API approach proposed for April start

05 January 2022 Seamus Ward

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CalculatorThe API approach was first introduced in October 2021, but not implemented in practice as block payments, which were part of the NHS response to Covid-19, continued to be used for the whole of 2021/22. API has two elements – a fixed amount to be settled locally in 2022/23 reflecting an agreed level of activity, and a variable element.

The national tariff payment system consultation said the fixed element should reflect changes in service delivery and associated resource requirements. It should be set at a level that is stretching but achievable and aligns with the system plan, it added.

API arrangements would cover funding for almost all secondary care activity, and would include the costs of new ways of delivering services, transforming outpatients, tackling the elective backlog, some high-cost drugs and devices, Cquin, and best practice tariff (BPT) performance.

Commissioners and providers will be urged to be pragmatic when agreeing the fixed element – using the block payments for the second half of 2021/22 as a starting point, for example.

Variable element

The variable element of API must include a payment for elective activity, advice and guidance activity, and BPT and Cquin performance. The variable element would replace the elective recovery fund used in 2021.

By default, the variable element would include payment at 75% of national or unit prices for elective activity over the agreed baseline (50% in 2021/22). Activity below the baseline would be deducted at 50% of national or unit prices. Both payments and deductions would be calculated after national variations such as the market forces factor are applied.

NHS England and NHS Improvement said it would be right to remove 50% of payments for activity not delivered because in this scenario pure variable costs and some staffing costs would not be incurred. Paying 75% for additional activity assumes that extra staff and variable costs would be incurred, but fixed costs would not increase.

Advice and guidance activity that is greater or less than that set in the fixed element should be paid or deducted according to local agreement. BPT attainment that is higher or lower than assumed in the fixed element should be paid or deducted from providers based on the difference in value between expected and actual levels of activity. NHS England guidance will determine the amount deducted from providers for less than 100% of Cquin indicator attainment.

The national bodies said the variable element was not intended to operate primarily as an incentive, but aims to encourage realistic but stretching activity plans with appropriate funding in the fixed element. It would also promote the sharing of financial risk and recognition of the provider cost base if activity differs from plan.

Under the proposed arrangements, the contract value threshold above which the API approach should be used would be set at £30m – it was £10m in the 2021/22 scheme. The national bodies said that with fewer commissioners as a result of the introduction of integrated commissioning boards, it is likely there would be fewer contracts. The increased threshold would capture an equivalent level of activity, they added.

Local areas would decide the payment arrangements for contracts with a value of less than £30m, though, with local agreement, NHS England and NHS Improvement encouraged the use of API. If agreement could not be reached, tariff unit prices would continue to be used as a default.

For smaller arrangements – expected to be less than £500,000 a year – NHS providers and commissioners are encouraged to use the low volume activity payment arrangements, where commissioners pay a fixed amount based on historical information to ensure transactions are reduced.

NHS England and NHS Improvement said the proposed one-year tariff would act as a bridge between the block payment arrangements that applied to most activity in 2020/21 and 2021/22, and longer-term ways of operating.

The consultation notes that the Health and Care Bill sets out changes to existing tariff provisions. However, if the bill is passed, these changes would apply to the 2023/24 payment system and do not affect the consultation on the 2022/23 tariff. Some elements of the proposed system for 2022/23 may need to be reviewed, including the design and scope of the API approach, the information used to set fixed payments, and the data used to set forward-looking adjustments for inflation and efficiency.

Prices for 2022/23 would be adjusted to reflect cost uplifts of 2.8% and an estimate of the minimum level of efficiency for providers (1.1%), which the national bodies say is challenging but achievable. Neither adjustment accounts for cost changes as a result of Covid-19.

An impact assessment said tariff revenue would increase by £0.7bn (1.7%) compared with 2021/22, with operating revenue rising by 0.8% on average, due to the tariff increases. The main driver for this is the net uplift of 1.66% for inflation and efficiency. Higher A&E tariffs account for almost half of the tariff revenue increase (£0.28bn).

The consultation is open until 28 January.