Hello pals, this has been a bit delayed thanks to a baby having a cold and chest infection, raw sewage coming through my ceiling and the kitchen tap exploding. I'm hoping thats all the bad luck for a bit.....

This week brings us an end to the HMT / NHSE / DHSC stalemate on the funding for redundancy payments for NHSE and the ICBs which then means that a bunch of people are out of work. The timelines for spending this cash is fast (end of this FY) so the HR processes surrounding them will need to kick in fast.

The perverse rejoicing at peoples livlihoods being taken away is really repugnant. It's not just the jobs which are going, it's the whole sector in which they work too. Lots of people will find themselves looking for work with people of a similar skill set at the same time and there seems to have been no attempt at helping to reskill people. When large redundancies have happened, I seem to remember lots of hoo-hah and press around how the state was helping those people reskill to avoid them being in reciept of benefits for too long and helping them back into the workforce. I have seen nothing of the kind this time round. Sadly.

If you're reading this and affected by the cuts and also in the wierd peacocking that's accompanied it's herald then I'm really sorry. It's shit and unneccesary to be gaining points at your expense and we shan't forget it. Well I won't anyway.

There's also been much grandstanding about the timesaving Microsoft Copilot has for staff in the NHS. I'm going to spend some time picking this apart - if I were still in the stock and trade of doing CIP schemes for NHS Trusts this would not have passed muster (and with good reason).

Lets have a look at the wording of the announcement (emphases mine)

"A groundbreaking pilot of Microsoft 365 Copilot across 90 NHS organisations found that AI-powered administrative support could save NHS staff on average 43 minutes per staff member per day or more - that’s 5 weeks of time per person annually. Results from the trial show that a full roll-out could save up to 400,000 hours of staff time per month, equating to millions of hours every year, enabling staff to focus more effectively on frontline care.

The NHS estimates that the technology could save it millions of pounds every month based on 100,000 users, which could reach hundreds of millions of pounds in cost savings every year - cost savings that would be spent on directly improving patient care and frontline services."

So it says that it's admin support but not necessarily whether that's for admin staff. I'm assuming it is because saving clinical staff admin tasks is something which would have been leapt on and maximised in the breifing.

So 43 mins per day in their maths equates to 5 weeks per year.

I usually cost things with 205 working days per FTE (full time equivalent).

There's 260 potential working days in a year (52 x 5) less

Holiday entitlement after 5 years: 29 days + 8 public holidays (37 total)

CPD and stat man training: 5 days

Sickness: 13 days based on latest figures from NHSE and fairly standard in non COVID times.

= 205 working days.

43 minutes saving per day x 205 working days available = 8,815 minutes / 147 hours /3.9 weeks......

So we are already at around 4 weeks not 5. And importantly, for the thousands of hours to stack up, it's tilted at all staff. I'd wager a lot more time could be saved with people not having to do stupid duplicative stuff. The NHS is appalling at stopping doing things. There's no questioning as to whether the AI is powering completely useless things.

Also if it's admin staff how could the saving enable staff to focus more effectively on frontline care? That's not who provides it by definition.

Oh here's how - the technology could save it millions of pounds every month based on 100,000 users, which could reach hundreds of millions of pounds in cost savings every year. So it would mean that fewer people would need to be employed to do whatever tasks this AI is doing.

The fact that it's less than an hour a day for an average person would indicate that it's a slice of time rather than a job function. It also supposes that these people are doing no unpaid overtime which is not true for most in the NHS.

In order to prove a staff cost saving in local NHS, you have to show that it's a cost saving rather than cost avoidance (and that means that it's a budgeted amount which is spent rather than reducing overspend) and that the staff saving can come from making posts redundant rather than just managing workload to allow people to not have to regularly work over their contracted hours. I would suggest that copilot is not going to save sufficient amounts of time to be able to consolidate teams and therefore this is not quite the win it's purported to be....

Sadly I think a bunch of Trust execs may have already put these savings on their CIP Christmas list....

That brings us on to our regularly scheduled programming of the intricacies of NHS finance.

Understanding NHS Contracting Mechanisms: History, Models, and Future

The NHS uses various contracting mechanisms to fund and deliver care. In simple terms, money flows from funders (commissioners) to health care providers through contracts. Commissioners (such as NHS boards or Integrated Care Boards (ICBs) in England) plan and pay for services on behalf of patients, while providers (NHS hospitals, GPs, private clinics, etc.) deliver the care. These contracts set out how providers are paid – for example, a hospital might be paid per treatment, or a GP practice might get a fixed amount per patient. This system has evolved over time and varies across the UK. In this explainer, we’ll assume no prior knowledge and walk through the history of NHS contracts, the different payment models in use, their pros and cons, how the NHS funds innovation, the role of the independent sector, and specific projects I worked on years ago like Project Diamond and Monitor’s gain/loss share framework.

A Brief History of NHS Contracting

When the NHS was founded in 1948, it did not initially operate with internal contracts – hospitals were given budgets and managed centrally. Doctors and nurses were (and still are) mostly salaried employees in hospitals, but interestingly GPs (family doctors) remained independent contractors rather than NHS employees. The schism in the BMA led to there being a choice between the status quo which was the private contractor who operated between their clinic and hospitals and becoming an employee and ceeding to having a master.

Early on, funding was simply allocated to services without “purchasing” care from one part of the NHS to another. This changed in 1991 when an “internal market” was introduced in England, creating a purchaser–provider split. Health authorities (and later GP-led purchasers) would “buy” services from NHS trusts via contracts, simulating a market to drive efficiency. Other UK nations experimented with but later reversed this internal market: Scotland and Wales abolished the purchaser–provider split (and NHS trusts) in 2004 and 2009 respectively, returning to more direct management of services[1]. Northern Ireland’s system also does not use an internal market in the same way.

