NHS sets out proposals to replace block contracts from 2022/23

The API system was originally planned for introduction this year, building on default blended payment arrangements originally introduced as a default mechanism for urgent and emergency care in 2019/20. However, with block contracts remaining in place for the rest of the year as part of the continued response to the Covid-19 pandemic, the new system is now expected to start in 2022/23.

The details of how the system will operate are yet to be finalised, but NHS England and NHS Improvement have been running a series of workshops* to engage with finance practitioners and other stakeholders over the plans. They are also encouraging feedback via an online survey.

Under the proposals, payments to providers by integrated care boards will consist of two core components. A fixed element will cover an agreed level of activity and a variable element will reflect quality of care and any differences in actual activity levels compared with the planned levels. A variable rate set at 50% of unit prices is under consideration.

The new arrangements would cover almost all secondary healthcare services and all specialised commissioning.

Some delegates at the workshops questioned whether the proposed system would reduce transaction costs – one of its aims – compared with the former payment by results approach. One delegate commented: ‘API will be no less of a transactional burden in reality and may possibly generate more initially through the negotiation of baselines against the backdrop of Covid and changes to patient flows (rendering historical trends of limited use) and the impact of elective recovery.’

Rob Unsworth (pictured), head of payment policy at NHS England and NHS Improvement, acknowledged that there would be a change of emphasis in terms of contracting arrangements and that systems were starting from different places. ‘It is probably fair to say that there could be an upfront increase in burden in agreeing arrangements at the start of the year. And then there will probably be a reduction in the burden of monitoring and adjusting payments throughout the year,’ he said.

However, he added that for systems already working with some form of blended payment, a return to pricing and tariffs would be seen as a huge increase in burden. ‘We envisage a much closer link between what is planned for, how payment flows and how we respond to things that go off plan,’ he said. ‘And in a few years, this will become the new normal with a lower burden set-up compared with payment by results.’

The proposal is for the API approach to apply to all contracts between a commissioner and providers within the same integrated care system (ICS). For contracts across ICS boundaries, API would apply to contracts above a set threshold. The national pricing bodies are considering either continuing with the £10m threshold that would have applied for clinical commissioning groups this year or raising this to £30m to take account of the move to ICS-level commissioning.

Payment arrangements for contracts below this value would be agreed locally or could be based on nationally published unit prices. National prices will continue to be set for unbundled diagnostic imaging services.

For low-volume activity (in contracts currently worth less than £0.5m), providers would be paid a set amount for activity below the threshold, reducing the costs and burden of processing low-value invoices. It has not yet been decided how these amounts would be set, but the national bodies said they are ‘prioritising simplicity and minimising any associated burden’. The initial focus will be on acute services.

Funding arrangements for high-cost drugs and devices would effectively be rolled over from the current system. High-cost drugs and devices commissioned by ICSs and some specialised drugs funded by NHS England would be included in the API fixed element. The majority of other specialised high-cost drugs and devices would be funded on a cost and volume basis.

In setting the fixed element, systems would agree the level of best practice tariff (BPT) performance included and the fixed element would then be uplifted by 1.25% to reflect the funding of Cquin targets. Differences in actual performance against BPT and Cquin goals would be adjusted for in the variable element, along with under- or over-performance against agreed activity levels. Activity performance will be measured by comparing the value of actual and planned activity at unit prices.

For non-acute providers, the API in 2022/23 would be restricted to a fixed element plus Cquin.

In setting unit prices for 2022/23, NHS England and NHS Improvement are considering using 2018/19 patient-level cost (PLICS) data. This would be a major update from recent tariffs, which were based on 2016/17 reference costs, and the first time that the more detailed PLICS cost collection had been used to set national prices. Analysis to date suggests that the level of change in moving from reference costs to PLICS data is similar to the variation seen when updating cost and activity data in previous years.

The national bodies are also considering options for the market forces factor (MFF). The MFF was updated in 2019/20 for the first time in 10 years. The changes resulting from that update are being introduced over a five-step glidepath, with 2021/22 marking the third stage. Three options are being considered: making no changes to MFF values (staying at step three); moving to step four; or updating the data used to calculate MFF values (although this could move some organisations in the opposite direction to the glidepath).

While decisions over the MFF made a significant difference to funding flows under the national tariff, the factor is likely to be less influential under the API system. Fixed elements will be agreed locally rather than using a formula of activity times price adjusted for MFF. However, it would still be considered as part of discussions around the fixed element and could still have a direct impact on contracts outside of the API system. And the MFF continues to form part of the formula used to set financial allocations.

*Webinars accompanying the engagement workshops, are available on the NHS England and NHS Improvement website.

The national bodies’ online survey is open until 1 October.