Note on the legal position concerning departures from National Tariff Prices for the provision by an NHS Provider of National Tariff Services.
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1 Note on the legal position concerning departures from National Tariff Prices for the provision by an NHS Provider of National Tariff Services. The legislative and policy background. 1. The purpose of this Note is to explain the fairly complex issues of law which arise in relation to the circumstances in which an NHS commissioner is entitled to contract with an NHS provider for the provision of services to NHS patients at prices which depart from those fixed under the National Tariff. In common with many other areas in the NHS, the legal obligations on NHS commissioners and providers of NHS services only makes sense if one understands something of the history of the ever changing legal structures of the NHS. 2. The NHS purchaser 1/provider divide was created by the government in as a way of trying to bring some market discipline to the NHS. The division of NHS bodies into those that purchased acute care 3 for NHS patients and those bodies, the newly created NHS Trusts that provided acute care produced a need for service level agreements between purchasers and providers. However, these agreements were not legally binding contracts but were NHS contracts that were not enforceable in law When NHS Foundation Trusts were created in 2004, the government decided that NHS Foundation Trusts should sign legally binding contracts with NHS commissioners (at that point primary care trusts). Thus, a significant number of the contracts between NHS commissioners and NHS providers were set up as commercial contracts as opposed to NHS contracts. 1 As some point the word purchaser was replaced with commissioner but the functions were essentially the same. 2 As a result of the implementation of the NHS and Community Care Act The purchaser/provider divide did not originally apply to community services. That was changed after the TCS programme in about The absence of legal duties arising under NHS Contracts was discussed in Pitalia & Anor v The National Health Service Commissioning Board [2014] EWCA Civ 474.
2 4. That series of changes led to 2 significant developments. First, the NHS developed a standard form of contract for use between commissioners and providers. There have been a variety of standard forms over the years but the current standard form contract is published annually by NHS England 5. Prior to the implementation of the Health and Social Care Act 2012 ( the 2012 Act ), NHS commissioners were primary care trusts. These bodies could be directed by the Secretary of State to act in a specific way 6. Primary care trusts were required by the Secretary of State to use the current form of NHS Standard Contract when contracting with virtually all providers of NHS services 7. Following the passing of the 2012 Act, the Secretary of State made Regulations which required the new NHS commissioners, namely clinical commissioning groups, to use the standard form of contract. 5. Secondly, the Department of Health developed a standard set of arrangements for paying NHS providers for providing services to NHS patients. This system is known as Payment by Results or PbR. There is a helpful 2012 publication by the Department of Health called A simple guide to Payment by Results 8 which explains the origins and operation of the system. The policy justifications for the introduction of PbR are set out at paragraph 16 of the introduction to the Guide as follows: Before PbR, commissioners tended to have block contracts with hospitals where the amount of money received by the hospital was fixed irrespective of the number of patients treated. PbR was introduced to: (a) support patient choice by allowing the money to follow the patient to different types of provider; 5 NHS England is the operational name for the National Health Service Commissioning Board, which his referred to in legislation as the Board. 6 See section 8 of the National Health Service Act These instructions may not have had the formal status of directions but the existence of direction making power meant that was unnecessary. 8 This at PbR-Simple-Guide-FINAL.pdf. There is, of course, an element of irony in the title. The PbR system is of considerable complexity and so a simple guide to this system could be seen as an oxymoron.
3 (b) reward efficiency and quality by allowing providers to retain the difference if they could provide the required standard of care at a lower cost than the national price; (c) reduce waiting times by paying providers for the volume of work done; and (d) refocus discussions between commissioner and provider away from price and towards quality and innovation 6. The existence of a standard set of prices for the delivery of NHS services also prevented NHS commissioners from choosing to place contracts with a provider which offered a reduced price for the delivery of a service. Where prices were set by the PbR system, providers were supposed to compete on service levels and not on price. However, the PbR system has only ever covered a proportion of NHS services. 7. In 2010, the incoming coalition government decided that the NHS would benefit from a major structural re-organisation. It published a White Paper in July 2010 and then began the tortuous passage through Parliament of the Bill which led to the 2012 Act. There are a number of aspects of the 2012 Act which are relevant for present purposes. 8. First, the 2012 Act created clinical commissioning groups ( CCGs ) as bodies that could not be subject to directions by the Secretary of State. Accordingly, if the Secretary of State wanted CCGs to act in a certain way, the Secretary of State needed to make Regulations. The Regulations which are relevant for present purposes are the National Health Service Commissioning Board and Clinical Commissioning Groups (Responsibilities and Standing Rules) Regulations ( the 2012 Regulations ). The broad effect of this change is that CCGs have a series of statutory duties imposed on them to replace the guidance which previously governed the way in which they took decisions. 9. Secondly, regulation 17 of the 2012 Regulations put the NHS standard contract on a statutory basis. It provides: 9 These Regulations have been amended on a regular basis since they were passed. Extracts in this Advice relate to the current version of the Regulations unless stated otherwise.
