Statutory guidance

National tariff explanatory notes: locally determined prices

Published 17 December 2013

Applies to England

The following guidance notes aim to clarify the rules on locally determined prices.

Also see:

• further guidance and information on the NHS payment system
• guide on submitting locally determined prices, for details on how to submit documents to Monitor

All locally determined prices

Services covered by the rules

Local variations and modifications can apply to all services with national prices, provided the rules and method set out in the national tariff are followed. The rules on local price setting apply to all NHS services covered by the national tariff that do not have national prices.

The role of clinical and technical experts

Clinicians and other stakeholders must be involved in the negotiation process under the rules set out in the national tariff. This brings frontline experience to discussions and helps balance quality and efficiency.

Services funded by social care

In the case of local price setting, the price to be paid for a national currency (without a national price) should be reported, regardless of who pays for the service.

However, if a national currency were changed, for instance to be bundled with social care services, this would need to be published according to the rules on local variations (for currencies with national prices) or local prices (for currencies without national prices). This is set out in the national tariff.

New services vs variations

In general, if the provision of a service would normally be covered by a national price, then changes to the way it is delivered and/or paid for are local variations. Otherwise it is considered a new service to be priced locally.

Providers and commissioners should exercise judgement in interpreting the guidance and determining whether a service is new, or a variation of a service covered by the national tariff.

The NHS standard contract

The publication templates for local variations and modifications are designed to be consistent with the NHS standard contract. Completed templates must be attached in Schedule 3 of the NHS standard contract and published within 30 days of contractual agreement. For providers and commissioners using the NHS eContract, completed templates can be uploaded as an attachment.

Local variations

Variations to support transition to new payment approaches

Chemotherapy and maternity gain shares and other variations to support transition to new payment approaches are allowed for under the rules for national variations in the national tariff and as such they do not need to be documented and published according to the local variation requirements.

Transitional funding from 2013/14 to 2014/15

Any transitional funding which is not directly linked to patient activity volumes is outside the national tariff for 2014/15 and does not need to be included in the local variation submission.

Paying a higher price where there is no change in service delivery

If a commissioner wants to pay a higher price than the national tariff it should submit a local modification agreement to Monitor for approval in accordance with section 7.3 of the national tariff.

Paying less for the same service

Local variations must be agreed by the commissioner and the provider and can be subjected to the national price deflator. This may result in the 2014/15 prices being lower than the 2013/14 prices in some cases.

Paying less than the national tariff price

Commissioners may propose lower prices for any proposed local variations or for services where there are no national tariff prices. This would need to be negotiated between commissioners and providers.

Rebasing of activity levels under the marginal rate rule

Local variations do not cover the rebasing of activity under the marginal rate rule.

Local variations not agreed by all parties

If a local variation is not agreed by all parties, the relevant national price applies, subject to any applicable national variations.

Revisions to local variations

If a local variation is amended during the contracted term, and a new variation is agreed, then the usual contract variation process applies and a new publication template must be attached to the commissioning contract and submitted to Monitor and published.

Pilot programmes and very low value agreements

All local variations, including those for pilot programmes and very low value agreements, must be published as a legal requirement of the Health and Social Care Act 2012.

Improved transparency about how public money is being spent will improve accountability across the NHS. Transparent local price agreements will be valuable for commissioners and providers as benchmarks and will help them to learn from peers about alternative payment practices.

Previously agreed flexibilities

All local variations must be recorded and published even if they have previously been agreed as ‘flexibilities’. However, when multiple local variations are agreed for similar reasons you may use a single submission to document them all at the same time.

Risk sharing arrangements

Local variation templates should be submitted for all contracts that meet the criteria of a local variation, including any arrangements of risk sharing between the commissioner and provider.

Block contracts

A block contract where the commissioner and provider agree prices that are less than the national tariff for healthcare resource groups (HRGs) would be a local variation.

Costs not fully identified

The provider must identify the costs of any local variation to national tariff before the commissioner submits the template to Monitor.

Identifying parties to a contract

Commissioners must identify all parties to a contract in the local variations template. The template allows users to add rows to identify all parties.

Submitting templates before a contract is signed

Commissioners cannot submit a local variations template if their providers have not signed the contract. A local variation must be based on an agreement between providers and commissioners.

Partly completed templates

Commissioners cannot submit a partly completed local variation submission template (eg that only identifies a risk sharing element if there is no variation to national currencies). All local variation submissions must be completed in full.

Commercially sensitive information

All information must be submitted by completing the local variation template. However, if a commissioner has concerns about commercially sensitive information being published by Monitor as part of a local variation it should inform Monitor in writing. Monitor will consider the request to exclude publication of such information.

Commissioning support units

Commissioning support units may submit a local variation template on behalf of a commissioner, but the submission must be signed by the commissioner.

Contracts that include local variations and national prices

A contract can include both local variations and national prices. Any local variation submission will need to provide evidence to demonstrate that the process outlined in section 7.1 of the national tariff has been followed.

Local modifications

NHS England funding

Monitor must notify NHS England of all approved local modifications. NHS England may have regard to these notifications when reviewing clinical commissioning groups allocations in the future.

Taking accont of clinical commissioning groups’ financial situation when assessing local modifications

Local modifications apply to specific services and to a specific provider (as specified in the Health and Social Care Act 2012) and are assessed on that basis.

Agreements vs applications

A local modification agreement is where both the provider and one or more commissioners agree to increase specific national prices, based on the method set out in the national tariff. An application is where a provider who has tried but failed to reach an agreement with its commissioners applies to Monitor for an increase in the price for specific services. This application is based on the method set out in the national tariff.

