National Health Service (Licensing and Pricing) (Amendment) Regulations 2015

Tuesday 1st December 2015 Lords Chamber

Motion to Approve

17:49

Moved by

[Lord Prior of Brampton]

That the draft Regulations laid before the House on 2 November be approved.

Relevant documents: 9th Report from the Joint Committee on Statutory Instruments, 14th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department of Health (Lord Prior of Brampton) (Con)]

My Lords, I am grateful to the noble Lord, Lord Hunt, for his interest in this matter, and I know he has great knowledge through his work at the NHS Confederation, in healthcare and as a Minister. Naturally, I am disappointed to understand from his amendment that he feels that the draft regulations are fundamentally unfair and in contradiction to the assurances given by my predecessor, my noble friend Lord Howe. I will take this opportunity today to reassure him—I hope—and wider stakeholders that this is not the case.

I want to begin by giving some context to the regulations. They seek to rebalance the objection mechanism that exists within the statutory processes of setting the national tariff for healthcare services. They increase the objection percentages for clinical commissioning groups and relevant providers of services. They will also remove the prescribed objection percentage for providers weighted according to their share of the supply in England of such services as may be prescribed.

Everyone knows the scale of the financial challenge facing the NHS. That is why the Government have committed to investing £10 billion by 2020-21 to fund the NHS’s own plan for the future, with £6 billion frontloaded in the first two years of the six-year period.

Along with the implementation of a range of provider support measures we have available, this will help to ensure the health and care system remains on a sustainable footing over the longer term. But as Simon Stevens made clear in the Five Year Forward View, the NHS must play its part in delivering these efficiencies.

Delivering a financially stable NHS is a key priority for the new chief executive of NHS Improvement, Jim Mackey, working closely with the department and NHS England to support the system at a local level to deliver the transformational changes needed to drive efficiencies.

Nevertheless, we do not underestimate the challenges facing the system from an increasingly ageing population with more complex needs, which I am sure all noble Lords are aware of. This is why we support the ambition of the Five Year Forward View set out by NHS England to ensure we protect the model of universal coverage free at the point of delivery for future generations.

But to realise this vision, we need to support the whole health system. This will not be easy, but this principle lies at the heart of the regulations, which we believe will ensure sufficient stability and timeliness in publication of the national tariff but also ensure that as much as possible of the additional funding that this Government have provided for the NHS reaches patient services, rather than being tied up in processes or reinforcing acknowledged barriers to transforming health and care.

Let me give noble Lords some background to the regulation—where this refers to statutory duties, I will use the name Monitor rather than NHS Improvement. The Health and Social Care Act 2012 introduced a new independent, transparent and fair pricing system that requires Monitor and NHS England to collaborate to set prices and further develop new payment models across different services. The intention of this system was to create a more stable, predictable environment, allowing providers and commissioners to invest in technology and innovative service models to improve patient care.

Monitor has the specific duty of promoting healthcare services that represent value for money and maintain or improve quality. It achieves this by working with NHS England to regulate prices and establish rules for local pricing and flexibilities. NHS England defines the “units of service” for which prices or rules will be specified. Units of service include, for example, the pregnancy-related services that a woman may need through antenatal, delivery and postnatal care, with levels of payment aligned to clinical factors—often complexity. At all stages, Monitor and NHS England have to agree elements of the tariff with each other.

The Act also includes a statutory basis for providers and commissioners to raise formal objections to the methodology that Monitor proposes for calculating national prices rather than the price itself. It is vital that tariff proposals reflect wider views across the sector but, as NHS providers acknowledge:

“The ultimate responsibility for setting NHS tariffs must lie with Monitor … and NHS England as the statutory price-setting bodies”.

Following comprehensive engagement with commissioners and providers, Monitor is required to publish a final draft of the national tariff and allow 28 days for commissioners and providers to consider the proposals. Commissioners and providers may formally object to the proposed methodology for calculating tariff prices for specified services. This draft instrument seeks to amend regulations made in 2013. Those regulations exercise a duty to prescribe two objection thresholds and a power to prescribe a third. Thus, under the current rules, Monitor will calculate the following after the consultation: the percentage of commissioners objecting; the percentage of providers objecting; and the percentage share of supply held by the objecting providers, which allows the objections of providers to be weighted proportionate to the nationally-priced services.

Each threshold is currently set at 51%. If any of these are met, the unexpired tariff remains in force. Monitor cannot publish the national tariff and has to either put forward alternative proposals and publish them for consultation, or refer the method and the objections received to the Competition and Markets Authority.

I shall now explain the outcome of the two tariff processes that took place in 2014-15 and 2015-16 under these new arrangements. No objection threshold was met when the first proposed national tariff was consulted on in 2014-15 and the tariff was published on time. For 2015-16, the objection tariff mechanism was triggered as the share of supply objection threshold was met as 73.7% of providers by share of supply objected. As a result, the unexpired 2014-15 tariff remained in place.

