briefing - NHS Confederation

NHS reform and transition

briefing December 2012 Issue 257

All systems go Testing the new licensing system for providers of NHS-funded care Key points • The NHS Confederation partnered with Deloitte to stage a simulation event to test the new licensing system for providers of NHS-funded services. • Key messages from the event (see page 2) were: ––the failure regime is a last resort, help must be available to deal with distress ––turning around organisations requires looking at the whole system, not just at those who are failing ––the new system must ensure a fair playing field for all providers ––there are limits to what can be achieved through competition, it shouldn’t be pursued for its own sake.

From April 2013, a new licensing system for most providers of NHSfunded services is expected to be established. To improve understanding of how the proposals might operate in practice, the NHS Confederation partnered with Deloitte to stage a simulation event to test the licence in a set of fictitious scenarios. Deloitte researched, developed, facilitated and hosted the event, with the roles of commissioners and providers played by participants. Monitor, the new sector regulator, provided support at the event and in designing the scenarios. This Briefing outlines the key messages from the simulation. It focuses on four parts of the new system: competition (page 2); pricing (page 4); commissioner requested services (page 5); service reconfiguration (page 7).

Background From April 2013, a new licensing system for most providers of NHS-funded services is expected to be established. Through this licence, Monitor will protect the interests of patients by promoting

services that are economic, efficient and effective. The development of Monitor’s role and the introduction of the provider licence marks a significant change in regulating the provision of care in the NHS. It introduces a sector regulator to sit alongside the Care

Note: The views expressed in this Briefing are those reported by the NHS Confederation as observed at the event. Where Monitor is described within the scenarios, it is only as part of the simulation. This Briefing does not reflect the views of Monitor, which has reviewed it from a purely factual perspective.

Produced jointly with

briefing 257 All systems go

Quality Commission (CQC), which will continue its role as the quality regulator. The proposals for sector regulation are complex and they have significant implications for the future provision of NHSfunded services and, ultimately, patient care.

The simulation The simulation was designed, developed and facilitated by Deloitte. It was designed to feed directly into Monitor’s consultation process on the proposed licence conditions and its guidance for commissioners on the designation of commissioner requested services. It has also helped to shape the NHS Confederation’s responses to these consultations.

See also: NHS Confederation briefing, Sept 2012: Sector regulation in the new system: proposals so far. www.nhsconfed.org/regulation

It is important to note that the scenarios in the simulation were entirely fictional. While we can use the lessons learnt constructively, we understand the limitations of any such exercise and will attempt to distinguish when outcomes are the result of the simulation rather than how the new system is likely to be set up.

1. Competition Competition in the NHS has always been a complicated issue. Healthcare is a public good, which makes the NHS difficult to economically regulate. However,

there are examples where anticompetitive behaviour is not in the patient interest. Monitor’s new role will be to exercise its function with a view to preventing such behaviour. In the simulation, two foundation trusts had established an arrangement whereby they would split patients for diagnostic services. Patients were directed to either provider by local GPs, depending on how close each trust was to their home. If a patient chose to attend one provider rather than the other at the point of first

Key points The failure regime is a last resort, help must be available to deal with distress The interests of patients are better served by preventing failure, rather than dealing with providers in the failure regime. The creation of a failure regime should be used as an opportunity to embed adequate measures aimed at supporting local health economies at risk. In the simulation, the shortage of apparent options was notable and the descent of the distressed provider into failure appeared almost inevitable. Turning around organisations requires looking at the whole system, not just at those who are failing When a provider enters special administration, it should be seen as a failure of the system, not just the provider. The solution to failure has to be considered across the whole of the local health economy, not just within that provider. It was interesting that some participants in the simulation concentrated on the troubles of the distressed provider, rather than considering the wider problems that had brought it to that point. The new system must ensure a fair playing field for all providers An important part of introducing more competition into the NHS will be ensuring that organisations are competing on a fair playing field. It is often argued that new entrants into the NHS are unfairly disadvantaged by preferences towards current providers. Whilst the simulation at times indicated this, it also showed that the designation of commissioner requested services could impair current providers unfairly. Furthermore, the designation of commissioner requested services could also restrict current providers in rural economies more than urban providers. There are limits to what can be achieved through competition, it shouldn’t be pursued for its own sake There are examples where anti-competitive behaviour is not in the patient’s interest, but this does not mean that competition should be pursued for its own sake. Patients value choice in their health services, but this is unlikely to be at the expense of access to high-quality services. In the simulation, participants were keen to suggest that where it is proving difficult to provide both choice and quality in health services, the system should always favour quality. 02