4 (1) The Board must draft (a) terms and conditions making provision for the matters specified in regulation 16; and (b) such other terms and conditions as the Board considers are, or might be, appropriate for inclusion in commissioning contracts entered into by a relevant body. (2) The Board may draft model commissioning contracts which reflect the terms and conditions it has drafted pursuant to paragraph (1). (3) A relevant body must incorporate the terms and conditions drafted by virtue of paragraph (1)(a) in commissioning contracts entered into by it. (4) The Board may require CCGs to incorporate the terms and conditions it has drafted pursuant to paragraph (1)(b) in commissioning contracts that a CCG enters into. (5) If a CCG is required by the Board to incorporate terms and conditions pursuant to paragraph (4), it must do so 10. NHS England (referred to as the Board in the above Regulation) has exercised the power under Regulation 17(4) and thus all new commissioning contracts are required to incorporate the terms and conditions set out in the NHS Standard Contract. 11. Thirdly, the 2012 Act (as finally passed) provided that the hitherto nonstatutory PbR system was put onto a statutory basis. The Health and Social Bill, as published, proposed market mechanisms for the NHS including price competition. Thus the proposal was that NHS commissioners could require all providers to compete to provide the best services at the lowest price. That was, of course, a freedom which (at least in theory) existed under the arrangements set up by the NHS Act 2006 and was referred to in the NHS Annual Operating Framework which was published annually by the Department of Health.
5 12. This aspect of the Bill was the subject of considerable debate, especially at Second Reading in the House of Commons on 31 January Expressions of concern about price competition were not confined to Labour MPs, as the Kings Fund Report 11 noted in its account of the history of the Act. It said: The academics attacked the operating framework, warning of a race to the bottom on price that would almost certainly threaten quality a concern that was echoed by the NHS Partners Network, the trade body for private and voluntary providers of NHS care, which declared itself very nervous about the idea. Zack Cooper, the LSE health economist, said: I am about as pro-competition in health care as you are going to find. But price competition would be a hugely retrograde step. To introduce it is not to learn the lessons from the NHS s own experience and from abroad. Julian Le Grand, another advocate of choice and competition in the NHS as Blair s health adviser, echoed the concerns.101 Shortly afterwards, in a letter to The Times, the leaders of six health service unions expressed their extreme concerns over price competition. The Government had managed to unite reformers and opponents, and it floundered. It took weeks finally to rule out price competition over services covered by the NHS tariff. 13. The government eventually responded by making amendments to Part 3 of the Bill which were designed to rule out price competition for services covered by the National Tariff (the new name for the prices fixed under the PbR system) unless specific price changes had been approved on an individual basis by Monitor. Speaking in the House of Commons on 20 March 2012, the Minister introduced a series of amendments which he explained as follows: The Bill makes sure that in future there can be no scope for sweetheart deals to incentivise new entrants into the NHS, it ensures that there cannot be price competition of the sort that was allowed under the 2006 Act, and it ensures a protection for commissioners to decide when and if it is appropriate to use competition 10 See for example David Miliband MP at column 618: cm201012/cmhansrd/cm110131/debtext/ htm 11 See page 81 at
6 14. Ministers repeatedly assured Parliament that prices would be set nationally so as to rule out local competition based on prices. For example Earl Howe said on 6 March 2012 at column : It is important to remember that Monitor will work with the Commissioning Board to design tariffs which best incentivise high-quality patient care, including through integration. That brings me to the point made by the noble Baroness, Lady Meacher. The Bill addresses the situation where a private provider could cherrypick the most profitable services to deliver, leaving an NHS hospital with the most complex procedures. It requires Monitor and the NHS Commissioning Board to take account of variations in the range of services provided by different providers, and the complexity of the needs of patients treated, to ensure a fair level of pay for providers. As a result, providers undertaking only the more simple interventions would be paid a suitably lower price. We are not seeking to stop providers choosing which services to deliver; the issue is