A key motivation for providers’ objections to the tariff proposals was the efficiency requirement of 3.8%. A further significant trigger for formal objections related to a variation to the payment of national prices for specialised services rather than the underlying method for the price, which is the only ground on which objections can be made. As a result of the objection mechanism being triggered, the 2015-16 tariff was not published and the unexpired 2014-15 tariff remained in place at a potential considerable cost to the health service.

Following further engagement, a large majority of providers agreed a local variation to the 2014-15 tariff prices while a minority have continued to be paid the unvaried 2014-15 tariff prices. Overall for 2015-16, this has meant an additional cost pressure estimated at £0.5 billion. We cannot afford this and any repetition would ultimately affect patient care and prevent crucial investment in front-line care. This cannot be right. It would also distract the system from implementing the five-year forward view which would place the NHS on a sustainable footing.

The objection mechanism is intended to be a process that is triggered in exceptional circumstances. When the thresholds were prescribed in 2013, it was made clear in the Explanatory Memorandum:

“The Department also intends to review the objections thresholds in due course once the new system beds down”.

The circumstance that national prices in the tariff are set predominantly for acute care rather than mental health and community services means that objections from acute providers then carry most weight in calculations against the share of supply threshold. While the larger acute providers have perhaps exercised their own role in using the objection mechanism in a broadly reasonable manner, the share of supply mechanism cannot fairly reflect the balance of wider interests across the healthcare sector. This should not be read as the Government placing less value on the crucial role played by the acute sector, but as a greater emphasis on the interests of the NHS as a whole. Indeed, we welcome the role that the acute sector is playing in new collaborative roles within its health economies.

18:00

The share of supply element of the objection mechanism has allowed larger acute providers to use the objection threshold as a veto to protest if and when they disagree with a particular aspect of the method, or changes to the pricing system outside the method. We also consider that more certainty on pricing is needed in advance of each financial year for the benefit of all providers and commissioners. Therefore, in order to avoid future potential for disruption and consequential cost to the taxpayer and the system, the objection thresholds and share of supply have been revisited to provide a process that is as fair and stable as possible for all NHS providers and commissioners.

We consulted on our proposals to change the objection thresholds, including the option of removing the share of supply threshold, and increasing the objection percentages for clinical commissioning groups and relevant providers to either 66% or 75%. The department made particular efforts to contact by email all commissioners, all relevant providers and their representative bodies. We received a total of 221 responses to the consultation from a range of stakeholders within the four-week period. This is a positive response rate and we thank everyone who took the time to respond.

Some 46% of respondents to our consultation, including many commissioners and mental health providers, agreed with our proposal that the objection mechanism should be revised to provide greater clarity in the system ahead of the coming financial year. The NHS Confederation said:

“We recognise the practical necessity to improve the processes around the objection mechanism”,

along with reservations about the need for significant improvements in engagement within the system. Some 52% of respondents opposed this proposal, the majority of whom were providers, with 123 responses. Respondents argued for delay before making any change. There were also further calls for more timely and deeper engagement with and transparency on tariff proposals.

The tariff development process is still evolving, and Monitor and NHS England continually evaluate how to improve their processes, including engagement, and will work to continue this going forward. We welcome the proposals put forward by sector representative bodies about improving engagement. I will return to that point later in my remarks. We considered in detail all responses to the consultation, including new proposals. For example, we considered and then discounted proposals to create a more complex form of the share of supply threshold, which would have been even more difficult to calculate accurately.

The Secondary Legislation Scrutiny Committee has informed our debate with a thorough report. Its conclusion draws attention to the opposing views held by the department and the major providers. It is precisely that difference of views which I seek to explain here. We recognise that a number of providers feel strongly that their opportunities to object should be left unchanged, but we believe that the regulations will ultimately strike the right balance for the interests of the NHS as a whole, including those of patients and particular types of institution.

However, our main concern must be the financial sustainability of the overall system to ensure the collective system focus is on delivering the vision set out in the Five Year Forward View. Our focus must be on securing a tariff settlement for 2016-17 that is fair to the NHS as a whole, that supports the implementation of the Five Year Forward View, and that is reached in enough time to be effectual for the coming year. NHS England has indicated that if there is a repeat of the 2015-16 process, there could be a negative impact on planned investment in areas such as mental health and community services which would have serious implications for the health service. This cannot be acceptable for patients or taxpayers. However, we duly note the concerns raised by consultees and consider that the spending review settlement demonstrates this Government’s commitment to building a sustainable NHS through supporting implementation of the Five Year Forward View.

