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Editor's blog Tuesday 22nd December 2009: New Operating Framework: prospect theory, price competition and market uncertainty

Much of the ‘ooof!’ in the OF – the NHS Operating Framework 2009-10 - had been correctly guessed or extensively leaked. So the zero growth in the tariff was no surprise (although the decision to keep 0% as a maximum growth for the following three years was perhaps less widely foreseen).

Nether were the 30% remuneration for emergency admissions over last year’s level - and 0% for ‘never’ events. However, the OF says that SHAs get to nick any money saved for regional rebalancing. Which could be very interesting.

Nor was the revelation that after 2010-11, the tariff will be a maximum price. However, the transaction costs have, it admits, “the potential for increasing contracting and transaction costs in the system”. (Which is putting it mildly, given the intent to reduce management spend by 30% - “each SHA must meet an aggregate target reduction of 30 per cent in management and agency costs by 2013/14. It will be for SHAs to determine how this is managed across PCTs. For absolute clarity, the expectation is that: while there is no specific target for 2010/11, most progress needs to be made in 2010/11 and 2011/12; co-terminosity can be used as a driver; and provider arms are to be included in the aggregate”.)

How many people will be reassured that “Accordingly, the Department will work through these with the NHS before implementation”?

It’s not necessarily either wrong or impossible. It might well be going to destabilise the whole concept of what makes a manager - particularly a middle manager - in the NHS. But managing negotiaton and competition on price is likely to do fascinating things to all of the following: demand management; financial skills; clinical governance; and co-operation and competition.

But if you go on to look at section 4.2 about the assurance and quality control matrix, only two conclusions are available. Either this is all going to be a big festive box of fudge; or there is zero chance of the 30% reduction in management overhead.

What else was fun? Oh, yes, wages. The 1% increment for pay was only a surprise in that it could well have been 0.5% or even 0%.

So what was interesting or surprising? A rise in the efficiency requirement was probably one more people should have called:  “The uplift in 2010/11 includes an efficiency requirement of 3.5 per cent offsetting the inflationary impacts of pay and prices. It is expected that the efficiency requirement will increase over the following three years”.

NHS CE David Nicholson’s forward bangs out three key messages: “Firstly, improving quality whilst improving productivity, using innovation and prevention to drive and connect them. Secondly, having local clinicians and managers working together across boundaries to spot the opportunities and manage the change. It is simply not possible to identify from the centre the kind of quality improvements that are necessary. And thirdly, to act now and for the long term”.

Interestingly, Nicholson sets out four principles to guide behaviours on implementing these three, which are to “ensure a relentless focus on quality, encourage risk management across the system, bring into sharper focus the characteristics of the new system we are developing, both in terms of shape and behaviours, and encourage more creative thinking about integration”

Someone is doing some smart thinking about risk: “we need to focus on how we share risk across the system and re-balance the risk between providers and commissioners. This NHS Operating Framework starts to drive this shift, not least through the changes in payment and contractual systems. But it is vital that NHS organisations do not respond by just trying to transfer risk to another organisation.

“We will not succeed if we have islands of success in a sea of failure. We have to recognise that we have a zero sum game. If risk is transferred elsewhere in the system, it doesn’t take the risk away. The people who pay are patients. They don’t recognise organisational boundaries. What they recognise are services that are joined-up across the system”.

Yet it seems both intriguing and inconsistent that just as the OF is seeking to make incentives do some of the heavy lifting of healthcare reform (particularly in its stated faith that “the whole point of setting a marginal rate for non-elective care, for example, is to bring primary and secondary care health care professionals together to discuss how to manage demand better and improve care for patients”), the equivocation as to the use of market mechanisms remains.

We also learn that “the appropriateness of the private finance initiative (PFI) and local investment finance trust (LIFT) as suitable vehicles to develop capital infrastructure in the PCT and trust sectors will continue to depend on demonstration of value for money and revenue affordability under the framework set by HM Treasury’s Consolidated Budgeting Guidance from 2009/10 (IFRS updated)23 published in June 2009” – and in the coming climate, we may see the reversig of the position where the public sector comparator gets crowbarred into always oproving PFI to be the ‘best’ option.

Allusions do appear to independent sector provision (under the meaninglessly ill-defined waiting guarantee put on PCTs, we are told that “wherever suitable we would expect this to include private provision”), but the overall sense is that the market mechanisms are being unwound by stealth.

It may be the correct decision: the evidence for parts of the market-based reforms is far from robust. However, the level of discussion about the “competition AND co-operation” approach espoused by David Nicholson is basically analogous to having your cake AND eating it.

The prospects for incentives
The use of incentives is fascinating. They have gone from being something that only health economists discussed to matters of DH doctrine within a very short period of time.

In general terms, a better understanding of the impact of economics is deeply welcome. However, there is an important branch of economics called cumulative prospect theory. It suggests that people value a loss more keenly than they do a gain; and also that, once having gained something, people ascribe to it a higher-than-intrinsic value using ‘endowment effect’.

Accordingly, it is interesting that for the potential 1% pay increment, the 3.5% efficiency assumption leaves a 2.5% loss. The potential CQUIN earning of 1.5% of tariff is offset by general economic inflation of about 1.6%, and by the eventual potential loss of 10% of provider income.

Moving too far too fast in icy weather can make you skid. It might be the acceleration; it might be the braking. Either way,  unless you stop doing what’s caused the problem very quickly, you lose control. It won’t be that different in a cold economic climate.