Feature / A year of stability?

During October, Monitor and NHS England consulted on plans for the payment system for 2014/15. Steve Brown sets out the key proposals and talks to providers about the likely impact

Having effectively labelled their first NHS price list as a stability tariff, it would have been surprising if Monitor and NHS England had announced any major changes when they published details of the 2014/15 tariff payment system for consultation at the beginning of October. Perhaps the one outstanding issue was the level of downward pressure that the two bodies would seek to exert via the efficiency requirement. But here too there was a feeling of inevitability.

The Monitor/NHS England document – 2014/15 national tariff payment system: a consultation notice – broadly confirmed the proposals for next year’s tariff outlined in an ‘engagement’ document at the beginning of the summer. Tariff prices will ‘roll over’ from this year’s prices – no updating for the latest reference costs – and there will be minimal changes to scope.

There were only a handful of currency changes – providing more granular breakdown of activities across a small number of healthcare resource groups – and the addition of one further best practice tariff, albeit the first to link payment to outcomes  (for hip and knee replacements).

But all eyes were on the adjustments that would be made to reflect cost inflation and the efficiency requirement. The document makes it clear that the cost uplift won’t be finalised until later in the year, when more should be known about likely pay rises and there will be a more up-to-date estimate of the GDP deflator.

But on existing assumptions – including pay and drugs adding 1.5% and capital costs adding 0.2% to overall costs – cost uplifts of 2.1% have been allowed for.

The other side of the price adjustment – efficiency – is where the real challenge arises. The document in fact sets out a revised approach to deriving the efficiency requirement. In short, it puts more weight on the recent achievements of foundation trusts and the anticipated cost improvements built into forward-looking financial plans.

The upshot is a 4% efficiency requirement that even Monitor accepts is ‘stretching’. It is well ahead of the 2%-2.5% achieved by the rest of the economy, which Adrian Masters, Monitor’s managing director of sector development, has suggested might be a demanding aspiration for the sector in the long run (see ‘It’s all about the price tag’, Healthcare Finance, October 2013, page 13).

Taken together, the cost uplift and efficiency requirement produce tariff prices that are around 1.9% lower than this year – and this is the adjustment that should be used as the basis for negotiation of services covered by local prices. A further cost uplift, reflecting cost increases in the clinical negligence scheme for trusts, has been applied directly to specific HRG prices. This raises prices by an average of 0.3%, so that average tariff prices are around 1.6% lower than corresponding tariffs this year.

Middle way

The overall approach attempts to find a balance between a firm rules basis – the tariff is the tariff – and allowing flexibilities. The key point about the flexibilities is that they must be used within a framework set by the tariff document and, crucially, all movements away from use of the tariff must be reported.

Paul Briddock, chairman of the HFMA’s Payment by Results Special Interest Group, says the document is ‘largely as expected’. ‘Monitor and NHS England have listened to what the service has said about the importance of stability, at a time when the service has faced significant structural change and while we face on-going service and financial challenges,’ he says. ‘Encouragingly they have formally provided for local flexibility and that is really important if we are to put payment mechanisms in to support the local transformation of services. But they are also increasing transparency, which should help us understand what is actually going on, stop people coming up with financial fixes to get round tariff problems and highlight arrangements that could be of value elsewhere.’

He describes 4% efficiency as feeling ‘extremely tight’ for providers. And although commissioners will see a reduction on tariff prices, they have pressures of their own – particularly as they transfer funds to social care in anticipation of a major switch in resources from 2015/16, when the health and social care integration transformation fund gets properly under way.

Mr Briddock supports the pooling of budgets to target the  interface between health and social care. On one day in October at his own trust – Chesterfield Royal NHS Foundation Trust – 89 patients (occupying 15% of its 600 beds) were fit for discharge, but were awaiting out-of-hospital packages to enable them to actually be released. But he says the health money needs to be targeted at the right services. And mechanisms will be needed to ensure the investment is targeted at delivering more timely, out-of-hospital care. ‘It mustn’t be used to inappropriately prop up other financial pressures in the system,’ he says. 

‘In summary, what we need to see is commissioners and providers working together in a mature and positive way,’ says Mr Briddock. ‘My worry would be if organisations simply used rules-based contracts to pass the problem on to other parts of a health and social care economy.’

Countess of Chester Hospital NHS Foundation Trust is one trust that has been working with its local CCG (West Cheshire) and mental health and community provider (Cheshire and Wirral Partnership NHS FT) to model the impact of the tariff across the whole health economy.

Chief finance officer Debbie O’Neill says the net impact on the trust is more severe than had been allowed for in original financial plans. ‘This is more than challenging,’ she says.