Establishing that a service is uneconomic

Providers must be able to demonstrate that:

• the average cost of providing each service is higher than the nationally determined price
• the provider’s average costs are higher than nationally determined prices as a result of structural issues that are:
• specific: the higher costs should only apply to a particular provider, or a subset of providers and should not be nationally applicable
• identifiable: the provider must be able to identify how the structural issues it faces affect the cost of the services
• non-controllable: the costs should be beyond the direct control of the provider, either currently or in the past
• not reasonably reflected elsewhere: the costs should not be reasonably adjusted for elsewhere in the calculation of national prices or variations
• the provider is reasonably efficient when measured against an appropriately defined group of comparable providers, given the structural issues it faces
• the commissioner and provider have engaged constructively to consider alternative service delivery models, and it is not feasible to deliver the care required at the nationally determined prices

Additional requirements for local modification applications

Providers must satisfy 3 additional conditions to be eligible to have a local modification application granted. A provider applying for a local modification must:

• demonstrate that it has engaged constructively with its commissioners to try to agree alternative means of providing the services at the nationally determined price and, if unsuccessful, a local modification agreement
• demonstrate that the services are commissioner requested services (CRS) or, in the case of NHS trusts or other providers that are not licensed, the provider cannot reasonably cease to provide the services
• demonstrate that it has a deficit equal to or greater than 4% of revenues at an organisation level in the previous financial year (2013/14 for the 2014/15 national tariff)

Monitor may consider applications which do not meet these conditions, in exceptional circumstances.

Rejected local modification agreements and applications

Monitor plans to publish an annual summary of the types of agreements and applications that we receive and approve or reject. We do not plan to publish details of individual rejected local modifications.

Submitting local modifications

In general, local modification agreements should be submitted to Monitor during annual contract negotiations. However, it is also possible to submit a local modification agreement later in the year.

Local modification applications should not be submitted until after the provider has engaged constructively with its commissioners to try and reach a local modification agreement. If an application is granted, Monitor must determine the date the modification takes effect, which will normally be from the start of the following year, unless there is an immediate risk to patients.

Time period covered

In most cases, local modification agreements will cover the full financial year for 2014/15, but providers and commissioners may agree a shorter period if they choose to do so.

Following terms of a modification

To be compliant with the national tariff, you must follow the terms of an approved local modification. Once approved by Monitor, a local modification has the same legal authority as national tariff prices. The published guidance on locally determined prices provides more information on how local modifications apply to providers and commissioners.

Applying local modification agreements

Local modification agreements do not have legal effect until approved by Monitor. However, commissioners and providers should include the terms of their proposed modification in their commissioning contracts and can agree to pay the proposed price pending Monitor’s approval. If Monitor rejects a proposed agreement, the local modification does not have effect and the national price applies. In this case, the commissioner and provider may agree a mechanism for adjustment and reconciliation, or possibly a local variation to the national price.

Local modifications for multiple HRGs

Local modifications can cover multiple services at once, particularly where they are affected by the same unavoidable structural issues. In this case the modification must be appropriate for each individual price (HRG).

Local modification decisions

Under Section 124 Monitor may approve local modification agreements; under section 125 Monitor may grant a local modification application.Where Monitor decides to approve a local modification agreement the notice must specify the date on which it takes effect. Monitor will publish decisions on local modifications on its website.

Funding local modifications approved in 2014/15

The higher price of any local modification agreement which is approved by Monitor will come into effect in 2014/15. Commissioners should therefore include the cost in their budget plans for 2014/15, pending approval by Monitor.

The higher price of any local modification application which is approved by Monitor will come into effect in 2015/16. Commissioners should therefore include the cost in their budget plans for 2015/16.

Assessing submissions for a local modification

Monitor will take into account agreement between a commissioner and provider as evidence that a proposed local modification follows the method set out in the national tariff. However, Monitor still requires providers and commissioners to submit the evidence set out in the national tariff and supporting guidance so Monitor can assess whether the method has been applied correctly.

Higher costs due to national rather than local issues

Local modifications are for structural issues which are specific to a provider or group of providers, and are not appropriate to address general issues with the tariff.

Minimum value for local modifications

Providers and commissioners should be mindful of the time required and approval process that a local modification needs to go through when deciding on whether to pursue this process. As a guideline, Monitor suggests that providers and commissioners should only agree local modifications when the expected increase in revenue for the specified services is greater than £1 million.

Public health and social care services

Local modifications only apply to services covered by the national tariff, and do not apply to public health services or local authority social care services. Local modifications would, however, apply to NHS services commissioned by a local authority on behalf of a clinical commissioning group under a partnership arrangement.

Examples of unavoidable, structurally higher costs

Please refer to section 4.1 of the guidance on locally determined prices.

PFI costs are not a valid example of a structural issue.

Applications for local modifications

Monitor will invite views from relevant commissioners in the event of an application for a local modification.

Supporting evidence for a local modification

The Guidance on locally determined prices explains the type of evidence Monitor expects to see in support of local modifications. This includes an annex with further data sources that may be useful.

Renewing local modifications

To renew a local modification, a new local modification will need to be submitted for 2015/16 during that contract round or the national tariff prices will apply.

Local prices

Changes to local prices agreed mid-year

Any changes in locally negotiated prices for services with national currencies but no national prices that are re-negotiated before 30 June 2014 may be reported to Monitor. Monitor will not formally capture changes made after 30 June 2014. Monitor will review this policy in the future.

If a provider and commissioner agree to change or stop using a national currency at any point during the financial year, this constitutes a local variation which needs to be published according to the rules set out in the national tariff.

Deciding not to use national currencies for services without national prices

If a provider and commissioner agree not to use national currencies for one or more services without national prices, they should document this variation using the local variation template, submit the completed template to Monitor and attach it to their commissioning contract (as required by the rules on local prices).

You can contact pricing@monitor.gov.uk if you have any questions.