making sure that they are paid a fair price for each of them. If prices accurately reflected the cost of services, private providers simply would not have the incentive to cherry-pick and damage the viability of other providers 15. Price competition for services covered by the national tariff is supposed to be prevented in NHS by section 115 of the 2012 Act which provides: (1) If a health care service is specified in the national tariff (as to which, see section 116), the price payable for the provision of that service for the purposes of the NHS is (subject to sections 124 and 125) such price as is determined in accordance with the national tariff on the basis of the price (referred to in this Chapter as the national price ) specified in the national tariff for that service. (2) If a health care service is not specified in the national tariff, the price payable for the provision of that service for the purposes of the NHS is such price as is determined in accordance with the rules provided for in the national tariff for that purpose 16. Whilst the precise meaning of this provision has not been considered by the High Court, the background set out above shows that its purpose was to ensure that where a service was covered by the National Tariff, commissioners were obliged to pay a set price for the provision of the service 12 See HealthAndSocialCareBill
7 in order to maintain service standards for NHS patients, save where Monitor approves a price uplift. 17. However, it appears that Parliament s decision, as reflected in the amendments to section 115, ran counter to the previous policy within the Department of Health, as set out in the first version of the 2011 Bill, which permitted price competition. It appears that this desire has led NHS England and Monitor to adopt an interpretation of the 2012 Act which supports a freedom of NHS commissioners and NHS providers to agree non-tariff prices as a local level notwithstanding the terms of section 115. In doing so Monitor has, in effect, sought to sidestep the restrictions and concessions that the government was required to accept as part of the process of securing the passing of the 2012 Act. 18. However, a close analysis of the wording of the relevant sections shows that the power of NHS bodies to depart from national prices for national tariff services is more restrictive than Monitor (pursuing the 2011 policy) are suggesting. The proper construction of section 115 is as follows: a. It is engaged whenever anybody makes any form of arrangement with any other person where the contract provides for NHS services which are covered by the National Tariff to be provided to NHS patients. The duty does not just rest on CCGs but on anyone who enters into a contract for NHS services which are covered by the National Tariff. Hence, for example, it would covers a sub-contract which a private sector provider has with another provider (whether that provider is a public body nor not); b. This section not only sets up a purely public law duty, enforceable only by way of judicial review (and without any damages claim), but also sets up a private law duty to make the payment at national tariff. The wording of the section 115 duty applies to both public bodies and
8 private contractors who set up arrangements for the purposes of the NHS and public law duties can only apply to public bodies; c. The duty defines the price payable by a commissioner to a provider when that provider provides services to NHS patients which fall within the national tariff; d. The section thus imposes a statutory duty on anyone who makes any form of arrangement with any other person under which a person agrees to provide services to NHS patients which are covered by the National Tariff, the price payable for that service is the price set out in the National Tariff; and e. The only exception is where the price has been varied by Monitor as a result of exercising its powers under sections 124 and 125. Amendments to the prices payable under national tariff under sections 124 and The duty under section 115(1) to pay the national tariff price is expressly subject to sections 124 and 125. These sections provide that national prices can be modified in specific circumstances. However: a. Each price modification needs to be approved by Monitor; and b. Monitor only has a very limited power to be able to approve a change to prices because, under section 125(3) it has to satisfied that:. without a modification to the price determined in accordance with the national tariff for that service, it would be uneconomic for the provider to provide the service for the purposes of the NHS 20. Thus, in effect, Monitor has been given the power to allow a local agreement between an NHS commissioner and an NHS provider for an increase in national tariff prices but has no power to approve the commissioner paying a lower price than fixed in the national tariff.
