UK hospitals may face ward closures if they are not prepared for changes in funding under the payment by results scheme, according to a report by watchdog The Audit Commission.

The Commission’s review of how well foundation trusts are adapting to the scheme, which was introduced last year, has concluded that changes in funding could potentially throw hospital finances into disarray, but that the scheme should continue as planned as it will fundamentally modernize the National Health Service.

Under payment by results, hospitals are paid for the work they do at a nationally set price. The aim of the scheme is to boost productivity, reward efficiency and support patient choice by “enabling the money to follow the patient.” In addition, the scheme provides powerful incentives for primary care trusts to provide more care outside hospitals.

But while trusts and PCTs recognise the potential benefits of the new approach, payment by results “is exposing weaknesses in financial and performance management and in information systems, all of which need to be addressed if the benefits are to be realised,” stated James Strachan, chairman of the Audit Commission. “Trusts are paid for each patient they treat at a fixed price. It is a more businesslike approach. But it means that income and expenditure are much more difficult to predict and control,” he explained.

Added Mr Strachan: “It is clear that foundation trusts and primary care trusts have been challenged by the complexities of introducing payment by results and it has exposed underlying financial difficulties where they exist. There are real dangers for the NHS in the short term, particularly given the recent increase in the number of organisations and areas with financial problems.”

The National Health Service Confederation has welcomed the key conclusion of the report that NHS bodies piloting the new funding system are ‘positive’ about its potential impact. Commenting on the findings, Director of Policy Nigel Edwards stated: “All the evidence from countries, including Australia and Sweden, which have introduced systems similar to payment by results, is that it will ultimately lead to improvements in efficiency.” However, he went on to say that the report “makes clear that it is too early to make definitive judgements about its impact on the NHS,” but that the evidence suggests that “payment by results is providing the impetus to improve NHS organisations’ information systems and that foundation trusts are increasing efficiency by reducing the length of time that patients spend in hospital.”