Background: Activity-based funding mechanisms are widely used in acute care. In England, payment by results is being extended to mental health care, but its financial viability is unclear.
Aims: To identify international examples of activity-based funding systems for mental health care and to inform the development of a national tariff in England.
Method: The international literature on payment systems for mental healthcare services was reviewed. Payment systems were appraised from an economic perspective. Variations in cost between English mental healthcare providers were explored using routine inpatient data on length of stay in 2007/8.
Results: The review identified activity-based mental healthcare payment systems in five countries. International experience highlights the need for gradual and stepwise implementation; the use of budget neutrality adjustments; top-slicing of budgets to stabilise provider income; and use of the classification system to drive improvements in quality and cost-effectiveness. All systems adjusted for length of stay, but methods varied. Comparing English mental healthcare providers, median length of stay ranged from 2 to 42 days for emergency admissions and from 0 to 56 days for elective admissions.
Conclusions: New payment systems must account for the economic incentives they embody, and appropriate adjustments for variations in length of stay are essential.