Aligned payment and incentive approach spelt out in tariff consultation

The usual contracting round and use of a national tariff was suspended in 2020/21 as part of the service’s response to Covid-19. Locally agreed contracts between commissioners and providers, based on or informed by national tariff prices, were replaced with centrally calculated block contracts, topped up to cover providers’ additional Covid-19 costs.

In January, it was announced that block contracts would be rolled over for the first three months of 2021/22. Reports have suggested the planning guidance, due imminently, could extend this to cover the first half of the year. (25 March update: this has now been confirmed, see Finance regime unchanged for first six months.) But the national bodies have now set out proposals for the payment system that would replace the current temporary approach.

The core proposal is to introduce aligned payment and incentive agreements, providing a more consistent approach to paying for both acute and non-acute secondary healthcare services. Prior to the current temporary arrangements, a range of different payment approaches were used. Some services continued to be contracted for on a pure payment by results basis, with activity paid for at national tariff rates. Other areas had added risk share mechanisms to these activity-based agreements. And some services, such as mental health and community, continued to be covered by block contracts.

The service had started a move away from activity-based contracts, which are not seen as supporting system working, with a phased introduction of blended payments. Moving back to this phased approach would now be seen as a backwards step. And the national bodies have also used the opportunity to revise the planned payment approach.

Aligned payment and incentive agreements represent a ‘simplification of the previous blended payment approach, while continuing to provide financial incentives for quality’, the consultation paper states. Under the proposals, the aligned payment and incentive agreements would be adopted for almost all services. They would cover all services commissioned by clinical commissioning groups from providers within the same integrated care system and for contracts outside of a system with a value of £10m or more. They would also cover all NHS England specialised commissioning activity.

Nationally mandated prices would be limited to unbundled diagnostic imaging services. Unit prices for other services will be published and used for a variable element included in the new contracts. The unit prices would be also used for activity contracted under the NHS increasing capacity framework, covering the independent sector, and could be used to price activity across system boundaries, where expected contract value is below £10m.

Payments under aligned payment and incentive agreements would include a fixed element, to cover an agreed level of activity, and a variable element to support elective activity and to reflect the achievement of best practice tariff (BPT) and Commissioning for Quality and Innovation (Cquin) criteria.

The aim is that the fixed element to be based on the local cost of delivering an agreed level of activity – a major departure from using nationally set prices. However, the guidance recognises that this may be challenging in some areas and so sets out possible approaches to calculating a ‘pragmatic starting point’:

• Basing it on the 2019/20 provider outturn contract values
• Using provider reported reference or patient-level costs
• Using forward-looking planned or predicted costs

Funding for the Cquin quality incentive scheme has now been transferred to the national tariff and so any initially agreed fixed element should be uplifted by 1.25% – assuming providers will fully attain the set criteria.

Under the old payment by results system, where activity was priced at national tariff rates, BPTs typically provided a higher price for meeting required best practice criteria for specific treatments/interventions. Instead, an agreed level of BPT attainment should now also be included in the fixed payment.

The variable element would provide funding for elective activity above those agreed in contracts, which would support the reduction of the elective backlog. This is also how adjustments would be made to allow for shortfalls in meeting Cquin and BPT criteria.

The variable element is proposed to be set at 50% of tariff unit prices – based on estimates that 25% of costs are purely variable and a further 50% are semi-fixed staff costs. However, systems could choose to use a different percentage.

In engagement over tariff proposals last autumn, the national tariff bodies said the variable element had received the widest range of feedback – with opinions split over whether it should be determined locally or nationally mandated. However the tariff bodies were won over by arguments that a lack of national rate could lead to conflict.

The retention of Cquin – worth a maximum of 1.25% of the fixed element – and BPTs means the centre continues to provide some incentives to improve quality. These microlevers are at odds with the general thrust of the aligned payment and incentive approach, and finance and contract managers raised concerns that the BPT validation process was overburdensome. However, clinicians are said to keen to retain direct links between finance and quality.

High-cost drugs and devices would continue to be reimbursed using the arrangements put in place for the second half of 2020/21. So Cancer Drugs Fund, Hep C and the majority of other high cost drugs provided as part of specialised services would continue to be funded on a cost and volume basis. However, the fixed element would be expected to include funding for other specialised drugs that are not expected to be volatile in terms of uptake and for CCG-commissioned high-cost drugs and devices.

While this is seen as a pragmatic option for 2021/22, a ‘more robust approach’ will be developed for future tariffs. In fact, the consultation says the overall tariff proposals ‘do not represent a final payment system design’. Future tariffs will feature increasing sophistication and rigour.

In terms of the tariff prices for unbundled diagnostics and the unit prices, the cost base has been increased by 1.25% to reflect the reallocation of Cquin funding into tariff. A further cost lift of 1.3% has been applied for inflation, although no allowance has yet been made for any pay settlement, and the efficiency factor has been set at 1.1%. The additional money announced in the 2020 spending review for mental health and elective recovery is being distributed outside of the tariff.