How the simulation worked The simulation played out the same scenarios in both a rural and urban health economy. The impact of the reforms was observed in both settings. This Briefing notes any differences between the two rooms that can be attributed to their respective environments, although many individual comments are presented as lessons for the simulation as a whole. Some assumptions were made at the start: • all proposals in the consultation document had been implemented into law • all NHS trusts had successfully been awarded NHS foundation trust status. Within each economy, four roles were represented by delegates with relevant experience. The four roles were a large acute foundation trust, a small acute foundation trust, a clinical commissioning group and an independent provider. Participants from Monitor, the Care Quality Commission, the Co-operation and Competition Panel and Deloitte provided support and expertise, while Deloitte also facilitated the exercise and discussions. The scenario took place over an 18-month period and all participants were briefed about the specific circumstances for their local health economy, for example population size, socio-economic factors, health indicators and transport links. Each participant was given individual details relevant to their own organisation, such as financial accounts, patient flows and performance indicators.

Team structures Urban health economy Large acute Small acute foundation trust foundation trust

Rural health economy Large acute Small acute foundation trust foundation trust

CCG

CCG

Independent provider

referral, they would be redirected by the trusts. Unsurprisingly, the independent provider took exception to this arrangement and requested that it be considered as anti-competitive. The following themes emerged from the simulation. Patient choice Most participants agreed that the arrangement was not in the interests of patient choice. Patients were actively prevented from accessing services of their choosing because of an arrangement between the two providers. Therefore, patients could not make judgements based on their needs

and preferences. There was less incentive for both providers to improve service quality, as they were effectively guaranteed a commission to deliver services in the local area. However, some participants did justify the arrangement on the basis that it provided a functional service for patients. They contended that the agreement had developed naturally as an understanding built up over time, not as part of a complicit pact to restrict choice and competition. Nonetheless, most participants agreed that the market should probably now be opened up.

Independent provider

Cherry-picking There were concerns that introducing greater competition in the NHS could result in ‘cherrypicking’ by new entrants into the market. Some participants suggested that new providers would only want to be involved in offering the services that were more profitable financially and would be less likely to compete for the services that made less money. This could then lead to a point, it was reasoned, where public providers lost the services that generated the most income, but would still be required to deliver those that brought in less but often cost more. 03


The new system and competition In the new system, Monitor is tasked with protecting and promoting patients’ interests by supporting patient choice of provider and, where it is in the interest of patients, taking action against anti-competitive behaviour. It is proposed that the provider licence will require licensees to notify patients when they have a right to choice and tell them where they can find information about the choices they have (choice and competition condition 1). It is also proposed that providers will be prevented from entering into or maintaining agreements that have the object or effect of preventing, restricting or distorting competition, to the extent that it is against the interests of healthcare users (choice and competition condition 2).

The independent provider contended that its intention was simply to improve service quality so that patients would chose it and that this was good for the NHS. It maintained that choice was enshrined as a basic patient right and that the market had to be opened up to guarantee this. Financial implications This led participants into a discussion about the financial implications for current providers of greater competition and how this fitted with the aim of improving service quality. In particular, it was suggested that clinical commissioning groups (CCGs) needed to better understand the effect that losing business to competition would have on current providers and their ability to deliver services effectively. This was most likely to be argued as the case where providers were cross-subsidising. The CCGs were wary of being in the difficult position of having to pursue greater competition in their local health economy before understanding properly the impact this could have on existing providers. Most participants agreed that it was not desirable to pursue 04

competition simply for its own sake, and the interest of patients would not be best served by just changing the providers that were delivering services in the local health economy. Simulation outcomes The simulated decision was that this arrangement was anti-competitive and it should be broken up. CCGs were encouraged by Monitor to allow for a fairer playing field between providers, who would be prevented from behaving in an uncompetitive manner.

