Getting the how of pricing right

Getting the how of pricing right Money is talked about a lot in the NHS, especially in tough financial times. Funding for health in England has grown modestly since 2010, establishing the most challenging settlement in recent times. 1 Yet, while it is important we have the public debate needed on how much money is spent on the NHS, how that money is spent is just as important, if not more. NHS payment system reform has attracted attention over the last year, despite its technical and complex nature. We notice a growing strength in the opinions and interests of our members on how pricing needs to change, which is no longer restricted to finance departments. Reports by other stakeholders and organisations reveal a belief in payment reform as an enabler for the wider transformation of care and culture across the NHS. 2 This is further demonstrated by the inclusion of pricing reform in the 2015 Challenge campaign, which calls for considerable change at pace in a report due out next month. 3 This document is the NHS Confederation s response to Monitor and NHS England s tariff engagement documents. It highlights the views of our members in advance of the formal publication of the 2015/16 National Tariff and the start of a statutory consultation period. It follows a sequence of activity on pricing and acts as an update to our response to Monitor and NHS England s discussion paper last summer. It should be read alongside the individual responses from our networks and corporate members, which provide added perspectives and points of detail. If you have any questions relating to this response, please contact Paul Healy on paul.healy@nhsconfed.org. Whole system response The NHS Confederation is the only body that brings together the full range of organisations that make up the modern NHS. We are an independent membership body representing all types of providers and commissioners of NHS services. We speak for the whole of the NHS on the issues that matter to all those involved in healthcare. Payment system reform affects all of our members and we have worked to ensure all sectors have been involved in our work over the last year. Firstly, we have engaged members through our member forums, which are open to all members and bring them together around specific issues. This has included a number of roundtables and conferences on the payment system and the gathering of views from members directly. We have three member forums, which are: Hospitals Forum, which brings members together to debate, share experiences and influence, at a national level, the development of acute care provision. It is chaired by Mark Newbold, chief executive of Heart of England NHS Foundation Trust; 1 Nuffield Trust (2014) Into the red? The state of the NHS finances. NHS funding between 2010 and 2015 is expected to have grown by 0.8 per cent each year on average, compared to historical growth of 3.8 per cent since 1948. 2 Some recent examples include: LGA (2014) Investing in our nation s future; College of Emergency Medicine (2014) - A call for action to get the NHS finance system to stop penalising Emergency Departments; Personal budgets and PbR offer integration stepping stones in HSJ, March 2014; PriceWaterhouseCoopers (2013) - NHS@75: Towards a healthy state 3 NHS Confederation (2014) 2015 Challenge Declaration, on behalf of a broad partnership 1

Community Health Services Forum, which is the only forum that brings together and represents organisations from across the community health sector. It is chaired by Matthew Winn, chief executive of Cambridgeshire Community Services NHS Trust; Urgent and Emergency Care Forum, which is where members work together to help steer the UEC system to a robust and sustainable future. It is chaired by Heather Strawbridge, chair of the South Western Ambulance Service NHS Foundation Trust. Secondly, the NHS Confederation benefits from working with our distinct networks to understand the specific needs of our membership. These views form part of our whole system response, but many of these networks have also prepared individual submissions to the consultation highlighting specific views from their respective members. Networks of the NHS Confederation include: Mental Health Network, which is the voice for NHS-funded mental health and learning disability service providers in England; NHS Clinical Commissioners, which is the membership organisation exclusively for CCGs; NHS Partners Network, which represents the widest range of independent sector providers of NHS clinical services; National Association of Primary Care, which represents and supports the interest of all primary care professionals. In addition, we have worked closely with a number of corporate members including: Foundation Trust Network, which is the membership organisation for NHS public provider trusts; Association of Ambulance Chief Executives, which is an organisation that supports, coordinates and implements nationally agreed policy for ambulance services We recommend Monitor and NHS England consider our response jointly with the individual responses of our members, networks and corporate members. Pricing can form a distinction between those paying and those being paid and, as the membership body for the whole system, we recognise the challenge this poses when seeking consensus. Nonetheless, we think it is notable how far the whole system now agrees on the direction pricing reform needs to take to work in the greater interest of patients. Summary of our response Our response represents the views of the whole healthcare system and highlights strong areas of agreement on the future direction for the NHS payment system. Our members are uneasy with how tough next year looks and are uncertain as to whether the efficiencies proposed for the 2015/16 National Tariff are achievable. We are concerned that expectations are being set for the system at a level that is akin to a balancing item for affordability. Services need to be transformed to make them more effective and efficient. These efficiencies though cannot be driven in a purely technical way, i.e. by reducing the individual price for 2