It is also crucial that tariff proposals reflect the broader views held across the healthcare sector, not just the view of one part of it, however important that part may be. But as I explained earlier, the ultimate responsibility for setting NHS tariffs must lie with Monitor and NHS England, the statutory price-setting bodies. This means that difficult decisions can be made at a time of unprecedented challenge around finite resources, an ageing population and improvements in medical technologies and drugs. We continue to keep under review the need for any further changes to ensure that the system operates optimally in the interests of patients.

These regulations remove the share of supply objection threshold and increase the objection thresholds for providers and commissioners from 51% to 66%. These changes can be made by secondary legislation in the form of these regulations, and there is no need to revisit primary legislation. We must also make these changes now because, as I mentioned, we cannot have a repeat of the process in 2015-16 as that could have a negative impact on planned investment in areas such as mental health and community services, which would have serious implications for the health service.

The Act provides the Secretary of State with a power to prescribe a share of supply threshold that takes into account a relevant provider’s scale and share of supply. I want to be clear that removing the share of supply threshold maintains a fair balance as a whole, as this will give small providers the same voice as larger ones. As I have explained, a significant trigger for formal objections related to a variation to the payment of national prices for specialised services rather than the underlying method for calculating the price. The largest trusts in the country are, in the main, the providers of specialised services. This means that disproportionate weight has been given to a small group of providers on relatively narrow issues, not all of which intentionally fall within the objection process. The draft regulations remove this bias. All providers of NHS services will continue to play a crucial role as part of the tariff development process. Furthermore, the changes made through the regulations will create the stability that is necessary for the tariff-setting process while retaining a comprehensive development mechanism that will allow for prices to be set in a fair, transparent and consistent way, taking into account the views of all providers.

The noble Lord, Lord Hunt of Kings Heath, has raised concerns about the 66% threshold: whether it is sufficiently fair; whether certain kinds of providers should by themselves be able to trigger the revised threshold, and whether our approach is consistent with that set out in 2012 by my predecessor. Our intention is that the revised 66% threshold will continue to give all relevant providers, regardless of their type, the opportunity to challenge the methodology where there is a widespread consensus about the existence of concerns. This includes relevant providers from all sectors, all of which make a valid and important contribution to the NHS and, ultimately, to patients.

The number of relevant providers increases year on year as increasing numbers of providers are covered by the national tariff. It is both fair and reasonable to set a threshold level that would reflect widespread serious concerns among the growing number of relevant providers that publication should be paused and adjudication possibly sought. It is therefore important to recognise that they should all have a part to play in a statutory process that may prevent publication of the national tariff, which would have a consequential impact on them. Therefore, where they are relevant independent sector or third sector providers, they can challenge the proposed methodology.

The noble Lord, Lord Hunt, has also raised concerns about whether these regulations are consistent with the Government’s views as set out in March 2012 by my noble friend Lord Howe. Those remarks focused on how objections from a sufficient number of commissioners or providers might lead towards adjudication, noting that recourse might otherwise be made to judicial review. It is true, as I have explained, that our views about the sensitivity of the objection mechanism as a trigger have evolved since 2012. We now consider that a more widespread consensus is fairer in the interests of all. The role of the Competition and Markets Authority remains. As adjudication by the CMA can occur, this is entirely consistent with the Government’s views as set out in March 2012 by my noble friend Lord Howe. The provisions in the Act enable Monitor to decide whether to make a referral to the CMA as the best course of action. We think that this is the right approach.

I must restate the importance of delivering the vision of the five-year forward view, including new models of care which providers and commissioners are collaborating to develop. In the interests of patients, those models of care are developing in a collaborative manner across organisational boundaries, or in services where national prices do or do not apply. Our concern, as we listen to proposals about improving engagement on the national tariff, is to capture that wider vision. The department, NHS Improvement and NHS England have read the proposals for better engagement from NHS Providers. It is clear that one of the things that went wrong around the tariff engagement process for 2015-16 was that one specific measure which had a significant impact on providers—specialist care—was proposed late in the day. This, quite understandably, was a very serious concern to many trusts and foundation trusts and contributed to their formal objection to the tariff proposals. To avoid scenarios like that in the future, but also more broadly to ensure that the tariff process produces an outcome in the interests of the NHS as a whole, my officials, NHS Improvement and NHS England will pursue more detailed conversations with NHS Providers to improve the process. As in other areas of NHS management, what is needed is transparency and understanding across the piece. As Jim Mackey, the newly appointed chief executive of NHS Improvement, said today:

“The development of the tariff needs to be done with the NHS, ensuring all views are heard and to avoid uncertainty from year to year. We now need to move past the distractions of technical changes to tariff rules and focus on the issues that really matter to patients and the providers who deliver NHS care”.

This has been a long speech because it is an important issue and one which is somewhat arcane for some noble Lords. I beg to move.

