Commissioning - Health Committee Contents

2  COMMISSIONING 1948-2010

What is commissioning?

4. Commissioning is a function which is at present primarily exercised within the NHS in England by Primary Care Trusts (PCTs), which exist to ensure that healthcare services are provided for their "responsible populations". Put more bluntly, the core role of commissioners has been to buy services for their populations, although it has always been more than this.

5. The Department of Health described to us its understanding of the roles of a health service commissioner as:

    To be the advocate for patients and communities—securing a range of appropriate high-quality healthcare services for people in need,

    To be the custodian of tax-payers money—this brings a requirement to secure best value in the use of resources.

The Department added:

    Commissioners increasingly need to be advocates for health and wellbeing, encouraging and enabling individuals, families and communities to take greater and shared responsibility for staying healthy and managing their health and conditions. This means understanding better the determinants of health, effective engagement and enablement of people and populations and strengthened partnership working to improve health and wellbeing. As a result the role of commissioners has grown from a traditional fairly narrow base of needs assessment and contracting. The challenges to commissioning capability has risen accordingly. [7]



6. At the inception of the NHS in 1948 a wholly nationalised system of healthcare funding was created. Comprehensive care was to be provided free of charge for all on the basis of need, funded from taxation. The provision of that healthcare was set up substantially on a nationalised basis, but not entirely. Secondary care in the NHS was to be provided by a national network of NHS-owned hospitals; and community services (such as district nursing), public health services and ambulance services were also to be publicly provided (initially by local councils and from 1974 by the NHS itself). However, primary care (i.e. general medical, dental and ophthalmic services, and pharmaceutical services) was to be provided by independent practitioners, acting as contractors to the NHS.[8]

7. The NHS in its initial form planned services that it provided itself, in particular in hospitals, and through a national contract and local committees procured services from independent providers, which were largely "cottage industries" run by self-employed clinicians who became, particularly in the case of GPs, closely bound in with the NHS.

8. While health policy for several decades after 1948 can be characterised as fairly modest adjustments to the original design of the NHS, the need to restrict public expenditure growth from the mid-1970s led to an increasing focus on how to make the NHS more efficient. Eventually, this resulted in the most significant cultural shift since the inception of the NHS with the introduction of the "internal market", outlined in the 1989 White Paper Working for Patients[9] and passed into law as the NHS and Community Care Act 1990. The then Government stated that the reforms would increase the responsiveness of the service to the consumer, foster innovation and challenge the monopolistic influence of hospitals. Proposals were made to make hospitals compete for resources in an internal market and to make doctors more accountable and involve them more effectively in management. These changes were implemented in 1991.[10]


9. The 1991 market reforms were based on the purchaser-provider split. It was thought that, whereas in the past providers, usually hospital doctors, had largely determined what services would be provided, now commissioning bodies would act on behalf of patients to purchase the services which were really needed. "Purchasers" (health authorities and some family doctors) were given budgets to buy health care from "providers" (acute hospitals, organisations providing care for people with mental health problems, people with learning difficulties, older people and ambulance service). To become a "provider" in the internal market, health organisations became NHS "trusts", separate organisations with their own management. This split between purchaser and provider underwent several changes over the next 20 years, as Box 1 shows, but in essentials remained the same.

Box 1: Commissioning models in the NHS since 1991

PeriodPurchasers Secondary care providersChoice of provider exercised by
1991-98192 District Health Authorities (100 Health Authorities from 1996) and GP Fundholders NHS Trusts (becoming independent from District Health Authorities in a series of waves during 1991-6) District Health Authorities (Health Authorities from 1996) and GP Fundholders
1998-2002100 Health Authorities (in conjunction with 481 Primary Care Groups from 1999, descending in a series of waves, with some mergers, into 303 Primary Care Trusts by 2002) NHS TrustsHealth Authorities
2002-06303 Primary Care Trusts (in conjunction with Practice-Based Commissioners from 2005) NHS Trusts and NHS Foundation Trusts (descending from NHS Trusts in a series of waves from 2004) Primary Care Trusts (with Practice-based Commissioners from 2005)
2006 to present152 PCTs in conjunction with Practice-Based Commissioners NHS Trusts, NHS Foundation Trusts and independent sector providers on local menus (also on Extended Choice Network from 2007, then "any willing provider" from 2008 - qualified in 2009 by the Secretary of State declaring that the NHS itself is the "preferred provider" of NHS services) Patients through Choose and Book (initially from local menus; also from Extended Choice Network from 2007; then on the basis of "free choice" from 2008), Primary Care Trusts with Practice-based Commissioners


10. The role of "purchasers" within the post-1991 NHS came to be defined as "commissioning". This term has had numerous definitions over the past two decades and continues to be contested, but it is intended to indicate that being a "purchaser" is, or should be, about much more than simply contracting with and paying "providers" for supplying healthcare services.