2. Pricing The price that the NHS pays providers for the services they deliver has a big impact on the way the market functions. Monitor’s new pricing role puts it in a key position to fulfil many of its core duties in the new system. This includes its new main duty to protect and promote the interests of people who use healthcare services by promoting the provision of healthcare services which are economic, efficient and effective, and maintain or improve the quality of the service. In doing

so, Monitor will have to set prices that are accurate reflections of costs and avoid building in any perverse incentives. In addition, Monitor could enable integrated care by utilising its role in setting prices to remove barriers to joinedup services. In the simulation, the consequence of breaking down the uncompetitive arrangement resulted in a loss of business for both foundation trusts, with patients choosing to access services offered by the independent provider. Responding to this, the large foundation trust began to compete for the services it previously left to the small foundation trust, which therefore lost more business. To manage the revenue loss, the small foundation trust appealed for transitional support from the CCG. The CCG was receptive to supporting the trust and offered a ‘glide path’ to provide an income guarantee, which would gradually reduce to actual income over a three-year period. This glide path was intended to give the small foundation trust time to restructure its services in a way that meant it remained sustainable. It did, however, contravene guidance set out by Monitor and the NHS Commissioning Board. Local tariff modifications were requested by the small foundation trust and all parties were asked by Monitor to consider their position. In doing so, the following key themes emerged. Fair playing field Responding to the proposed glide path, some participants raised concerns about the lack of a fair playing field. The independent


The new system and pricing From 2014, a new pricing system will be regulated by both Monitor and the NHS Commissioning Board. As part of this arrangement, the NHS Commissioning Board will define services included in the tariff and determine the currencies for reimbursing them. It will also set rules for variations. Monitor will develop the actual methodology for setting prices and will publish prices in the National Tariff. It will set the methodology for agreeing local modifications and the rules for local price setting, where services are not included. Through the NHS provider licence, Monitor will require providers to record and provide information needed to set prices (pricing conditions 1 and 2) and to comply with the National Tariff (pricing condition 4).

provider, in particular, was adamant that such financial support could be perceived as rewarding failure. It argued that it would be put at an unfair disadvantage in competing with the small foundation trust. The large foundation trust was more concerned about the CCG’s overall strategy. While it seemed less troubled about the glide path itself, it wanted to be sure that any financial support provided to the small foundation trust would form part of a sustainable plan for it to recover. Service quality The small foundation trust felt that the financial support allowed it to maintain service quality. Even with the support, it argued, there were still concerns about its financial future but these challenges would be more certain without any support. Further discussions raised interesting questions about how financial support would be provided in the new system and how Monitor or local CCGs would sustain providers gradually slipping into distress. Interestingly, the competitive discussions that were apparent in the first scenario developed

into more collaboration in this move. The CCG insisted that it was keen to reach a solution and help turn the small foundation trust around, but would not waste public money. It argued that such a solution would need to have the future sustainability of the local health economy and the interests of patients at its core. In doing so, the CCG emphasised the need for local health services to be optimally utilised. Simulation outcome The simulated decision was that the transitional payments could not be approved and Monitor would not recommend a local modification of the tariff in this circumstance. Providers were therefore expected to find cost improvement plans to cover the remainder of the loss that was not supported by the loan.

3. Commissioner requested services The failure regime for providers of essential NHS-funded care will be a crucial part of the new system. It is designed to ensure that vital services continue to be provided, even when providers fail. Through

this regime, Monitor aims to establish a more transparent way of dealing with insolvent services. It will provide a more apparent safety net for those services that patients depend on the most, which could not adequately be covered by alternative providers. In the next move of the simulation, a significant number of services provided by the small foundation trust were designated ‘commissioner requested services’ (CRS) by the CCG, despite recent changes to the local health economy. The small foundation trust appealed to the CCG to remove many of these designations in light of its financial troubles. This would allow it to reconfigure its services and reduce the amount that it would need to pay into the risk pool. The CCG was uncertain of changing the designation, and a local campaign by patient groups argued that the CRS designations should be retained. The small foundation trust, therefore, applied to Monitor for advice and the CCG convened all parties to discuss the designation. During these talks, the following themes emerged. Continuity of essential services The key concern for the CCG was with the continuity of essential services. It highlighted the uncertainty of new entrants to the markets being able to adequately cover the CRS and suggested that it would be reluctant to de-designate them. It was also receptive to the concerns of patient groups, which had argued that de-designating CRS could allow providers to reduce their responsibilities for these services. 05