delivering episodes of care through the tariff. Instead, a greater focus should be placed on how resources are allocated and distributed, so that we reduce costs overall by both doing the right things as well as doing things right. In addition to this central message, three further points are raised: 1. Pricing reform needs to accelerate to enable the transformation of services Support is strong for changing the pricing model and for developing payment mechanisms to reward effective and innovative services that meet the needs of people today. This is recognised in Monitor and NHS England s strategy, but there is uncertainty as to how quickly reform will support organisations in meeting the significant challenges they face in the short- to medium-term. 2. National tariffs should fairly reflect the pressures across the health system Part of a whole system response is understanding the rising pressures on all parts of health care. As such, it is not in the lasting interest of any one organisation to benefit at the expense of another, if that shortfall negatively affects the whole health economy. Prices set should balance risks in a way that sets up local discussions about how best to share the burdens and benefits. 3. NHS payment systems must complement other levers Payment mechanisms can create a barrier to efforts to work together and to transform services, but we need to be careful not to focus on them as the only lever. Pricing reform alone will not change services in the way needed and its influence can be weakened if other factors, both structural and cultural, are not aligned as well. Funding and finances The NHS has so far been successful in delivering the savings required by a flat funding settlement at the same time as costs pressures continue to grow. Almost 15 billion has been saved in the last three years and the NHS is on course to meet the set target of 18.7 billion by 2015. 4 Around half of the savings have been driven by tariff, specifically by setting a 4 per cent efficiency factor on prices of NHS-funded care. For next year s tariff, Monitor and NHS England have indicated that this efficiency factor may increase to 5 per cent. Around two-thirds of the savings from tariff efficiency realised in the first two years of the QIPP programme have been found from reductions in staff costs. These are savings separate to the national pay freeze and includes reductions in agency services, sickness absence and a reduction in pay drift. 5 Evidence shows that organisations are now struggling to reduce staff costs and in 2013/14 spending on permanent staff increased by 1.37bn and on contract and agency staff by 295m. 6 Many of these cost pressures relate to investment in front-line staff, which Monitor has described as a positive step, and are a direct reaction to pressures from the implementation of the Francis recommendations and safe staffing. 7 We understand the need to make savings to ensure the NHS continues to deliver good value for public money and the efficiency factor has proved to be an effective mechanism for doing this. The factor is applied to the unit price of individual treatments or on the overall contract for 4 Department of Health submission to Health Select Committee 5 Department of Health submission to Health Select Committee 6 Nuffield Trust (2014) Into the red? 7 Monitor (2014) Press release: NHS foundation trusts hire more staff to improve patient care 3

