Martin Bardsley: Risk sharing and risk pooling in health

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Risk sharing and risk pooling Martin Bardsley Head of Research, Nuffield Trust

Nuffield Trust Health Policy Summit 29 February 2012

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Financial Risk

• Risk is about how well you manage a budget and uncontrolled costs

• Relates to both the commissioning (insurance risk ) and provider side

• Will need new arrangements on the commissioning side

• Bill mentions creation of a risk pool to ensure that certain designated services will continue to be delivered to patients in the event of failure.

• Any allocation/budget has some element of uncertainty. Mitigating risks can mean removing local control

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Why is the management of risk of growing importance

• Creation of new potentially 'smaller' commissioning entities

• More complex markets for health care with greater range of independent private provision

• Renewed emphasis on organisation autonomy for providers and commissioners

• Desire to create a system that reinforces incentives for ‘efficient’ care rather than bailing out ‘failures.’

• Dangers of demotivating emerging CCGs

• May apply at CCG level and potentially below

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Why might your expenditure be out of line with your budget/allocation?

1. Random events

2. Limitations in the budgeting/allocation process ie systematic elements of needs not recognised in allocation

3. Local practice in use of resources..efficient and inefficient

4. Systematic regional imbalances in supply

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Patterns of cost variation

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Observed cost Allocation Mean obs cost Mean +/- 2 sd

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Persistent variance from budget – in control but over budget

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Observed cost Allocation Mean obs cost Mean +/- 2 sd

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How have we done it in the past?

• Commissioning for specialised services (the budgets for high cost, low volume care are effectively pooled across groups of PCTs)

• Services that are provided outside the national tariff system may be commissioned using a block contract, effectively shifting the financial risk for service provision from the commissioner to the provider

• Strategic Health Authorities hold a 2% (‘topslice’) of annual allocations to PCTs as a contingency fund with rules put in place for disbursement

• There are ex post subsidies (bungs) to commissioners and NHS Trusts that end the financial year in deficit.

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Risk strategies

Strategy Examples

Risk bearing Spreading risk across financial years

increasing the size of the pool of people at risk

Risk sharing share financial risk with other entities, in the case of the NHS other commissioners or providers

Specific arrangements for specialised services in which the risks are shared across a group of PCTs

Transferring financial risk

carving out’ whole services that are known to have unpredictable

truncation when the annual cost incurred by individual patients are borne by another entity (the financier) when it exceeds a defined ceiling In commercially driven systems, the risk bearer or insurer can buy stop-loss insurance to cover spending bove a certain threshold

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What do we know of the impacts ?

1. Specialist services

2. Size

3. Time for break-even

4. Effects of truncation/stop loss arrangements

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Cut the cake .....

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What’s in or out of the budget?

Service element Approximate share of total expenditure

Our models

Specialist 14% Excluded

Maternity 7% Modelled

Critical care (non-specialist cases) 1% Modelled

Inpatient (non-specialist cases) 46% Included

Outpatients 21% Included

A&E 4% Included

Mental health (2ndry care) c.7% Excluded

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Balance of specialist /non specialist costs per person per year

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Issues around the exclusions

• No established and consistently applied definitions

• Debates at what services are included/excluded and at what level

• Some areas eg critical care information is patchy at present

• Will not exclude some high costs cases – based on annualised costs

• Scope for considering differential arrangements around the country if some CCGs want to take more risk

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No matter what size you are....

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A world of randomly assigned CCGs

“Target” Size

Average number produced

Average size

Average number of practices

Within ± 1%

Within ± 2.5%

Within ± 5%

100000 546 99996 14.9 39.0% 79.6% 98.5%

150000 364 149993 22.4 45.5% 87.0% 99.7%

200000 273 199990 29.9 52.4% 92.1% 100%

250000 218 249998 37.3 56.7% 95.0% 100%

300000 182 300029 44.8 61.7% 96.9% 100%

400000 136 400038 59.8 69.5% 98.8% 100%

500000 109 499984 74.7 73.6% 99.2% 100%

Differences between observed costs and predicted according to size of CCG. Based on random pseudo-CCG (Simulation run 50 times)

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Contiguous pseudo CCGs

CCGs at 100,000 pop CCGs at 250,000 pop

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CCGs at 500,000 pop Jackson Pollock, Number 18

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Differences between expenditure and estimated allocations at practice level for different time periods

Months Within ±5%

Within ±10%

1 23% 44%

3 32% 57%

6 36% 63%

9 38% 66%

12 39% 68%

18 42% 71%

24 43% 72%

36 46% 76%

48 48% 78% 0%

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Scale of cases affected (excl specialist services)

Truncation threshold People affected

Costs exposed to truncation (£million)

Percentage total cost truncated

Amounts ‘truncated ‘ (£ million)

Resultant per person premium (based on registered practice

population) £1k 5,057,759 17,769.10 79% 12,692.96 £232.10

£2.5k 2,266,079 13,390.95 60% 7,707.36 £140.93

£5k 962,578 8,844.89 39% 4,013.61 £73.39

£7.5k 464,314 5,826.57 26% 2,325.83 £42.53

£10k 258,562 4,053.38 18% 1,449.37 £26.50

£15k 95,306 2,098.34 9% 650.37 £11.89

£20k 41,142 1,172.68 5% 331.45 £6.06

£25k 19,739 698.64 3% 186.78 £3.42

£50k 1,571 124.28 0% 27.35 £0.50

£75k 420 57.19 0% 7.31 £0.13

£100k 187 37.09 0% - £-

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Impact of ceiling truncation

Truncation level % within 5% % within 10%

£5k truncation 59% 87%







No truncation 49% 80%

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Comparing the number of GP practices where expenditure is within 5% or 10% of predicted acute care costs (excluding specialist care), at different levels of truncation

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Summary observations

• Population sizes is a critical factor affecting the scale of financial risk especially with populations below 150k

• Break even period not that significant an - only small gains from extending beyond one year

• Truncation (stop loss) was not that effective in our analyses (that excluded specialist care)

• Significant underlying regional differences in the level of acute care spending

• Range of options on ‘service carve outs’ that need to be explored further

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Key issues going forward

• What level of risk should CCGs have to bear – and how might that change over time?

• What organisations/mechanisms need to be in place for risk pooling?

• Should there be some local discretion to take on more risk?

• Do we need additional mechanisms to avoid ‘cream skimming’ or ‘dumping’?

• What are the rules for underspends and overspends?

• What will be expected in terms of pace of change to evening out regional differences ?

© Nuffield Trust Feb 2012

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Martin Bardsley: Risk sharing and risk pooling in health

Health & Medicine

Transcript of Martin Bardsley: Risk sharing and risk pooling in health