The small foundation trust contended that where significant business had been lost to new providers, there was probably less need for it to be considered as CRS. It referred back to earlier suggestions of an unfair playing field in favour of current providers and against new entrants and instead stated that this scenario highlighted that the reverse could sometimes be true. The independent provider seemed keen to welcome dedesignation of CRS on the basis that it should signify the presence of meaningful competition for services. Meanwhile, the large foundation trust indicated that it would have concerns about how de-designating the CRS of smaller providers would affect the demand on its services. It maintained that, even if it had the capacity to manage the increased demand, there would still be uncertainty about whether this would offer a sustainable and long-term solution. Furthermore, it reiterated that it would likely be picking up loss-making services and questioned what incentives to step in to deliver these there would be in the new system. An interesting contrast between the public and independent provider was how the former maintained that it would be picking up services in this scenario which were unsustainable, while the latter believed that it would be able to turn such services around. The scenarios also highlighted differences in how the designation of CRS might be viewed in rural areas compared to urban areas. The rural teams seemed more reluctant about de-designating 06

The new system and commissioner requested services Monitor is required to establish a continuity of services framework to make sure that, in the event of a financial failure of a provider, services continue to operate. Monitor will achieve this by allowing commissioners to designate services as ‘commissioner requested services’ (CRS). Providers who deliver CRS will be obliged to comply with separate conditions within their provider licence. These conditions will restrict how providers operate and manage such services. This includes the requirement for CCG approval when changing services and restrictions on disposing or relinquishing control of assets without Monitor’s consent. It is proposed that all mandatory services currently delivered by foundation trusts will initially be designated as CRS, at least until commissioners are able to review and de-designate services appropriately. It is expected that CCGs will be given a limited timeframe, probably three years, within which to do this. Monitor also intends to establish a risk pool to be funded by providers and commissioners to cover the costs of the ongoing provision of protected services during special administration.

CRS, acknowledging that doing so might cause significant access issues for patients. In the urban team, the availability of services within close proximity and with good transport links was used as an example of why de-designation might not be detrimental to patients’ interests. Unintended consequences Participants widely accepted that there could be unintended consequences for CCGs when making CRS decisions. This reinforced the difficulty that the CCG had in accurately gauging the effect of de-designation and how it could impact on the local health economy. In the new system, Monitor will provide guidance to CCGs, although commissioners will probably need to assess the local implications themselves. The CCG was keen to ensure

that providers and patients understood that de-designation was not the same as decommissioning. However, in this scenario it was almost certainly the case that de-designating the services would trigger their reconfiguration. It reiterated that if the small foundation trust wanted to undertake major service change, it would still be required to undertake a public consultation overseen by the local Health Overview and Scrutiny Committee. The small foundation trust made it clear that this reconfiguration would be needed to establish it on a more sound financial footing. Furthermore, the independent provider stated that although it would be supportive of de-designation, it had reservations about taking on additional requirements imposed by CRS, if other providers exited the market.


Simulation outcomes The simulated decision was that Monitor would approve of the CRS designations attached to the small foundation trust. This meant that the small foundation trust would be required to continue to run these services at a major loss. The previously requested cost improvement programmes had not delivered, which was compounding the current overspend. In addition, the independent provider continued to carry out the cost of expansion, but was still not getting the patients to deliver revenue growth.

4. Service reconfiguration The current financial environment and the anticipated growth in demand over the coming years will likely compel providers to look at the way that current services are designed. In some cases, good financial management and improved efficiency will not be enough to establish more sustainable models of care. However, redesigning services can be incredibly difficult and may prompt considerable public and political concern. In the last stage of the simulation, the financial position of the small foundation trust deteriorated further and the provider was now on the brink of financial failure. Local patients continued to choose other providers amid rumours of worsening quality standards. Meanwhile, the financial performance of the independent provider began to dip as the investment in extra capacity started to come on-stream. The NHS Commissioning Board considered the health economy

The new system and service reconfiguration Part of Monitor’s role in ensuring the continuity of services will include supporting commissioners to redesign services where the current delivery model is becoming increasingly unsustainable. Monitor’s proposals would allow it to require providers of CRS in financial distress to cooperate with a group of specialists – contingency planning teams – who would work with local commissioners and providers to plan for the best way to make sure that, if things got worse, appropriate services would be protected. This might include, for instance, helping to identify options for restructuring healthcare provision so that protected services could be viably sustained. This process might lead to a solution that could be agreed and implemented without the provider declining further into failure. In the event of failure, the special administrator would also be able to make use of this work.

