This document summarizes a presentation on managing financial risk in the NHS. It discusses concepts of insurance risk and provider risk. It outlines provisions in the Health and Social Care Bill related to allocating resources from the NHS Commissioning Board to clinical commissioning groups and managing insurance risk for providers. The document also discusses strategies for ex-ante and ex-post risk management, including risk bearing, risk sharing, and risk transfer. Finally, it presents an approach to person-based resource allocation and risk sharing between clinical commissioning groups using simulation modeling.

1. Annual Health Strategy Summit
Managing financial risk in the NHS
Jennifer Dixon (with thanks to Sian Davies)
Nuffield Trust
March 2011 © Nuffield Trust
Twitter: #NTSummit

2. Presentation
Concepts
Health and Social Care Bill
Insurance risk
Person-based resource allocation
© Nuffield Trust

3. Financial risk: concepts
• Risk of a unit overspending due to circumstances beyond its
control
• Insurance risk
• Provider risk
• Ex ante risk management
• Ex post risk management
March 2011 © Nuffield Trust

4. Health and Social Care Bill: Insurance risk
• SoS specifies resources to NHS CB in annual mandate
• NHS CB allocates resources to consortia
• NHS CB commissions specialised services for rare
conditions (SoS decides)
• NHS CB and consortia can set jointly or each up a pooled
fund
• NHS CB can set up a contingency fund
• NHS CB can provide financial assistance
• NHS CB specifies matters in standard commissioning
contracts
• NHS CB sets structure of pricing
• NHS CB can set up a failure regime for consortia © Nuffield Trust

5. Health and Social Care Bill: Provider (FT) risk;
designated services
• Monitor sets prices
• Monitor: core function of setting up a ‘special
administration regime’ in event of provider failure to
preserve ‘designated services’
• Commissioners apply for a service to be ‘designated’
(Monitor provides guidance on criteria)
• Monitor can impose additional licence conditions on the
designated.
• Can be local modifications of prices for designated
services
• Corporate insolvency procedures (undesignated services)
• Special administration regime (designated)
March 2011 © Nuffield Trust

6. Health and Social Care Bill: Provider (FT) risk
• Financial assistance for failing FTs providing designated
services could be through:
- providers and commissioners being required to set up a
risk pool (powers by Monitor to require commissioners or
providers to pay a levy)
- providers being required to purchase their own
insurance to cover liabilities as specified by Monitor.
• Taxpayer investment in FTs managed through
operationally independent banking function.
March 2011 © Nuffield Trust

7. Risk map: undesignated services
Insurance Provider
NHS CB
PCT clusters
Consortia FTs
Practices Practices
Patients
© Nuffield Trust

8. Risk map: designated services
Insurance Provider
NHS CB Monitor
PCT clusters
Consortia FTs
Practices Practices
Patients
© Nuffield Trust

9. Insurance risk
March 2011 © Nuffield Trust

10. Insurance risk: strategies
Transferring
Risk bearing Risk sharing
risk
Source: Ryan, J. Bruce, Healthcare Financial Management 07350732, Jan97, Vol. 51, Issue 1
© Nuffield Trust

11. Insurance risk: some strategies (ex ante)
Transferring
Risk bearing Risk sharing
risk
Joining
Increasing
others’ risk To providers
the risk pool
pools
Spreading To other
Alliance
risk across insurance
contracts
years entity
Self
insurance
© Nuffield Trust

12. Insurance risk: some strategies (ex ante)
Transferring
Risk bearing Risk sharing
risk
Joining
Increasing
others’ risk To providers
the risk pool
pools
Spreading To other
Alliance
risk across insurance
contracts
years entity
Self
insurance
© Nuffield Trust

13. Person-based resource allocation
PBRA
© Nuffield Trust

14. Policy context
• NHS Commissioning Board responsible for allocations to GP
consortia
• Cover: secondary care, prescribing, community health services
• Allocations based on aggregating up practice level budgets
(allows practices to move between consortia)
• First allocations to be made for 2013/14
• Shadow allocations in 2012/13
© Nuffield Trust
14

15. Person-based resource allocation
• To develop a person-based formula for resource allocation to
practices for commissioning
• To promote equity of access for equal need
• Provide advice on risk sharing
March 2011 © Nuffield Trust

