Monitor might refuse to allow local increases to the prices paid to NHS trusts unless commissioners have proven they could not buy the services more cheaply elsewhere, an independent report for the regulator has suggested.

The Health and Social Care Act gave Monitor the power to increase the amounts paid to a provider above the nationally set “tariff” prices for NHS services. It may only sanction a price increase where the provider can prove it is “uneconomic” for them to continue providing services at normal health service prices.

Click here to read Crispin Dowler discuss why there are no clear winners from the new price-setting regime

Monitor director of strategy Adrian Masters said the new rules would bring an end to “hidden bailouts” for NHS trusts. Where trusts are unable to agree a rate with their commissioners, they will even be able to apply directly to the healthcare sector regulator for permission to raise their prices.

However, an independent report commissioned by Monitor has recommended that price changes should only be allowed where “alternative options have been tested but ruled out as unviable”.

The report, by Frontier Economics, states that the “requirement for commissioners and providers to test options should be substantial”. They may even need to first put the services up for tender, to prove there are no competitors who could provide them more cheaply, it suggests.

“[Commissioners] should demonstrate that alternative providers and service configurations have been considered,” the report proposes. “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.”

Under the Frontier Economics recommendations, a price increase would only be granted where no other form of reimbursement is already made for local cost differences, and where the additional costs are “beyond the control of the provider and commissioner”. Providers and commissioners would have to demonstrate that the additional costs were not due to the provider’s inefficiency, and that the price rise was not being used to sustain poor quality services or encourage quality improvement.

The tariff already makes some allowances for differences in local costs, by adjusting prices according to a “market forces factor”.

But tariff prices – which are based on the average costs of providers across the NHS – do not always cover the costs of individual services even for efficient providers.

Mr Masters said: “There are sometimes variations in terms of the pressures and challenges facing local health services. Making local modifications to the national tariff is a way of recognising that a one size fits all approach to setting prices will not always be appropriate.

“If a provider can demonstrate that it can’t provide services at the tariff price that are valued by patients and commissioners it may be appropriate for Monitor to approve a local modification to the national tariff.  Evidence based local modifications will increase transparency about how we spend money in the NHS, provide stability for those that need it, and end hidden bailouts.”