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Summary

We wished to analyse the factors influencing the potential profitability of surgical operations under the National Health Service ‘Payment by Results’ scheme. First, we planned to develop a generic theoretical model describing the relationships between ‘profit’, ‘procedure duration’ and ‘costs’. Second, for a group of specific operations, we planned to investigate (using analysis of hypothetical lists) whether it was possible for hospitals to make a profit when lists were maximally efficient. ‘Efficient’ meant full utilisation of the list time, with no gaps between cases and no case cancellations. We assumed that operating theatres cost a median of £16.min−1 (range £12–20.min−1 or ∼£7680 for an 8-h list), and we used published mean (SD) times for seven common day-case operations (varicose veins, inguinal hernia, cataract, circumcision, hydrocoele, cystoscopy, breast biopsy). We found that even when conducted perfectly efficiently, some operations (notably varicose veins) were always unprofitable. Conversely, other operations (notably cataracts) would be likely to be profitable even if conducted inefficiently. We conclude that current tariffs do not properly reward efficiency. As tariffs are based in large part on hospitals’ reporting their own costs, flaws in the tariffs are likely to be due to inaccurate reporting. Even for this imperfect funding system, our theoretical model may help to develop strategies to maximise profit. Our analysis suggests alternative ways in which reimbursement systems could be designed to avoid creating perverse incentives and instead properly reward efficient practices.