Feature / Equal opportunities

Creating a level playing field for all providers of NHS-funded care is not a simple task. Different types of providers face different regulatory, funding and tax regimes that place some at a competitive advantage, while others are disadvantaged. Finance managers argue that changing one element is inequitable and all gains and losses should be considered side by side to right all the imbalances. With its wide scope, Monitor’s fair playing field review offers an opportunity to do so.

NHS organisations have been concerned about the cost of education and training for some time. Private sector providers do not train clinical staff and many in the health service believe they should contribute to the cost of this training, particularly as they often employ NHS-trained doctors and nurses on a full- or part-time basis.

While NHS providers receive specific funds for teaching and research, it is not clear if these are insufficient or over-generous compared with actual costs. Current reference costs guidance requires organisations to net off the income they receive for clinical training and research, before then allocating the remaining costs down to HRGs.

This presumes that the income received for these activities matches the cost of providing the training or research. However, if the actual costs of delivering these activities are higher than the sums received, additional costs will be allocated down to patients or HRGs, leading to inflated tariff prices. Private sector providers paid at these inflated tariff rates will in effect be paid more than the real average costs of delivering the treatment or procedure.

Similarly, if actual costs of training/research are lower than the sums received, under current costing rules, tariff prices will be deflated compared to actual average costs – which means providers that are not delivering training will be underpaid for the services they deliver to patients.

Deanery funding

The picture is further imbalanced by the way deaneries fund training of medical foundation years one and two. These subsidise junior doctors’ salaries, but some deaneries fund different percentages of basic salary. Although under current reference costs rules, this will have no impact on tariff prices, as the income is netted off the reference cost quantum before being allocated down to HRGs, it creates an unfair playing field in the direct money received for training activities.

The solution may be to calculate actual costs of non-patient care activities to ensure tariff prices correctly reflect the cost of patient care activities. Work is under way to create costing templates to inform education tariffs.

The Department of Health has confirmed the first tariffs for education and training will be implemented in April 2013. This would go some way to reimbursing the NHS for the

cost of some training. Also, the Commons health committee has suggested tariffs would allow private sector providers to receive funding for training clinicians.

The first stage of education tariff implementation will include tariffs for non-medical education and training and undergraduate medical placements in primary care. Implementation will be phased, with providers that lose funding receiving transitional funds to cap their losses. Phasing higher payments to organisations gaining funding under the new arrangements will fund this. The Department added that work to develop tariffs for postgraduate medical placements and placements in primary care will continue during 2012/13, with a view to implementing them as soon as possible. 

The government has also discussed the possibility of a levy on all providers to cover the costs of NHS training, to ensure that private sector providers bear some of the costs of training staff. But the Department says this is complex and the detail has yet to emerge.

According to the Foundation Trust Network, the private sector benefits from taxpayer-funded clinical training, education and research. ‘There is the potential to see this remedied through the planned introduction of a levy system to support training budgets, but given that this is some way off, the sometime introduction of a levy is not a reason for this benefit enjoyed by non-NHS providers not to be taken into account,’ it says.

Corporation tax

In this year’s Budget, chancellor George Osborne said he would introduce legislation to exempt the NHS Commissioning Board, clinical commissioning groups, the National Institute for Health and Clinical Excellence and the Health and Social Care Information Centre from corporation tax. However, he did not mention foundation trusts, which have been waiting for a decision on corporation tax for a number of years.

Since 2004, governments have retained the power to apply corporation tax to foundation trust commercial activity. Initially, a three-stage test was proposed to determine whether an activity was taxable. However, from 2009 HMRC suggested changing the test to one that examined the source of funding. If the income came from the private sector it would be taxable no matter what activity it supported.

This created several problems for foundations and, following a campaign led by the HFMA, implementation was deferred until 2010/11 and concessions won. But following the change of government in 2010, it appears to have been kicked into the long grass and

the basis for proceeding remains unclear. But Monitor’s fair playing field review specifically mentions the tax, bringing it into the spotlight once again. The 2009 proposals would have meant interest receivable on their income (which mostly comes from the public purse) would be taxable because it mostly comes from the private sector (banks). HFMA lobbying led to HMRC agreeing that interest receivable would no longer be taxable. However, some questions remain, including whether there will be a de minimis level.

The HFMA argued then – and now, in its initial response to the fair playing field review – that there should be clarity on what is taxable and what is exempt. It says there is a difficulty in defining where public sources of funding end and private sources begin. Should a foundation be taxed on the profits it makes from providing a payroll service to a community trust, for example?

The fair playing field  response called for ‘clear and transparent definitions to support the consistent application of future corporation tax requirements in so far as they are applicable to all NHS providers’.

Trusts have said that even with greater clarity, administration costs could increase as they seek to apportion expenditure to taxable income. While it backed an equitable approach for all sectors, in its fair playing field  response the HFMA said any changes to the tax regime should be accompanied by a circular flow of funds. This would avoid the potential for less money being available to treat patients. Tax reduction mechanisms available to the private sector should also be available to the NHS.

Compared with the NHS, private healthcare providers and social enterprises are disadvantaged as they are subject to corporation tax on their activities. The Department has quantified this. In its impact assessment of the Health and Social Care Act 2012, it says corporation tax had a £2 impact on the private sector’s cost base per £100 of cost, relative to an NHS acute provider.

Some opponents of the Act say it could allow Monitor to factor in this cost, and other ‘distorting factors’, in differential tariffs that would be paid to private providers.

VAT

The treatment of VAT is not the same across all healthcare providers. While voluntary and community (VCS) and private providers are exempt from charging VAT on many of the services they provide, they cannot recover a significant portion of the VAT costs they incur. VCS providers do benefit from certain other relief that applies to the wider charity sector.

The Department says NHS providers are advantaged in as much as their overall funding takes account of VAT costs in the same way as any other cost. Its Health and Social Care Act impact assessment says, relative to an NHS acute provider, in the private sector VAT has an impact of £1 per £100 of cost.

In its fair playing field submission, the HFMA recognised that the different cost bases are not reflected in the tariff. And it called for greater clarity on the status of social enterprises, whose competitiveness compared with NHS providers is limited by the fact that they are not eligible for some VAT exemptions.

The Business Services Association believes current NHS VAT rules make voluntary, private sector, mutual and social enterprise organisations less efficient than their NHS counterparts. ‘This treatment of VAT makes it artificially uneconomic for them to outsource their support services, hindering competition and resulting in the taxpayer not securing best value,’ it says.

The Royal Pharmaceutical Society calls on the review to address an anomaly in VAT law that means items purchased and dispensed to patients via a community pharmacy are not subject to VAT, while those purchased in secondary care by NHS trusts attract the standard rate of 20%.

Partly in an attempt to get around this, in the past few years many hospitals have significantly increased the provision of medicine delivery in patients’ homes, where the drugs are VAT free. According to last year’s Hackett review of homecare medicines, while homecare was initially intended to improve patient care and choice for their clinical treatments, its ‘exponential’ growth since the initiative began in 1995 has been in part driven by the VAT treatment. It valued homecare medicines at around £1bn against secondary care drugs spending of £3.2bn and called on the government to ensure arrangements for the supply and administration of medicines are ‘safe and appropriate for patient care as well as representing value for money for taxpayers’.

In its initial submission to the fair play review, the HFMA recognised the lack of uniformity in the application of VAT. It added: ‘From a commissioning perspective, it is important that the focus is on seeking out the best services available for the patients concerned rather than having to spend time and effort considering how contracts are influenced by differing VAT implications.’