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Are we heading towards US-scale transaction costs?

There is an Atlantic-sized gulf between the US and the UK when comparing health bureaucracy and transaction costs.
A conservative estimate puts the nations’ health transaction costs at around 3% for the UK and 12% for the US.
A few years ago, public sector union UNISON estimated the cost of administration in the UK at around 12% of the health budget compared to more than 30% in the US.
Professor Andrew Street, professor of health economics and director of the health policy team in the Centre for Health Economics at the University of York, puts the difference down to a more disaggregated purchasing base in the US with a plethora of insurance companies for providers to deal with. By contrast,
NHS hospitals mostly deal with one or two PCTs.
He adds: ‘While in the UK hospitals are generally similar with reporting systems that are similar, in the US you have voluntary sector hospitals, charities, private hospitals – all with different ways of doing things. Plus, systems vary from state to state – it’s decentralised.’
The nature of contracts in the US also varies considerably, with more nuanced block contracts and tariff prices.
But are CCGs on the beginning of a similar US-style curve as they set about trying to innovate more transformational contract changes?

On the up?

A criticism of PCTs was that they simply rolled provider contracts over from one year to the next – but this approach helped keep transaction costs down.
Early versions of GP commissioning – especially the fundholding experiment of the 1990s – were notoriously expensive in transaction costs terms, mainly through the increased bureaucracy involved in checking on GP fraud.
A 2010 Commons health select committee report on commissioning warned: ‘Whatever the benefits of the purchaser/provider split, it has led to an increase in transaction costs, notably management and administration costs. Research commissioned by [the health department] estimated these to be as high as 14% of total NHS costs.’
Architects of the Health and Social Care Bill were certainly mindful of the dangers of escalating transaction costs. The impact assessments for the bill published in January 2011 recognised a risk of ‘potential higher transaction costs as we change the number of organisations commissioning services’.
The assessment made it clear limiting transaction costs was the primary purpose of capping the CCG running cost allowance at £25 per capita.
And it revealed a faith in PbR: ‘The payment by results policy has introduced a comprehensive fixed price system for an increasing array of NHS activities. This means that for tariff activities, CCGs will not need to engage in contract price negotiations thereby reducing potential transaction costs.’
The burden of transaction costs could be ‘dramatically reduced’ by greater integration, economies of scale and scope, a national qualification process for Any Qualified Provider – coupled with PbR and electronic systems including Choose and Book, allowing financial and clinical records to be more closely and easily linked, the assessment concluded.

A cap or a hindrance?

Interestingly, there is another conversation in CCG circles that the £25 a head cap could actually hinder opportunities for CCGs to make cost savings.
Dr Shane Gordon, clinical commissioning co-lead for the NHS Alliance, says: ‘It equates to 1.5% of NHS running costs
which is very very low – possibly the lowest in Europe – which is very constraining and in some senses too low. It ignores the potential value of managing your transactions better.
‘It may be that spending more on drilling down into the data may mean you get back more than you put in. There’s
a risk that muscle-power will be lacking, preventing CCGs getting down to the nitty gritty where real money can be saved.’
Some CCGs may be tempted to dip into their clinical budgets in the short term to do just that, says Dr Gordon, who is also clinical chief officer designate for NHS North East Essex CCG. ‘Some CCGs are trying out things such as hospital electronic prior approval systems which cut out some of the human overheads involved in commissioning,’ he says. ‘If we’re down that far in terms of resources, more of those sort of initiatives will come into their own.’

Coding errors

Removing errors in the coding of hospital treatments is one area ripe for savings – or expense. Some US hospitals reportedly use three coders per speciality – another factor ramping up their transaction costs.
An Audit Commission report published in August 2012, revealed an error rate in Secondary Uses Service data of 7.5%, almost always in hospitals’ favour.
Graham Poulter, managing director of iQ Medical says: ‘If you do the sums, that means of the £30bn sent through practices to secondary care, £2.25bn is in error. That’s £267,00 a year for every practice. Take that into a CCG of 40 practices, and it’s £10m per annum; a very substantial transaction cost that has to be monitored and accounted for annually.’

New NHS costs

So with CCG running costs clamped and evident potential for using IT to make administrative savings, the evidence suggests UK transaction costs are unlikely to move anywhere close to US levels – yet.
Early experience with AQP and ISTCs suggests a marketplace of competing providers is yet to develop in most parts of the country, and so far CCGs look more likely to work together than against each other.
But for Professor Street, there are two further danger areas – the relative costs of GPs compared to PCT managers and the cost of outsourcing commissioning support – that could yet significantly bump up transaction costs, though he feels little will change on the hospital side.
‘My hunch is that the reforms overall will increase transaction costs a bit. It remains to be seen how commissioning support beds in and unless you can get GPs to do the admin work more cheaply, costs could increase there. But I don’t see much will change for hospitals. They’ve got their infrastructure in place and we know what the payment systems are.’
So no major cost timebombs lurking for now. But a worrying, and recurring, trademark of these reforms is that their full scope is still to be revealed.
Ruth Thorlby, senior fellow in health policy at the Nuffield Trust, describes ‘an expanding universe of regulation at the moment’. She singles out a recent consultation document from Monitor on ensuring continuity of health services, as suggesting a ‘potentially huge amount of extra work’ for CCGs three or four years down the line.
‘Commissioners are supposed to identify in advance which services are essential and what would happen if they went under, which means they have to undertake a full market analysis. To do this properly, they would have to go through all their local services asking if there is an active alternative. I’m not sure the system as it is currently evolving could cope with this.
‘Basically, if procurement and competition are supposed to happen on
a more rigorous level than at the moment there are going to be loads of extra transaction costs.
She adds: ‘I’m not sure people have a clear grasp of what’s involved yet. Of course this Monitor document is still at the consultation stage and what will happen with implementation is one of the current imponderables – along with the precise role of the arm’s length bodies and how powerful the NHS Commissioning Board will prove to be.’
While for now it looks as if transaction costs on the hospital side will not radically increase, for CCGs the experts agree it’s difficult to predict real transaction costs until the reforms are fully implemented.
Alisdair Stirling is a freelance journalist