1. Payment by Results: Setting the Tariff Liz Eccles Deputy Director of Policy and Strategy Department of Health

2. 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?

3. 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 Plan April 2002

4. 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)

5. 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)

6. 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?

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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?

15. 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

16. 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

17. 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

18. A fundamental question Is the tariff just a price list or Is the tariff an instrument of policy Another political judgement?

19. 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