In England, however, the internal market continued and evolved. During the 1990s, contracts were often block contracts (a lump sum for a bundle of services) or cost-and-volume contracts. A major change came in the 2000s: Payment by Results (PbR) was introduced in 2004. Despite the name, this wasn’t about health outcomes – “results” meant activity. PbR pays providers a fixed price per patient treated, based on standard tariffs for each type of case[2]. Under PbR, each hospital case is classified into a group (using Healthcare Resource Groups, similar to diagnosis-related groups) and paid a set national tariff. By 2005, most hospital specialties in England were funded this way, replacing the old block contracts[3]. The idea was to incentivize hospitals to treat more patients (since income rises with activity) and improve efficiency, while giving commissioners and patients more choice of provider[4]. This activity-based payment did help reduce waiting times and increased transparency, but it also carried risks: hospitals with higher costs than the fixed tariff could face financial losses, and some worried it might encourage focusing on quantity over quality[5].

Over the past 15–20 years, NHS payment systems kept evolving. By the 2010s, reforms introduced more competition (especially after the Health and Social Care Act 2012 in England, which required tendering of some services and promoted a “market” of providers). Yet around the same time, Scotland, Wales and Northern Ireland were moving in the opposite direction, emphasizing collaboration and integrated health boards instead of internal competition. Fast-forward to the late 2010s: England began to reconsider the market-driven approach. The NHS Long Term Plan (2019) explicitly shifted policy towards integration rather than competition. Recent legislation (the Health and Care Act 2022) removed the automatic requirement to competitively tender NHS services in England and formalized Integrated Care Systems (ICSs). ICSs bring together commissioners and providers in a region to plan services collectively, aiming to pay for and deliver care in a more joined-up way. In practical terms, this means moving away from pure Payment by Results. As the Long Term Plan put it, “reforms to the payment system will move funding away from activity-based payments and ensure a majority of funding is population-based”[6]. Today in England, the old National Tariff has been replaced by a more flexible NHS Payment Scheme, which encourages blended and population-based payments (more on these below). Meanwhile, in Scotland and Wales, health boards get block funding to run all services, and no internal contracts are needed between commissioners and providers[1] – a key UK divergence.

TL;DR: Initially, no internal contracts; then an internal market with purchaser–provider contracts from 1991 (England); Payment by Results introduced in 2004 for most hospital care in England[2]; divergent paths across UK (Scotland/Wales ending the split by 2010s[1]); and recent moves (2018–2022) toward integration and new payment models in England.

Contracting in Different Settings

NHS contracting isn’t one-size-fits-all – it differs between primary care, hospital care, community services, and specialised services. Let’s look at each:

Primary Care Contracts (General Practice and Others)

General Practitioners (GPs) are usually the first point of contact for patients. Uniquely, GPs are mostly independent contractors running their own practices that contract with the NHS. They are not salaried NHS employees. Instead, each GP practice has a contract (funded by the local ICB) to provide general medical services for its registered patients. The typical contract is the General Medical Services (GMS) contract, a national agreement. There are also Personal Medical Services (PMS) contracts (locally negotiated, giving some flexibility) and APMS contracts (Alternative Provider, allowing e.g. private companies or charities to run a GP practice).

GP contracts are mainly funded by capitation – the practice is paid a set amount per patient on its list (adjusted for patient demographics and needs). This gives a predictable income tied to the population served. On top of capitation, GPs earn money through various incentive schemes. One major scheme is the Quality and Outcomes Framework (QOF), introduced UK-wide in 2004 as part of the new GP contract. QOF is a pay-for-performance system: practices score points for meeting certain clinical and organizational quality targets (for example, managing chronic conditions or offering preventive services), and more points mean more payment[7][8]. At its peak, QOF could account for up to ~25% of a practice’s income, rewarding “good practice” in care. Most GP practices participate, as QOF became a key source of income and a tool to drive improvements in primary care. (Notably, Scotland chose to scrap QOF in 2016 to reduce bureaucracy, while England, Wales, NI have retained modified versions[9].) If you’ve ever been invited repeatedly for a random screening you didn’t ask for – chances are it’s related to a QOF payment as the targets are normally around preventative services - blood pressure checks and cholesterol are the usual culprits.

In addition to QOF, GP practices can receive payments for enhanced services (optional extra services like vaccinations or extended hours) and are reimbursed for things like prescription costs. Overall, the GP contracting mechanism is a blend of capitated base funding + performance pay. Pros: Capitation incentivizes preventive care and keeping patients healthy (since the practice isn’t paid more for more illness or visits). QOF-style bonuses encourage adherence to evidence-based care standards. Cons: Capitation can risk under-provision (if a practice has very high demand, they don’t automatically get paid more for the extra work unless the population formula catches up). QOF and similar schemes can lead to a “tick-box” approach and more paperwork, and some argue they don’t always translate to better patient outcomes, or they might skew focus to measurable targets at the expense of holistic care.

Other primary care contractors include dentists, pharmacists, and optometrists, who largely operate as independent businesses with NHS contracts. For example, high-street pharmacies are private entities but dispense NHS prescriptions under contract; dentists often have NHS contracts for a certain volume of treatment (or operate in mixed NHS/private modes). These sectors each have their own contract and payment arrangements (for instance, NHS dentists in England have contracts measured in “Units of Dental Activity” for different treatments).

