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Editor's blog Monday 14 February 2011: The DH & KPMG back-story to the 14% solution

Happy Valentine's Day to romantics and cynics alike (the latter group generally being the former group plus plenty of beers, tears and years).

I think that the very smart Richard Blogger was first to pick up on the Health and Social Care Bill Impact Assessment's stating that private sector acute providers would notionally need to be paid 14% above tariff to create a 'level playing field'.

Richard's article stated, "The Impact Assessments document concludes (B55): 'The majority of the quantifiable distortions work in favour of NHS organisations; tax, capital and pensions distortions result in a private sector acute provider facing costs about £14 higher for every £100 of cost relative to an NHS acute provider'.

"This is suggesting that the private sector would have to charge 14% more for their tender to be treated as the same as the NHS rate if there was a "level playing field". (Level only when you ignore training.)"

This has proved to be all sorts of interesting.

Last Thursday, Monitor's acting chief executive Richard Bennett told the Bill committee that he felt the DH's numbers on this were "incomplete analysis" (Qs 199-208).

And last Friday, a regular Health Policy Insight reader (who checks out to have access to this kind of information) emailed me with some background to the 14% number.

The 14% solution explained - KPMG
In mid-2009, the DH commissioned KPMG to do a piece of economic evaluation called 'The Fair Playing Field Project', to quantify the differential in costs faced by the NHS and the private sector and the impact on pricing/profitability if both were to be on a "Fair Playing Field" (the project is mentioned in this KPMG publication.

KPMG found that the price differential was approx 13-14% in favour of the NHS providers. This was almost totally made up of the benefit to NHS providers of being able to offer NHS pensions to staff, without their directly bearing the full costs.

In other words, KPMG's analysis suggested that it was a free good, or subsidy, from the state to the NHS providers.

The one thing offsetting this in the private sector's favour was the cost of clinical education, as the private sector doesn't have to pay for this (although it generally benefits from it).

When KPMG put the two things together, the balancing figure was deemed to be 13 - 14% in favour of the NHS.

Unsurprisingly, the project got quietly shelved before the election because of Andy Burnham's volte-face on the "NHS Preferred Provider" policy.

This was not the only impediment to playing field-levelling, however.

My correspondent reports that legal advisers warned the DH not to publish the report, in case the private sector could use it in any legal challenge to show that NHS procurement was unfair.

Who was involved
The Fair Playing Field Advisory group (inevitably, FPFAG) consisted of:
6 DH staff from competition management team
2 DH staff from choice and system management levers team
1 DH staff from PBC team
1 DH staff from NHS pensions team
1 DH staff from Transferring Community Services team
1 DH staff from social enterprise team
3 DH staff from Strategy unit
1 DH staff from Commercial Directorate (suppsed to have been regionalised via the SHAs, wasn't it?)
1 DH staff from commissionig and systems team
1 DH staff from foundation trusts team
1 DH staff from third sector team
1 DH staff from Social Care Policy & Innovation team

We will pause here for a moment, to consider the splendid irony that 20 members of a 43-strong advisory group on making a fair playing field for the commercial and independent sector all came from the DH.

2 staff from HM Treasury were (inevitably) also on board
5 staff came from SHAs (one each from North West and Yorkshire And Humber, and a splendid three from East Of England)

1 staff from Monitor
2 staff from the Co-operation and Competition Panel

2 staff from the NHS Confederation
1 staff from the NHS Partners Network

1 staff from Age UK (Concern & Health The Aged as were)
1 staff from ACEVO

4 staff from KPMG

3 staff were from private and independent sector companies - workers' co-operative Circle; SOS Lansley's office-supporting Care UK; and from Darzi-centre debt to Virgin LIFT specialists Assura Group.