Feature / Levelling the field

Monitor’s fair playing field review promises to examine many elements of the system for providing care in England, but much of the focus will be on the fine detail of payment by results. Steve Brown and Seamus Ward report

There was little surprise that the announcement of Monitor’s fair playing field review was universally welcomed. The inquiry into the factors that prevent providers of NHS-funded care operating on an equal footing gives them an opportunity to have their gripes about the system addressed or, at the very least, aired. The review will be wide – the regulator’s initial list has 11 potential topics, including corporation tax and value added tax, NHS staff contracts and pensions and the costs of capital. However, the tariff promises to be one of the most hotly contested debates.

The introduction of the national tariff brought greater consistency to the payments made to NHS providers for similar treatments. No-one would argue it is perfect. Every single provider could list activities for which the tariff works for them and those it doesn’t. But many organisations accept it either works in overall terms or could be adjusted so that it did.

However, using the tariff as the basis for payment for non-NHS providers – making a reality of the any qualified provider policy – opens a can of worms.

HFMA call for clarity

In its initial evidence to the review, the HFMA calls for a strong, rules-based payment mechanism based on accurate, granular costing that takes into account the complexities of individual patients, specialist care, long-term conditions, clinical training and education and capital. It adds: ‘The payment mechanism is best supported by clear guidance in relation to what is expected of both commissioners and providers operating within a rules-based system.’

Finance managers contacted by Healthcare Finance raised a number of issues they believe Monitor should address in its review. The first is the potential for the independent sector to cherry-pick less complex cases. Individual elective healthcare resource group (HRG) tariffs cover a range of less complex through to more difficult cases. As the tariff is based on average costs, it is likely simpler cases within a particular grouping are over-reimbursed. If the independent sector takes the simpler cases, they argue the NHS will be left to deliver more complex cases, potentially at a loss.

In some cases the private sector, through independent sector treatment centres (ISTCs), may even be receiving more than the tariff for what might be a basic casemix. While the service has moved away from the guaranteed contract values (regardless of activity actually undertaken) that were characteristic of the first wave of ISTCs, the second wave retained some minimum income guarantees (to help the independent sector cover their set-up costs as they entered the NHS market).

And while it is the Department of Health’s intention that all providers will be paid at tariff eventually, one trust told Healthcare Finance that its local ISTC had a contract based on HRG3.5 structure and was receiving an uplift of RPI plus the tariff uplift. The contract has a number of years to run and in the meantime it has an advantage over its NHS neighbours.

The Foundation Trust Network (FTN) says it is unlikely that guaranteed activity would be offered in a new contract, but believes the potential for unfairness remains through the use of differential contract lengths. This would allow some providers to spread the cost of providing a service over a longer period than others. It adds that commissioners should be encouraged to adopt an equitable approach to contract length.

Some managers argue the playing field needs to be levelled within the NHS, even before we can think about a broader levelling exercise. Though providers of some specialist services – children’s, orthopaedics, neurosciences and spinal surgery – can be eligible to receive top-ups, specialist trusts argue the current tariff can already work against them.

Stephen Kennedy, deputy finance director at Salford Royal NHS Foundation Trust, explains. ‘For example, a patient who attends a district general hospital with a headache may be admitted for tests before being referred on to specialist neurosciences centre where more tests are done and, say, a tumour is found. It is possible that care at both units could be coded to the same HRG, even though the cost would be relatively little in the DGH and quite expensive in the specialist centre,’ he says. ‘With a tariff based on average costs, the neurosciences centre income for the case will almost certainly be less than the cost.’

A trust that has a wide casemix could subsidise this with income from less complex cases (where it is overpaid), but a specialist centre with complex caseload is likely to be underfunded.

The FTN insists specialist tariffs must be reformed. ‘As tariff is generally based on the average cost of a pathway, providers delivering services for a category of patients in which complex or costly procedures are over-represented are likely to lose out under the payment by results system. This is a particular issue in relation to barriers to exit and incumbency advantage,’ it says.

Finance managers say greater use of specialist service top-ups and a more granular tariff would address both cherry-picking and specialist centre disadvantage. The Department has been moving towards a more granular tariff – the introduction of HRG4 in 2009, for example, saw new bandings and greater use of age and comorbidity/complication splits to recognise higher costs in some cases.

