2013 accountability hearing with Monitor - Health Committee Contents

4  Pricing

Recent and future changes to NHS pricing

46. Monitor and NHS England are now jointly responsible for the NHS payment system.[50] The Committee's report on last year's accountability hearing emphasised the importance of the setting of the tariff, and recommended that Monitor attach a high priority to this new area of its remit.[51]

47. Monitor's written evidence provides the following summary of their proposals:

    Our proposed national prices for 2014/15 are broadly similar to those in 2013/14, having been adjusted only for efficiency (4%) and inflationary factors (e.g., the increase in drugs prices) to ensure some predictability of income for providers while we develop the longer term strategy.

    However, we have made changes in two important areas for 2014/15 based on our engagement with the sector. Following a review of the marginal rate rule for emergency admissions, we made significant changes to the way baselines and re-investment plans were determined locally, with commissioners held firmly to account for the first time. Local health economies will also be able to adopt alternative payment approaches where this is in patients' interests, as long as they do so transparently and have engaged constructively on the available options.[52]

48. Monitor states that its proposals for the payment system in 2014/15 are designed to help commissioners and providers over the coming year address the strategic challenges facing NHS care in their localities in three ways:

    by offering more freedom, to encourage the development of new service models;

    by providing greater financial certainty to underpin effective planning; and

    by maintaining incentives to provide care more efficiently.[53]

49. Monitor state that currently there are problems with information on costings:

    To fully redesign the payment system to underpin a sustainable NHS we need reliable evidence about the likely impact of innovation in service delivery and quality, complete information about provider costs and patient outcomes. Unfortunately, the quality of information available at the present time is generally poor. We therefore decided to keep the tariff largely the same during the first year for which we had pricing responsibility. The stability this offers ensures that we have adequate time to consult on any changes and to test the impact of any proposed alternatives.

    However, although we chose not to make significant changes to the tariff, we have chosen to define a set of principles for the sector to use when thinking about integrated care and explained the significant flexibility they have within the existing rules, provided they are open and transparent about how they are using that flexibility.[54]

50. Looking forward to the 2015-16 payment system, Monitor report that they are "considering changes to the payment system" as well as "developing a shared long-term strategy with NHS England.":

    The spending settlement for 2015/16 requires a comprehensive analysis of opportunities for using the national tariff to signal where greater efficiency is possible, through productivity improvements or shifts in the way care is delivered. In particular, we are addressing the misaligned system incentives for urgent and emergency care and the proactive co-ordination of health and social care for vulnerable and ageing populations.[55]

51. The Committee does not believe that this record constitutes an adequate response to its recommendation in last year's Accountability Report that Monitor should attach a high priority to its work on the tariff. The Committee believes that that the current tariff arrangements often create perverse incentives for providers and inhibit necessary service change.

52. The Committee therefore repeats its recommendation from last year that Monitor should attach a higher priority to its work on this subject and further recommends that Monitor and NHS England should initiate a formal joint process for a prioritised review of the NHS tariff arrangements with the objective of identifying and eliminating perverse incentives and introducing new tariff structures which incentivise necessary service change. The Committee requests that Monitor submits a report of this process to the Committee before 30th June 2014.

"Cherry picking"

53. In our evidence session with Monitor, we returned again to issues of "cherry picking". In oral evidence to the Committee, Adrian Masters discussed two different ways in which 'cherry picking' might conceivably occur. Firstly, in relation to and concerns that the providers might choose to treat only less complex patients who were therefore less costly to treat, Adrian Masters told us that local flexibilities should enable commissioners to re-negotiate prices if this were to emerge as a problem:

    In the usual bundle, for which there is a usual price, that assumes a mix of different patients with different types and degrees of complexity. If the commissioner feels "I am not actually sending the patients with that full range of complexity to this local provider", again the commissioner can negotiate and agree a lower price because "I am not sending you all the people assumed in that bundle. I am sending you less complicated ones so I want a lower price." That is totally open for the commissioner to negotiate....[56]

54. While Dr Masters suggested that that flexibility should cover most cases of 'cherry picking', he stated that Monitor were conducting further research into claims that providers are more likely to make a surplus on elective care than other types of care, and use that to cross-subsidise other parts of the service: "Therefore, they are saying, if some of the elective care is going elsewhere, "without that surplus, we can no longer cross-subsidise other parts of our service". In connection with the Committee's inquiry into Public Expenditure, Anita Charlesworth of the Nuffield Trust pointed to the example of maternity services as a type of care that is generally perceived to be loss-making.

    Everyone in the NHS says you lose money on normal maternity. Women have to have babies and it costs money to deliver those, so it can't be sensible to price the system where everyone loses money on maternity. If you are a big teaching hospital, you make money on certain types of, say, cancer care, and so you can cross subsidise. If you do not offer that other service, then you are just left picking up the pieces, but you have to deliver the care. When we had quite high growth rates you could cope; these sorts of things were not ideal but they did not really bite. We need to get much better at making sure that we understand cost and that we price according to that.[57]

    If we do things such as systematically underprice maternity, we will lead to people being in difficulty who might be perfectly efficient. Equally, if we overprice some bits of complex surgery, we will make people look very good financially when actually they could be very inefficient. That does not help the system overall; it means that where the problems emerge may not reflect what is underlying them. So I would like much more focus on getting the prices right.[58]

55. Dr Masters told us that "Over time, we need to improve the quality of the costing, so that the prices more accurately reflect the costs. That, again, is an exercise we have started working on as to how we can get better costing information and better reflect the cost in the prices."[59]

56. Concern continues to be reported to the Committee about "cherry picking". As we recommended in our report on Public Expenditure: it is important that payments to providers reflect the costs of treatment, and that the payments system is able to distinguish accurately between different types of case. It should be a priority for NHS England and Monitor to work to develop a payments system which reflects this requirement.The Committee welcomes the fact that Monitor has acknowledged the need to improve the quality of the costing on which prices are based; improved cost information is a key part of the wider tariff review proposed by the Committee, which would also assist in the elimination of "cherry picking".