[Lord Hunt of Kings Heath (Lab)]

My Lords, I am very grateful to the noble Lord for his detailed and careful explanation of the reason for this statutory instrument. I still regard it as a flawed set of regulations and I am not surprised that your Lordships’ Secondary Legislation Scrutiny Committee has reported it for the specific attention of the House on the grounds that the regulations may imperfectly achieve their policy objective. It is my contention that the regulations undermine a core part of the Health and Social Care Act 2012. They certainly run against the spirit, if not the letter, of what the noble Earl, Lord Howe, told the House during the passage of the Bill. Although the noble Lord has been very careful to differentiate between acute and non-acute trusts, the actual impact of what is being proposed is that NHS trusts and foundation trusts, which provide 96% of the tariff work for the NHS, are effectively disabled from using the tariff objection mechanism because it is mathematically impossible for them to trigger it alone. They would need some of the very small-scale, private providers to join in. The effective silencing of the voice of the NHS front line in the tariff-setting process displays a shocking degree of arrogance on the part of NHS England. It seems to be bent on punishing these providers for having the temerity to object, as they did in the last financial year.

The noble Lord has carefully described the national tariff. I suspect that noble Lords know more about it than they ever thought they wished to. As he says, it is very important in terms of the income going to most NHS providers. The 2012 Act provides for a statutory duty to consult on the proposals that NHS England and Monitor make. There is also a parallel right to object to the tariff proposal if they have insignificant numbers. The current threshold is 51% of commissioners or providers, either individually or based on the proportion of services they provide. This is called the share of supply. I do not think that 51% could be said to be not setting a pretty high threshold. I understand entirely that this mechanism is not meant to be used regularly, but current experience shows that it actually works. It was not used in the first year of its operation, but it was used in the 2014-15 financial year, with 75% of providers by share of supply making an objection. The reason they objected was that the tariff changes made, particularly for specialist services, would have an enormously negative impact on the providers of those services and, by definition, on the specialist services themselves.

18:15

Specialist services are vitally important to the NHS and its patients and are often accessed only by a small number of people with some of the rarest and most complex conditions, ranging from cancer to congenital heart disease. Obviously, those services are expensive to provide. My understanding is that demand is hard to predict, and that there was a late amendment to the proposal in 2014-15 to introduce a marginal rate for those services whereby providers would be paid just 50% of the tariff price for services that exceeded their own projections of patient demand. The noble Lord made great reference to uncertainty for the health service because of the tariff objection, but surely he would agree that the introduction of this proposed marginal rate would cause huge uncertainties for the organisations providing those specialist services. That is why they triggered the mechanism.

We know that the Government, NHS England and Monitor went back to the drawing board and returned with a solution, moving £500 million over to providers from the commissioning side, increasing the marginal rate for specialist services to 70%, and allowing providers the option of remaining on the previous year’s tariff. The noble Lord seemed to find it quite shocking that this actually happened and that it caused a huge problem for his department and NHS England. I would have thought that it is evidence that the mechanism worked. The Government had to think again and had to find resources from somewhere else in their pot—which clearly they did.

I remain puzzled about the real rationale for why on earth NHS England—which is clearly the body that wants the change—wants to do this. The only rationale that I can see is that essentially NHS England is so offended by the fact that these providers could object to the mechanism that it is determined to rewrite the rules so that they can never again object in the way that they did in 2014-15.

I turn to the regulations, which to me seem unbalanced, risky and rushed. The imbalance is quite extraordinary. It gives every single licence provider in the country the same say over the tariff as a large-scale provider. One or two noble Lords in your Lordships’ Chamber have chaired NHS foundation trusts, and we have a current chairman of such a trust. Taking Guy’s and St Thomas’ as an example, it would be extraordinary if a small-scale provider, providing services for a few thousand pounds, was given a similar weighting as Guy’s and St Thomas’ and other hugely important NHS foundation trusts. That does not seem a very fair approach.

Increasing the trigger threshold from 66% essentially means that, given the ability of providers to vote with the share of supply status being removed, even if all NHS trusts and foundation trusts were to object to a proposed tariff, they would account for only 62% of all providers. So clearly, NHS England designed this to ensure that NHS providers collectively would never be able to object to the tariff. This is a manipulation of the rules. It is not a statement of principle. It is underhand and completely unjustified. This level of democracy would make the North Korean Government proud. What is being proposed is outrageous and NHS England should be ashamed of itself. I wonder about the board of NHS England sometimes, as I try to understand what is in board members’ minds when they agree to such a proposal.

It is clear from what the noble Earl, Lord Howe, said to me in debate in 2012 that he recognised that there needed to be a process for adjudication on Monitor’s proposals if a sufficient number of those who would be affected by them objected; otherwise, they would have no way of disputing proposals other than by judicial review. I think it would have shocked the noble Earl, Lord Howe, at the time if a suggestion had been made that even if all the NHS providers objected to a proposal, they would in fact not have enough votes to trigger the arbitration mechanism. Quite clearly, for individual foundation trusts, the noble Earl, Lord Howe, has pointed them in the right direction. In future, because they cannot use this mechanism, it is an open invitation to go for judicial review.

If the Minister is so worried about the timing and the disruption to planning, there are two simple alternatives: either publish the tariff proposals earlier or accept that there are likely to be judicial review proceedings in the future, at enormous expense. I remind him of what is happening in Manchester with the JR proceedings in relation to the reconfiguration of specialist services, which is putting back changes for many months. So I really do not understand why the Department of Health agreed to this. Of course the financial situation facing the NHS is considerable, but it is as considerable for individual NHS trusts as it is for the department, and surely they can expect to be treated fairly. This is not treating them fairly.

I am also concerned about the way that this was rushed through, which was highlighted by your Lordships’ scrutiny committee and the consultation process. I have to admit to past form but when a consultation document is issued on 13 August, to be completed by 11 September, your Lordships know that something fishy is going on. To sneak it out for just 29 days is not on. In fact, it is amazing that so many NHS providers were able to respond, and that is tribute to them and their representative organisations.

The Minister mentioned the consultation. This is the Department of Health at its very best. Some 82% of those responding did not want the objection threshold raised. Just under two-thirds also disagreed that the weighted vote of providers should be removed. What was the point of consulting? Clearly, there was no point: 29 days’ consultation, August to September, and no notice taken of the comments coming back.

It really is disappointing that the Minister has brought this regulation before us, but I listened with great care to what he said at the end, because that was very important. He knows that NHS Providers has made a specific proposal to him, to which there were three elements: first, a far more transparent process for setting the national tariff through an open-book approach; secondly, a genuinely collaborative approach to developing the tariff each year—this is what is required—achieved through the set-up of a new form of strategic stakeholder group overseeing the development of the tariff; and, thirdly, the good offices of the Department of Health to exercise some oversight and scrutiny over whether the open-book approach and strategic stakeholder group are working effectively. The Minister went some way but not quite as far as I had hoped, so I hope that he might reconsider this within our debate tonight.

It is clearly important that there is ownership. If the Minister does not have NHS Providers owning this process, it will be unhappy. Judicial review proceedings are certainly a factor that would have to be considered. At the end of this whole sorry saga, I would have thought that it would have been much better if the department and the noble Lord agreed the elements that we need to see, going forward, which have been proposed by NHS Providers. I beg to move.

[Lord Patel (CB)]

My Lords, perhaps I might start by suggesting to the Minister that this is another example of why the NHS might be unsustainable and that we probably need an independent commission to look at the whole of the NHS. I realise that neither he nor the Opposition Front Bench are likely to agree with me on that, but I make the point that this is yet another nail in the coffin, so to speak, which will get us to that end some day.

I find myself in agreement with some of the things that the noble Lord, Lord Hunt, has just said. We have an example here of where raising the tariff to 66% actually means ruling out the ability of the providers to engage in any kind of discussions relating to the tariff because the target is too high. If that is the case and the providers are therefore not able to engage with NHS England and Monitor, which sets the tariffs, what other mechanisms do they have? They cannot see the proposed tariffs until the consultation occurs, which is rather too late for them even to road test whether the tariffs are likely to be workable—particularly if they involve, for instance, any implications on pensions or proposals that the Government may have brought about pay deals, or any other issues that may impact on the cost. So how is the provider likely to get any input at an early stage and engage with the tariff-setting mechanism? There will be no such input, I suggest, through these proposals, which will make it impossible. They will therefore have to live with the tariff.

I realise that the big providers might be able to do that, because they might save some money from other aspects, but let us take the specialist providers. We can particularly imagine this in paediatrics and with some cancers, where providers work on small margins and the costs may escalate. Because of a few patients having highly complex issues, costs can overrun. That is why the top-up fees of some £300 million were introduced, 70% of which go to paediatric specialist services. Now the proposal is to remove those or reduce them considerably. In paediatrics, the top-up might go down from £217 million to £95 million. So these specialist providers have a choice: either to provide poor-quality service, which impacts on the patients, or to opt out. Who will then suffer? It will be not the commissioners, NHS England or Monitor but the patients—because they will not have a service or will have a poor-quality service.

I agree with the noble Lord, Lord Hunt, that there needs to be some kind of mechanism where there is early involvement of the providers, which can engage in the tariff-setting mechanism. They would not necessarily dictate it; they might disagree with it but suggest some proposals. One of the ways, as he suggests, would be a stakeholder forum involving all the parties at an early stage. The Department of Health can then have some accountability from all the people in the stakeholder forum, including the providers. I am attracted to that suggestion, and I hope the Minister will respond to it.

The Minister responding in the other place sounded sympathetic—or at least suggested that he understood the issues. I hope that we can go further today and that the Minister will say that it sounds attractive and that he might look at it.

