Feature / Game on

This year’s reference costs were more keenly awaited than ever as they are the first to use the new heathcare resource groups, HRG4. But how has the new currency affected trusts’ cost position? Seamus Ward reports

In the classic children’s game Operation specialists are paid twice as much as their generalist opponents to perform a procedure. With the latest set of reference costs showing many specialist hospitals among the highest-cost trusts, they must wish this were the case in real life.

The 2006/07 collection covers more than £41bn of NHS expenditure in more than 400 organisations (including PCTs). For the first time the currency used was HRG4, a major revision of the previous healthcare resource groups (HRG version 3.5) that takes account of complex cases and extends the scope of care groupings beyond admitted hospital treatment.

Though costs were collected on both the finished consultant episode (FCE) and spell level, only the FCE information has been published as this is the first time NHS organisations have attempted to cost at a spell level. The figures, published by the Department of Health in early February, will give organisations an insight into how they will fare in 2009/10, when the tariff will be based on HRG4.

The average cost of the 240 NHS trusts’ aggregate activity, the 2006/07 reference costs index (RCI), adjusted for market forces factor and including excess bed days, ranged from 78 to 163. The previous year the spread was from 50 up to 153.

Removing specialist, mental health and ambulance trusts from the figures shows a spread of 80 to 138, compared with 83 to 119 a year before. This marks a reasonably significant widening in the gap between lowest- and highest-cost organisations as measured by reference costs.

The range for mental health trusts was 78 (Tavistock and Portman NHS Foundation Trust) up to 119 (Mersey Care NHS Trust). The specialist trusts’ range was 86 (Clatterbridge Centre for Oncology NHS Foundation Trust) to 158 (Royal National Orthopaedic Hospital NHS Trust).

Staffordshire Ambulance Service NHS Trust again recorded the lowest ambulance reference costs (81). The highest index was the Isle of Wight Primary Care Trust (163), although the PCT higlighted data issues.  The South Western Ambulance Service (113) had the next highest index.

It is difficult to compare the 2006/07 figures with those from 2005/06 because of the change in currency and there are 24 fewer provider organisations – a result of ongoing reorganisation, including a halving in the number of ambulance trusts. Taking them at face value, while some organisations are managing to reduce reference costs, the general trend is towards higher RCIs. Fewer trusts are achieving an RCI of 100 or less, continuing the trend of the previous year. In 2004/05, 149 organisations did so. In 2005/06, this fell to 136. In 2006/07, it has dropped again to 115. Fewer organisations, however, have an RCI greater than 110 – 35 compared with 40 in 2005/06 – highlighting an ever-greater cluster in the 101 to 110 range.

The acute trust with the lowest RCI in 2005/06 was Heatherwood and Wexham Park NHS Foundation Trust, which gained foundation status in 2007, with 83. In 2006/07, its RCI increased slightly to 85. Poole Hospital NHS Foundation Trust, the second lowest acute trust in 2005/06, improved its position, moving from 85 to 82.

The lowest-cost foundation in 2005/06 was Frimley Park Hospital NHS Foundation Trust with 88. Though its RCI fell to 81 in 2006/07, two foundations had lower reference costs – Tavistock and Portman and Salford Royal NHS Foundation Trust. The latter, with an RCI of 80, can also claim to have the lowest reference costs of all acute trusts in 2006/07.

In the Department’s tables this appears to be the Royal Bournemouth and Christchurch Hospitals NHS Foundation Trust with 69. The trust, however, says it revised the figures it had initially submitted to the Department, saying its RCI should be 88.

Though seven foundation trusts had RCIs greater than 110, stripping out the speciality and mental health foundations – such as Royal National Hospital for Rheumatic Diseases NHS Foundation Trust (147) and the Christie Hospital NHS Foundation Trust (135) – no foundation trust had an RCI higher than 111 (University Hospital of South Manchester NHS Foundation Trust).

In 2005/06, University College Hospitals London NHS Foundation Trust’s RCI was 114. This followed its move into a new hospital in 2005, which meant it had double-running costs for part of the year. The trust anticipated its reference costs would come down once the move had been completed. This was the case in 2006/07, when its RCI dropped to 105.

Reference costs have always faced criticism over their accuracy and robustness as a meaningful test of relative costs. In presentations last year the Department reminded people that costing practices in some cases left significant room for improvement. It highlighted previous cases in which one hospital had, apparently, provided 1,526 diabetic adult face-to-face contacts for a total cost of £1,678 (an average of £1.10 each). Another provided 16 intermediate pain procedures for a total cost of 80 pence – 5 pence each. While there has been an ongoing drive to improve costing and eliminate nonsense data such as this, no one would argue that the reference costs provide absolute accuracy.

