Payment by Results: Setting the Tariff

Liz Eccles

Deputy Director of Policy and Strategy

Department of Health

Ground to be covered

Everyone is interested in who sets the tariff But what do they mean by “setting the tariff”? How do we do it in England? How do they do it elsewhere? Does the “how” affect the “who”?

Why introduce a tariff?

Experience of the internal market taught us that price competition did not work – particularly for emergency cases who were admitted to the nearest hospital – and merely led to excessive transaction costs. We will therefore use new Health Resource Group (HRG) benchmarks to establish a standard tariff for the same treatment regardless of provider. This is the hospital payment system used by many international health care systems

Delivering the NHS PlanApril 2002

Rapid progress to date

2003/04 Growth in 15 HRGs managed at “tariff” 2004/05 Foundation Trusts use tariff for all activity

(elective, non-elective, out-patient and A&E) within scope

2005/06 All trusts use tariff for elective activity within scope, FTs continue with all activity (£9bn)

2006/07 All trusts use tariff for elective, non-elective, outpatient and A&E – (£22bn)

What is the tariff?

A list of 550+ nationally set prices for packages of healthcare activity (HRGs)

Based on, but not equivalent to, the average cost of the provision of the HRGs by NHS service providers (the reference costs)

Setting the tariff – one step or five?

Classification of medical and surgical procedures Grouping those procedures into financial units

(Healthcare Resource Groups) Providing guidance on costing and then collecting

data from service providers on the costs of delivering HRGs

Using that data to set cost weights for each HRG and

Translating the cost weights into a price or “setting the tariff”?

The players

Connecting for Health: Responsibility for underlying medical and surgical classifications (OPCS,ICD and SNOMED)

Health and Social Care Information Centre: Responsibility for continued development of HRGs

DH: Responsibility for reference costs, tariff development and tariff setting

The process within DH

Annual cycle of collection of reference costs

Individual reference costs are based on full absorption costing by the providers of NHS services using guidance produced by the Department

DH undertakes data cleansing and validation and produces a reference cost index for each organisation

Turning the reference costs into the tariff – first steps

The HRGs on which the reference costs are based are currently insufficiently precise to reflect some aspects of treatment

The first step is therefore to adjust the quantum of some reported costs to enable redistribution in the form of specialist top-ups etc

Turning the reference costs into the tariff – second step

The reference costs are retrospective

The tariff is prospective

The second step is therefore to adjust the tariff to take into account unavoidable cost pressures

Adjusting for cost pressures

Pay and prices Expected impact of other policies eg working

time directive Expected impact of NICE appraisals Capital Any necessary technical adjustments eg

pensions indexation rebasing

Are we there yet?

Cost does not equal price

Reference costs are based on local cost not local price

We need to check the difference between local price and tariff price

Experience so far

2005/06 – difference between local price and tariff price = £1.6bn

2006/07 – difference between local price and tariff price = £1.3bn

Without other adjustments the tariff is unaffordable

Bridging the gap

Could just deflate the tariff

But – would hit providers only

Need other options to share the burden between purchasers and providers

A political judgement?

How do they do this elsewhere?

No obvious model configuration Australia – main objective to lower costs; tariff based

on sample cost data; tariff cost weights set by Federal Government but subject to local amendment

Germany – main objective to increase transparency and stem cost increases; tariff based on sample cost data; tariff cost weights set nationally by joint purchaser/provider organisation but prices set regionally

Source data: McKinseys for DH

Norway – main objective to cut waiting lists; tariff based on sample cost data; Ministry of Health sets base rates but final price set locally

USA – main objective to increase efficiency and curb spending; tariff based on sample charge data; tariff set by Government but process highly politicised and subject to lobbying

Where does that leave us?

“It is vital that tariffs are set by a body that is independent of government, to ensure that tariffs transparently represent average costs, and that there is widespread confidence that the tariff cannot be altered for short-term political ends.”

Monitor

“The Department should also continue, at least for the medium term, to set the tariff under payment by results. Although it would be possible to delegate this task or to set a total sum and broad parameters to determine its distribution we consider that it is important to retain the fundamental link between funding and output and also ensure clear accountability for the two together. Delegating tariff setting would risk breaking such links with associated consequences for control of overall funding as recent experience in rail regulation demonstrated. Moreover, the tariff will be an instrument for delivering policy objectives which only the Government and the Department can set.”

The Audit Commission

A fundamental question

Is the tariff just a price list or

Is the tariff an instrument of policy

Another political judgement?

While the tariff continues to develop and PbR is still in its implementation phase ministers have decided that………….

DH will continue to set the tariff, based largely on average costs

Independent advice and scrutiny will continue to be provided through NHS working groups and the Project Transition Board