18:30

[Lord Warner (Non-Afl)]

My Lords, I start by thanking the Minister for his briefing yesterday, which I found very helpful. I also declare a forthcoming interest in that I shall shortly be chairing a short-term commission to consider the approach to commissioning specialised services, which will report next April. That may well, in the light of the debate this evening, have some fairly uncomfortable things to say about the commissioning of these services in today’s financially straitened NHS. It is very difficult to argue technically with the points made by my former noble friend—still my noble friend—the noble Lord, Lord Hunt, about this set of regulations, but in a sense that misses the bigger point raised by the noble Lord, Lord Patel.

I express my sympathy for the Minister. He is, to all intents and purposes, between a rock and a very hard place. He has to operate within the extremely clunky system provided for setting the tariff for specialist services in the Health and Social Care Act 2012—which, if I may say so, is one of the less distinguished pieces of legislation passed by Parliament. Trying to set a tariff using a system of objection thresholds is a somewhat bizarre way of doing it, even by the standards of the 2012 Act. That so-called new transparent system for reconciling the needs of commissioners and providers has clearly not worked. It is very difficult to see it working, not least because we end up leaving the decision on the tariff right up close to the start of the next financial year. If we want a five-year plan for reforming the NHS, that is about the daftest way to go about setting a national tariff. I understand why no one wants to go back to the 2012 Act and revise part of it but it is pretty bizarre, in a fast-changing world, to set the detail of how you negotiate the tariff in primary legislation. That is a fundamental flaw which we are now struggling with, as a result of that legislation. That is why we are getting into this tangle over the technicalities of this set of regulations.

If I was still the Minister trying to set acute hospital tariffs at a time of tight NHS finance and, at the same time, trying to prioritise community health services and mental health—as the Minister rightly suggests people are trying to do—I would probably be doing the same thing as the Minister, stuck as he is with this piece of legislation. I might even, if I was feeling particularly crotchety, go for 75% instead of 66%. But that is the fault of the system we have landed ourselves with, not because of a devious NHS England, devious Ministers or a devious Department of Health. We need to get to a different system. NHS providers have opened up some issues to talk about. It is certainly very difficult, in today’s age, to argue with the idea of a more open-book approach. But it also requires the open-book approach to take place further back down the food chain, before we get close to the beginning of the financial year. That is the only way these specialised services can look ahead.

It is true when I look back on my time as a Minister —this is where I start to part company with the noble Lord, Lord Hunt—that there is a pretty strong track record of the big NHS acute hospital providers having everything their own way. Even when, as a Minister, I said that the commissioner’s view should determine the outcome, those providers went on pushing and pushing, way up to and past the start of the new financial year. Of course, I am not talking about trusts chaired by the noble Lord, Lord Hunt—I am sure nothing like that ever happened in Birmingham. However, let us be clear, that is how some of the big London providers, in particular, behave—not in our second city, of course; heaven forbid.

There is a long history, then, of big providers pushing the envelope on the price for the job and weak commissioners being unable to stand up to them and deal with them. We now move to a situation where that problem must be tackled, and quickly. We can quibble about the technicalities of the way NHS England and Monitor have handled this episode, but it does not get away from the point that the Minister made: at the end of the day, these guys and girls have to make the decision. They have to decide on a canvas that is much bigger than that being painted by the acute hospital sector.

We should be a bit more forgiving towards the Minister on that. It takes a bit of bottle to say that we are going to put more money into community services and give more money and parity of esteem to mental health, even in a difficult financial climate. That means taking some fairly tough decisions about how much of the collective resources you put into acute hospitals and specialised services. This is where commissioning must play its part. It may mean that we want a smaller number of providers for some of those service lines; it may mean that we have to concentrate them.

NHS providers may not have realised that an open-book approach means that we start to find out more about those who are less productive or effective. I hope the Minister will listen to some of those ideas, particularly the points made by the noble Lord, Lord Hunt, at the end of his speech and by the noble Lord, Lord Patel. We have a clunky system and we need to change how we set the tariff if we really want to deliver the vision in the Five Year Forward View. I hope the Minister will respond positively to some of those ideas for a new approach.

[Lord Turnberg (Lab)]

My Lords, I must first apologise to the Minister for not appearing at his briefing yesterday and for coming late to his initial remarks. That will not stop me speaking, if I may.

The regulations are clearly designed to save money. They have little to do with correcting what is a major underlying defect in the tariff system: the perverse incentives that tariffs have introduced. My noble friend Lord Hunt has dealt pretty well with how the regulations were aimed at raising the threshold at which objections can be raised and, equally importantly, levelling the playing field to allow small providers with limited budgets to have the same voting power as very large teaching hospitals with billion-pound budgets, which provide more than 95% of the service. It is rather like non-league football clubs and those in the Premier League having the same voice in their commercial activities. The problem is that, to get 66% of all organisations, including all the small ones, puts those trusts that provide more than 90% of the service in hock to those who provide less than 10%. So it is not much wonder that the highly specialised hospitals—the Marsden and Great Ormond Street, the Institute of Neurology, the Christie hospital and so on—are voicing strong concerns about the impact on them. Of course, that is why the Government want to shackle them—to keep costs down—but that is at the risk of denying high-quality specialised care to those who need it.

