Comment / Facing up to tariff price volatility

By Andy Hardy

Price changes are an essential part of any tariff system in the NHS. They can reflect changes in underlying costs for delivering services arising from higher drug costs or pay settlements. They might reflect changes in practice or technology – lower prices to reflect lower lengths of stay perhaps or higher costs because of new technology. Or they could be used as incentives to change behaviour.

The common factor in all these changes is that they are made deliberately – or at least the reason for a change in price would be understandable by both the purchaser and the provider. But not all price changes fit into these categorisations.

According to a PricewaterhouseCoopers report for Monitor on the NHS reimbursement system, since 2005/06 (with the exception of 2006/07 and 2007/08 when prices were fixed), more than 40% of prices fluctuated by 10% or more. PwC raised concerns about this instability in prices. If there is such a high level of noise in the system, how will providers pick up on deliberate price signals?

They also said it threatened both providers’ and commissioners’ confidence in the pricing system. We know all too well how the new tariff each year can have a dramatic impact on service line profitability. In extreme cases it can throw a service line from surplus to deficit, or vice versa, without a single change in practice. This can be hugely damaging to the clinical engagement we know is vital to driving up quality and improving cost-effectiveness.

But as well as this high-level volatility in tariff prices, organisations face differential impacts because of their different casemix. Overall the aim this year is for the tariff to deliver a 1.8% reduction – taking account of a 2.2% uplift for price inflation and a 4% efficiency requirement. But commissioners and providers will see, and do report, differential impacts. A 1.8% reduction could turn out to be flat income for one provider or require heroic levels of efficiencies in another. How does this affect providers’ and commissioners’ ability to plan for achievable cost improvement programmes and for capital investment? Easier in times of plenty than now, when we are already working in very tight margins.

It is not a simple problem to solve. For example, the volatility talked about by PwC/Monitor could lead some to propose setting prices for longer periods. But given there are already concerns about a three-year lag between cost data and its use to set tariffs, do we really want to contemplate tariffs that for some years would be based on four- or five-year-old data?

Caps on price changes to individual tariff prices are seen by some as too crude. They might also mute price changes that accurately reflect changes in practice or improvements in data quality. And they may still result in differential impacts at organisational level. Perhaps we need to consider more local solutions – some form of tolerance or ceilings/floors around the intended uplift/reduction. We have been there before with the transitional arrangements put in place for acute payment by results. Over time better costing based on more standardised and patient level approaches, along with improvements in currency definitions, should reduce volatility. But it will never go away completely.

There’s no easy answer but the financial environment means we must be aware of potential impacts on local organisations. The handover of pricing responsibilities from the Department of Health to Monitor provides a clear opportunity to get this and other issues on the table. As a finance community we need to be involved during the development stage and be ready to offer solutions.

An evaluation of the reimbursement system for NHS-funded care is at www.monitor-nhsft.gov.uk (see Monitor’s new role)

Andy Hardy is chairman of the HFMA Payment by Results Special Interest Group