This document summarizes key points from a presentation on financial risk sharing and risk pooling in the English NHS. It discusses the importance of managing financial risk under new models of commissioning and provision. It outlines different sources of variance from budgets and examines strategies like risk bearing, sharing, and transferring. It also analyzes the impacts of factors like population size, time periods, and truncation thresholds on financial risk for clinical commissioning groups. The document concludes by identifying several important issues to address going forward around appropriate levels of risk, risk pooling mechanisms, regional differences, and rules for underspends and overspends.

1. Risk sharing and risk pooling
Martin Bardsley
Head of Research, Nuffield Trust
Nuffield Trust Health Policy Summit
29 February 2012
© Nuffield Trust

2. 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
© Nuffield Trust

3. 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
© Nuffield Trust

4. 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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5. Patterns of cost variation
£100
£90
£80
Monthly cost per person
£70
£60
£50
£40
£30
£20
£10
£0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48
Month
Observed cost Allocation Mean obs cost Mean +/- 2 sd
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6. Persistent variance from budget – in control but over budget
£100
£90
£80
Monthly cost per person
£70
£60
£50
£40
£30
£20
£10
£0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48
Month
Observed cost Allocation Mean obs cost Mean +/- 2 sd
© Nuffield Trust

7. 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.
© Nuffield Trust

8. 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 carving out’ whole services that are known to have unpredictable
risk
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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9. 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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10. Cut the cake .....
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11. What’s in or out of the budget?
Service element Approximate share of Our models
total expenditure
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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12. Balance of specialist /non specialist costs per person per
year
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13. 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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14. No matter what size you are....
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15. A world of randomly assigned CCGs
Differences between observed costs and predicted according to size of CCG. Based on random
pseudo-CCG (Simulation run 50 times)
“Target” Average number Average Average number Within ± Within ± Within ±
Size produced size of practices 1% 2.5% 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%
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16. Contiguous pseudo CCGs
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CCGs at 100,000 pop CCGs at 250,000 pop

17. Contiguous pseudo CCGs
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CCGs at 500,000 pop Jackson Pollock, Number 18

18. Contiguous pseudo CCGs
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19. Random pseudo CCGs
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20. Give me just a little more time....
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21. Differences between expenditure and estimated
allocations at practice level for different time periods
Within Within
Months ±5% ±10%
90%
1 23% 44%
80%
3 32% 57% 70%
6 36% 63% 60%
9 38% 66% 50%
12 39% 68% 40%
Within ±5%
18 42% 71% 30%
20% Within ±10%
24 43% 72%
10%
36 46% 76%
0%
48 48% 78% -2 8 18 28 38 48
© Nuffield Trust

22. Nelly the elephant packed her
trunc(ation)....
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23. Scale of cases affected (excl specialist services)
Costs Resultant per person
exposed to Percentage Amounts premium (based on
Truncation truncation total cost ‘truncated ‘ registered practice
threshold People affected (£million) truncated (£ million) 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% - £-
© Nuffield Trust

24. Impact of ceiling truncation
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
Truncation level % within 5% % within 10%
100%
£5k truncation 59% 87% 90%
80%
£10k truncation 54% 84% 70%
60%
£15k truncation 52% 82% 50%
40%
£20k truncation 51% 81% 30% % within 5%
20%
£25k truncation 50% 81% 10%
% within 10%
0%
£50k truncation 50% 80%
£75k truncation 49% 80%
No truncation 49% 80%
© Nuffield Trust

25. 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
© Nuffield Trust

26. 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 ?
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Feb 2012 © Nuffield Trust