Key point: Primary care in the NHS is mostly delivered via contracts with independent providers (GP partnerships, pharmacy owners, etc.), funded by capitation and fees, not by direct employment. This differs from hospital care, which we turn to next.

Hospital and Secondary Care Contracts

Most NHS hospital and specialist services are delivered by NHS trusts or foundation trusts (public entities). The contracts here traditionally follow the purchaser-provider model in England – commissioners (formerly Primary Care Trusts (PCTs where I worked for a time), then Clinical Commissioning Groups (CCGs, now ICBs) contract with hospital trusts. The dominant payment model from 2004 until recently was Payment by Results (PbR) in England. Under PbR (an activity-based payment system), hospitals are paid per case or per treatment at a nationally fixed price. For example, a standard hip replacement might have a tariff of X pounds – any hospital treating that gets X adjusted for regional cost differences via an index called Market Forces Factor (MFF), regardless of their actual cost. This created a financial incentive to increase activity and reduce waiting times, which was very effective in the 2000s at boosting elective surgery volumes[4]. It also improved transparency and fairness in payments (every provider gets the same payment for the same work) and made it easier for patients to exercise choice (money “follows the patient” to whichever hospital they choose).

Pros of Payment by Results (activity-based pay):
- Encourages productivity: Hospitals get paid for each additional patient treated, so it rewards activity and helped cut long waiting lists[4].
- Transparency and equity: A national tariff means a procedure is worth the same amount everywhere, reducing ad-hoc price deals and giving a clear value to each service. Efficient providers can even generate surpluses by delivering care below tariff cost.
- Supports patient choice and competition: Since price is fixed, hospitals compete on quality and patients can choose providers knowing the cost to the NHS is the same[10].
- Market Forces Factor: This is an indexation based on a Trust which is the model Trust. It estimates the unavoidable cost differences between healthcare providers. It is also used to adjust resource allocations in the NHS in proportion to these cost differences, so that patients are neither advantaged nor disadvantaged by the relative level of unavoidable costs in different parts of the country.

Cons of Payment by Results:
- Financial risk and perverse incentives: Not every patient fits the “average” cost. By design, about half of providers will have costs higher than the tariff for a given service and face a loss on each case[5]. Hospitals with sicker or more complex patients often found tariffs didn’t fully cover costs[11]. PbR initially came with “winners and losers” – some hospitals got windfall gains, others plunged into deficit overnight[5].
- Encourages volume over prevention: Paying per treatment can lead to emphasis on downstream hospital interventions rather than upstream prevention. Commissioners worried it “primarily incentivises more expensive, downstream interventions, accelerating an ever-increasing share of the NHS budget going to the acute sector rather than preventative care”[12]. In other words, a hospital gets paid for doing surgeries, not for keeping people healthy, which could work against the goal of integrated, preventative care.
- Potential for overtreatment or upcoding: In some systems, activity-based pay has led to unnecessary procedures or gaming the coding of cases to higher-paying categories. Strong auditing is needed to prevent this.
- Administrative complexity: Measuring every episode and managing billing by HRG codes adds bureaucracy compared to simply funding a hospital with a block budget.

Given these pros and cons, the NHS hasn’t stuck strictly to PbR for all areas. Many services use other models:

• Block Contracts: A fixed sum for a set of services or for a period, regardless of activity. Block budgets have continued to be common for mental health and community health services, even in England[13]. These sectors found it harder to define “outputs” per patient, so historically they stayed on block funding. Blocks give stability – a mental health trust gets £X to serve the population’s needs, which encourages flexibility in how they deliver care. Pro: stability and ability to invest in prevention (the provider won’t lose funding if demand drops, so they can try to reduce needs). Con: little financial incentive to increase activity or productivity; if not carefully monitored, can allow inefficiency or under-provision (doing less saves money but patients might wait or go without). Commissioners sometimes felt block contracts made it hard to ensure funds were used optimally, since money couldn’t easily be redirected to other providers if performance was poor[14].
• Capitation/Population-Based Payment: This is paying a set amount per head of population for a range of services. While commonly used in primary care (GPs), it’s also been tried for integrated care pilots in secondary care. For example, an area might give a provider group a budget of £Y per resident to cover all their health needs for a year. If they keep the population healthier and need fewer expensive treatments, they can reinvest the savings; if they overspend, they may bear the cost. Capitation aligns well with integrated care goals, because it incentivises keeping people out of hospital and managing care proactively. The NHS Long Term Plan explicitly aims for “a majority of funding [to be] population-based” rather than activity-based[6]. Pros: encourages prevention and holistic care, flexibility to spend on any service that keeps patients well. Cons: providers take on financial risk of high needs; could potentially lead to underservice if not monitored (a risk that a provider might skimp on care to stay in budget, though quality and outcome monitoring is intended to prevent this). Getting the capitated budget set at the right level (risk-adjusted for age, deprivation, etc.) is complex.
• Blended Payments: As a middle ground, the NHS has moved toward blended payment models in recent years. A blended payment might include a fixed block element plus a variable element and even an outcomes-based element. For instance, for emergency admissions, since 2019 England has used a blended system: each hospital gets a fixed base payment (to cover fixed costs) and then a variable payment for each A&E attendance or admission beyond a certain threshold, plus potential quality incentives[15]. The idea is to reduce the “all-or-nothing” nature of pure PbR or pure block. Blended payments (now often called Aligned Payment and Incentive (API) in NHS England’s terminology[16]) aim to give some stability (via the fixed part) while still rewarding extra activity or better outcomes (via variable or outcome-related parts). Example: In maternity services and mental health, blended payments have been adopted where a base allocation is given, with additional pay if activity exceeds plans and possibly penalties if outcomes aren’t met[15]. This approach was accelerated by the COVID-19 pandemic when the NHS temporarily shifted to block contracts for financial certainty, then emerged with new blended payment rules post-pandemic[17].
• Outcomes-Based Contracts: A few areas have experimented with contracts that pay for outcomes or results rather than just activity. For example, an outcomes-based contract for musculoskeletal services in Bedfordshire in 2013 paid a provider consortium based on patient-reported outcome improvements and reduced surgeries, rather than paying per physiotherapy session or operation. These models are complex to design because you need reliable outcome measures and ways to attribute results to the provider’s work. Pros: aligns payment with what actually matters (patient health improvement), encourages innovation to achieve outcomes. Cons: hard to implement and measure, providers may avoid high-risk patients (to ensure good outcomes), and there can be delays in payment until outcomes are realized. Outcomes-based elements are sometimes incorporated as bonus incentives rather than the sole payment method.
• Prime Contractor/Alliance Contracting: In some cases, commissioners make a single contract with a lead provider (prime contractor) who then subcontracts to others, or form an alliance with multiple providers sharing one contract. This is more about contract structure than payment per se, but it’s a mechanism used for integrated care. For instance, an alliance contract in community services might have the hospital, mental health trust, and voluntary sector partners all signed up to deliver parts of a single contract, sharing risks and rewards. This promotes collaboration rather than siloed working. The principles of the Monitor gain/loss share framework discussed later often underpins these arrangements.

