Tariff: the right blend

There are two ways to look at the recently announced plans for a blended payment approach for urgent and emergency care (UEC). Either it looks strikingly similar to the marginal rate emergency tariff it is proposed to replace (with some different numbers and baselines). Or it is a statement of intent showing how tariffs for all services will develop, merging the best features of block contracting and activity-based payment.

The proposals were published by NHS Improvement and NHS England for a short engagement exercise in October ahead of the formal consultation on firm proposals in the new year.  The changes to emergency care payment are the stand-out feature.

The attempt to do something different was broadly welcomed by the service. There is wide recognition that the current system of paying for non-elective admissions in particular is not working. This uses a marginal rate emergency tariff (MRET) that pays 100% of tariff for activity in a baseline that in many cases reflects historical activity levels that fly in the face of recent demand increases. Providers are then paid a 70% marginal rate for activity above this level.

Many have also argued that the full tariff rate doesn’t cover costs, as a result of overall underfunding and flawed costing processes in the reference costs on which tariffs are based. The targeting of sustainability funds on providers of emergency care has sought to address some of these concerns.

A number of areas have even moved away from the whole payment by results approach, preferring instead a return to block contracts to improve certainty for both commissioners and providers.

NHS Improvement chief executive Ian Dalton underlined the need for change at NHS Providers’ conference in October, when he announced wider plans to change the NHS financial architecture – including a phased end to control totals and the Provider Sustainability Fund.

‘From 1 April, I’d like to see the PSF, which is £2.45bn, to be significantly reduced, potentially by a 10-digit figure, with the funds released going into the UEC tariff price, which we know has been significantly underfunded,’ he said. He went on to describe the current marginal rate as ‘illogical’, with admissions paid at less than their cost.

The new proposals would see MRET abolished, along with the 30-day readmission rule, in favour of a blended payment approach that is better suited to the new world of integrated care systems, sustainability and transformation partnerships and collaboration.

‘We wanted something that takes the best parts of an episodic spell-based system and block arrangements,’ says Gareth Harper, pricing development lead for NHS Improvement, ‘providing greater certainty while still reacting to activity.’

Two options

Two options are put forward to deliver a blend of fixed and variable payments. Under option A, the fixed element would be based on agreed forecast levels of activity paid at 100% of the tariff price. Under/over-performance of activity against this level would then be deducted or added to the payment using a rate of just 20% of the tariff price.

In option B, the fixed element would be based on 80% of expected revenue, with the 20% variable element then paid for all activity, not just activity in excess of plan.

To some, option A looks rather like the current MRET mechanism, albeit with a much lower marginal rate. The crucial differences are in the activity level used to inform the fixed element and the additional resources channelled into UEC tariffs from the PSF.

When MRET was introduced in 2010/11, there were already concerns that using a baseline set on 2008/09 activity levels failed to recognise that emergency demand had already grown beyond these levels. Ten years later, these levels of activity are a distant memory in many areas.

More recent tariff guidance has introduced greater levels of flexibility in acknowledging demand increases in the baseline, but the official tariff guidance for 2017/19 still references 2008/09 activity. The reality is that different areas use different approaches to set activity levels in the baseline and this can create the potential for misplaced incentives, with providers paying the price for failed demand management programmes.

Basing the fixed element on agreed activity at 80% of tariff price arguably moves the NHS into slightly different territory. The guidance underlines that both approaches would lead to the same price being paid for the same levels of activity. It is the flow of payment that could differ.

The idea is that the fixed element would pay for capacity, corresponding to fixed and semi-fixed costs – 80% has been chosen as a proxy for this, informed by patient-level costs, but this could change. ‘A provider that has invested in emergency services – for example, providing 24-hour consultant cover – could argue for a higher fixed rate,’ says Chris Skilbeck, head of pricing engagement at NHS Improvement, underlining that the proposed new approach is not intended to inhibit health economies already working on local payment approaches.

Either option would mean the end of the existing MRET and the 30-day readmission rule – although the guidance says this would happen on a ‘financially neutral basis between providers and commissioners’.

‘Whatever is currently paid as MRET and episodic prices plus any extra money [from the transfer from PSF] will continue to be the amount commissioners spend on emergency care,’ says Mr Harper.

He admits the detail has not been finalised and is keen to hear ideas from finance practitioners. The proposed financial neutrality is not intended to inhibit the change of money flows to support service change – re-providing services in the community, for example – but seems to offer protection against arbitrary changes in where financial risks sit.

This is possibly the hardest proposal to understand. Mr Harper admits NHS Improvement may define better what it means by ‘financially neutral’, particularly in terms of specifying the comparative baseline.

Another significant change will make it even more difficult to understand how any changes in financial flows have come about. The market forces factor – used to adjust tariff prices to allow for the unavoidable cost differences that arise from delivering healthcare in different geographical areas – has been revised. This includes an update to the calculation method and the data on which it is based.

Given that the last update was 10 years ago and PCT boundaries were still being used within the formula, Mr Harper says it was ‘untenable to leave it as it is’. NHS Improvement has published all the work behind the updates. But many providers will have been concerned by seeing their MFF reduce. One trust finance manager said a 25% reduction in its MFF, from 4% to 3%, was its clear biggest concern about the tariff plans.

However, straight comparisons may be misleading. The range of variability between highest and lowest MFF has reduced. Next year, the MFF ‘top-ups’ will amount to a smaller total – with about £120m rechannelled back into the core tariff price. So trusts need to see the changes in the round – rather than focus on their change in MFF.

This won’t be straightforward given that there are a number of forces acting on what commissioners will pay and providers receive under the new tariff proposals:

• New reference costs (2016/17) will change the relativities between different HRG prices
• At least £1bn of PSF funds will be added to emergency tariff prices overall

• The updated MFF will change actual tariff prices in different areas, with London losing out due to wage differences narrowing
• The blended payment approach, depending on the financial neutrality clause, could change flows between commissioners and providers.

Direction of travel

Although the proposed changes will have a financial impact, in many ways they are symbolic of where the NHS is heading in terms of payment approaches. ‘Looking at the two options for emergency care, if the activity is the same, then the financial outcome is the same,’ says Mr Skilbeck. ‘But we are interested in whether the service sees these as two genuinely different propositions – could they lead to different behavioural responses and better outcomes?’

The new approach is currently being proposed for non-elective admissions, accident and emergency attendances and possibly ambulatory care. The inclusion of ambulatory care is seen as particularly important, although current data quality and completeness is far from ideal. But there are more ambitious plans. ‘This is probably a first step in a longer term move towards bringing in all services,’ says Mr Harper.

How the continued development of the tariff fits into broader plans for system-level payments remains unclear. On the one hand, there are systems moving away from using tariff towards system-level capitation payments, while there are also new detailed level tariffs being proposed for services such as smoking cessation and IVF.

Mr Harper insists the approaches are compatible. He argues that moving to capitation-based payment with gain/loss sharing mechanisms depends on the maturity of different systems. But even if this is the direction of travel, there is still a role for tariff – and 70% of NHS bodies say they are currently using tariff to some degree. ‘A detailed and high-level approach can both be required,’ he says. ‘Even if contracts aren’t based on episodic payments, it is crucial we have the currencies and reference prices and ways to build these contracts.’