News / Cost refresh for 2015/16 tariff with bigger changes to come

By Steve Brown

The national tariff in 2015/16 would be modelled from updated reference costs rather than rolling forward uplifted current year prices, under draft proposals by NHS England and sector regulator Monitor.

This ‘preferred option’ would mean that admitted patient currencies’ design and costs would be based on the 2011/12 reference costs. However, the two bodies have ruled out a move next year to the updated healthcare resource group currency (HRG4+), which forms the basis of the most recently published reference costs for 2012/13.

According to 2015/16 national tariff payment system: national prices methodology discussion paper, there are benefits to a further roll-over on prices – the approach used to provide stability for the 2014/15 tariff. However, it said this would mean that prices would be ‘five years removed from current clinical practice’.

The two bodies agree that it would be ‘premature’ to move to HRG4+. Although it provides much greater granularity, with much more recognition of the costs associated with different levels of patient complexity and comorbidities, NHS England and Monitor said it would have ‘considerable sector-wide impacts’ and would be ‘too risky’.

The discussion paper, which confines itself to national currencies and prices, does, however, serve notice of a ‘significant redesign on currencies’ in 2016/17 alongside the implementation of the ‘first major elements of our long-term payment system design’.

This significant redesign appears to suggest partial or full implementation of HRG4+.

Specialised service providers have viewed HRG4+ as a better way of recognising the higher costs of their more complex workload, much of which currently attracts special top-ups.

However, the discussion paper said the two bodies are ‘assessing whether there is a case for changing the reimbursement of specialised services and whether it is feasible to propose a change in time for the 2015/16 tariff’.

No further details are given as top-ups are a national variation and outside the scope of the discussion paper.

‘We are not intending to implement HRG4+ for the 2015/16 national payment system, but we will continue to work with providers and commissioners to understand how this could work in the future,’ said Adrian Masters, managing director of sector development at Monitor.

‘We are proposing to use more up-to-date reference costs than last year to better reflect recent changes in clinical practice.’

 The model used to translate reference costs to prices would be based on that used by the Department of Health for the 2013/14 tariff. However, there are likely to be key changes. In particular, Monitor and NHS England are looking to address inter-year volatility in some currency prices – sometimes linked to low activity volumes – by using an average of several years of cost data. This could potentially even draw on the more recent 2012/13 reference costs if HRG4+ can be meaningfully mapped back to the HRG4 currency.

No changes are proposed on the process for calculating core cost uplifts within tariff prices. However, the two bodies are reviewing the process around costs related to service developments specified in the autumn NHS England mandate. 

The two bodies faced criticism over this part of the process for the 2014/15 tariff after deciding to adopt differential cost uplifts for acute and non-acute providers.

At the end of February, Monitor raised the prospect of using different efficiency factors for different providers in future tariffs. However the discussion paper makes it clear this will not happen in 2015/16. The two bodies remain keen to explore the potential of three possible approaches:

• A specific factor for each provider
• Different factors for different service types
• Different factors for groups of providers.

But they said ‘the data currently available is insufficient and not always comparable for us to confidently estimate the efficiency factor at different levels of disaggregation’. Instead, under the draft proposals, a single efficiency factor would be used in 2015/16, based on estimates for the acute sector.

The two bodies also want to address tariff leakage. In recent years, actual reported efficiencies achieved by providers have been lower than the tariff efficiency requirement. However, there has been no commensurate deterioration in provider financial positions. This gap – perhaps filled by non-tariff income from commissioners – is described as ‘tariff leakage’.

While the two bodies are keen to explore the causes and impacts, they have committed to publishing an efficiency factor that is clearly linked to what is actually achievable by providers. This might mean a separate adjustment for leakage.

Mr Masters added that the sector could influence Monitor’s and NHS England’s plans. ‘Publishing this paper is one of the ways we are engaging with the sector in order to improve how the payment system works. We are asking the sector to work with us to get the payment system right for patients,’ he said.