as a whole to be over-served and the CCG called a meeting with all parties to identify strategic options. At this meeting the following themes emerged. Patient safety Among participants there was general concern for patient safety as service quality at the small foundation trust deteriorated due to financial distress. All participants were adamant that patient safety must come before finances, although the small foundation trust was concerned that it had very little room for manoeuvre. A consensus emerged that there were few options available in dealing with the problems. It was clear that the small foundation trust needed to redesign its services, but that it needed the finances to support the necessary investment. One suggestion mooted in the rural room was for the small foundation trust to rent some of its extra elective capacity to the independent provider. This, however, would need to be a sufficiently long-term deal to invest the capital needed. In particular, it was striking that these discussions focused mainly on the

problems of the small foundation trust and not on how the whole system could be redesigned to make it more sustainable. Special trust administration One frequently made point was whether the small foundation trust should be considered for the special trust administration regime. Current proposals indicate that a risk adjusted framework will be used to govern when a provider should be considered for the failure regime. It is interesting to note that in these discussions many participants felt the need to trigger this process sooner rather than later. This is particularly remarkable considering that commissioners and providers could be incentivised to allow the finances of a distressed provider to deteriorate further into failure, so as to trigger the administration process and access the funds from the risk pool. The risk adjusted framework will need to be designed in a way that prevents any such temptations from emerging and to ensure that more options are available to distressed providers, instead of just when they are in failure. 07


Confederation viewpoint The NHS Confederation supports the introduction of a sector regulator in the NHS and agrees that Monitor is best placed to fulfil this role. However, we recognise that the health system is currently undergoing significant change and that introducing a new system of regulation will be difficult as the new system develops. Monitor must tread carefully as it places itself within the new system and should make sure that it adapts

to the changing environment. In particular, it must respond if sector regulation is becoming too cumbersome and complicated, or if it fails to achieve anticipated objectives. The simulation highlighted several issues and reflects concerns that we have heard from our members. Early in the introduction of Monitor’s proposals, we highlighted the importance of developing a pre-failure regime alongside the failure regime to ensure that local health economies at risk could be offered better support

when providers are in distress. More work is needed in this area. We have also argued that dealing with failure in the NHS needs a wholesystem approach, which reflects challenges across the local health economy. Competition should not act as a barrier to this, but there is a concern that if it is not applied appropriately it could make it harder for actors in the market to collaborate. Competition must not be pursued for its own sake and should be applied in a way that protects patient interest and allows for a fair playing field for providers.

Our work This Briefing forms part of our work programme on NHS reform and transition. We have also responded to Monitor and Department of Health consultations on sector regulation. To read more about our work in this area, see www.nhsconfed.org/NHSreform

The NHS Confederation The NHS Confederation represents all organisations that commission and provide NHS services. It is the only membership body to bring together and speak on behalf of the whole of the NHS. We help the NHS to guarantee high standards of care for patients and best value for taxpayers by representing our members and working together with our health and social care partners. We make sense of the whole health system, influence health policy and deliver industry-wide support functions for the NHS.

Deloitte

Further information

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms. Deloitte MCS Limited is a subsidiary of Deloitte LLP, the United Kingdom member firm of DTTL. This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte MCS Limited would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte MCS Limited accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.

For more information on the issues covered in this Briefing, contact [email protected] Sara Siegel, [email protected] Laragh Walton, [email protected]

Registered office: Hill House, 1 Little New Street, London EC4A 3TR, United Kingdom. Registered in England No 3311052. Member of Deloitte Touche Tohmatsu Limited

Further copies or alternative formats can be requested from: Tel 0870 444 5841 Email [email protected] or visit www.nhsconfed.org/publications © The NHS Confederation 2012. You may copy or distribute this work, but you must give the author credit, you may not use it for commercial purposes, and you may not alter, transform or build upon this work. Registered Charity no: 1090329 Stock code: BRI025701

The NHS Confederation 50 Broadway London SW1H 0DB Tel 020 7799 6666 Email [email protected] www.nhsconfed.org Follow the NHS Confederation on Twitter: @nhsconfed