Specialised Services and “Project Diamond”

Some NHS services are highly specialised – for example, rare disease treatments, transplants, specialist children’s care. In England, these are commissioned centrally by NHS England rather than local ICBs. Specialised services often cost more than standard tariffs would cover because they involve very complex cases and expensive technologies. To address this, the payment system includes top-up payments for certain specialised services (a percentage add-on to the tariff for specific complex procedures).

Around 2010, a group of England’s most advanced tertiary hospitals (largely in London with a few others such as The Christie) argued that even with these top-ups, they were under-funded for the complexity of their case mix. This led to an initiative informally known as “Project Diamond”. Under Project Diamond, extra funding was given to certain specialist trusts in London with a ‘more complex than usual case mix’[18]. NHS London (the strategic health authority at the time) set up this fund – reportedly around £40 million in 2010-11 was distributed among these elite hospitals[19]. The hospitals involved were mainly the large teaching and research centers (such as UCLH, Imperial, King’s, Guy’s & St Thomas’, Royal Marsden, Great Ormond Street, etc., many of which are part of the Shelford Group of top academic trusts). On average, those trusts received about £16 million each per year in Project Diamond funding[18].

The purpose was to keep them financially sustainable despite treating disproportionate numbers of very complex (and costly) cases. Indeed, those trusts became dependent on this income – analysis showed if it were removed, several would flip from surplus to deficit[20]. As part of the analysis we undertook, we proved that treating any patient with a diagnosis for cancer for anything (diagnosis related or not) was more expensive.  They stayed in hospital for longer, needed more medical input and have more expensive medication. If you break your leg and you have cancer, the treatment is about twice as expensive. Project Diamond was essentially a temporary specialist top-up fund. It was never rolled out beyond the 12 member Trusts, despite calls from other regions for similar help (“We need a Project Diamond outside London” was a common refrain). After the abolition of the SHA in 2013, NHS England took over administering this funding, but it was phased out by 2015/16[21]. The sudden removal caused real financial pain for those trusts – they had come to rely on it to break even[21]. In written evidence, the Shelford Group of hospitals noted that Project Diamond was “imperative” for keeping specialised providers sustainable and its removal contributed significantly to their financial difficulties after 2016[21].

Pros/Cons: Project Diamond funding was a pro for patients needing care with complex co-morbidities – it ensured hospitals could continue providing cutting-edge treatments without going bankrupt. It arguably acknowledged the limitation of one-size-fits-all tariffs, showing flexibility in funding the “super-specialist” end of care. However, from a cons perspective, some saw it as an opaque subsidy: the methodology for calculating who got how much was not very clear[22], and relying on ad-hoc top-ups could undermine the integrity of the tariff system. When budgets tightened, Project Diamond was an easy target for cuts, raising questions of how to properly fund specialised care long-term. Today, the gap has partly been addressed by refining tariffs and central funding for specialised services, but the tension remains – highly specialised hospitals still argue that normal payments don’t fully cover their unique costs[23].

Innovation Funding in NHS Contracts

How does the NHS encourage innovation and quality improvement through its contracting mechanisms? There are a few key ways:

• CQUIN (Commissioning for Quality and Innovation): Pronounced “Sequin”, this framework was introduced in 2009. Under CQUIN, a small percentage of a provider’s contract income is made conditional on achieving certain quality or innovation goals each year. For example, a hospital might have 2.5% of its revenue tied to CQUIN goals like improving sepsis care or adopting new safety practices. If they meet the targets, they earn that money; if not, they miss out. The idea is to reward excellence by linking a portion of providers’ income to quality improvement goals[24]. CQUIN indicators can be national (set by NHS England) or local. This approach injected some pay-for-performance into hospital contracts, analogous to how QOF did in primary care. Pros: incentivizes focus on priority areas (e.g. hospital adopts an innovative new therapy because a CQUIN pays for it), and signals what improvements commissioners want. Cons: can add administrative burden and sometimes front-line staff feel there are too many small targets. During COVID-19, the mandatory CQUIN scheme was paused to let staff focus on core care[25]. As of 2023, CQUIN is not a big factor (some regions use a slimmed down version, or incorporate it into base pay), but the principle of incentive payments for quality remains in the toolbox.
• Innovation Tariffs/Funds: NHS England has occasionally created special funding streams for innovation. For instance, an Innovation and Technology Tariff/Payment existed to directly fund certain new medical devices or digital tools – meaning providers could adopt a new innovation at no cost locally because the center paid for it via a national pot. Academic Health Science Networks (AHSNs) also play a role in spreading innovation with some funding support. These are more one-off schemes rather than core contract mechanisms, so for a blog audience it suffices to know that the NHS tries to avoid contracts being a barrier to innovation. If something new will save money or improve care, commissioners can agree to fund it explicitly or share savings (see gain-sharing below).
• Research and Development funding: Large teaching hospitals receive specific R&D funds (like NIHR funding) and education funds. While not exactly a service contract mechanism, it’s worth noting that some innovation is funded through these separate streams, not via the standard service contracts.
• Quality frameworks in contracts: The NHS Standard Contract (used for most NHS services in England) includes requirements around service quality. Commissioners monitor things like waiting times, patient outcomes, and can withhold some payment or impose penalties if quality standards aren’t met (for example, fines for very long A&E waits were used in the past). These act as indirect incentives to maintain quality.
• Local incentive schemes / Gainshare: Some CCGs (now ICBs) have used local “gainsharing” deals to encourage innovation or efficiency. For instance, if a hospital and commissioner agree on a new care pathway that saves money (like switching to a cheaper but equally effective drug), a gainshare scheme might let the hospital keep, say, 50% of the savings to reinvest, while the commissioner gets the other 50% saving for the NHS. This way, the provider isn’t penalized for reducing activity or costs. This brings us to the concept of risk/gain sharing frameworks, spearheaded by Monitor.

Risk-Sharing and Monitor’s Gain/Loss Share Framework

In traditional contracts, either the commissioner bears the financial risk (e.g. in a block contract, the provider could over-perform without extra pay, so the commissioner “gains” if less activity happens than expected), or the provider bears it (e.g. in PbR, if volumes or costs spike, the commissioner pays more, so risk is on the payer). Gainshare/loss-share arrangements aim to balance the risk between both sides. Monitor (the former regulator for NHS Foundation Trusts) published guidance around 2014–2015 on how local health economies can implement “multilateral gain/loss sharing” to support new care models[26][27] which we worked on, using the basis of game theory and behavioural economics. The brief was to figure out how to get one part of the system to exert effort for the benefit of other parts of the system, even if it costs them money but the system makes a saving overall. Under the National Tariff rules, commissioners and providers can agree local variations to prices – as long as they notified Monitor/NHS Improvement – which allows such risk-sharing deals[28].

So what does a gain/loss share look like? In practice, these agreements say: we’ll continue paying per activity as normal, but at the end of the year we compare actual spend to a target budget. Any savings (underspend) will be shared between commissioner and provider in a certain ratio, and any overspend (loss) will also be shared. For example, an ICB might contract with a hospital for urgent care on a gainshare basis: if the cost of emergency admissions comes in under the agreed baseline (perhaps due to joint prevention efforts), the hospital keeps 50% of the unspent money as a reward (and can invest in services or cover fixed costs), while the other 50% returns to the commissioner (to invest elsewhere or hit financial targets). If costs run over (more emergencies than expected), the hospital might only be paid, say, 50% of the excess activity – effectively eating the other 50% of the cost, so the commissioner isn’t hit with the full overrun[29]. This way, both parties have “skin in the game” to control costs and improve care delivery.

Monitor’s framework provided technical guidance on designing these schemes, including multilateral ones (involving multiple providers and commissioners, not just one-to-one)[30][31]. It stressed that sharing should be agreed up-front, transparent, and aligned with service changes. Gain/loss sharing can be one-sided (only sharing savings, but commissioner covers any loss – an upside-only deal often to encourage initial provider engagement) or two-sided (sharing both gains and losses symmetrically). The U.S. Medicare Accountable Care Organizations use a similar idea (one-sided vs two-sided risk contracts). In the NHS, early integrated care “Vanguard” projects and some Sustainability and Transformation Plan (STP) areas tried these models as a stepping stone towards full capitated budgets. They allow a transition phase: providers get used to managing population health costs without the shock of all risk at once[32].

Pros: Gainshare arrangements align incentives – historically, a hospital might lose income if it prevented admissions, but with a gainshare it can benefit financially from doing the right thing (since it keeps some of the saved funds). It fosters commissioner-provider collaboration, as both sides sit together to monitor budgets and outcomes, rather than acting adversarially. It can also smooth out extreme financial swings and help build trust before moving to more radical integrated budgets. Cons: These schemes can be complex to set up and administer, needing good data systems to track the “savings” and clear rules to avoid disputes. If not carefully calibrated, they might inadvertently reward reduced service (so quality metrics must be in place to ensure savings come from genuine efficiency, not denying needed care).

An example in simple terms: A local area has £150m budgeted for all providers for certain services. After the year, they spent £147m – £3m less. Under a gainshare, that £3m saving might be split 50/50: commissioners keep £1.5m (to perhaps invest in primary prevention next year) and providers share £1.5m (maybe split among the hospital, community, and mental health services according to an agreed formula). If instead they had spent £156m (£3m over budget), each side might cover £1.5m of the overrun – the commissioner pays £1.5m extra and providers collectively forego £1.5m they would otherwise be paid (absorbing it via cost-cutting or deficit). In effect, they share the pain or gain. Monitor’s guidance provided several such stylized examples[33][34].