9 Does section 116(2) provide an alternative route by which national prices can be modified? 21. Section 116 has provisions about the content of the National Tariff document that has to be published on an annual basis by Monitor. Section 116(2) provides: The national tariff may provide for rules under which the commissioner of a health care service specified in the national tariff and the providers of that service may agree to vary (a) (b) the specification of the service under subsection (1)(a), or the national price of the service 22. The National Tariff is published by Monitor 13 (which is now part of NHS Improvement ). The National Tariff is a substantial document which is published annually. It sets out the rules which commissioners must follow when setting the prices they will pay for NHS services. Part of the national tariff scheme involves the national variations to national prices which reflects the variations in the costs of delivering services in different parts of the country. However, there are also parts on Local Variations and Local Prices. The rules purport broadly to cover 3 types of local prices, namely: a. Local variations to nationally agreed prices; and b. Local modifications to nationally agreed prices; and c. Locally agreed prices for services that are not covered by an HRG and thus fall outside national prices. 23. The National Tariff seeks to draw a distinction between local variations under section 116(2) and local modifications under sections 124 and 125 to National Tariff prices. Monitor suggests that an NHS commissioner and provider can agree a local variation to change the price paid for a national tariff service provided the rules in part 6.2 of the National Tariff are followed 13 The 2016/17 national tariff is at attachment_data/file/509697/ _national_tariff_payment_system.pdf
10 without Monitor s consent. Monitor has provided further information on local variations in the document Guidance on the locally determined prices for 2106/1714. This Guidance document suggests that the rules under Part 3 of the 2012 Act permit local commissioners and providers to agree to vary national prices without Monitor approval, provided they follow the procedures set out by Monitor. It is suggested that all that is necessary is for the local commissioner and provider to do to agree local prices that depart from national prices is to complete the Local variations template and submit that template to Monitor. It thus envisages a considerable degree of freedom for commissioners and providers to contract at prices other than those set out in the national tariff. That process proposes a system for price variations which is wholly inconsistent with the specific assurances that there would be no such local arrangements provided by Ministers to Parliament. 24. The freedom for local commissioners and local providers to set local prices which depart from national prices (without Monitor approval) is said to be achieved by suggesting that there is a legislative difference between local commissioners and local providers varying prices under section 116 and modifying prices under section 124. That involves reading the words of section 115 as setting up an entirely separate structure for price variations in a way that is not referred to in section 115. It seems to me that this is plainly not what Parliament intended. 25. Whilst it is correct that section 116(2) uses the word vary and section 124(1) uses the word modify, it is very hard to draw any sensible distinction between the 2 words. In practice, the 2 words mean the same thing. It thus seems to me unlikely that Parliament would impose severe limitations on the varying of prices under section 124 whilst allowing a virtually unlimited power for local commissioners and local providers to vary prices under section See LDPguidanceupdate_mar2015.pdf
11 26. Further section 116(2) refers to the ability of commissioners and providers to agree price variations, but section 124(3) provides that any such agreement is not effective unless approved by Monitor. 27. It follows that suggesting that section 116(2) allows an alternative means of varying national tariff prices (which have not been approved by Monitor) involves adopting a construction of Part 3 which is inconsistent with the wording of section 115(1). Section 115(1) requires the price payable for a national tariff service to be: such price as is determined in accordance with the national tariff on the basis of the price (referred to in this Chapter as the national price ) specified in the national tariff for that service 28. The wording of section 115 is, in my opinion, only consistent with a departure from the national price where a modification has been agreed by Monitor under sections 124 and 125. But section 115(1) it does not make any reference to a departure from national prices where these are agreed under section 116(2). There is nothing in the wording of section 115 which permits the nationally set price to be varied by way of a local agreement under section 116(2) without Monitor approval and the suggestion that section 116(2) provides an alternative way for national prices to be varied is inconsistent with the express words of section 115(1). 29. The construction adopted by Monitor and NHS England is also inconsistent with the assurances that parliament was repeatedly given that no price competition or locally based sweetheart deals would be allowed in the NHS (see the quotations at paragraphs 10 and 11 above). 30. Accordingly, in my opinion the proper construction of part 3 of the 2012 Act is that rules for price variation under section 116(2) only operate in law where the price change is subject to Monitor approval under sections 124 and 125. I do not consider that section 116(2) allows NHS commissioners and providers to strike local agreements on prices under a separate mechanism from the Monitor scheme under sections 124 and 125.
12 DAVID LOCK QC 7 th March 2017 Landmark Chambers 180 Fleet Street, London. EC4A 2HG.
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