Comment / News analysis: Price flaws

The publication of last month’s report by consultancy PricewaterhouseCoopers for foundation trust regulator (and future economic regulator) Monitor on current NHS reimbursement systems was greeted – in press terms – with a deafening silence. A single comment about NHS finance can often trigger multiple headlines. So an article on the eve of publication in the Financial Times and precious little else seems an odd reaction to a 60-page report that sets out some of the problems and concerns about a system that distributes £66bn of NHS funds across secondary care.

There are a number of possible explanations for the apparent media disinterest. The resignation of Care Quality Commission chief executive Cynthia Bower, announced on the same morning, is perhaps the most compelling. Or perhaps the report was simply seen as too technical, incapable of competing with stories about the latest representative body to oppose the health and social care bill.

There is no doubt that NHS provider remuneration is a technically detailed subject. It covers numerous mini-systems, including payment by results, block contracts and local tariffs currently funding acute, mental health and community care.

But the overall system is absolutely crucial to ensuring providers are paid fairly and providing the right incentives to drive productivity and quality improvement. Getting it right is in fact critical to making the new NHS work.

Monitor chairman and interim chief executive David Bennett described the review and the report – Evaluation of the reimbursement system for NHS-funded care* – as ‘the most comprehensive analysis of pricing in the NHS that has ever been done’. It is part of preparatory work for Monitor’s proposed new role as health sector regulator, a key aspect of which will be price setting.

Mr Bennett made it clear that Monitor was keen to make improvements in pricing. ‘The publication of this report is the first step in evolving the payment system to make sure it delivers the best possible care for patients and the best possible use of valuable resources,’ he said. And while the regulator was already thinking of how things could be improved, he said, these would be taken forward in a measured way. ‘It is important to recognise that this will be a lengthy and complex process,’ he added.

Key findings
Finance directors will be familiar with many of the points raised. The quality of basic costing data, variability in prices from year to year, and increasing use of local reimbursement mechanisms all make an appearance, along with some old favourites – such as the link between market forces factor and real cost variation at the patient level and how capital investment is reimbursed through the tariff.

The overriding main finding of the evaluation is that the ‘information underpinning reimbursement needs to be significantly improved’. The consultants highlighted ‘significant variations’ in reference costs that can’t be explained. Some 30% of unit costs were at least 50% away from the national average for the specific healthcare resource group (weighted by activity). They said it was unclear how much of this variation reflected differences in efficiency or quality or the result of costing and coding methods.

However, they said it was clear that costing approaches did play some part, singling out the different ways of allocating overheads – typically accounting for 20% of treatment costs – as having a potentially big impact.

Even if there is a question mark over the underpinning cost data for tariff prices, at least there is a link between costs and prices. This is not the case for block contracts, where the report highlighted that historical funding remained the key determinant. The consultants also raised concerns about the focus on average costs. An examination of patient level costs in a sample of 14 acute trusts revealed some HRGs with long tails in their cost distributions.

For some HRGs, the most expensive episodes cost 20 times more than the median cost. In other cases HRGs had multiple peaks in their cost distributions, which the consultants suggested might indicate an opportunity to split the HRG into two classifications. It warned that if these multiple peaks were evidence of two distinct groups of patients, having a single average price created opportunities for cherry picking and a system that would both over- and under-reimburse different providers.

Again looking at its patient level costing sample – an approach Monitor looks increasingly drawn to both in its consultation around licence conditions and in specific costing work that has been kicked off following this evaluation of reimbursement – the consultants looked at the impact of removing the most expensive patients from the calculation of average costs. It found that if the top 1% of episodes across a sample of HRGs were removed, the unit costs reduced by between 16% and 26%.

‘It may be worth considering whether an alternative mechanism for reimbursing providers for these patients may be appropriate,’ the consultants said, suggesting that this could even be a local mechanism.

The report also majored on instability in tariff prices, which it claimed reduced their usefulness as a signal to improve efficiency. Between 2006/07 and 2007/08 and 2007/08 and 2008/09, more than 40% of individual tariff prices fluctuated by 10% or more each year. Between 2010/11 and 2011/12, almost 50% of prices fluctuated by 10% or more (see table). The consultants highlighted the problems this creates for service line management – turning profitable services into loss-making services (or vice versa) overnight, despite no change in the way services operate.

The report says better underpinning cost data would improve price stability, but also recommends considering setting prices for longer periods. For example, it points out that Ofgem sets revenue caps for five-year periods for distribution of electricity and gas and is moving towards an eight-year period. Ofwat uses a similar approach for water and sewerage.

The different characteristics of services could also be taken into account with a different approach to price setting. For example, having some payment linked to the need to maintain capacity may make more sense for some services – non-elective activity, for example – rather than using a per case approach across the board.

The consultants also looked at current compliance with the tariff system. Using evidence from an HFMA survey last summer and separate work by the Foundation Trust Network, it argued that health economies were already operating outside of the rules of the pricing system, albeit in some cases in very specific service areas. And they highlighted an increase in income covered by local negotiations, despite an expansion of PBR.

The consultants claim that ‘non-compliance’ is an indication that the current system is not always fit for purpose. Crucially though, despite an inevitable concentration on things that could improve, the report is clear that PBR has delivered benefits – enabling choice, improving information availability and driving some quality and efficiency improvements. PBR was never envisaged to be a finished product – it was always meant to evolve. The report may not reveal significant new issues but, combined with the shift in responsibilities for price setting to Monitor, it provides the opportunity for that evolution to make a major stride forward.