News / News analysis: Level headed

With prime minister David Cameron’s promise last month  to ‘create a presumption… that public services should be open to a range of providers’, the idea of a level playing field has moved firmly to centre stage.

For the NHS, the subject really hit the headlines in January with the Department of Health’s impact assessment, published alongside the health and social care bill. In a section on creating a fair playing field across NHS bodies, private providers, social enterprises and charities, it suggested there were a number of ‘distortions’ giving rise to ‘arbitrary cost advantages’ for particular provider types.

It highlighted a study by consultancy KPMG that concluded the majority of the quantifiable distortions work in favour of NHS organisations. In particular the study suggested that tax, capital and pensions distortions meant the private sector faced costs that were £14 higher for every £100 of cost relative to an NHS acute provider (see table).

Taken alongside the government’s commitment to level the playing field, this was interpreted in parts of the media as a sign that private providers might expect a 14% top-up on tariff prices.

This simplistic conclusion has been dismissed by FT regulator Monitor, which in its expanded role as economic regulator will be responsible for promoting competition and, crucially, setting tariff prices.

In evidence to the Commons committee debating the health and social care bill, Monitor interim chief executive David Bennett said:  ‘The starting point must be to do the analysis more extensively, looking at a broader set of issues. I cannot say those figures are the ones that we would come up with. Putting it bluntly, [it] is an incomplete analysis and the analysis needs to be finished.’

Monitor chief economist Sonia Brown did, however, acknowledge that the Department’s list of distortions was ‘a good one’ in that it did set out all the areas that needed to be analysed. But she added: ‘It is unfortunate that the majority of the quantification is in one direction at the moment.’

This will provide some reassurance to the NHS. Finance managers spoken to by Healthcare Finance were alarmed at the suggestion that the private sector was at a 14% cost disadvantage compared with NHS acute providers. Many felt particularly uncomfortable with the suggestion that the NHS pension scheme on its own accounted for half the 14%.

The argument, rehearsed in the KPMG report, is that private acute providers incur significant cost in matching the NHS pension benefits or offering alternative benefits to attract staff, given the effective government subsidy of NHS pensions.

One NHS finance manager said he was puzzled by this assessment. With the NHS already paying an employer’s pension contribution of 14%, this would suggest that private providers were having to put more than 20% into employee schemes (or provide alternative benefits, such as higher salaries).

He added that given the level of NHS pension contributions to the unfunded, pay-as-you-go pension scheme, he would argue the pension scheme amounted to an additional cost for the NHS, not the other way around.

The cost of capital is another interesting area. The Department’s impact assessment suggests NHS providers’ access to capital at government borrowing rates reduces their overall costs by four percentage points compared with the private sector.

But the assessment makes no allowance for the impact of capital rationing within the NHS, nor does it address the uneven playing field that exists within the NHS. Organisations with private finance initiative schemes already have higher costs than those with publicly funded schemes, yet no allowance is made for this within the national tariff.

Corporation tax – the imposition of which is still heading towards NHS bodies, albeit slowly – also provides an estimated £2 per £100 of cost disadvantage for the private provider. But one NHS finance manager pointed to last month’s revelation that Barclays paid just 2.4% of its annual profit in corporation tax, compared with the UK rate of 28%, as evidence that a broader understanding of these potential ‘additional’ costs was needed. The impact of capital allowances should also be taken into account.

A more complete analysis of cost distortions would clearly need to quantify the additional costs of upfront and ongoing training for clinical staff. Teaching trusts may receive separate funding streams to cover training costs but NHS providers identify significant extra costs in the continuing professional development of clinical staff.

Perhaps the biggest area of concern for the NHS is around casemix. National tariff prices are set at healthcare resource group level. Each HRG can cover a range of different procedures and different complexities. The fear among NHS practitioners is that even with the same tariff on offer to both public and private providers, the private sector can cherry-pick the simple cases – in fact it is set up for this type of work and would often rely on the NHS for emergency back-up facilities.

This would then leave the NHS with the more complex and costly activity. And changing the NHS elective casemix may also have wider repercussions for the viability of urgent care services not provided in the private sector.

Monitor is making reassuring noises. ‘What Monitor will need to look carefully at, after doing a thorough analysis, is the extent to which the current pricing mechanism, which is a bit “one size fits all”, is appropriate in the future,’ Ms Brown told MPs.

‘We may see the need to have, for example, differential pricing in the event that there are true market distortions that need to be remedied. But we are far from reaching the conclusion that that is the case at the moment.’ 

But there are alternative ways the playing field could be levelled other than having different prices in the national tariff for different providers.

For instance, the casemix issue – where simple procedures attract the same price as more complex procedures in the same HRG – could be fixed with a more granular currency. The NHS may retain the more complex work, but a more granular tariff would reflect this. Ms Brown has been clear that a ‘sophisticated tariff’ will be needed to differentiate between procedures or patients that are more expensive to undertake or treat.

On the training side (assuming the distortion favoured the private sector), Mr Bennett suggested one approach could see ‘an element of what you would have paid to the private sector’ being taken and used to fund the training. ‘In that way you establish a level playing field. There are lots of different ways you can do this,’ he said. ‘It does not have to be that you straightforwardly pay one differently from another.’

Some distortions may simply disappear. The current review of public sector pensions could end up closing the apparent cost gap between NHS and private sector pensions. If a decision was taken to lend to NHS bodies at commercial rates, this could eliminate any distortion on the cost of capital.

In fact, crude uplifts to tariff as a mechanism for levelling the playing field appear unlikely. Ms Brown told Healthcare Finance she would be uncomfortable with such an approach. ‘Obviously these things affect different organisations in different health economies in different ways. You’d want to make sure you were targeting these issues in an efficient way. Tariff is only one of a number of mechanisms and I’m not sure it is the one you’d go to first.’

The clear message from Monitor is that there will be a measured approach taken, informed by analysis and involving wide consultation with all stakeholders. ‘There is a pace question here as well,’ Ms Brown added. ‘If you look at all the other sectors, levelling of playing field is something that is done over the order of magnitude of five to 10 to 15 years, not something economic regulators tend to do in the first 12 months of operation.’

No sudden announcement will be made. Monitor promises that it will, in time, consult on the scope of level playing field issues, call for evidence and consult on proposals before any corrective measures are applied.