11. Under the initial model of the purchaser/provider split there were two kinds of purchasers: District Health Authorities (DHAs) and GP Fundholders. DHAs had been created in 1982 to run local health services (apart from primary care), which meant they directly managed local acute hospitals. As NHS Trusts broke free from DHA control, DHAs became purchasers of healthcare services from the Trusts.

12. In successive "waves" of development from 1991 to 1997, many family doctors were given budgets with which to buy health care from NHS trusts (and also the private sector) in a scheme called GP fundholding. The scheme was voluntary but each year more and more GPs joined. Those who did not have their own budgets had services purchased for them by health authorities that bought "in bulk" from NHS trusts. Patients of GP fundholders were often able to obtain treatment more quickly than patients of non-fundholders.

13. During the 1990s some GP fundholders came together in networks (multi-funds or fundholding consortia). This was to enable smaller practices to participate in fundholding schemes, and to create organisations which could pool resources and share financial risks. Non-fundholding GPs also started to work together as GP commissioning groups as a means of gaining influence over health authorities purchasing decisions.

14. In 1994, the government decided to develop a "primary-care led NHS", which included the addition of total purchasing pilot schemes which gave volunteer fundholding practices a delegated budget to purchase all of their hospital and community services, i.e. increase further the variety of commissioning models.

15. There were advantages and disadvantages of fundholding in the 1990s. There were accusations that the NHS was operating a two tier system, contrary to the founding principles of the NHS of fair and equal access for all to health care. Supporters said fundholding saved money and was more efficient. Researchers found that GP fundholding exerted downward pressure on secondary care admissions for elective surgery, but it also had disadvantages, including the creation of a two-tier system and high transaction costs.[11]

Primary care groups: 1997-2001

16. In May 1997 the incoming Labour Government decided to abolish the internal market. In December of that year the Government set out a 10 year vision for the English NHS with the White Paper, The New NHS—Modern, Dependable.[12] The purchaser-provider split was retained and overall responsibility for commissioning health services remained with health authorities, but fundholding was abolished, leading to a search for other ways to give primary care power and influence over the use of money in the hospital sector.

17. Primary Care Groups (PCGs) were established; membership of them was compulsory for all GPs and primary care professionals. PCGs effectively took on the purchaser role, but were also providers of some community services. The core functions of PCGs were:

  • to improve the health of the local population,
  • to develop primary and community services,
  • to commission secondary and tertiary services.

Primary Care Trusts, 2001 to 2005

18. The Government launched its NHS Plan[13] in 2000, backed up by a significant increase in funding. The key problems the Plan identified were: a lack of money; a lack of national standards; old-fashioned demarcations between staff and barriers between services; lack of clear incentives and levers to improve performance; over-centralisation; disempowered patients. Its key reforming principles were:

  • A patient-focussed service, offering patient choice and an expanding independent sector,
  • Competitive providers, giving hospitals and GPs incentives to change, including Payment by Results, money following patients and the possibility that organisations might fail,
  • Active purchasers, including PCTs (successor organisations to PCGs) and practice-based commissioning,
  • Cost-effectiveness and affordability.

19. Under the NHS Plan all PCGs were to become Primary Care Trusts (PCTs) by April 2004. Shifting the Balance of Power, published in 2002,[14] brought forward this date to April 2002. In addition, the 100 Health Authorities were to be abolished and 28 new Strategic Health Authorities (SHAs) created, essentially local offices of the Department of Health. SHAs were to develop a strategic framework, agree annual performance agreements and build capacity and support performance improvement. The number of SHAs was reduced from 28 to 10 in 2006.

20. After the 2002 Budget, funding increased. Alan Milburn, the Secretary of State for Health, published Delivering the NHS Plan which introduced important new ideas:[15]

  • Payment by Results: a change in the pattern of financial flows in the NHS using a tariff system paying providers for the work they actually did,
  • Foundation Trusts: hospitals established as public interest companies outside Whitehall control,
  • Patient Choice: where patients would be given information on alternative providers and would be able to switch hospitals to have shorter waits,
  • Primary Care Trusts freed to purchase care from the most appropriate provider, public, private or voluntary.

21. Since 2003, the Primary Care Trust (PCT) has been the main local public health commissioning organisation in England. Early criticisms included their increasingly management-focused or "corporate" strategy and culture and a falling away of clinical engagement and support. This was addressed with the introduction in 2005 of Practice-Based Commissioning (PBC)[16] designed to reignite clinical enthusiasm and involvement.

22. PCTs were expensive organisations. PCT staff had many different backgrounds and skills. PCTs had to develop new and commercial commissioning skills as their decisions were open to challenge, particularly when independent contractors tendered.