16. Basic model
Expenditurei f( Needs i
, Needsa , supplya
, Other variablesa
(
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17. Data
Explanatory variables Prediction variable
2007/08 2008/09 2009/10
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18. PBRA model: actual to predicted costs, 2007/8
Table 4 Actual compared to predicted cost for the basic set of models, predicting costs for 2007/08
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
-------
Model Set of variables Validation sample 2 Individuals=5,445,559
Practices=797
-------------------------------- --------------------------------
Percentage of practices where (actual-predicted)/predicted cost
-------------------------------- --------------------------------
-10<%<0 -5<%<0 -3<%<0 0<%<3 0<%<5 0<%<10
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------
Model 1: age and gender 21 10 5 7 12 21
Model 2: age and gender
morbidity markers
26 14 8 8 14 25
Model 3: age and gender
morbidity markers
152 PCT dummies 34 16 11 11 18 31
Model 4: age and gender
morbidity markers
152 PCT dummies
135 attributed needs & 63 supply 37 22 13 12 19 31
Model 5 age and gender
morbidity markers
152 PCT dummies
7 attributed needs & 3 supply 35 19 11 12 19 33
© Nuffield Trust

19. Comparison Observed and Expected Costs
at Practice level
2.5000
2.0000
1.5000
1.0000
0.5000
0.0000
0 5000 10000 15000 20000 25000 30000 35000 © Nuffield Trust
40000
List size

20. Risk sharing
Measures include: (actual-predicted)/predicted cost
Size of practice/group of practices/consortia
Various ‘risk’ arrangements:
• Service ‘carve outs’ eg specialised commissioning
• Per capita limit per annum (stop loss)
• Extended ‘break even’ period
© Nuffield Trust

21. Approach: Pseudo-Monte Carlo simulation
• Dataset of 10million patients with all relevant information to predict expenditures (for 2006/07) using
Nuffield model
• Randomly sample from dataset repeatedly for a given GP consortium size to assess risk:
• Example
• start with GP consortium of size = 10,000
• Sample 10,000 from the available 10m
• Generate the model predicted level of expenditure for each individual
• Compare predicted expenditure to known actual expenditure
• Compute difference (risk) at individual level and at aggregate consortium level
• Repeat above for different sizes of consortia from 10,000 to 500,000 in increments of 10,000
• Summarise results - done graphically
© Nuffield Trust
• Can repeat for different assumptions about composition of consortia and/or risk sharing arrangements

22. Sampled from patients (10m) within a 20% random sample of all patients
100 replications for each consortium size
Consortium size increased in units of 10,000
Consortia risk profile
40
Upper 95% C.I.
Consortium risk per capita(£)
20
Average risk
0
Lower 95% C.I.
-20 -40
0 100000 200000 300000 400000 500000
Consortium list size
Average risk Lower CI
Upper CI
Simulations from all data
Risk smoothed over time - predicted versus actual expenditure
© Nuffield Trust

23. Consortia risk profile
40
Upper 95% C.I.
Consortium risk per capita(£)
20
Average risk
0
Lower 95% C.I.
-40 -20
0 100000 200000 300000 400000 500000
Consortium list size
Average risk Lower CI
Upper CI
Simulations from all data
Risk smoothed over time - predicted versus actual expenditure
© Nuffield Trust

24. Consortia risk profile
40
Upper 95% C.I.
Consortium risk per capita(£)
20
14
Average risk
0
-13.5
Lower 95% C.I.
-40 -20
0 100000 200000 300000 400000 500000
Consortium list size
Average risk Lower CI
Upper CI
Simulations from all data
© Nuffield Trust
Risk smoothed over time - predicted versus actual expenditure

25. Sampled from patients (10m) within a 20% random sample of all patients
100 replications for each consortium size
Consortium size increased in units of 10,000
Consortia risk profile
40
Upper 95% C.I.
Consortium risk per capita(£)
20
£4 Average risk
0
£4
Lower 95% C.I.
-40 -20
0 100000 200000 300000 400000 500000
Consortium list size
Average risk Lower CI
Upper CI
Simulations from all data
Risk smoothed over time - predicted versus actual expenditure
© Nuffield Trust

26. Sampled from patients (10m) within a 20% random sample of all patients
100 replications for each consortium size
Consortium size increased in units of 10,000
Consortia risk profile
40
Upper 95% C.I.
Consortium risk per capita(£)
20
£8 Average risk
0
£8
Lower 95% C.I.
-40 -20
0 100000 200000 300000 400000 500000
Consortium list size
Average risk Lower CI
Upper CI
Simulations from all data
Risk smoothed over time - predicted versus actual expenditure
© Nuffield Trust

27. Conclusion
Comprehensive strategy to
manage insurance risk needs
developing
Recent empirical advances in risk
adjustment help
Ex post risk management needs to
be more explicit
© Nuffield Trust

28. Thank you
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