She has used a 1.9% reduction in prices in the trust’s assumptions. Although the impact on average tariff prices is expected to be a 1.6% cut, after the CNST cost increases have been targeted at specific HRGs, Ms O’Neill thinks the trust is unlikely to see the benefit.

 ‘We’ve had the highest level of risk discount on our CNST premium, but if premiums move to being set on previous claim history, as indicated, we expect to see a net cost increase on CNST despite the extra 0.3%,’ she says.

Medical staff costs are a concern. ‘We have gaps on junior doctor rotas. There aren’t enough medical staff available and so providers are going out to agencies and paying premium rates,’ says Ms O’Neill. ‘This isn’t being reflected in tariff rates.’

In general, she is concerned about the current zero allowance for cost increases relating to service developments – although Monitor has said this could change once the government has published its mandate for NHS England.

This is a particular issue for the Countess, where tariff does not reflect the service developments undertaken recently in relation to specialised services.

 ‘Francis and nursing reviews are also driving costs, none of which will be picked up in using four year old cost data as the basis for the tariff,’ says Ms O’Neill.

Risk assessment

In practice, she believes the trust could be looking at a potential 5% efficiency requirement – a level that in theory could earn a greater level of Monitor scrutiny under the risk assessment framework.

She is concerned that the national approach is based on an assumption that the 1.9% ‘saving’ from price reductions would be available for commissioners to reinvest locally in new services and activity growth. ‘But our commissioner has its own pressures and is planning for very little if any growth,’ she says.

Rising emergency activity remains a worry. But working together and investing in local community services, channelled through the trust in conjunction with its partners, has enabled some 60 patients – equal to two full wards – to be managed in the community.

Richard Price, deputy finance director at

The Dudley Group NHS Foundation Trust, agrees that 4% efficiency will be extremely challenging for providers. Applying a simple 1.6% cut to overall income puts the challenge in context.

‘On income of around £275m, that’s £4.4m being taken out for Dudley,’ he says.

The cost uplift allowance depends on final pay negotiations and GDP deflator estimates. But even if there was agreement about a pay freeze, he says, the trust would still face the costs of incremental pay drift, clinical excellence awards, non-pay and drugs increases and inflation on its private finance initiative deal.

The decision to retain the marginal rate emergency tariff (MRET) adds to the challenge. Mr Price says that Dudley has already implemented many of the proposed changes to enable baselines to be revised.

There was recognition that changes in local service provision – for example, with Dudley becoming the vascular hub provider – meant the original baseline, above which the marginal rate is applied, needed to change.

The trust and its commissioners have also sought to tackle other distorting factors. They have negotiated a local contract to cover people ‘admitted’ for short spells of observation, taking these patients out of the admissions count.

‘These patients were neither admissions nor outpatient appointments and the 30% rate just wasn’t valid, so we have agreed a local rate for this home discharge activity,’ he says. He suggests that a national ‘observation tariff’ would make sense.

Even so, the remuneration of emergency care is seen as one of the main risk areas for Dudley, as it is for many providers across England. On top of the financial risks, Mr Price says the system is complex and time-consuming to administer – everything from calculating and agreeing the baseline to reconciling emergency admissions on a monthly basis. He believes more viable alternatives are needed to pay for emergency care and welcomes suggestions that Monitor is exploring alternative approaches such as paying for capacity as well as activity.

Maternity concerns

One final concern is around the maternity tariff. Although Mr Price backs increasing use of pathway tariffs, he suggests they should be confined to payments within a given financial year. The trust is still in discussions about this year’s maternity contract, with the issue of payments for women whose antenatal care started last year one of the key difficulties.

The trust is currently planning to split antenatal payments between years – with a complex notional hand back and repayment of part payments at the end of each financial year.

Mr Price acknowledges there are benefits in the roll-over approach to prices in 2014 – with prices based on this year’s tariff rather than refreshing for the latest reference costs.

‘It can be difficult if prices swing dramatically, especially if you are trying to work with consultants on service line reporting,’ he says.

But he also acknowledges that this means prices are broadly based on four-year-old cost data. In future, he says, he would like to see tariffs move towards normative price setting, perhaps basing prices on top-quartile costs but then moving to this level over a defined period. He suggests this might provide the right driver for efficiency, while also providing some stability between years.

There is always a tendency to see the year ahead as the most challenging ever, particularly at this stage of the planning process, when the focus is often on seeing out this year’s cost improvement plans, rather than those of the following 12 months.

But there is a growing sense that the provider sector cannot continue to deliver such high efficiency targets year after year. The centre appears to acknowledge the challenge it is setting for the sector. The question then is when will this apparent empathy translate into less heroic efficiency requirements?