Provider feedback on our HRG4+ consultation

Over the summer Monitor and NHS England consulted on various proposals for the national tariff. One proposal was to move from the current currency design for reimbursement of admitted patient care, HRG4, to a revised currency design, known as HRG4+.

HRG4+ makes three significant changes to the current design. It groups patients according to a better clinical logic; it introduces more granularity to better reflect complexity; and introduces more age splits where costs differ according to the age of the patient. 80% of respondents, including over 75% of providers, supported the introduction of HRG 4+ in the summer consultations.

Considerable concern from providers, in particular via NHS Providers, has subsequently been received. This suggests that there is still no real, aligned, stable understanding of the impact of the introduction of the new currency design alongside the other changes that were being proposed.

HRG 4+ would now start in 2017/18, rather than in 2016/17

Given the overwhelming need to focus on returning the provider sector to financial balance in 2016/17 and the fact that this requires the greatest possible level of stability and support for providers in the overall financial framework, Monitor and NHS England have announced their proposal that the move to HRG 4+ would now start in 2017/18, rather than in 2016/17.

To accompany HRG4+, Monitor and NHS England had proposed moving to a new set of top-ups for specialised services, based on the new definition of specialised services (prescribed specialised services) and independent analysis commissioned from the University of York. We now also propose to begin implementing this in 2017/18. The scope of services currently eligible for top-up payments would therefore continue for 2016/17, and the current rates would remain unchanged.

Before implementing HRG4+ or changes to top-ups for specialised services, we propose to continue analysing, explaining and, if necessary, mitigating the effects of the proposed changes.

80% of providers currently use a price list known as the Enhanced Tariff Option (ETO). To maximise stability, Monitor and NHS England propose to use the prices in the ETO as a starting point for all nationally set prices for 2016/17.

Changes to prices

Delivering the Forward View: NHS planning guidance 2016/17-2020/21 indicates that the Section 118 consultation will propose changes to those prices, as follows:

  • a cost inflation uplift of 3.1%. This includes a specific, one-off adjustment for the effect of changes to pensions
  • an efficiency factor of 2%
  • adjustments to specific prices to reflect the anticipated increase of 17% in contributions to the clinical negligence scheme for trusts (CNST), most of which is allocated to national prices for specific sub-chapters of HRGs based on data from the NHS Litigation Authority. While it impacts different prices differently, the CNST uplift is equivalent to a 0.7% uplift on national prices

The statutory consultation will take place early next year.

Estimating inflation cost uplift for the 2016/17 tariff

Using the latest available data we propose to use an inflation cost uplift of 3.1%. The cost inflation uplift reflects Monitor and NHS England’s assessment of inflation on costs such as pay (including changes in pension costs), drugs, general procurement, and depreciation.

Five different cost categories represent the main cost pressures faced by NHS healthcare services providers: labour cost, drug cost, GDP deflator, change in capital cost, and CNST.

Based on these five cost categories, Monitor and NHS England have calculated the average increase a provider is expected to face, to form a single cost uplift factor that applies to all services.

The table below summarises the cost uplift factor for each cost uplift category.

Increase in pay and prices 2016/17 item uplift % estimate final Tariff cost weighting1 2016/17 weighted average estimate
Pay (including changes in pension costs) 3.3% 65.4% 2.2%
HCHS Drugs 4.5% 8.2% 0.4%
Non-pay, non-drugs inflation 1.7% 20.2% 0.3%
CNST (not allocated to individual HRG sub-chapters) 1.1% 1.5% 0.0%
Revenue cost consequences of capital 3.1% 4.8% 0.1%
Total   100% 3.1%

Note: figures do not sum due to rounding

National variations and rules

With regard to national variations and rules relating to specialised services, NHS England and Monitor will propose:

  • a marginal rate for emergency admissions of 70%. This reflects the rate agreed for providers that adopted the ETO
  • a delay to the formal inclusion within the national tariff rules of a marginal rate (or risk share) for specialised services
  • that the current approach to the Market Forces Factor continues

Next steps

We have consulted on other proposals that affect the rules that govern how commissioners and providers agree prices locally, for example, for mental health services.

Monitor and NHS England will be providing a support package to help with implementation and will be monitoring progress during the year. We will finalise proposals on these as part of the statutory consultation.

  1. Tariff cost weight estimates are the total expenditure forecast for the secondary care. The figures are calculated and provided by Department of Health using NHS Revenue Disposition Contents.