Gain/loss sharing has become more common under ICSs. In fact, NHS England’s latest payment guidance makes Aligned Payment and Incentive (API) the default for large contracts, which includes a fixed payment with a risk-sharing element for variances[16]. This is essentially institutionalizing the gainshare approach for system finances. It’s worth noting that all these tools – blended payments, gainshare, capitation – are part of a broader shift to get the NHS working as one system rather than fragmented purchaser vs provider silos. A slow row back from the god-awful Lansley reforms.

Independent Sector and NHS Contracts

No discussion of NHS contracts is complete without the independent sector (private and voluntary providers). The NHS is mostly publicly provided, but the independent sector has long been involved in certain areas. For example, GPs, dentists, and pharmacists are technically independent. But here, let’s focus on private hospitals and companies providing NHS-funded clinical services, as that’s often what people mean by independent sector involvement.

A brief history: The private sector’s role in NHS clinical services expanded in the 2000s under the Blair government, which introduced Independent Sector Treatment Centres (ISTCs) to perform routine operations (like cataracts and hip replacements) under contract, helping cut waiting lists. These contracts sometimes paid a premium to guarantee capacity, which was controversial. The idea was to inject extra capacity and a bit of competition. Later, policies like Any Qualified Provider (AQP) (early 2010s) allowed approved private (or third-sector) providers to offer services (e.g. physiotherapy, elective surgeries) paid at NHS prices, giving patients a choice of provider. The 2012 Act (furrows brow at its mention) further opened up the market, leading to many tenders where private firms bid to run services (from community nursing to scanning services). By the mid-2010s, around 7% of NHS England’s budget was spent on services delivered by private providers[35] – a figure that had risen slightly from previous years but stayed in the single-digit percent range. In 2019/20, for example, NHS commissioners spent £9.7 billion on private sector provision, roughly 7.2% of the NHS revenue budget[35]. (If you include GP, dental, pharmacy – which are technically private – and charities, the total “non-NHS” spend is higher, some estimates around 25%, but that conflates a lot of different things[36].)

How these contracts work: An independent provider that wins an NHS contract must meet the same standards and treat patients for free (to the patient) just like the NHS would. They bill the NHS commissioner. Contracts might be PbR tariff-based (e.g. a private hospital gets paid the standard tariff per case – since 2008 the national tariff has applied to private providers too[37]), or block contracts for a service (e.g. a company gets £X million to deliver community care in an area).

Pros of independent sector involvement: It can increase capacity and patient choice. Private facilities have helped the NHS cope with demand – a recent example is during the COVID-19 pandemic, the NHS block-booked almost all private hospital capacity to help handle overflow and later to tackle the backlog, essentially commandeering private hospitals for public use via national contracts[38][39]. Proponents also claim the private sector can bring innovation and efficiency, and that having alternative providers keeps the NHS on its toes. For certain planned surgeries, independent centres focused only on electives have shown they can be efficient with high patient satisfaction and frequently have more unused capacity so can help with taking on blocks of long waiters from the NHS.

Cons and controversies: Critics worry about privatisation of NHS services – the idea that outsourcing could undermine the public system. While the data shows the private share of spending has grown modestly and not dramatically[35][40], the number of contracts awarded to private providers did increase after 2012[40]. Some high-profile contracts failed (e.g. a £1.2bn contract for Cambridge’s older people’s services that collapsed, or Circle’s contract for Hinchingbrooke Hospital that ended early - theres a story for another day on that as I was involved in the letting of that contract to Ali Parsa then CEO of Circle....). There are concerns that private providers may “cherry-pick” easier cases, leaving the NHS with more complex patients. For instance, independent centres might take straightforward cataracts or hips (within contract limits) – profitable under tariff – but not emergency or complicated cases which NHS hospitals handle without question. Thats partly true - private providers do not have ITU/HDU provision so high risk patients often cannot be treated, even for simple things on their premises (joint replacements with a minor heart murmur). There’s also the question of money leaving the NHS: private companies aim for profit, and if things go wrong, the NHS may have to step back in.

In terms of contracting mechanisms, since 2022 the tilt has been back toward collaboration over competition. The legal requirement to put many services out to tender has been eased, so we might see fewer large competitive procurements. Instead, the independent sector might be used in a more planned partnership way (e.g. the NHS may directly partner with private hospitals to outsource some elective surgeries to clear waiting lists, under a framework agreement, rather than via dozens of CCG tenders). Indeed, in 2023 NHS England struck an agreement with the Independent Healthcare Providers Network to utilize private hospitals for cutting wait times, effectively a centrally coordinated contract to buy capacity[41].

UK comparisons: England has involved the private sector the most in its NHS contracting. Scotland and Wales made less use of competitive tendering; they do occasionally purchase care from private providers (e.g. to cut waits for elective surgery, or sending patients to private clinics for scans), but it’s more ad-hoc and smaller scale. The ethos in devolved systems leans more on investing in NHS capacity. That said, no UK nation is 100% state-provided – all use independent GP contractors, dentists, etc., and sometimes private sector for specific needs.

