Promoting efficiency in the NHS: problems with the labour productivity index.

Abstract

The introduction of the internal market in the NHS has highlighted a number of issues concerning efficiency—its definition, measurement, and in particular mechanisms for its promotion. Until now the Department of Health's main tool for promoting efficiency has been the much criticised efficiency index. In effect health authorities have been given less money each year in the expectation that they would seek commensurate efficiencies from their providers, and each year the government has set a target for this “efficiency index”: this year's is 3%. Due partly to criticisms of the efficiency index and other performance measures1 2 3 and partly to the need for information to support local pay bargaining, the NHS Executive has recently introduced the labour productivity index, to be used for all NHS trusts in England.5 This paper discusses the possible perverse incentives that this might introduce for trusts and purchasers and the problems they face in interpreting (and hence acting on) this performance measure. The construction of this new index is similar to that of the efficiency index, except that in order to produce a single number for a trust's total activity, each type of activity—inpatients, outpatients, health visitor contacts, etc—is weighted using the national average cost of producing one unit of the various types of activity—a finished consultant episode, a contact, etc. A trust's labour productivity index is then simply derived by multiplying each type of activity by its average cost, adding all these costs together and dividing the total by the number of employees in the trust (see box). Thus, the labour productivity index (unlike the efficiency index) facilitates comparisons between trusts. The national average cost weights used for 1995–6 (based on 1993–4 data) are shown in table 1. Problems with separately identifying certain types of activity—the work done by health …