Some trusts, however, say that the move to HRG4 caused additional problems in collecting the data for 2006/07 while, more generally, there was a call for the Department to release the relevant collection software earlier.

Other trusts were left scratching their heads over the causes of increases in their reference costs. For instance, the Robert Jones and Agnes Hunt Orthopaedic and District Hospital NHS Trust’s reference costs rose from 119 in 2005/06 to 141. The trust describes this as ‘curious’ as it has achieved significant improvements in productivity.

A trust spokeswoman says two significant changes to the methodology used for the 2006/07 collection contributed towards this increase.

‘The trust is one of the few national spinal injuries centres, providing a service to the Midlands and North Wales,’ she says. ‘Spinal injuries is a high-cost, high-dependency service for relatively few patients that has previously been excluded from the reference cost exercise. The inclusion of spinal injuries has increased the cost base by £5.5m for only 711 inpatient FCEs. As an individual component, spinal injuries provides a reference cost of 225. This compares to the 120 component for trauma and orthopaedics in isolation.’

She adds that the use of HRG4 for the first time to calculate reference costs had a significant impact. Some 16% of the trust’s specialist activity has been reclassified to a routine HRG compared with 0.1% in the previous year. For example, half of the knee revisions performed have been re-categorised as ‘other’. ‘This means no allowance has been given for the complexity of the procedures undertaken,’ she says.

Other trusts say higher figures are a result of problems with data, including the University Hospitals of Morecambe Bay NHS Trust, which went from 110 in 2005/06 to 138 in 2006/07. The trust says it has reviewed the process and will address the problems in its 2007/08 collection.

Other big increases were seen at the trusts for Maidstone and Tunbridge Wells (up from 111 to 138), Leeds Teaching Hospitals (110 to 123) and Christie Hospital NHS Foundation Trust  (98 to 135).

A spokesperson for Maidstone and Tunbridge Wells says some of its submitted information was incorrect and this increased its reference cost index. While the problem was spotted, it was too late to change the published index. It also claimed that using the same methodology as the previous year, and covering the same services, its score would have improved to 102.

Christie’s reference costs jumped 37 percentage points in a year. The trust says that all its activity had not been taken into account: ‘Our reference cost index of 135% for 2006/07 has been calculated using only 20% of our activity. Last year (2005/06), it was 98%. This was because radiotherapy and chemotherapy, which accounts for 80% of our activity, was included.’

The 2006/07 reference costs introduced unbundling of services, including chemotherapy and radiotherapy. The Department guidelines for their collection says organisations have to implement OPCS 4.3 procedural classification to ensure the unbundled reference costs are accurate. Since take-up of OPCS 4.3 classification varies across the country, however, the 2006/07 unbundled reference costs are excluded from the RCI.

The Christie adds: ‘We are the largest single site specialist cancer trust in the UK, treating rare and complex cancers, and there are no other trust comparisons with a patient profile mix such as ours. This costing system uses average costs to assess relative efficiency. As we do not provide average services, comparisons of our efficiency in this way are not appropriate. We are working with our commissioners to benchmark our costs.’

At the other end of the scale, the Royal Surrey County Hospital NHS Trust recorded one of the best figures with 81. This is down from its 2005/06 figure of 95. Director of finance Paul Biddle says the reduction was not a result of a conscious effort by the trust to have a low RCI but because it was trying to balance its books. As a result, its RCI of 81 was a surprise. ‘The driver for this has been what the trust has had to do to report a slight surplus,’ he says.

‘You might ask why has the trust had to achieve as low as 81 to generate a small surplus. With the transition to full implementation of payment by results, the trust is having a significant sum deducted from its income over the four-year transition period. For this trust to achieve breakeven it had to be down to that level of costs.’

He adds: ‘This would suggest that achieving 100% of reference costs will not necessarily ensure that a trust breaks even and that national tariffs are not necessarily set at 100% of reference costs.’

The trust sought to manage its cost base, from keeping tight controls on consumables and staffing levels to more strategic actions such as increasing day case rates. As a result, it is projecting a £3m surplus in 2007/08 and generated a £39,000 surplus in 2006/07.

‘Now we’ve achieved this, in 2008/09 we will no longer have that income deduction as part of the transition to payment by results, so we will be able to reinvest in some critical areas in the trust,’ says Mr Biddle.

The 2006/07 reference cost collection was clearly difficult, with the introduction of a new currency and, following unbundling, the exclusion of costs that represented a large proportion of some trusts’ activity from the final reference cost index. As a result, many have been forced to battle against the perception that they are high cost trusts. For others, the issue has been the collection of accurate data and, while this problem remains, calls for ever greater professionalisation of coding, classification and collection are likely to grow louder.


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