All that has been well rehearsed by my noble friend Lord Hunt and other noble Lords. I really wanted to point out that the regulations do nothing to get round the unintended consequences and perverse incentives of the tariff system, which I raised with the Minister in a previous debate. That system encourages trusts to go down the route of using devices to gain higher incomes and discourages cross-referral between specialists within a hospital when a trust can gain two fees for two referrals from general practice. It discourages consultants from using phone-in follow-up out-patient clinics to save patients the need to travel in to be seen, as a visit to a hospital incurs a higher fee on the tariff. I agree with the noble Lord, Lord Warner, as he rails against the acute hospitals, but I do not necessarily agree with all his solutions.

I support my noble friend’s amendment. The regulations are unwarranted and damage those who provide the vast majority of the service, while doing nothing to get at one of the major defects in the tariff system.

[Lord Kakkar (CB)]

My Lords, I declare my interest as chairman of University College London Partners, an academic health science centre which has a number of important providers. The Minister made a very important point about the five-year forward view and the need to encourage new models of care working that ensure collaboration beyond institutional boundaries —and, indeed, to go further and look at new models of funding, including those of accountable care organisations. With a view to a potential journey towards more effective commissioning, and therefore more intuitive constructing of a tariff to support general acute services and more specialised services, will the proposals that the Minister brings to the House today aid that journey? Will looking at these regulations in the way proposed help institutions to work more effectively together, recognising the opportunity to look at tariffs that focus on pathways of care rather than individual segments of care, so ensuring the Government’s objective to ensure that valuable resources committed to the provision of healthcare are used most efficiently? There is a recognition that there will have to be greater attention to these matters as we go forward, and every opportunity should be used to ensure that that objective is achieved. One of the most important is the approach to setting the tariff and, therefore, these regulations.

[Lord Prior of Brampton]

My Lords, as always in these debates, we have had some pertinent and useful contributions. I shall take some of the points raised in reverse order. On the very important point raised by the noble Lord, Lord Kakkar, a profound change is happening in how we will deliver care over the next five years, which will be very much more based around a system rather than the institution. I think that the noble Lord, Lord Hunt, would agree with that; we will move from a payment-by-results system that has been very much based around individual pieces of care delivered in acute hospitals, to other payments systems, such as a capitation system or a whole pathway system. That is going to happen.

18:45

I am always struck by a quotation from, I think, Warren Buffett—that you get what you incentivise for. Over the past 20 years, we have incentivised almost everything going into acute care, and that has got to be changed at a time when acute care facilities are very busy. It will be very difficult to make that change. Increasing the threshold from 51% to 66% will aid that journey because it will prevent NHS providers, which are currently taking most of the tariff income, being a possible brake on that change.

The noble Lord, Lord Turnberg, prefaced his remarks by saying that this was designed to save money. It is not designed to save money, but to reallocate money. We have a fixed pool of money. The noble Lord will be familiar with the concept of the tragedy of the commons. The problem with the tragedy of the commons is that when you have a fixed resource, be it fish, money or common land—where it is used in law the most—no individual user of that resource has an incentive to husband it. This is not about saving money. The specialised commissioning budget got out of control two or three years ago. It was running much higher than had been budgeted for. The appointment of Jonathan Fielden, who was a very distinguished medical director at UCL, to head the specialised commissioning role in NHS England is important because getting control of that budget will be vital.

The noble Lord also mentioned the unintended consequences of the tariff, which go beyond the debate today about the thresholds. I am very happy to speak to him further about that. The issue he raised related to gastroenterology, I think, and getting double payments. I have picked that up, and I think that issue has been resolved, but if there are other problems with the tariff, I will be very happy to address them with the noble Lord outside.

The noble Lord, Lord Warner, made some very important points. We are committed to the principle of a multiyear tariff that will remove a lot of the angst over these annual negotiations, which often happen at the end of the year, and make a big difference. The noble Lord made the point, which is true, that we have been very provider-centric and teaching hospital-provider-centric. I am guilty of that. Having been chairman of a provider for many years, I was very provider-centric. The commissioner, along with Monitor, must ultimately have the final say on the allocation of resources within the system. I will come back to the point that the noble Lord, Lord Hunt, made about the imperative need for proper engagement and transparency, but ultimately, as NHS providers recognised in their briefing note to noble Lords, NHS England and NHS Improvement must have the ultimate say on the allocation of resources within the system.

