Implementing payment by results in the English NHS : Changing incentives and the role of information

Purpose – This paper draws on economic theory and empirical evidence in order to explore the role of incentives and information in the successful implementation of the new hospital funding system in the NHS. Design/methodology/approach – The research is based on case studies in two strategic health authorities comprising in‐depth interviews with key stakeholders and analysis of background statistics and documentation. Findings – The structure of tariffs under payment‐by‐results (PbR) provides high‐powered incentives for providers to increase activity because they are rewarded for hospital activity, and payments for increases in activity are made at full average cost. However, there is a danger that hospitals will increase activity beyond affordable levels and possibly induce demand inappropriately. Practical implications – In future, as PbR is extended, it will be important to monitor its intended and unintended effects. Such evaluation should consider the extent to which commissioners are able to live within their budgets and whether hospitals are engaging in opportunistic behaviour and gaming the new funding system. Originality/value – This study has shed light on the incentive structure of PbR for NHS organisations and has provided insights for the development of information strategies for providers and commissioners in the NHS market. It also highlights a number of policy issues that need to be addressed as PbR is rolled out nationally as well as several important gaps in knowledge that are in need of more sustained investigation.