Alan Maynard On the real effects of tariffs

Published: 06/05/2004, Volume II4, No. 5904 Page 17

The government hopes that a system of national tariffs in England will increase activity and efficiency. Is that hope well founded or will the tariffs merely increase inequity?

How will managers respond? The evidence from the US in the 1980s is informative. First there will be an incentive to reduce length of stay as this reduces expenditure and creates a potential surplus between tariff and cost. This led to the problem of the 'quicker sicker' syndrome in the US whereby it was argued that reducing length of stay led to increased readmissions. A study in the US by Rand think tank showed that hospitals avoided this by investing in more efficient discharge planning. Another US problem was tariff 'creep'. This involved the purchase of software to allocate patients to the most remunerative tariff category.

Advocates of tariffs argue that they will force finance directors to improve their accounting systems. Another claimed advantage is that they will oblige managers to validate their hospital episode statistics so that they can charge primary care trusts for all activity.

The remarkable thing about the US has been that although diagnostic-related groups or tariffs have been in operation for nearly two decades, clinical practice variations in activity and outcomes remain a major cause of inefficiency.

What are the likely equity effects of tariffs? Since 1977 successive governments have pursued a policy of equalising the financial capacity of purchasers. To do this they have used a budget allocation formula that distributes national resources on the basis of population weighted by need. The resource allocation working party (RAWP) initially carried out this work. Need has been gauged with various social deprivation measures and by local standardised mortality rates. This policy has reduced geographical inequalities in local financial capacity to provide healthcare.

This significant achievement may now be undermined by tariff policy. If your hospital has reference costs of 85, the theory is that you will be paid 100, and have a 'profit' of 15. To fund this your PCT will have to be allocated funding in excess of its RAWP budget allocation. If that PCT is at RAWP target, this is inequitable, and means some other PCT will lose out.

If your reference cost is 115, you will get 100, but your PCT will have to be funded to keep you in business as you follow government strictures and drive down your costs to 100. If your PCT is below target, it will lose RAWP allocations, increasing inequity.

There is a risk that gainers will commit their 'profits' from the tariff system in the short term and then find themselves in difficulties as funding returns to equity or RAWP principles. This may be a particular problem for foundation hospitals with their accelerated progress to tariffs.

Successive governments have sought to equalise financial capacity for nearly three decades with RAWP-type mechanisms, but national tariffs are a major threat to this sensible policy. The current health secretary is a nice old-fashioned socialist. Is he aware that one part of the Department of Health (tariffs) is not talking to another part (budget allocation)? Greater clarity is needed urgently.

Alan Maynard is director of the health policy group at York University and chair of York Health Services trust.