Recent Reforms and the 10-Year Plan

The NHS Long Term Plan 2019 and subsequent policies have brought significant changes to contracting. Key points include:

• Integration through ICSs: England is now divided into Integrated Care Systems, which are collaborations of health and care organizations. Each ICS has an Integrated Care Board (ICB) that allocates resources and commissions services for the whole area. The goal is to enable joined-up commissioning – so instead of each service having separate contracts that might conflict, the system can plan a coherent approach. For example, an ICS might decide to put a single contract in place covering both hospital and community care for diabetes, encouraging a provider partnership to manage the patient’s whole pathway. This is a shift from the old purchaser-provider split mentality towards a more collective approach (though a split still exists on paper, it’s softer in practice within an ICS).
• NHS Payment Scheme & Blended Payments: The Long Term Plan committed to moving most services to blended payment models[6]. Concretely, the latest NHS Payment Scheme for 2023-25 requires that large contracts with NHS providers use Aligned Payment and Incentive (API) arrangements – essentially a fixed payment component plus a variable element[16]. Small contracts (below £0.5m) can be simple blocks. The emphasis is that funding should be population-focused and preventative. During COVID-19, emergency measures actually cancelled PbR entirely for a while – hospitals got guaranteed block funding so they could focus on the pandemic[42]. Learning from that, the new normal is to give hospitals more financial stability and predictability, while still motivating them to hit activity targets for critical areas (like elective surgery to reduce backlogs, where incentives remain for higher volumes[43]). There’s also more flexibility – local systems can propose their own payment models if it suits their transformation plans, as long as certain rules are met. Monitor (now part of NHS England) retains oversight to ensure variations from national prices are fair.
• Removal of Competitive Tendering Rules: The 2022 Act removed Section 75 of the 2012 Act, meaning commissioners are no longer forced to put all contracts out to tender. A new provider selection regime is being introduced, allowing commissioners to continue with existing NHS providers or make direct awards if that makes sense, rather than running disruptive procurements. This should reduce transaction costs and the involvement of private firms via contest by default. It signals a policy intent to cooperate first, compete if beneficial rather than the earlier “any qualified provider” competition ethos.
• Focus on Outcomes and Population Health: NHS contracts are gradually incorporating more outcome measures and tying payments to them. For example, newer contracts with mental health providers might include metrics on recovery rates, or ICS-wide agreements might reward reduction in health inequalities. The Long Term Plan’s vision was that by aligning money with outcomes and systems, the NHS can achieve its goals (like better chronic disease management, prevention, shorter waits, digital innovation). Ten-year workforce and service plans feed into this by ensuring capacity meets these new ways of working.
• Innovation and Digital: Recent initiatives also include more digital and AI-focused contracts – e.g. funding for electronic patient records, or outcomes-based payment for digital monitoring of patients at home. While specific funding pots (like the Digital Transformation Fund) are outside routine contracts, the day-to-day contracts are being updated to accommodate new tech (for instance, allowing video consultations in the GP contract, or paying for remote monitoring services under community contracts).
• England vs Devolved: The reforms mentioned are mostly England-centric (because Scotland, Wales, NI have their own structures). However, all UK nations share some challenges like ageing populations and tight budgets, and each is experimenting with ways to integrate care. Scotland has integrated health and social care budgets via Integration Joint Boards; Wales has its own local health board planning; NI integrates services under regional planning. They all are watching each other’s approaches to funding mechanisms. England’s ICS and blended payment approach is somewhat analogous to what Scotland/Wales already do with global budgets – just executed differently.

Pros and Cons Summary

To wrap up, here’s a quick summary of pros and cons of the different NHS contract mechanisms discussed:

Block Contracts (fixed budget):

Pros: Financial stability for providers; simple administration; encourages flexibility and possibly preventative approach (provider can reinvest savings).

Cons: No direct reward for increasing activity or efficiency; risk of complacency or unmet demand; commissioners can’t easily shift funds if provider under-performs.

Payment by Results (activity-based payment):

Pros: Drives volume and reduces waits[4]; transparent and fair pricing; rewards efficiency; facilitates patient choice and competition on quality.

Cons: Can lead to overtreatment or focus on quantity; providers with above-tariff costs face deficits[5]; incentivizes hospital activity over community prevention[12]; creates financial volatility.

Capitation/Population Budget:

Pros: Aligns incentives to keep populations healthy (prevent costly illness); allows holistic care models; predictable spending for commissioners.

Cons: Providers take on risk of unexpected high needs; potential to underserve if not balanced by quality oversight; needs good data for risk adjustment.

Blended Payment (Fixed + Variable):

Pros: Balances stability with incentives; can be tailored to local needs; softens extremes of pure block or pure PbR.

Cons: More complex to negotiate and manage (multiple components); if poorly designed, could confuse incentives (e.g. unclear how much activity is “worth” at margins).

Outcome-Based Incentives:

Pros: Focuses on what truly matters (patient health outcomes, quality); encourages innovation and long-term thinking.

Cons: Difficult to measure and attribute outcomes; time lag between intervention and outcome; risk of cherry-picking patients; requires robust data.

Gain/Loss Risk Sharing:

Pros: Aligns commissioner and provider goals; shares risk so no one side is overly penalized; builds partnership approach to managing resources[32].

Cons: Complex accounting; requires trust and transparency; savings need to be genuine (danger of just cutting care to save money if not guarded against).

Independent Sector Contracting:

Pros: Adds capacity and choice; can spur innovation; patients may get faster access for routine procedures; provides flexibility in crises (e.g. buying private capacity in COVID)[38].

Cons: Fragmentation of services; profit motive concerns; potential unequal focus (private takes simpler cases); transaction costs of tendering; ideological controversy over “privatisation” even if small scale[40].

Innovation Funding Mechanisms (like CQUIN/QOF):

Pros: Signals priorities and rewards improvement; has led to widespread adoption of best practices (e.g. QOF improved chronic disease monitoring significantly in primary care).

Cons: Can become tick-box exercises; may not always translate to meaningful patient outcomes; adds to workload if too rigid.