Greater differentiation

Recent research has shown there are opportunities for even greater differentiation. A PricewaterhouseCoopers paper for Monitor, Evaluation of the reimbursement system for NHS-funded care, observed a double peak in the cost distribution of patients in some HRGs, leading the firm to suggest splitting these HRGs in two would be more appropriate.

There are already more than 1,600 HRGs – up from about 1,400 when HRG4 was launched. And across Europe the Nuffield Trust has reported a general trend of increasing numbers of groupings used in different payment systems. France, for instance, has 2,300 casemix-adjusted groups, although not all countries have as many groupings as already exist in the UK. There are also some countries that are reducing grouping numbers from very large starting points – the Netherlands and Czech Republic, for example. While greater granularity offers the potential to more closely match costs to the actual level of intervention and services delivered, there are concerns that with too many groupings, low activity could lead to price instability.

Paul Assinder, director of finance at Dudley Group of Hospitals NHS Foundation Trust and former HFMA president, believes greater granularity is essential if we are to pursue the current tariff approach. ‘While there are pragmatic arguments for simplicity and clinical relevance in currency determination, the evidence of more mature PBR systems is that increased granularity is the norm. Any acute finance director will tell you that in the typical district general hospital, cross-subsidy between and within specialties is high. Unless tariff is sufficiently sensitive, “everybody welcome” public sector providers will be put to the sword by selective niche providers who will steal high-margin activity.’

The HFMA also backs greater granularity, but adds that this would be best supported by the application of more detailed costing standards by organisations providing the raw data on which tariff is based. Clinical costing standards, developed by the association and the Department, could provide the basis for national guidance, it says.

In most cases, non-NHS providers are expected to target elective activity. But NHS providers, which have to deliver a comprehensive (elective and emergency service), believe they could be left at a distinct disadvantage. For a start, current reference costs are unlikely to cover the real split of costs between emergency and elective activity.

This is likely to be for a number of reasons. For instance, a theatre in the evening may have higher running costs as staff are on out-of-hours rates. But depending on how costs are allocated, the higher costs of emergency work may be spread across emergency and elective activity. Elective prices based on these costs will be inflated at the expense of emergency tariffs. Take out the elective work and an NHS trust is underpaid for emergency work.

Some trusts may have clear separation between emergency teams and theatres and those working on elective cases. But in others the dividing line will not be so clear. Even if costs are allocated accurately to elective or non-elective cases, there are issues. For a start take away the elective activity and the NHS will still need to run a fully staffed theatre for emergency work. The impact of such a move is likely to be higher costs for emergency activity, although under current tariff calculation processes this would take three years to feed through, leaving providers with a financial headache in the short term. 

In many organisations, unexpected peaks in emergency workload will also have an impact on elective workload. For example, a winter spike in emergency admissions could lead to delays in elective work, which might lead to higher elective costs – through waiting list initiatives or catch-up contracts with a private provider. Under current rules these costs would more than likely be recorded as elective costs, which would inflate any future elective tariff, rather than being allocated to the emergency work that caused them. In short, the full costs of the emergency work are not captured.

Mr Kennedy says the NHS requirement to deliver emergency services and the costs of that provision – and keeping those services available on demand – have to be fully appreciated. ‘There needs to be a recognition that emergency care is a 24/7 activity,’ he says.

Additionally, some costs rise at certain levels of activity. For example, maternity units require different levels of consultant presence depending on the number of births per year. While an independent hospital can limit the amount of activity it undertakes, an NHS trust has to flex its provision with demand.

One possibility could be to include an element of payment for capacity as well as activity. Two-thirds of the delegates attending the HFMA FT conference in July backed the need for capacity payments in a survey about the tariff development undertaken during the event.

Other finance managers even suggest a requirement could be introduced to contract for a certain level of elective and non-elective work in tandem (recognising the inter-connectedness of both types of activity). In reality this may be something outside the scope of level playing field protections and be more dependent on having mature commissioners who take commissioning decisions with an eye on both the short-term and long-term impacts.

In general, Mr Assinder believes mature commissioning will be key and points to the experience of GP fundholding. Unit prices to GPs were driven down for a small range of highly competitive procedures while unit costs to PCTs for residual work increased.

‘In an age of national austerity we should be doing all we can to promote overall system efficiency within a health economy, not the opposite,’ he says. ‘Curbing the excesses of the new market in this manner will be a challenge for the NHS Commissioning Board and to the resilience of the tariff system.’

Monitor’s review of the provider market promises much but if it is to facilitate better services for patients, refinements to the detail of payment mechanisms will be one of its cornerstones.