Multi-year budget allocations could help commissioners develop local contracting more effectively, Monitor has said.

In a research paper published last week, the sector regulator said the need to balance budgets each year was a barrier to agreement of local contracts and prices which could potentially deliver better outcomes.

It cited an example where locally-agreed activity prices had been dumped in favour of block contracts midway through the financial year because a commissioning organisation needed to reduce the risk of overspending.

Setting allocations spanning several years – or with more flexibility each year - is one of the options being considered by Monitor and NHS England, which will together have responsibility for setting NHS prices and currencies from 2014-15.

They are also looking at redesigning the “commissioning for quality and innovation” pay for performance system, and redesigning the sanctions and incentives which can be applied under the standard NHS contract.

The report, called Local price setting and contracting practice for NHS services without a nationally mandated price, found £40bn annually was spent on locally contracted services by the NHS, compared with £29bn where prices were set nationally.

Acute services were most likely to be contracted for using the national tariff with local prices more important in mental health and community services.

However, the report identified several barriers to successful local contracting. These included a lack of good quality information; poor contracting skills of small commissioners; commissioners not able to negotiate with providers on equal terms; and reluctance to enforce financial penalties and avoid formal negotiations and disputes.

Another issue identified was the high transaction costs associated with contracting, which could make block contracts look more attractive than activity-based methods.

The research paper proposed making local contracting more transparent, although it said this would involve significant changes in behaviour. It said better information availability could help address the power imbalance between providers and commissioners, and might be more effective than extending national pricing.