A fork in the road: the Enhanced Tariff Option

It’s been an important couple of weeks for the finance departments of all providers of NHS services. Following objections from 13% of commissioners, and 75% of relevant NHS providers by share of supply, the proposed tariff for next year was delayed (although the fact that this was only 37% of all providers shows that it was mostly the largest providers objecting).

The fact that the majority of providers are currently in deficit is likely to have been a major reason for the objections, suggesting that that the original tariff proposal would have made this situation worse.

The delay of the tariff has had many implications, and means that formal prices won’t be available for providers and commissioners in time for the start of the next financial year, from 1st April. Providers would therefore have to continue to operate using this year’s prices.

However to help improve this situation, NHS England and Monitor made the positive step of writing to each provider offering an Enhanced Tariff Option. The offer contained some obvious benefits compared to the original proposal:

• 70% of costs for emergency admissions above the 2014/15 level will be paid, instead of 50% originally proposed, and the current rate of 30%. This is worth an extra £130m compared to the original proposal.
• 70% of costs for additional specialised activity will be paid, instead of 50% originally proposed. This is worth an extra £170m compared to the original proposal.
• The required productivity growth included in the tariff reduced to 3.5% from the 3.8% originally proposed, worth an extra £200m.

All in, this means an extra £500m available in the enhanced option compared to the original proposal. Although it still means an estimated decrease in income of around £1.2bn from 2014/15, it is obviously an improved offer for providers.

Those not accepting the offer will continue with the 'Default Tariff Rollover'. Essentially this means providers will carry on with 2014/15 prices until the new formal tariff can be agreed, and will:

• continue being paid 30% for extra emergency admission, rather than 70%
• not benefit from increased premium for the Clinical Negligence Scheme for Trusts (CNST)
• not benefit from the proposed uplift for mental health
• not be eligible for Commissioning for Quality and Innovation (CQUIN) payments for the whole of 2015/16 (presumably this includes the period after providers move onto the new formal tariff).

The deadline for making the choice was Wednesday this week (4 March), and the vast majority of providers have accepted it (87%).

For the 210 providers that have taken the enhanced option, the situation come April 1st is clear and they can start planning appropriately. The new offer still represents some serious challenges, requiring another year of substantial savings. But at least the challenge is now tangible.

For the remaining 31 providers, largely made up of large teaching hospitals and specialist trusts, the future is less clear. Remaining on the default tariff also contains serious challenges, such as continuation of the 30% emergency tariff and the loss of the 2.5% CQUIN payments. Add to this the uncertainty of when the new formal tariff will be published. However, this has obviously been deemed a better option for these trusts.

Offering the enhanced option was clearly a positive step from NHS England and Monitor, giving an alternative to the period of uncertainty involved with the formal process. Hopefully the process of agreeing the formal 2015/16 tariff can be achieved with minimal time and fuss to allow some clarity to the remaining 31 providers on the default tariff.

Whether or not a provider has accepted the enhanced offer, 2015/16 will be extremely challenging. Most providers are unlikely to achieve financial balance this year, and even the more generous enhanced offer requires further savings for next year, so it's hard to imagine how providers would not see their deficits continue to rise throughout 2015/16 as well.

Adam is Senior Economics Fellow, www.twitter.com/ADRoberts777