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.

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. 

Competition and markets remain firmly on the agenda in the English NHS. This summer’s white paper Liberating the NHS makes that perfectly clear with its promises to deliver patient choice based on any willing provider, to make it easier for new providers to offer services and for a level-playing field for competition.

First it is perhaps worth noting that this is not the only way to run the NHS or any other health service.  They don’t do it like this in Wales, Scotland or Northern Ireland.  In Wales, the One Wales coalition assembly government abolished the internal market last year. In its place, it has established seven integrated care health boards with responsibility for many of the elements of primary and secondary healthcare provision. This followed similar changes in Scotland to adopt single system working.

Nevertheless England has remained unswayed and appears firmly wedded to the market principles. In fact, the white paper appears to signal moves towards a higher degree of market-based mechanisms.

The academic under-pinning for the efficiency of the market is based on the fact that unproductive suppliers go out of business, leaving the competitive suppliers in the market place.  This market-based efficiency – the efficiency with which inputs are turned into outputs – is known as X-efficiency.

The pursuit of X-efficiency potentially poses some interesting challenges in the specific Liberating the NHS: regulating healthcare providers consultation. A market-based NHS system has to allow for provider failure and insolvency. In fact, it could be contended that the only way that we could truly demonstrate we were delivering a level of X-efficiency would be to see a number of poor performing hospitals, or certainly services in individual hospitals, go out of business or be stopped.

There are perhaps three key challenges to the pursuit of X-efficiency in health – all of which can be related to specific questions in the regulation consultation.

• - Is hospital failure acceptable? (Q18)
• - What goods are provided in the NHS marketplace? (Q8)
• - Are existing pricing structures sophisticated enough to ensure a level playing field? (Q16)

Q18. Do you agree that Monitor needs powers to impose additional regulation to help commissioners maintain access to essential public services? If so, in what circumstances, and under what criteria, should it be able to exercise such powers?

The key thing here is the definition of essential services. A service could be considered essential not just because of the nature of the service, but because of its local context. Without it, patients might have to travel too far to access a comparable service. This might legitimately require some form of intervention and even discretionary funding. But without this clear definition, how do you determine the cases where the market should be allowed to run its course and those where intervention might be appropriate?

Q8. Should there be exemptions to the requirement for providers of NHS services to be subject to the new licensing regime operated by Monitor, as economic regulator? If so, what circumstances or criteria would justify such exemptions?

Again we need clarity. How broad exactly is the market place that Monitor will cover – particular as foundation trusts look to develop their sub-acute and social care activities? The divisions between step down care, continuing care and residential care are blurry. In a plural market place, it is hard to see how Monitor or others will draw a distinction between say healthcare provision and wider social care provision. A highly-effective foundation trust with a broader mandate for social care would still require a Monitor licence. For a market to exist and function properly, licensing and regulatory regimes need to be consistent for all providers taking part.

Q16. What more should be done to support a level playing field for providers?

If organisations are to be allowed to fail – or if we want to decide how we react to potential failure – we need to understand the reasons for that failure. Different causes could indicate different responses. For instance, failure could be a result of relative inefficiency. Or it could be because of tariff prices that do not accurately reflect costs. Some organisations may be perfectly able to operate with a tariff set using national average costs. Others, with a more complex casemix say, may have a shortfall in income. Levelling the playing field may require a step change in pricing methodology.

Research and development and teaching levies also provide a distortion. But again in a level playing field, prices would take full account of legitimate activities that contribute to an organisation’s cost base. While the movement at present is towards paying the same tariff irrespective of setting, perhaps we need to consider tariffs for tertiary services or differential tariffs that recognise training responsibilities or casemix differences that are not picked up by the current HRG4 currency.

But levelling the playing field goes beyond price setting. Commissioners are in different positions relative to their fair share of resources – some are over target, others under target. This will have a knock on impact on providers. If a PCT is over its capitation funding target, it will have more resource available to pay for provider activities whether in terms of paying higher prices for non-tariff services or simply buying more activity. This will lead to differentials in the level of pressure on different providers. A true level playing field would need to take this into account.

We await the feedback from the Liberating the NHS consultation with interest.

Prior to the general election there was much talk not just of X-efficiency but of 3X efficiency. This reflects efficiency generated by better integration with primary and sub-acute care, in many cases in response to the Transforming community services agenda. The English NHS perhaps needs to decide where greater efficiency can be found. Targeting X-efficiency should lead to provider failure, which may or may not be politically acceptable. Targeting 3X could be regarded as anti-competitive.