Improving local price setting – opportunities and challenges

Approximately £40billion of total NHS expenditure in 2011/12 was spent on local contracts for services that do not have nationally mandated prices. Until now little research has been done to assess just how effective these have been in delivering more for patients, with the focus being on national price setting.

Recent Monitor research highlights that pressure on local commissioners to balance annual budgets may limit their potential to drive better quality care for patients through local contracts for services without a national price.

Additionally, even if commissioners didn’t have to balance their books each year, our research found several other challenges that local commissioners face in using local contracts to drive better care for patients. Commissioners rarely have access to all the information they need to make decisions on behalf of patients.

Some commissioners, for example, can be reluctant to enforce penalties on providers already in financial difficulties for fear of destabilising their local hospital

Providers collect information (some more than others) about their costs, activity and service quality, but not only is the quality of the information they collect sometimes poor, providers are not always willing to share what they know with commissioners. Providers also tend to have greater contracting expertise and capabilities than commissioners, making it even more difficult for the latter to negotiate on equal terms.

We also know that for contracts to be effective commissioners have to make sure that providers stick to agreed terms – but this has to be balanced against ensuring patients do not suffer the consequences. Some commissioners, for example, can be reluctant to enforce penalties on providers already in financial difficulties for fear of destabilising their local hospital.

All of these issues tend to raise the costs of local contracting, and can increase the time and resources that commissioners and providers need to spend on it. They can also mean that some commissioners pay more for the services than they should. These challenges, particularly those related to poor information, are similar to those identified in our earlier evaluation on how national prices are operating.

Commissioners often rely on good relationships with providers to overcome these challenges. But good relations are hard to build and maintain in some areas, especially if they are disrupted by frequent staff changes in negotiating teams.

Monitor and NHS England are already trying to address some of the issues identified by our research in the proposals set out in the forthcoming 2014/15 National Tariff Payment System: A Consultation Notice. We have also begun thinking about some of the broader issues which the research identified, including multi-year payment rules.

We recognise that clinical commissioning groups (CCGs) and Area Teams are new to their role and face tough times now and in the future. We know these issues will take time to address. Together with NHS England, we will help local commissioners on this journey.

Shahrazad Kolsi is a Senior Economist at Monitor. Please note that the views expressed in guest blogs on the Nuffield Trust website are the authors’ own.