Feature / Counting the costs

The quality of reference costs is improving, with more data checks and greater use of patient-level costs. Steve Brown gives a quick tour of the latest data for 2012/13


It is not often that an increase in costs represents a good news story – especially in today’s environment of tight public finances and rising demand. But a small increase in the overall costs relating to the treatment of non-NHS patients, submitted as part of the 2012/13 reference costs, is exactly that. It represents a small but significant step in the journey towards improved costs.

The publication of 2012/13 costs at the end of November reveal that the overall costs submitted rose by £1.7bn. But nearly £130m of this was because NHS trusts were required to exclude the actual costs of providing non-NHS services (£758m) rather than net off the income for these services (£888m) as a proxy for costs. If the costs have been accurately identified, this suggests NHS providers made a good profit on non-NHS patients and, given that tariffs are based on reference costs, that previous tariffs for NHS services have been set too low.

Before anyone gets too excited, the figures are small: £129m is about £500,000 per trust and represents about a quarter of 1% of the £55bn of NHS expenditure in the 2012/13 reference costs. The real winner is the costing process. The NHS has known that the netting off of allowable income – to use the reference costs jargon – distorts costs. The new publication represents the first step towards eliminating this distortion as there are plans to apply the same approach to the more complex funding streams of education and training and research and development.

The reference costs provide significant detail on NHS costs, accompanied by increasing levels of analysis and explanation to guide the non-accountant through the phone directory-sized publications. The headline figures, while undeniably too high-level to ever be used as robust benchmarks, make interesting reading for anyone wondering about the link between what the NHS does and how much it costs.

Some £55bn (54%) of the £103bn NHS budget for 2012/13 is covered by the costs, accounting for 5.6 million data items submitted by 244 NHS trusts and foundation trusts. Detailed costs were submitted for 2,100 treatments or procedures covering 15 million finished consultant episodes in admitted patient care alone.

The average cost of a day case was £693 (up from £682 in 2011/12). An average inpatient stay cost £3,366 (up from £3,215), while for non-electives this was £1,489 (£1,436). These figures do not include excess bed days, the average cost of which was £273 (£264). An outpatient attendance cost £108 (£106), while an A&E attendance cost the NHS an average of £114 (£108). These increases (1.6% for an average day case, 4.7% for elective inpatients) should be seen against a 1.8% cut in tariff prices for 2012/13, combining a 2.2% allowance for inflation, and a 4% national efficiency requirement.

The real value for NHS providers comes at the more detailed level. A reference costs schedule shows both the average cost for each healthcare resource group (the currency for admitted patient care) and the range of costs across all providers. So, a tonsillectomy for an under-18-year-old (with no complications or comorbidities) remains one of the service’s modestly high-volume activities with modestly high costs (just over 33,000 operations, with slightly more day cases than elective inpatients). The average cost was £1,316, with elective inpatients costing £330 more on average than a day case. The interquartile range for elective cases reported with a service description of ear, nose and throat (as opposed to general surgery or paediatric ENT, for example) ranged from £1,201 to £1,641.

The publication also compared the overall costs of different providers using a reference cost index, with 100 equating to national average costs for same mix of patients. The full range stretches from 63 to 137 (though this ignores two outliers where data quality was a known issue).

Reference costs have suffered a poor press over the years. Criticisms have been levelled at the historically top-down approach to cost calculation, with, for example, different treatments of key cost components such as overheads making comparisons meaningless. The netting off of allowable income has also attracted flak and the inability to drill into patient specific costs has often made it difficult to investigate any apparent cost differences.

But things are changing. There has been a 30% increase in the number of trusts that have implemented patient-level costing, with almost all of them using the more detailed costs to ‘underpin some or all of their reference costs return’.  Similar numbers are also following the HFMA Clinical costing standards, which although not mandatory, set out best practice in cost allocation and costing practice.

The Department of Health, which continues to collect reference costs on behalf of Monitor (now responsible for price setting), has also been tightening up on data validation with further checks introduced for 2012/13. At the highest level, for the first time boards were required to approve the costing process for their organisations’ submissions. And finance directors, historically required to sign off the costs themselves, this year had to sign off against revised requirements. These included confirmation of board approval, as well as that clinicians had been engaged in the costing process and that a self-assessment quality checklist had been used.

The checklist confirms that all but one of the submitting organisations reconciled their costs to within 1% of the signed annual accounts. It also forces trusts to review and justify very low and very high unit costs.

There were two new mandatory validations and several new non-mandatory validations built into the templates. In most cases, the Department says the validations show reducing numbers of issues over the past three years, suggesting data quality is improving.

Also helping comparability of cost data is the use of a revised currency. HRG4+, which pushes the HRG count up beyond 2,000, gets its first run out in the 2012/13 reference costs. The currency aims to take greater account of complexity and comorbidities, as well as providing more age splits, and should help separate out the costs (and in future the prices) of specialised activity from more routine cases.

In theory, the new HRG4+ currency could provide the basis for the national tariff in 2015/16 – though the decision to base 2014/15 prices on those in 2013/14 rather than on 2011/12 reference costs must throw this into doubt. So, for trusts looking to get ahead of the game on planning, the new reference costs could give a glimpse of future income levels.