The government has performed a significant U-turn on allowing price competition between NHS trusts and independent providers.

*** Updated ***

A letter to senior staff from NHS chief executive David Nicholson on February 17 said there was “no question of introducing price competition” – contradicting the Health Bill which refers to the tariff being only “a maximum price for that service”.

The Department of Health is denying the comment represents a ministerial U-turn, saying in a statement today: “There is no U-turn because we never intended to introduce price competition. There has been incorrect reporting around this and Sir David’s letter simply sets that straight.”

However astatement issued by the Department of Health last month said: “In the future, Monitor will have a vital new role in ensuring effective competition and a level playing field, acting in the interests of patients and the taxpayer. They will also oversee the process of price competition, which is to be allowed only where it is deemed appropriate and where it will not harm quality of service.”

A senior Department of Health source told HSJ ministers had now “changed their minds” on allowing competition on price, although they added the real test was whether or not they changed the wording in the Health Bill.

Sir David’s letter came as the British Medical Association’s General Practitioners’ Committee passed a resolution calling for amendments to be added to the Health Bill to “preclude price competition”.

GPC chair Laurence Buckman responded to news of the apparent U-turn saying: “I want to see it on the face of the bill. If we now say that it doesn’t say that, we’ll have to see an amendment on the bill. It’s what goes through parliament and comes out the other end [that matters].”

Last month Sir David told the Commons Public Accounts Committee price competition would be “extremely dangerous” without strong safeguards to protect quality.

Asked by HSJ why, given his own concerns, the change was being introduced, Sir David said: “To test it. To, in very restricted circumstances, test it as a pilot and see what happens.”

The DH now plans to develop guidance which will make clear offering NHS services below the national tariff will only be permitted in exceptional circumstances and subject to approval by strategic health authorities or their successor bodies.

A spokeswoman for the DH said: “There is no change to the policy set out in the 2011-12 Operating Framework and first set out under the previous government in December 2009.

“Given the potential risk to NHS business planning of the incorrect speculation that this policy amounts to price competition, Sir David’s letter serves to reaffirm this policy - that we want to see competition on quality, not price. Anyone can see that it is difficult for the government to U-turn on a policy which it inherited from the previous administration and which it has not amended since coming into office.”

Paragraph 5.43 of the operating framework said: “The flexibilities set out in the 2010-11 NHS Operating Framework will remain largely in place for 2011-12.

“One new flexibility being introduced in 2011-12 is the opportunity for providers to offer services to commissioners at less than the published mandatory tariff price, where both commissioner and provider agree.

“Commissioners will want to be sure that there is no detrimental impact on quality, choice or competition as a result of any such agreement.”

The DH source said they hoped that would now be the ongoing policy, as, in clarified form at least, it makes a distinction between allowing below-tariff pricing, and permitting competition on price.

HSJ understands the DH will now allow providers and commissioners to jointly agree prices below tariff but only where there is “third party sign off”. Such below tariff prices would likely be used where providers wish to deliver more procedures than originally agreed with commissioners. As their fixed costs would be covered, they may want to offer additional activity at a marginal price.

A letter from deputy NHS chief executive David Flory, issued today alongside detailed guidance on the NHS tariff for 2011-12 says that from April providers will be able to “offer” commissioners services “at less than published mandatory tariff price”.

However it says that “flexibility cannot be imposed through a competitive tender process, and the overriding requirement is that, the quality of service to the patient should not be diminished, in any way.

“Commissioners will be responsible for ensuring that the quality of services purchased using this flexibility is at least equal to, if not better than, services purchased at full tariff price. Commissioners must seek strategic health authority approval before any variations to tariff can be implemented.”

Shadow health secretary John Healey said: “On a day of chaos, the Tory-led government is all over the place thanks to its reckless and unfair policies on forestry, housing benefit and now the NHS. If their new policy is to rule out price competition, then I look forward to both Tory and Lib Dem MPs backing our amendments to do just that.”

“I hope this is a sign of more U-turns to come and that the Tory-led government will rethink its high-cost, high-risk plans for NHS.”