News / News analysis: Price signals

Urgent and emergency care tariffs that reflect provider capacity, activity and outcomes and tariffs that are set for three years are key ideas being examined as part of Monitor and NHS England’s longer term redesign of the NHS payment system.

The two bodies, which together oversee the tariff system, have started to consult on the approach to tariff setting in 2015/16 (see Healthcare Finance May 2014, page 3). Initial proposals suggest small incremental changes on their first tariff for 2014/15, which itself aimed to support stability.

However, they are also working on a more fundamental long-term payment system design, with a vision paper planned to be published later this year. Representatives from Monitor used May’s HFMA NHS payment systems conference, run in partnership with Monitor and NHS England, to share some of their early thoughts and provide a progress report on work in key tariff areas.

Urgent and emergency care is one of these. At the most fundamental level, any new payment system must support the vision of emergency care networks set out in Sir Bruce Keogh’s review of urgent and emergency care. That vision sees enhanced services closer to patients – through the 111 phone service, enhanced GP out-of-hours services, urgent care centres and enhanced roles for paramedics – supported by two tiers of emergency centres.

Payment concerns

But it will also look to address some perceived concerns in the NHS about the current approach to paying for urgent and emergency care. These concerns include a belief that non-elective activity is often under-remunerated compared with elective activity, that the system incentivises activity rather than outcomes and that the activity basis ignores the fact that services have to be provided and staffed regardless of actual usage.

The current payment system for urgent and emergency care in reality uses a range of different models from capitation in primary care and

competitively tendered price per call in 111 services through to national healthcare resource group prices in accident and emergency units.

These different approaches are seen as inhibiting system-wide working and a single, co-ordinated system – or at least one where payment approaches are aligned across the different components – is seen as a key benefit for the future system.

A bottom-up study of the cost structures was undertaken on all the urgent care system components in two case study health economies. Monitor pricing development lead Jyrki Kolsi told delegates that this revealed some interesting common characteristics.

‘The large majority of costs in all the different components were either fixed or semi-fixed over a 12-month period,’ he said. ‘Variable costs in the case studies looked at in fact ranged from 0% to only 21% of total costs.’

On the basis of this study and further analysis, Monitor and NHS England’s current proposal is to explore a system that uses three different elements for payment: core funding; a volume element; and a quality element. The quality element in particular meets one of the key objectives for tariff reform to promote better outcomes for patients.

The two bodies are now looking to test this way forward with the NHS – a process that started with the HFMA conference and will pick up pace with the publication of a discussion paper later in the year.

No firm decisions have been taken and there are still significant amounts of detail to be worked through. For a start, there are different options for setting the funding level for each element. For example, the core funding could be set using capitation, capacity or expected case volumes, while the volume element could be a simple incremental cost element or use some form of risk/gain share mechanism. Under such a mechanism – used for funding some accountable care organisations in the US – providers that support reconfiguration of services that lead to reduced activity could share in the wider system benefits.

There is plenty more detail to be added. ‘If the sector thinks it is a good idea to employ all three elements, then we need to understand what the balance should be and how the different components might combine,’ Mr Kolsi said.

Even under the current payment system arrangements, Monitor has been looking into how costs are assigned across elective and non-elective activity, with a number of providers starting to use more accurate patient-level cost allocation methodologies. For example, some trusts are ensuring the higher costs of running emergency theatres are targeted specifically at the emergency patients being treated and there is also work to ensure junior doctors’ time is correctly split across elective and non-elective work, rather than allocating on the basis of the time split of the supervising consultant.

Mr Kolsi suggested these improvements in costing would need to continue. ‘If we are going to pay for elective and non-elective care using different mechanisms, it will be more crucial than ever that we get the costing of these different streams right.’

Local variation example

The regulator is hoping to use existing local variation rules in the national tariff to provide a ‘local variation example’ in 2015/16. ‘We’d be keen to work this up with some willing sites,’ Mr Kolsi added. ‘Then we’d look to evaluate and refine further and perhaps try some early piloting in 2016/17.’

Outside of emergency care, other currencies and payment approaches being investigated include capitation and year-of-care models. NHS England is overseeing a pilot looking at how a year-of-care model might be applied for people with multiple long-term conditions. However, Monitor is also taking forward work looking at the applicability of the approach to other areas that would benefit from an integrated approach to care delivery. Areas include care for the frail and elderly and for some single long-term conditions such as diabetes.

Other reform work is of a more general nature. For example, there has been some concern about the annual nature of the national tariff-setting process. The volatility in prices that this can contribute to is seen by some as a barrier to longer-term contracting and inhibiting long term planning. Giving greater certainty to providers and commissioners on income and expenditure is seen as a way of facilitating investment in new ways of working.

However there is also a recognition that a tariff set for a longer period than the current one-year may mean a greater lag between prices and the costs they are based on. The 2014/15 tariff is based on 2010/11 reference costs. Although the costs are adjusted to take account of cost uplifts and efficiency requirements, the four year lag means that current prices may not reflect recent changes in treatment practice or innovation.

To consider the pros and cons of longer term tariffs, Monitor engaged consultancy FTI Consulting to undertake a study. The consultancy’s own engagement with stakeholders suggested there was broad support for a longer term tariff – with some suggesting that currency stability as well as price stability would be helpful.

Using a detailed assessment matrix, the consultants’ conclusion was that three years would be the optimal period for the tariff. ‘The consultants suggest this would provide significant opportunities for investment in service redesign and innovation in new models of care, leading to more integrated and greater quality care for patients now and in the future,’ said Lily Tang, Monitor pricing development manager. ‘It would also provide opportunities for efficiency discoveries, with providers having a longer timeframe to benefit from cost efficiencies achieved and  the regulator having better information on providers’ efficient costs at the end of the cycle.’

The consultants also considered whether there might be benefits to having different tariff cycles for different areas of care. For example, they suggested that there may be benefits of a four-year cycle for emergency care, seen as having more potential to benefit from large-scale service redesign.

However, given the added complexity and the potential confusion with this approach, they believe that a single cycle makes most sense initially. They also think this could be moved to in a single ‘big bang’ change.

Monitor and NHS England are now reviewing the consultants’ recommendations. Last month, NHS think tank the King’s Fund reiterated its call for a new ‘blend of payment systems’ in the NHS, with a particular request for work on capitated budgets to be ‘accelerated’.

The initial approach to tariff changes in 2014/15 and those proposed for 2015/16 might not meet this demand for speed. But the briefings at the HFMA payment systems conference suggest far more significant work is being undertaken in the background. And more substantial tariff reform may be just around the corner.