Who stands to gain most from Monitor’s new power to dictate “local modifications” to the price of NHS services?

Under the Health Act, the regulator can increase the fees due to a provider if the provider can prove they cannot cover their costs at nationally-set NHS prices.

The policy was hurriedly tacked on to the legislation late last year, in one of many efforts to reassure parliament that essential services would not be sacrificed to unrestrained market forces.

At the time, the winners and losers seemed obvious. The winners: providers and Monitor; the losers: commissioners and the NHS Commissioning Board. The act means providers can even bypass their commissioners if the two parties cannot agree, and petition the regulator directly for higher prices; commissioners have no corresponding way of cutting fees they consider excessive.

However, a study Monitor has just published on how this regime might work suggests providers won’t be running at an open goal.

The report, by Frontier Economics, advised the regulator should not approve extra payments without evidence of “substantial” work to prove the services could not be obtained at normal NHS prices – for instance, through reconfiguration, or handing the work over to another provider.

“[Commissioners] should demonstrate that alternative providers and service configurations have been considered,” it stated. If that wasn’t enough to give an NHS trust pause for thought, it added: “This could also include competitive tendering for services. This sort of market testing could help determine whether a modification is necessary for the service to be sustainable.”

Monitor says it will need to analyse the recommendations in detail before it decides where to set the bar. Do not expect unrestrained celebration in hospital boardrooms if the bar ends up anywhere near the “competitive tender” mark.

Set the bar too low, however, and the regulator can likely expect a stampede of hard-up trusts requesting extra funds as soon as the new licencing regime comes into effect. There are many reasons trusts cannot always cover their costs at “tariff” prices, not least the inaccuracy of the tariff itself. Untangling the providers with genuine “structural” problems from those who are simply inefficient will be an unenviable task.

Assuming it can be done, will the real winners be patients? The idea is that no NHS provider should face perennial financial crises because accidents of history or geography make their services more expensive. The new regime gives them a transparent means of securing the funds they need, rather than depending on bailouts.

The problem is commissioners will have to pay for price increases out of their existing budgets. Assuming they don’t have spare money lying around, the premium paid will simply mean they have to ration other services they might have provided. For the local population, it is basically a birthday party where you buy your own presents.

Monitor director of transition policy Jason Mann argues, with some justification, that this is what happens anyway when commissioners bail out troubled trusts.

“What local modification of prices will do is make transparent where money is going to fund services above tariff,” he told HSJ. “It’s then up to Monitor to make a decision about whether that’s warranted.”

He added: “Going forward, it’s then a decision of budget allocation for commissioners, which isn’t up to Monitor.”

The Frontier Economics report suggests that over time “it may be appropriate for commissioning allocations to evolve to reflect changes in local prices”. It may indeed, but it may not be as easy as it sounds.

Take one group of providers that has a fairly plausible claim for extra funds: hospitals in sparsely populated rural areas argue that their costs per patient will necessarily be higher than average, but their services are essential. People cannot live hours away from the nearest emergency department. Allocations could in theory “evolve” to support these essential, but relatively underused, hospitals. But how likely would that be if it meant taking resources away from areas with high demand for NHS services, in constituencies that were urban, densely populated, and maybe even politically marginal?