23. PCTs began to experiment with new organisational patterns, from commissioning confederations (Manchester, Cheshire and Merseyside) to vertical community and acute service mergers (Isle of Wight, Winchester and Cheshire).[17]

2005 to 2010; larger PCTs and major reforms

24. Labour's election manifesto in 2005 made a commitment to reduce management costs in the NHS by £250 million. Creating a Patient-Led NHS[18] (March 2005) promised to move money from management to "front line" services and reduce the number of SHAs, PCTs and Ambulance Trusts. Following the 2005 General Election a further wave of organisational change began.

25. It was decided to reduce the number of PCTs from 303 to 152 in May 2006, as the DH realised there were insufficient skilled personnel for so many PCTs and to reduce costs. New chairmen were appointed and the new PCTs were established from 1st October 2006.

26. While GP fundholding had been abolished in 1997, in 2005 the Government introduced practice-based commissioning to give GPs a larger role in commissioning. Unlike with GP fundholding, which gave GPs the money, PBC gives GPs only "indicative" budgets to commission services on behalf of their patients, while the PCT still does the contracting.

27. Reforms were also made to the commissioning of services for rare conditions, known as specialised commissioning. In June 2006 the Department published a review of these services by Sir David Carter, which inter alia recommended the establishment of a National Specialised Commissioning Group.[19]

28. In the same year there was a reduction in the number of Strategic Health Authorities from 26 to 10. Their new role was to develop plans for improving health services in their local area, performance managing PCTs, improving the quality of these organisations and ensuring they met national priorities.

29. PCTs were central to the running of the NHS, but concern about their weaknesses remained as the Committee concluded in several recent reports.[20] To bring about improvement, the Government introduced its World Class Commissioning initiative in 2007. In addition PCTs, lacking in-house expertise, were encouraged to buy this from outside agencies. The Framework for procuring External Support for Commissioning (FESC) was established in the same year.

30. In 2008 the Lord Darzi's Next Stage Review established as key objectives promoting health and improving the quality of care. The review announced the introduction of CQUIN, Quality Accounts and patient reported outcome measures (PROMs) to bring about an improvement in quality.[21]

31. In our report on the Darzi Review, we voiced concerns about its implementation, because we doubted that PCTs were currently capable of doing the task successfully. We concluded:

    PCT Commissioning is too often poor. In particular PCTs lack analytical and planning skills and the quality of their management is highly variable.[22]

32. As already mentioned, the Government has made other far reaching changes to the NHS, including the introduction of Payment by Results and Foundation Trusts, which have had significant effects on how commissioning bodies operate.

Transaction Costs

33. According to the official historian of the NHS, Dr Charles Webster, the service:

    has traditionally scored highly on account of its low cost of administration, which until the 1980s amounted to about 5% of health-service expenditure. After 1981 administrative costs soared; in 1997 they stood at about 12% […][23]

34. An estimate of administrative costs since 1997 has been made by a team at York University, in a study commissioned by the DH but never published. This concluded that:

    management and administration salary costs represent, as a very crude approximation, around 23% of NHS staff costs, and around 13.5% of overall NHS expenditure.[24]

35. The report noted that "Historically, Beveridge-type systems like the "old" NHS (pre-1991 reform) have been relatively inexpensive to manage and administer", in contrast to systems involving insurance, which have high "transaction costs". It noted that

    In the English NHS, the purchaser-provider split, private finance, national tariffs and other policies aiming to stimulate efficiency in the system and create a mix of public and private finance and provision mean almost unavoidably that the more information is needed to make contracts, hence transactions costs of providing care have increased, and may continue to increase.[25]

36. This seems to be contradicted by evidence the Department has provided to us in response to our Public Expenditure Questionnaires, indicating consistently low management and administration costs, ranging from 3-8%.[26] However, our questioning of DH officials has shown that there is a considerable lack of clarity and consistency in the way that management and administration costs are defined in these data.[27]

37. Whatever the benefits of the purchaser/provider split, it has led to an increase in transaction costs, notably management and administration costs. Research commissioned by the DH but not published by it estimated these to be as high as 14% of total NHS costs. We are dismayed that the Department has not provided us with clear and consistent data on transaction costs; the suspicion must remain that the DH does not want the full story to be revealed. We were appalled that four of the most senior civil servants in the Department of Health were unable to give us accurate figures for staffing levels and costs dedicated to commissioning and billing in PCTs and provider NHS trusts. We recommend that this deficiency be addressed immediately. The Department must agree definitions of staff, such as management and administrative overheads, and stick to them so that comparisons can be made over time.

Present System

38. Such is the history of commissioning. We now look in more detail at how commissioning works, considering

  • The role of PCTs and the World Class Commissioning Initiative
  • Practice-based commissioning,

Commissioning for specialised services will be considered in the next chapter.