Emergency admissions tariff

57. The marginal rate rule for emergency admissions was introduced in 2010-11, with the intent of slowing the growth in emergency admissions. Under the marginal rate rule, trusts are only paid at 30% of the usual NHS price (tariff) for emergency admissions above a baseline set in 2008-9, with commissioners retaining the other 70% in order to enable them to invest in better admissions management.[60] Monitor provided the following summary of their recent work on the marginal rate rule:

    We reviewed the marginal rate rule for urgent and emergency care during 2013 and decided to retain it albeit with new flexibilities for local circumstances. In partnership with NHS England we have sought to make local commissioners more accountable for the way any retained funds from the marginal rate are spent. We will evaluate the impact of this when making decisions about the tariff for 2015-16. We are also researching the cost structures of the urgent and emergency care networks set out by the Keogh Review to inform the design of new payment approaches.[61]

58. During the oral evidence session, Monitor explained some of the perceived advantages and disadvantages of the marginal rate rule:

    Broadly speaking, I think the marginal rate rule has done the kind of job we wanted it to....It has helped control the rate of growth in emergency admissions, and it has directed attention by commissioners and providers in how they can work together to keep people well and supported outside hospital and to discharge them better one they have been in hospital....

    Can I add, though, that it does have two problems? The first is, while it has incentivised hospitals to reduce the rate of growth in admissions, there are clearly problems if there are unavoidable admissions and they are not getting paid enough for them...we have had trusts in difficulty because of that. The second problem is that, if the 70% which is held back from the hospital is not being spent effectively to either prevent attendance at A&E in the first place, or to get them out once their treatment is complete, then you have further pressure on the hospitals, and I think most of us would agree that it is not all being spent as effectively as we would like.[62]

59. The Urgent and Emergency Care review, published in November 2013, states that NHS England expects to make "significant progress over the next 6 months" in developing new payment mechanisms for urgent and emergency care, in partnership with Monitor.[63]

60. The Committee has heard that the marginal rate rule, while it has the potential to act as a lever to reduce levels of emergency admissions and improve care outside hospitals, also carries the risk of pushing trusts into financial difficulty where admissions are unavoidable. Monitor also told us that the proportion of funding retained by commissioners "is not all being spent as effectively as we would like". Changes have been introduced this year to allow for revised baselines, and to ensure that money retained through the application of the rule will be spent transparently and effectively, to enable more patients to be treated in community settings. We will seek an update on progress in this important area from Monitor and from NHS England later in 2014.

Mental health tariffs

61. Evidence received during the Committee's post legislative scrutiny of the Mental Health Act 2007 in 2013 suggested that the continuing use of block contracting in mental health services made them "much easier to cut", and that introducing a payment by results system for mental health might be beneficial.[64] We questioned Monitor about what progress had been made in this area to date, and they reported that while work is now ongoing to collect activity and cost information and to set quality information for mental health 'clusters', this work is revealing wide variations in both cost and clinical practice. This means that, in Monitor's view, "it is going to be quite a while" before national prices can be agreed in this area. Meanwhile, Monitor are advising those working in this sector to use clusters and to increase their understanding of their own activity and clinical practice, and use this to negotiate locally on prices.[65]

62. Since our accountability hearing in November 2013, there has been considerable debate about differences in cuts to the tariff price paid to the acute sector and the non-acute sector, with critics arguing that this has the potential to undermine the Government's commitments to achieve parity of esteem in mental health. We will explore these issues more fully in our inquiry into Children's and Adolescent Mental Health Services.

63. Monitor told the Committee that "it is going to be quite a while" before national prices can be established that will enable the introduction of a well-based tariff in mental health. Since our accountability hearing, concerns have also been raised about differences in the changes being made to the prices paid for care in the acute sector and the non-acute sector. These changes raise important questions about the relative priority of acute and non-acute care, and undermine delivery of the objective of parity of esteem between mental and physical healthcare. The Committee will return to this issue in our inquiry into Child and Adolescent Mental Health Services.

50   Monitor (AMO 0010), para 4.23 Back

51   Health Committee, Tenth Report of Session 2012-13, 2012 Accountability Hearing with Monitorpara 96 Back

52   Monitor (AMO 0010),para4.27-4.28 Back

53   Monitor website, Regulating Prices for NHS Funded care Back

54   Monitor supplementary information (AMO 0013), para 2.2 Back

55   Monitor (AMO 0010), para 4.29-4.30 Back

56   Q83 Back

57   Public expenditure oral evidence, 20 Nov 2013, Q166 Back

58   Public expenditure oral evidence, 20 Nov 2013, Q195 Back

59   Q84 Back

60   Monitor (PEX 0018), 4.1 Back

61   Monitor supplementary information (AMO 0013), para 2.3 Back

62   Q88 Back

63   NHS England, Urgent and Emergency Care Review, 13 Nov 2013, p28 Back

64   Health Committee, First Report of Session 2013-14,Post-legislative scrutiny of the Mental Health Act 2007, August 2013, para 35 Back

65   Q95 Back

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Prepared 26 March 2014