Bumpy ride ahead on pricing?
By Lee Outhwaite

As I wrote my first blog in October 2010, the new coalition government’s proposed health reforms were fresh on the table. I duly reflected on the proposed greater use of markets to drive efficiency and in particular the implication that, as part of the deal, there would need to be the potential for organisations to fail .

When I re-donned my blogger’s guise in May 2011, the Health Bill was enjoying a pause. I turned to existing academic study for evidence that competition in healthcare created greater efficiency – although I found the results to be somewhat inclusive.

Well we have now well and truly hit the ‘play’ button with the reforms. There have been changes since the original vision was set out – partly as a result of the aforementioned pause and partly as a result of quite a rough ride through Parliament. However competition remains a central theme of the Act, although this is perhaps made slightly ambiguous by a parallel duty to co-operate. 

Now I’m not here to say that competition and co-operation are mutually exclusive, but we do need to understand when and where each approach is appropriate.  One organisation’s sensible approach to integrating care with a separate healthcare partner could be viewed as collusive and anti-competitive behavior by other providers. 

Health secretary Andrew Lansley notes (in a February comment article in the Health service journal): ‘In healthcare, the term “competition” is often used pejoratively by vested interests with something to fear from change.  But the vast majority of the NHS – including the many world-beating services we have, which already compete with other health providers on a global scale, recognise there is nothing to fear from competition.’

One of the strands of work now being developed is Monitor’s role as economic regulator and in particular its responsibility for price setting. Monitor commissioned an evaluation of current reimbursement systems and published it earlier this year (with consultation lasting until mid-April).  It has followed this up with further commissioned work on improving costing to underpin the tariff.

The first study forms a number of valid conclusions on the current approach to NHS costing and consequently pricing.  A level playing field and good pricing approach is necessary for the NHS internal market to further develop and generate the X-efficiency I spoke about in my first blog outing.  There were 12 key findings and eight recommendations for improvements to the reimbursement system.  My view is that we need to prioritise a number of issues as we move forward. We need to:

1. Seek to evaluate the wider dimension of the funding environment (the market forces factor, research funding, teaching and education and the commissioner funding formula) to ensure that the residual costs associated with healthcare delivery used in reference costs and for pricing are accurate.
2. Acknowledge that primary care is also a key deliverer of care and that the boundary between secondary and primary care delivery will blur –  and has to – to generate integration efficiency; and acknowledge this will have an impact on the reimbursement model for secondary care.
3. Enforce greater transparency in local pricing and cost arrangements to ensure they are operating in the best interests of patients.
4. Have a wider structural conversation on the adequacy of the currencies used under payment by results, particularly in the chronic disease area to ensure reimbursement is matched to the characteristics of service. Although year-of-life tariffs will have their own innate problems (how they are defined and what happens if there is a patient with both diabetes and rheumatoid arthritis, for example) they are perhaps more likely to provide appropriate incentives.

It will be interesting to see how great the scope of the response to the consultation is and the extent to which the pricing review gets into some wider English NHS funding issues.  There are potentially big winners and losers if the basis of the MFF, education and research funding and allocations start to be challenged.  We must continue to look at how we can derive (and agree) prices that adequately drive the market and the competitive approach. But it may be a bumpy ride.

NHS procurement is in a state of flux, again. National procurement organisations have been dismantled, the effectiveness of frameworks set up by regional collaborative hubs is in question and the former NHS Logistics organisation, renamed NHS Supply Chain, is now partly privatised and with its own commercial motivation. With collaboration being the word on everyone’s lips and the numerous procurement agencies now competing against each other for business, it’s all change again. Overlay that with the Commons public accounts committee highlighting the lack of standardisation and being openly critical of a lack of efficiency, and the whole situation looks like an almighty mess.

Everyone seems to be waiting for a silver bullet solution – a panacea that will, in an instant, provide every single part of the NHS with a small number of perfect suppliers, lowest prices, best service, same day availability and access to cutting-edge innovation. And all sorted out by some central organisation, with the savings delivered on a plate.

It simply isn’t going to happen. The supply market for healthcare goods and services is global, competitive, profit-hungry, driven by complex market forces and, for many categories, subject to rapid technological change. Dynamic change is an understated description.