NHS contracting mechanisms have continually adapted in search of the right balance between incentivizing activity to reduce waits, ensuring quality, controlling costs, and promoting integration. From the early days of block budgets, through the PbR era of paying per procedure, to today’s blended payments and system-wide budgets, each approach has had trade-offs. Recent reforms are pushing the NHS toward more collaborative, population-based contracting, in line with a broader vision of integrated care where different services work together rather than compete or operate in silos[6][13].

For a blog reader new to this topic, it’s important to appreciate that no single payment model is perfect – the NHS often uses a mix of models simultaneously, tailored to different services. For example, an acute hospital may have a blended contract for A&E, a block for mental health, a gainshare deal for elective recovery, and a quality incentive (CQUIN) for improving sepsis care, all at once! The key is how these tools are used to drive the best care for patients.

Further topics worth exploring include: how social care is funded and how it interfaces with NHS funding (a crucial issue for truly integrated care); how public health services are commissioned (local authorities in England commission things like sexual health or addiction services, usually via contracts as well); the future of Personal Health Budgets (where patients are given control of a budget for their care – a radical form of commissioning on an individual level); and international comparisons of health payment systems (for instance, how do other countries’ contracting/payment approaches differ, and what can we learn from places that use global budgets or more outcome-based pay?). Additionally, the role of digital data in enabling new payment models is a hot topic – as better data allows for more sophisticated outcome measurement and perhaps even real-time funding adjustments if, say, an AI predicts a surge in demand.

The NHS’s journey with contract mechanisms shows a constant tension between simplicity and fairness, competition and collaboration, paying for activity and paying for value. Understanding these mechanisms is not just a dry financial matter – it directly impacts patient care. The way contracts are set up influences how providers behave: whether a hospital focuses on throughput or a community team invests in prevention can hinge on how they’re funded. As the NHS moves forward with its 10-year plan, the hope is that smarter contracting will support the ambitious goals of better integrated, higher quality care for all.

[1] Devolution and the NHS | Institute for Government

https://www.instituteforgovernment.org.uk/explainer/devolution-and-nhs

[2] [3] [4] [5] [10] [37] [44]  Payment by results—new financial flows in the NHS: The risks are large but may be worth while because of potential gains - PMC

https://pmc.ncbi.nlm.nih.gov/articles/PMC404484/

[6] [15] [42] 20-21 Guidance on blended payments

https://www.england.nhs.uk/wp-content/uploads/2021/02/20-21NT_Guidance_on_blended_payments.pdf

[7] [8] Quality and Outcomes Framework - Wikipedia

https://en.wikipedia.org/wiki/Quality_and_Outcomes_Framework

[9] A pay for performance scheme in primary care: Meta-synthesis of qualitative studies on the provider experiences of the quality and outcomes framework in the UK | BMC Primary Care | Full Text

https://bmcprimcare.biomedcentral.com/articles/10.1186/s12875-020-01208-8

[11] [21] [23] NSS0013 - Evidence on NHS Specialised Services

https://committees.parliament.uk/writtenevidence/67569/html/

[12] [13] [16] [17] [43] Improving health and care at scale

https://www.nhsconfed.org/system/files/2024-03/Unlocking-reform-and-financial-sustainability-NHS-payment-mechanisms.pdf

[14] [PDF] Towards an effective NHS payment system: eight principles

https://www.health.org.uk/sites/default/files/EffectivePaymentSystemEightPrinciples.pdf

[18] [20] [22] assets.publishing.service.gov.uk

https://assets.publishing.service.gov.uk/media/5a80173aed915d74e622c691/Tariff_Leakage_Qualitative_Research_report.pdf

[19] UCLH's Project Diamond funding falls £1m | HSJ Local | Health ...

https://www.hsj.co.uk/university-college-london-hospitals-nhs-foundation-trust/uclhs-project-diamond-funding-falls-1m/5045255.article

[24] Guidance on new national CQUIN goals - GOV.UK

https://www.gov.uk/government/news/guidance-on-new-national-cquin-goals

[25] NHS England » Commissioning for Quality and Innovation

https://www.england.nhs.uk/nhs-standard-contract/cquin/

[26] [27] [28] [30] [31] [33] [34] assets.publishing.service.gov.uk

https://assets.publishing.service.gov.uk/media/5a7f4c90ed915d74e62299d0/GLLPE.pdf

[29] [32] strategyunitwm.nhs.uk

https://www.strategyunitwm.nhs.uk/sites/default/files/2018-06/Risk%20and%20Reward%20Sharing%20for%20NHS%20Integrated%20Care%20Systems%20-%20180605_0.pdf

[35] [36] [38] [39] [40] Is The NHS Being Privatised? | The King's Fund

https://www.kingsfund.org.uk/insight-and-analysis/long-reads/big-election-questions-nhs-privatised

[41] Private Hospitals Are Helping the NHS Cut Wait Times

https://www.bloomberg.com/graphics/2025-nhs-private-health-waitlists/

And finally

This fortnight I have been mostly

Trying to make the house less full of water and sewage. This has been a partial sucess.

Reading -Influence the Science of Power and Persuasion. This is a really interesting book and also something which feels pertinent as we hurtle into Black Friday and the relentlessness of Christmas Capitalism.

Listening to .... obviously the Happy Song on repeat with a grumpy baby - but other than that, I've been listening to this.

Next edition I'm going to be picking over the budget aftermath and also the latest from NHSE on payments - Jim's 'absolutely terrifying' payment reforms and the return of PFI. Our old mate. Oh and the new old FTs. It's all feeling like 2005 except my back hurts.

I'll also be breaking down what Trusts spend their money on at the moment to put some context around the latest announcements.

Have a lovely weekend pals