The noble Lord, Lord Patel, made a particular point about specialised providers. Monitor is currently devising HRG4+—that sounds rather technical—which is designed to get more money into more specialist procedures. For example, only last week Monitor briefed more than 100 providers on the specialised tariff proposals for 2016-17 as an example of its recognition that there must be a greater degree of consultation with providers. The noble Lord made a powerful speech, and of course I recognise the strength of a number of his arguments. It is critical that providers again have confidence in the process, as it is true that a number had to some extent lost confidence in it.

I should mention here the importance of the changes at NHS Improvement. I hope we are going to see an organisation that is culturally and strategically very different from Monitor. I know that Jim Mackey, the new chief executive of NHS Improvement, has already set up a group of chief executives from foundation trusts and NHS trusts from whom he will be taking regular advice.

We recognise the degree of consultation, engagement, openness and trust that was not there last year, and we are committed to rebuilding that. We note the comments made by NHS Providers and have taken them on board. I can tell the noble Lord that Simon Stevens, Jim Mackey, the Secretary of State and I are absolutely committed to rebuilding that confidence and to having a much higher degree of engagement and consultation in the tariff-setting process.

[Lord Hunt of Kings Heath]

My Lords, I am very grateful to all noble Lords who have taken part in this interesting debate. We perhaps went rather wider than the terms of the regulations. I agree with the Minister that payment by results was brought in essentially to drive through reductions in waiting times by providing the right incentives. By and large that has been very successful, but we are moving, and this is a very good thing, into thinking about systems and how they work. There is a clear need to develop a funding mechanism to ensure that there are proper incentives for system-wide working, and I absolutely agree with that.

However, I also agree with the noble Lord, Lord Warner, my fellow former Minister. Looking at the Five Year Forward View, it seems to me that essentially we are moving again to a planning model but we are still stuck with the 2012 Act, and the two do not seem to mesh together. The Minister is struggling with these regulations because they are trying to operate a system that is still based on payment by results, when in essence we are trying to incentivise people to work together to produce a much more effective system and that is very difficult. If he were to tell me that the NHS amendment Act was to be brought forward, I think he would find a warm welcome in your Lordships’ House, but perhaps I dream too far.

I say to the noble Lord, Lord Patel, that I do not disagree at all with his idea of an independent commission; the funding challenges facing health and social care warrant that kind of independent consideration. I say to him, though, that all the work done by the King’s Fund and the Nuffield Trust suggests that if you could maintain real-terms growth at 4% a year, which is the historic annual real-terms growth of the NHS, we would get a pretty good system without some of the pressures that we are facing at the moment. It is not a question of having to increase money to the NHS and social care hugely, but it needs some increase or we will be faced with the kind of problems that we have at the moment. The Barker commission, which was sponsored by the King’s Fund, shows some of the thinking that one might ask a royal commission to go into.

My noble friend Lord Turnberg mentioned the particular challenges of highly specialist providers, which of course are very much tied into the area that he knows so well: our whole R&D effort in this country and the link with the life sciences. While I understand the language of domination by specialist providers, we need to recognise that the link that these very same providers have with R&D and the life sciences is crucial to this country and to the lead that we often have in these areas. We have to be very careful not to undermine their financial viability because of the general financial challenge.

I am delighted that the noble Lord, Lord Warner, is working on, chairing or leading this work on specialised services, and I am sure he is right that we need to have much more effective commissioning. I certainly accept that that is likely to lead to a rationalisation of specialised services, which will not be universally popular. However, if we can show that by doing so we get more bang for our buck, getting better specialist services, and that they are a better investment, clearly, that has to be followed through. I hope that we will see the outcome of that work within the next few months.

I have no problem at all with putting more resources into mental health and community services—I entirely understand that. However, the regulations are a pretty poor show, and in effect disfranchising the providers, who get 96% of the tariff income, is not the way to go forward. However, I am very grateful to the noble Lord, Lord Prior, for what he said. I take his commitment to rebuilding the confidence, as he described it, of providers in the system, as a very strong one. He did not quite go as far as I would have wished with regard to endorsing the open book approach. Does that mean that that is still being considered, or has it been rejected? Can I take anything from that?

[Lord Prior of Brampton]

I will have to defer to Jim Mackey, the chief executive of NHS Improvement. It would not be fair for me to answer that question.

[Lord Hunt of Kings Heath]

I am sure of that, my Lords. I will just say to the Minister that I hope the spirit of this debate will be conveyed to him and NHS Improvement. I certainly have been very impressed by the chief executive’s words since his appointment, and of course the chairman, Ed Smith, commands great respect and authority, not least for the work he has done on behalf of Birmingham University, for which those of us in the city are very grateful.

With that, I thank all noble Lords who have spoken. The point has been made, we look forward to a better approach in the future, and I hope that the spirit of the proposal regarding early consultation and an open book process will be acceded to. I beg leave to withdraw my amendment to the Motion.

Amendment to the Motion withdrawn.

Motion agreed.

House adjourned at 6.57 pm.