Mohammadi, Sara;
Arifoğlu, Kenan;
Gokpinar, Bilal;
(2025)
The NHS Blended Payment Scheme: Incentive Issues and Optimal Reform.
SSRN: Amsterdam, Netherlands.
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Abstract
The National Health Service (NHS) in England ntroduced the blended payment scheme for emergency care in 2019, as a mixed prospective payment model that combines fixed lump-sum payments under block contracts with variable activity-based payments under Payment by Results (PbR). Under this scheme, hospitals receive a fixed lump-sum payment at the start of the year based on their planned activity or readiness, and a variable payment at year end that adjusts for differences between planned and actual activity, scaled by a variable rate but capped by break-glass provisions that limit extreme financial adjustment. We develop a game-theoretic model to analyze hospitals’ treatment cost and planned activity decisions under the blended payment, considering information asymmetry between hospitals and the regulator. We show that the blended payment scheme offers a middle ground and improves upon block contracts and PbR, as validated by our empirical analysis. However, it fails to fully align hospital incentives for cost reduction and readiness. We identify three key limitations: (i) information asymmetry makes it difficult for the regulator to set the appropriate variable rate; (ii) break-glass provisions may weaken hospital incentives for readiness; and (iii) hospitals may face long-term budget deficits. To address these issues, we propose a modified blended payment that retains the fixed payment but reforms the variable payment by: (i) setting the variable rate at 100%; (ii) adjusting payments based on deviations from average actual activity across all hospitals rather than each hospital’s own actual activity; and (iii) eliminating break-glass provisions. Our proposed payment model aligns hospital behavior with the social optimum and ensures a balanced long-term budget.
| Type: | Working / discussion paper |
|---|---|
| Title: | The NHS Blended Payment Scheme: Incentive Issues and Optimal Reform |
| Open access status: | An open access version is available from UCL Discovery |
| Publisher version: | https://doi.org/10.2139/ssrn.5274537 |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | Blended payment, information asymmetry, yardstick competition, planned activity, healthcare reimbursement |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > UCL School of Management |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10209403 |
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