Establishing a Fair Playing Field for Payment by Results

The English government has encouraged private providers – known as Independent Sector Treatment Centres (ISTCs) – to treat publicly funded (NHS) patients. Providers are paid a fixed price per patient treated, adjusted to reflect geographical differences in input costs. But there may be other legitimate cost variations between providers. This report considers the regulatory and production-process constraints that could cause public and private providers costs to differ. Most of these exogenous cost differentials can be rectified by adjustments to the regulatory system or to the payment method. We find evidence that ISTCs are treating different types of patients than NHS hospitals. If these differences drive costs, payments for treatment might need to be differentiated by setting.