Faced-off against all that is NHS procurement. With this level of change there can never be a ‘one size fits all’ solution. The NHS is a hugely complex and varied organisation, which needs an enormous variety of goods and services. The supply market always will be in flux and procurement will always be in a constant state of change to accommodate this. Of course improvements are happening at all levels, but we must expect these to be incremental rather than radical. The different layers of collaboration and aggregation at national, regional and local levels will change and adapt, as the market changes and morphs. Trusts must get used to this change and work with it. After all, this is a normal part of a dynamic supply market.

We must also recognise the fundamental limitations of collaborative frameworks. There is no doubt that aggregation of volumes does provide the economy of scale to drive improved pricing. But with every collaboration comes compromise and the resultant frameworks can easily end up trying to be all things to all men. It is hard enough for a single trust to standardise products and channel their requirements to preferred suppliers, let alone trying to do this across multiple trusts. The simple fact is that for a supplier to provide its best prices, they want exclusivity and commitment. These are the two things that are missing from frameworks, the worst of which then end up simply a collection of multiple suppliers’ list prices.

So what can NHS execs do to ensure that their trust can navigate through this confusing landscape and determine effectively how to get the best value for money and get the savings they need?

Firstly, trusts must take responsibility for their own financial health. In our experience 30%-50% of a trust’s total costs is likely to be on purchased goods and services and it is this commercial interface with the supply base that fundamentally determines the financial health of the entire organisation.

Secondly, action must be taken at trust level. Each trust needs the commercial capability, skills, tools, processes and knowledge to achieve best value for itself, based on its own particular requirements and based on the commercial landscape it faces. Don’t wait for some greater entity to do it – that silver bullet simply won’t come.

Thirdly, use all the potential sourcing solutions to your advantage. National frameworks, regional collaborative frameworks and NHS Supply Chain or other distributors will be the right answer for many requirements. These should be used when each trust has defined that this is the optimum commercial solution for them, on a category-by-category basis. And when procurement at trust level is the most effective solution, the trust needs its own commercial capability to achieve this independently. Not every trust is ready for this though, and some might need help to build this capability. Close collaboration is the most effective way of coaching and preparing the team for the challenges ahead.

Finally, recognise that the money is actually spent at trust level, so this is where the savings are implemented and actioned. This is where QIPP is important, as each trust must drive its own savings programme to standardise product requirements, drive spend to the optimum suppliers and challenge clinical preference. Whether a trust is utilising national or regional frameworks or putting in place its own agreements, commitment and exclusivity in its own requirements will allow procurement to achieve the optimum costs. You can access the best frameworks in the world, but if everyone can buy anything from any of them, the net result is still poor.

Many say that procurement has not delivered the savings it should have done. But it doesn’t mean it can’t. The answer is to improve procurement at national and regional levels, and get it working properly. But it is at trust level where it can make a big impact. It is the role of NHS execs to prepare their trusts for the bumpy ride during the reforms. And procurement, if done correctly, will be an answer to their worries.

It is an interesting time for the NHS, faced on one hand with extreme economic pressures and on the other with exciting opportunities under the banner of QIPP (quality, innovation, productivity and prevention) to deliver better health outcomes.

Well, it won't be easy unless clinicians and finance managers find ways to proactively share their knowledge and skills to drive common goals - improving quality and efficiency by working together effectively. Finance directors cannot design clinical pathways, but they can help frontline clinicians to play that lead role by informing them of the financial implications of the changes they intend to make to improve quality of health services, including the impact of any variations of clinical practices. Therefore, both groups of professionals have to engage at all levels in an NHS organisation in a meaningful way.

The creation of such valuable engagement at a large scale within the NHS would pave the way to achieve QIPP objectives. However, we would also need to:

• Challenge conventional boundaries of silo working with new approaches of effective engagement
• Generate new ideas to streamline structures and data sharing, in order to make rational decisions together to deliver effective services (in terms of patient outcomes); and
• Use tools, such as patient level information and costing systems (PLICS), to create better understanding of cost and quality issues and showcase examples of good practice of joint-up working with measureable outcomes.