PCTs commissioning

39. Eighty percent of the NHS annual budget of £96 billion (in 2008/9) currently flows through PCTs.[28] In this section, we look briefly at the methods used by PCTs to decide how to spend this money. There are three main elements to commissioning:

  • The assessment of needs and development of a strategy for each condition, groups of conditions or client group within a population. This strategy determines the services which are required and the minimum standards they should meet and provides a framework within which purchasing services takes place.
  • Purchasing services which is done through formal contracts between purchasers and providers.
  • Monitoring and evaluation of services.

The diagram below (the Commissioning cycle) outlines how the Department of Health envisages commissioning should be done.

Source: NHS Isle of Wight (as amended)

40. The figure below shows commissioning responsibilities according to the size of the catchment population involved.

Source: National Specialised Commissioning Group website (FAQs)


41. Practice Based Commissioning (PBC) is a reform designed to give GPs and practice nurses more say in how the NHS provides services for patients.[29] Since 2005, GPs have been able to hold an "indicative" budget to spend on secondary services. The intention is that they will reflect their patients' preferences, leading to greater variety of services from a greater number of providers and for more conveniences for their patients, as well as a more efficient use of resources. Practices can combine together to commission services. Box 2 shows how PBC is expected to work.

Box 2: Practice-based Commissioning

According to the Department of Health, practice-based commissioning (PBC) continues to play a vital role in health reform. It puts clinicians at the heart of PCT commissioning and allows groups of family doctors and community clinicians to develop better services for their local communities.

Primary care trusts (PCTs) are the budget holders and have overall accountability for healthcare commissioning, however practice-based commissioning is crucial at all stages of the commissioning process.

In particular, practice based commissioners, working closely with PCTs and secondary care clinicians, will lead the work on deciding clinical outcomes. They also play a key supporting role to PCTs by providing valuable feedback on provider performance.

PBC is about engaging practices and other primary care professionals in the commissioning of services. Through PBC, front line clinicians are being provided with the resources and support to become more involved in commissioning decisions.

Practice based commissioning will lead to high quality services for patients in local and convenient settings. GPs, nurses and other primary care professionals are in the prime position to translate patient needs into redesigned services that best deliver what local people want.

DH website 30 June 2009

42. PBC is still voluntary but most practices are now involved, even if only nominally. However the Next Stage Review (2008) acknowledged a "widespread view" that PBC had not yet lived up to its potential, and pledged to reinvigorate it and give greater freedoms and support to high performing GP practices.[30]

7   Ev 2, Department of Health Back

8   Geoffrey Rivett, History of the NHS. Back

9   Department of Health, Working for Patients, Cm 555, January 1989 Back

10   Ev 337 Back

11   Ian Greener & Russell Mannion, "A realistic evaluation of practice-based commissioning", Policy & Politics, vol 37 (2009), pp 57-73 (2009) Back

12   Department of Health, The New NHS-Modern, Dependable, 1997.  Back

13   Department of Health, NHS Plan: a plan for investment, a plan for reform, 2000. Back

14   Department of Health, Shifting the Balance of Power: the next steps, 2002. Back

15   Department of Health, Delivering the NHS Plan: next steps on investment, next steps on reform, 2002. Back

16   Department of Health, NHS Improvement Plan-putting people at the heart of public services, 2004 Back

17   Geoffrey Rivett, History of the NHS,, Chapter 6 Back

18   Department of Health, Creating a Patient-led NHS, Delivery the NHS Improvement Plan, 2005 Back

19   Review of Commissioning Arrangements for Specialised Services. Independent Review requested by the Department of Health, May 2006 Back

20   Health Committee, Fifth Report of Session 2007-08, Dental Services, 289-1, First Report of Session 2008-09, and NHS Next Stage Review, HC 53-1, Sixth Report of Session 2008-09, Patient Safety, HC 151-1 Back

21   Department of Health, High Quality for All: NHS Next Stage Review, 2008 Back

22   Ibid. p 20 Back

23   Charles Webster, The National Health Service: a political history (2002), p 203 Back

24   Karen Bloor et al., "NHS Management and Administration Staffing and Expenditure in a National and International Context", March 2005, p 8. We are grateful to York University for providing us with a copy of this Report Back

25   Ibid., p 32 Back

26   Health Committee, Session 2009-10, Public Expenditure on Health and Personal Social Services 2009, HC 269-i, Ev 179, Table 59A and Ev 252, Table 90 Back

27   Health Committee, HC (2008-09) 28-i, Qq 66-69 and HC (2009-10) 269-ii, Qq 22-26 Back

28   Department of Health, 2009-10 and 2010-11 PCT Allocations, http:[email protected][email protected]/documents/digitalasset/dh_091447.pdf Back

29   Department of Health. Clinical Commissioning: Our Vision for Practice-based Commissioning, March 2009 Back

30   Department of Health, High Quality for All: NHS Next Stage Review, 2008 Back

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