also tested for a period of time before they are formally adopted.

Originally, tariffs were calculated on the mean average of costs calculated to be part of the tariff. As PbR practice has developed, some tariffs now reflect the costs of best clinical practice, rather than average costs (DH, 2011a:34). These costs could be highger or lower than the national average costs (DH, 2011a:34).

Adjustments are often made to tariffs, often to incentivise certain provider behaviours. For example, a key way to increase the efficiency of the acute sector and the quality of the patient experience has been to drive down length of stay. Thus, the tariff for elective care, when first established in PbR, sought to support the desire to move activity into day case settings where appropriate by setting a price that was based on the average ordinary elective and day care costs… This meant that the price would reward providers that were achieving higher than average levels of day cases and under reward those providers who day case rate were lower than the average (DH, 2011a:30-31).

In addition to these types of tariff adjustments, uplifts or reductions in tariffs reflect pay and price inflation in the NHS, and include an efficiency requirement (DH, 2011a:28).

The tariff ultimately received by a healthcare provider is the tariff multiplied by a nationally determined market forces factor (MFF) (DH, 2011a:8). This is an index which recognises unavoidable cost differences faced by each organisation in providing health care, such as staff and capital costs (DH, 2011a:28)

Thus, provider income under PbR = activity x price x MFF (per case) (DH, 2011a:14).

(There is a nice set of case studies of how provider payments are calculated in DH, 2011a:15-17.)


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Man of letters & numbers; also occasionally of action. Husband to NTW. Dad of three. Friendly geek.

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