With the help of the HFMA I have recently initiated an online survey to get views of such engagement from acute trusts’ finance directors. And I hope, through this blog, our wider finance community feel inspired and come up with ideas to do things differently – but jointly with their clinical colleagues. I look forward to hearing your ideas, views and examples of good practice of effective engagement, which you think should be spread widely in the NHS.

We are now firmly into the ‘pause and listen’ mode on the great NHS reforms. Competition is a key area being discussed. But what does competition mean for the NHS? And is it a healthy thing? These are perhaps two of the most frequently asked questions.

My academic endeavours – running in parallel with my day job as finance director – have given me an opportunity to look for answers to these questions among the existing academic literature.  

It would be great if we could determine how much of the change in healthcare outcomes in the last 20 years is due to: increased funding; approaches to managing the system; advances in medical understanding and technology; and external population factors (rising obesity levels for example). Unfortunately determining causality in a healthcare system is difficult.

In fact being able to link a change in outcome to a specific change in input or practice is a bit like trying to find a politician who recognises the contribution of NHS managers – it’s rare.

Two articles by economist Carol Propper stand out in reviewing competition in healthcare.  One reviews the responses of hospitals to the more competitive market models[i], by looking at what factors determine prices.  The other assesses the impact of competition on the quality of care[ii], by evaluating three years of death rate data.  Both take the original 1989 Working for patients reforms[iii] as their context.

The first paper, which is itself dated given it stretches back to 1996, uses regression analysis to evaluate the relative importance of potential drivers of price setting, including individual hospital costs, average prices, market size, bargaining power of seller and hospital characteristics.  The paper concludes that ‘the results offer some support to the view that competition will result in lower prices in the NHS internal market.  Clearly, these results are partial[iv].

But of course efficiency in the healthcare system is only an element of the requirement to deliver taxpayer value. We also need to consider effectiveness.  A cheap system that saves no lives would not be regarded as optimal.  Hospital death rates provide one obvious way of measuring effectiveness, although they can be misleading.  In her second and later article (2004), along with colleagues, Ms Propper attempts to evaluate whether the competitive system set out in Working for patients led to better outcomes for patients, as measured by death rates after patients had been treated for a heart attack.

Published data on individual hospital death rates for acute myocardial infarction (AMI) within 30 days of admission to hospital were analysed by type of hospital (specialist heart, teaching specialist heart, London hospitals and all hospitals). Two proxies for the level of competition were factored in – the number of hospitals serving the catchment population and the number of hospitals divided by the population they serve. (This latter measure could be the more sensitive as the lower the population and higher the hospitals, potentially the higher the competition).

The research concluded: ‘We find the impact of competition is to reduce quality.  Hospitals located in more competitive areas have higher death rates, controlling for hospital characteristics, actual and potential patient characteristics.  The estimated effect of competition is small, but is robust to different measures of competition and hospital volume[v]. This research is fascinating but it can clearly be challenged.  First, is competition really linked to hospital concentration? You need more than a monopoly provider before you can have a competition. But they need to do more than just exist, they have to actually compete and that would require a marketing strategy and spare clinical capacity.  Also the choice of clinical area provides some difficulties. How much choice or competition is involved when the patient is lying in the back of a blue light ambulance having a heart attack? 

In these circumstances, the ‘choice’ of hospital will be a function of the shortest journey time and the most appropriate unit with an available coronary care bed or emergency staffed facilities.

Inconclusive at best. The researchers clearly found differences in outcomes, but had they really proved correlation and causality. I don’t think so. These studies struggle to conclude what the precise impacts, and cause and effect are, of competition in healthcare, it is therefore unsurprising that politicians and the service itself is struggling too.

 In my view there are probably areas of service delivery where competition keeps the provider sector its toes and other areas where these incentives don’t work.  The trick is how to draw the line. Any regulator trying simultaneously to determine whether the healthcare marketplace is adhering to potential duties to compete and collaborate is going to have its work cut out.

As I said before, if we are to use competition, there is a clear issue around providers or services being able to fail.  If ‘access to essential public services’ is shorthand for all services, in their current provider locations, competition may not be the tool we need to drive any required acute service reconfiguration in the next few years.