providers, which builds cost reductions into pricing mechanisms to ensure financial savings are delivered. However, we think efficiency needs to be delivered by both technical means, where the same activity is delivered more efficiently, and increasingly by allocative means, where more costeffective models of care are supported. 8 We are concerned the two approaches above are not being balanced appropriately and many NHS organisations will be unable to meet the challenge being set, particularly on the back of a succession of price reductions. The possible impact on already troubled providers could be significant. Monitor and NHS England s own analysis highlights that a 5 per cent efficiency factor could see more than half of providers in deficit in 2015/16, if only 3 per cent savings are delivered. This is very concerning given that recent analysis has suggested 3 per cent might be a realistic expectation beyond 2015/16. 9 Pushing organisations into deficit does not represent a saving and, in a period of significant change, we expect financial levers to reflect the appropriate funding for the delivery of care and the funding for reform. Wider debates around making sure funds are available for transforming care to deliver financial efficiencies across the system cannot be divorced from discussions about tariff. We recommend Monitor and NHS England reconsider if setting an efficiency factor of 5 per cent would be appropriate and whether it would balance both allocative and technical approaches to delivering efficiency. They need to be confident savings can realistically be made without pushing organisations further into deficit and be transparent in their assumptions of the source for these efficiencies. These considerations need to be made in the light of wider arrangements on NHS funding, including whether there are non-recurrent resources available to fund transformation. We would also expect both organisations to recognise the tough challenge a 5 per cent efficiency target would set as they conduct their other duties in the system, in particular how Monitor regulates providers. 1. Pricing reform needs to accelerate to enable the transformation of services When Monitor and NHS England published their discussion paper on long-term payment system reform last year, we welcomed the opportunity to take a step back and consider as a whole how services are being paid for in the NHS. Members continually tell us that pricing can be a barrier to change and, in our most recent member survey, 90 per cent of NHS leaders said more permissive flexible structures, regulations and policies were an important factor for achieving change. 10 Good progress has been made by Monitor and NHS England this year, for example with regards to improving transparency and accuracy in price-setting, however we share the belief that some areas of reform now need to be delivered with more pace and scale. In particular, we continue to highlight the potential for empowering commissioners and providers to develop innovative solutions locally and to have the flexibility in pricing to establish mechanisms to 8 This is also set out by the 2015 Challenge partners in the 2015 Challenge Declaration 9 Health Foundation (2014) Turning the supertanker: finding the NHS quality/cost sweet spot ; and Nuffield Trust (2014) Financial Crystal Ball Gazing 10 NHS Confederation (2014) 2014 Annual Member Survey 4

support their solutions, rather than them being a barrier. This approach requires support from Monitor and NHS England, as well as a commitment to be less prescriptive in some areas. One area where we think this is needed most is in urgent and emergency care (UEC) and better co-ordination is needed between the review of the UEC payment system and Prof Sir Bruce Keogh s review of UEC models. A big pressure on all health economies is the growing number of emergency admissions with 1.6 million additional hospital admissions through emergency department between 2008 and 2013. 11 Action is needed to halt this trend and we are clear that a considerable part of this will come from investing in new models of care, so they support people in a way that reduces the pressures at both the front and back door of acute providers. Our members show us demonstrative examples of how primary and community services have supported large numbers of patients, especially those at most risk, from being admitted into hospital. 12 Monitor s own analysis suggests that integration along these lines could save 1.2bn to 2bn in reduction of hospitalisations. 13 But it is clear there are many instances where costs pressures lag behind in acute providers despite investment in alternative models. Flexible pricing arrangements need therefore to be developed and shaped around local risk and benefit sharing. On the marginal rate for emergency admissions, we are supportive of this being used as a transitional arrangement before wider reforms are implemented, if it is delivered in the round. We encouraged the changes in the 2014/15 National Tariff to make the marginal rate more transparent and accurate, but would welcome an update from Monitor and NHS England on the impact these have had. Evidently, the mechanism will only be effective at facilitating local discussions about solutions to rising emergency admissions where all parties are involved in creating the right solutions and determining how the remaining tariff is spent. We can support a marginal tariff for acute providers as a transitional step toward a better arrangement. We cannot support a marginal tariff for the system for these episodes and greater support must be made available to ensure that health systems are able to invest all of the resources available to support this cohort of patients who are admitted as emergencies or may be admitted without appropriate care being in place. We recommend Monitor and NHS England begin to implement reforms to the NHS payment system at greater pace and scale. In particular, these reforms should focus on removing payment as a barrier to change and facilitating investment in primary and community services, in a manageable and sustainable way for all providers. The marginal rate should be maintained as a mechanism for doing this at present, but only where there is a honest and comprehensive picture of how the remaining resources are used involving all local parties and as a stepping stone into wider reforms to the urgent and emergency care payment system. 2. National tariffs should fairly reflect the pressures across the NHS An important issue to emerge since the publication of the 2014/15 National Tariff is how to engage with all sectors effectively to establish a tariff that fairly reflects the pressure on the 11 Hospital Episode Statistics 12 For example, see case studies in NHS Confederation (2013) - Transforming local care 13 Monitor (2013) Closing the Gap 5

