PCT Overspends and non-Tariff Prices: A cautionary tale.
Recently whilst working with an Acute Trust on behalf of its Co-ordinating PCT we raised suspicions about the validity of its local prices. The Trust was defensive and prevaricated in supplying relevant information. Eventually the PCT had to impose an audit on this aspect of its charging.
The Auditor discovered that the Trust had been charging £9.8m above the actual cost of delivering its activity - the extra charge represented over 6% of the Trust’s total income.
But is such overcharging an isolated case?
Those who have been involved from both Acute and PCT perspectives in contract negotiation will have come across the thorny issue of local priced activity. However, how many have spent time to gain a full understanding of the costs of the activity relating to this area of contract management?
According to the Audit Commission the average PCT spend on the PbR tariff element of activity was 72.3% in 2008/09. Maybe the 80/20 rule comes into play when agreeing contracts and the scrutiny of local prices is seen as less of an issue. Raise last year’s local prices by the tariff inflator - negotiator’s job done?
Such a naive view may be part of the reason for some of the expenditure problems now being described in the headlines.
More for Less: Audit Commission Report
The Audit Commission’s recent report ‘More for Less’ proclaims that growth in acute activity has allowed Acute Trusts’ incomes to outstrip PCTs’ funding levels. It compares Acute Trusts’ income between 2007 and 2008 and summarises the increases in their’ incomes relating to both PbR and non PbR activity – or tariff and non-tariff income.
The breakdown shows that income has increased by 1.8% on tariff and by 19.2% on non-tariff.
'Startling'
The report describes the results as 'startling' which 'might, at first sight, suggest a massive shift in trading between tariff and (more specialised) non-tariff services’. It then adds, somewhat enigmatically - and without further explanation, ‘but close inspection of the accounts suggests that the figures are more a product of classification switches between the two categories than any real change’.
There is more in the report* – well worth a read and only 12 pages thick - to explain the apparent outstripping of PCT funding by Trusts that I shall not go into here. However, the effect of non-tariff charging is an interesting point that is worthy of more detailed discussion than is covered in the report.
Non-tariff activity and Trust incentives
Non-tariff activity comes in many guises and, in the majority of cases, its counting and costing are not standardized. Furthermore as the tariff activity is based on reference costs there are potential perverse incentives to load overheads into the costs of non-tariff activity when calculating its price.
The 2005 best seller Freakanomics provides remarkable examples of dysfunctionality where incentives and their aims were not matched. We do not have to look far in the NHS for examples such as the A&E target affecting admissions.
If there is an incentive to load or exaggerate the costs or counting of locally priced activity, more sceptical PCTs are likely to challenge their Trusts. Surely PCTs will want to understand why non-tariff expenditure rose by 19.2% in a year. Furthermore in periods of financial constraint PCTs are more incentivized to this challenge. Are these costs due to legitimate increases in activity or are there other reasons, maybe changes in coding and counting – or even falsifying the costs?
NHS Acute Contract levers and non-tariff prices
The NHS contract is quite clear on what action can be taken to verify costs:
Clause 7.2 makes it incumbent on the Co-ordinating Commissioner to agree local prices with the Provider on the basis of the properly incurred costs of providing those Services.
It goes on to add that the Non-Tariff Prices may reflect a reasonable margin for the Provider though notably does not elaborate on what this means.
Clause 7.3 continues;-
The calculation and basis of the Non-Tariff Prices shall be transparent, equitable and open to revision annually by Review (such Review to be completed at least 2 months prior to the start of the subsequent Contract Year). If the Co-ordinating Commissioner and the Provider cannot agree the Non-Tariff Prices either may refer the matter to dispute resolution under clause 28 (Dispute Resolution). Section 19 of the Acute Services Contract covers Governance Transactions Records and Audit and permits the auditing of non tariff prices. Clause 19.5 permits the Co-ordinating Commissioner and the Provider the right to appoint an independent third party auditor.
Clause 19.6 states;
In relation to Non-Tariff Prices, the Provider shall provide the Auditor appointed by the Co-ordinating Commissioner under clause 19.5 with particulars of its costs (including the costs of Sub-contractors and suppliers) and permit the costs to be verified by inspection of accounts and other documents and records...Clause 19.7
If the Auditor, whether appointed by the Co-ordinating Commissioner or by the Provider, concludes that the Provider has overcharged in matters including but not limited to activity counting and coding, the Provider shall, within 5 Operational Days of receiving written notice of the overcharge, reimburse the overcharged Commissioner the amount of the overcharge and shall pay the reasonable costs of the audit.
Of course the problem does not relate purely to the costs of this type of activity. The currency upon which they are based is often far from standard and there may be reasons why the counting of activity may change from one year to the next. Any change in counting should be reflected in a change in local price, but occasionally they are not.
This aspect of the PbR Guidance used to be covered in the PbR Code of Conduct but is now encapsulated in the Acute Services Contract at clause 29.6 which states;
Subject to clause 29.5 and where clause 29.1 applies, the Provider shall notify and agree with the Co-ordinating Commissioner any change of practice in the counting and coding of activity at least 6 months before such change is to be implemented by the Provider. Any such change may only occur on 1 April of the following Contract Year unless the changes are required by the Department of Health in which case the Provider shall implement the changes either on 1 April of the following Contract Year or on such other date as is agreed with the Co-ordinating Commissioner, and the Provider shall at all times comply with the Code of Conduct for Payment by Results.
So coding and counting changes have to be agreed and can only take effect on April 1st. Timing is of the essence here, at least 6 months prior agreement is required so any notifications of proposed changes will have to be with the Co-ordinating Commissioner well in advance of 30 September if they are to be incorporated in the following year’s contract. Yet how often do Trusts submit such requests for consideration at the end of September? Experience tells me often.
Such changes can be a minefield and are the subject of many a data challenge by PCTs and the defence of a new DSCN is one that cannot always protect the Provider. The example of Critical Care referred to in the December CHIME newsletter is an example of this.
Conclusion
So why have PCTs not used the powers of the NHS Acute contract and what can Trusts do to mitigate the potential fallout should PCTs become more diligent? There is some evidence that PCTs are unable to do so in the case of FTs who continue on previous versions of contracts where these powers were less evident. However this does not explain an apparent reluctance to verify non-tariff prices for non FT Trusts who have had to operate under the constraints of the new NHS Acute contract for the past two years.
Perhaps as previous FT contracts come to the end of their lives and require renewal PCTs will be more diligent in undertaking this task. If the necessary skills are available to the PCTs is another question.
A further constraint on the implementation of reviews is the timing required under the contract. This effectively means that any audits have to be agreed by 28 January 2010 if they are to impact on the next contracting round – a stiff proposition for those who have not yet started to consider the requirement.
There would seem to be a demand building for reference cost consultants who can go into Trusts and verify the figures that have been used. In the meanwhile Trusts may be wise to have their costs audited in advance of such visits.
Either way there would seem to be plenty of work out there for those with the requisite skills.
Kevin Pritchard
References:
*Audit Commission ”More for Less”
NHS Acute Services Contract: