Feature / It’s all about the price tag

The payment system is key to supporting change in the NHS, but matching the right approach to each service will be vital. Adrian Masters talks to Steve Brown ahead of the publication of Monitor’s and NHS England’s first national tariff

NHS England’s estimate of a potential funding gap of £30bn by 2020/21 can make it seem as though the service has a number of years to address the current financial challenge. But Adrian Masters, managing director of sector development for health sector regulator Monitor, says this summer’s spending round has given the NHS a much more urgent deadline. And a revised payment system has a role to play in helping organisations meet it.

The immediate financial pressures facing the NHS – a result of a long recession and problems with public finances – are well rehearsed. But Mr Masters says that anyone thinking that productivity demands will diminish once the economy recovers is likely to be disappointed. Affordability is the key long-term issue, he insists, highlighting health spending that has historically grown faster than gross domestic product, while taxation (as a proportion of GDP) stays broadly static.


Dominating factor

‘The result is that public finances are dominated more and more by what happens to health spending,’ he says. He dismisses out-of-hand any talk of alternative funding options such as co-payments, describing them as ‘bad in principle’ and ‘a distraction’. Instead he says the service’s complete focus has to be on getting better value for every pound of health spending. 

He is convinced that existing variations in outcome and cost across England mean there are still significant opportunities for operational improvement. But increasingly this better value will need to come from doing things differently, rather than doing the same things more efficiently.

‘We’ve been talking about changing patterns of care for long-term conditions, and vulnerable and older people, for about 10 years now,’ he says. This has often centred on providing more proactive support for people in the community and helping them to avoid costly hospital admissions. ‘But we’ve still not really addressed this,’ he adds.

He believes the spending round has added to the urgency, confirming a further flat settlement plus the creation of a £3.8bn integrated transformation pot from the health budget. ‘A significant proportion of that, maybe even the majority, is going to go into social care,’ says Mr Masters. ‘And that means the rest of the budget will fall – and that’s likely to mean acute hospital spending will fall in 2015/16 for the first time. That sets a tough timetable for us to start making these changes in services.’

Monitor wants to start seeing evidence of these changes being planned for. Together with the NHS Trust Development Authority and NHS England, the regulator is exploring setting a requirement for providers to publish robust two-year plans covering 2014/15 and 2015/16, rather than the current focus on the year ahead.

The  payment system, responsibility for which transferred to Monitor and NHS England in April, has a big part to play in underpinning the required changes and in enabling providers to forecast their future finance flows. But Mr Masters is keen to stress that it is only one of a number of tools the centre uses to ensure changes happen. Any payment system has to work with existing performance management against targets, regulation against standards, professional standards and patient and public voice mechanisms. And it has to support strategic changes to how NHS care is delivered.

NHS England is working on identifying priorities for change, following on from its Call to action public consultation/awareness initiative. ‘We are not aiming to run a separate initiative through the payment system,’ says Mr Masters. ‘The payment system has to align with all the other tools that are being developed.’

So what plans for the payment system? There have been lots of calls for reform – bodies such as the HFMA and King’s Fund have highlighted the need for change to help support transformation and greater integration of care. And Monitor has already acknowledged the need for reform. In theory, a first draft national tariff, to be released just after Healthcare Finance was published (see box), should start to set out the first steps in that reform process. But in practice, Monitor and NHS England have made it clear that stability and local innovation are their key concerns in 2014/15.

An engagement document on the principles of the national tariff, released earlier this year, announced that national prices next year would largely be set at present  levels, rather than refreshing them to take into account the latest available reference costs. The big interest will be in what allowances are made for NHS inflation and the efficiency requirement, plus the two organisations’ thoughts on how non-elective admissions should be paid for following a summer review of the marginal rate rule for emergency admissions.

Few would bet against an efficiency requirement in the region of 4%. This is in line with the requirement in recent years and in the middle of the range published in the draft tariff plans. Taken alongside an inflation uplift of 2.5% to 3%, this would imply a national price cut of 1% to 1.5%.

The engagement document delivered on earlier promises about greater transparency by explaining how the proposed efficiency requirement range had been set. But there were still significant amounts of subjectivity and assumption in selecting from the published evidence. Mr Masters accepts that levels around 4% are demanding – the NHS cannot continue to deliver such heroic savings year after year.

‘In the long run, a productivity improvement of 2%-2.5% is a demanding aspiration but it is not unrealistic given that is what the rest of the economy achieves,’ he says. ‘So I’m aware we are running at more than that.’


Productivity signs

As evidence for the achievability of higher productivity, he points to: continuing levels of variation; the years of increased spending; the fact that the NHS has managed these financial pressures in recent years; and FT plans that continue to be based on ‘these sorts of numbers’. Again, he says the key is changing patterns of service and reducing hospital activity where appropriate.

Setting any decisions around marginal rate to one side, there are unlikely to be many surprises in October’s tariff notice, which will be subject to a formal 28-day consultation. But the publication is likely to begin the demise of the term ‘payment by results’.

Monitor believes there is  confusion over the term . Does it refer only to national prices?  Does it include national currencies priced locally? Is it synonymous with activity-based funding? And so it is keen to position its national tariff document as providing rules for all NHS care contracts, not just those with national prices.

Monitor is also thinking through its long-term approach to the payment system. May’s discussion paper, How can the NHS payment system do more for patients?, put local experimentation at the heart of finding better payment mechanisms to support new ways of working. Mr Masters says Monitor is looking at how it can provide central support for local trials – similar to the PBR development sites project run by the Department of Health early in the development of the payment system.

There has been much speculation about new currencies. Monitor is keen to bring a bit of structure to how different currencies could be applied. ‘One option we are considering is segmenting the healthcare sector and designing payment approaches to fit with each segment,’ says Mr Masters.

For example, this might mean identifying activity-based payment as the main mechanism for elective care, where choice applies and money needs to follow the patient. For long-term conditions, capitated year-of-care payment could be the prime approach, while capacity payments could be set for emergency care. These currency types have already been raised in discussion. But the segmenting approach would provide a clear framework for the model used in each area, rather than thinking about different approaches in all areas.


Activity links

Mr Masters stresses that even where a capitation approach were taken, Monitor would (and local providers should) want to continue to understand the links between activity, quality and cost. Again, he says, any segmenting of payment approaches would need to align with the commissioning strategy.

Monitor remains wedded to the use of financial incentives to drive better patient care and the need to improve the design of those incentives. There is a place for different types of financial incentives. These include prospective prices or capitation budgets that encourage providers to improve costs or innovate to free up resources for developing services or infrastructure. There is equally a place for activity-based payments that encourage providers to compete on the basis of quality. And bonuses/penalties (such as never-event non-payments) are also useful.

However, it also recognises that if providers and commissioners are to respond in the intended ways to signals given in incentives, the right financial environment is needed.

‘To be effective, you’ve got to have meaningful financial discipline – there have to be consequences for failing – and you need to clean up the influence of informal subsidies,’ he says.  Put another way, if the price signals are to be heard properly, you need to reduce the system noise.

So while the direction of travel is clear – incentives finely tuned to the characteristics of the services they cover – a new working payment system cannot be winched into place in April 2014. ‘We want to improve but at a manageable rate,’ says Mr Masters.

And with local experimentation at the heart of the research and development programme, local health economies will have a major influence on that pace of change.