whole system. We are clear that if prices are set unsuitably below costs this will have an impact across the whole system, as it could destabilise providers and/or compel them to withdraw from some services. It is more important than ever at a time of financial constraint that we establish prices that fairly reflect their value, so as to get the most out of the resources we have available. The decision to agree a differential tariff for mental health, community and ambulance trusts, which was separated on the basis of service development uplifts, has created an impression with some of our members that they have not received a fair price to reflect the costs of delivering services. It is clear that additional costs required as part of meeting the obligations of the 2014/15 NHS Mandate and the Francis recommendations applied further than acute providers. Yet, reflecting only those costs in national prices established a risk to the financial position of non-acute services, and thus to the whole system. We accept that tariff should represent a starting point when negotiating local prices, yet many of our members felt they entered negotiations this year at a disadvantage. The introduction of a consultation period after the NHS Mandate is published will help to highlight concerns to Monitor and NHS England, but the real need is for better data in nonacute services on which to base service development uplifts in the future. Payment by Results fostered the improvement of cost data in the acute sector and this is now being further developed with Monitor s support for patient-level and information costing systems (PLICs). Similar progress is now needed to develop the data on costs in primary and community services, which we would recommend being led by the Community Tariff Working Group. Improving data on costs is important to delivering value but it is only one side of the coin. 14 This is reinforced by Prof Michael E. Porter in his work on creating a value-based health care delivery system. 15 The other side of the coin is to improve data on outcomes in a way that supports a population-based approach to pricing and could allow for real-time value, i.e. the balancing of real time quality with real time costs. With this kind of data, the opportunity for using the payment system to improve quality, as well as drive efficiencies, grows and there are good international examples to consider. 16 We welcome the commitment in the tariff engagement documents to improving pricing in mental health services. NHS bodies are required to ensure mental health is given equal priority to physical health, in acknowledgement of the impact that poor mental health has on the NHS. Pricing is no different in this regard. What is proposed for 2015/16 is a sensible next step, but we would be keen to see further signals from NHS England and Monitor of the priority placed on improving mental health pricing, as part of an overall message about tariff being more than simply prices for acute services. We recommend Monitor and NHS England develop the national tariff in a way that shows that it has developed beyond being a set of prices of acute services. In particular, improving cost and quality data across the system should now be a priority along with developing an approach to pricing in mental health services that encourages innovation and does not hinders discussions at a local level. 14 NHS Confederation (2014) Two sides of the same coin 15 Professor Michael E. Porter (2014) - Value-Based Health Care Delivery 16 NHS European Office et al (2013) Lessons from Europe: the value of tariff redesign 6

3. NHS payment systems must complement other levers We have emphasised how pricing might be reformed to support change and empower local commissioners and providers to develop local solutions to the challenges they face. But, we are careful not to expect changes in the NHS payment system to drive reform on its own. In truth, pricing sits within a wider system of levers that will impact on how services are planned and delivered. We think part of reforming the payment system is understanding the relationship between prices and these levers, so as to maximise the impact reform can have. We are keen to see more long-term, strategic planning in the NHS because change requires investment and development beyond annual cycles. Good work is being done to develop two and five year plans across local health economies. Certainty in pricing will be important to support these plans, but so too will be stability in other areas. We are calling for a longer term funding settlement for the NHS, which we believe would send a strong signal from HM Treasury about the length of planning needed. In addition to this, we also think similar arrangements could be developed for CCG allocations, national pay settlements and in service contracts more generally. These are all strong themes from the 2015 Challenge. This puts an emphasis on getting the wider regulation of commissioners and providers right, much of which Monitor and NHS England are also responsible for. Included in this is understanding the overall burden regulation poses and assessing whether regulatory intervention delivers a benefit that is greater than that burden. Regulation in the NHS is important for providing guidance on achieving desired outcomes and assurance to the public that standards are being maintained. Structural factors are not the only enablers of change though because culture will in many cases be dominant. Pricing can influence culture because it often changes behaviour, but the counter can also be true with behaviour affecting the impact of changes in the payment system. One building block for the payment system needs to be the culture in the NHS, although this is something Monitor and NHS England are unable to guide directly. Instead, they should look to create conditions that support local relationships and to ensure that pricing does not hinder those relationships from being developed. We recommend Monitor and NHS England be conscious of the impact other levers have on the ability of pricing to drive change. This include those aspects of regulation that Monitor and NHS England are also responsible for, as well as cultural shifts taking place in the NHS that may ultimately fall out of their control but which have an impact. 7