Market forces factor

Outside a small group of anoraky economists and accountants, many in the NHS probably have little or no knowledge of the market forces factor and less than zero interest in its construction or application.

But as the NHS moves into its new financial environment, where providers will be reimbursed according to the number of patients treated and a fixed national tariff, the importance of MFF will - or at least, should - become increasingly clear.

Initially recommended by the resource allocation working party in 1976, an MFF has since been developed and used by the NHS as a way of adjusting allocations to health authorities (and latterly purchasers) for unavoidable variations in healthcare costs around the country. So MFF helps to even out the purchasing power between health authorities, and latterly primary care trusts.

Broadly, MFF is a composite index of geographical cost variations in land, buildings, equipment and staff pay (including London weighting). Such variations can be significant. For example, in 1996-97, pay for inner London was calculated to be a third higher than in the rest of England. The latest trust-specific MFFs show a variation of around 40 per cent for acute trusts and a slightly smaller variation for PCTs.

MFF is applied to PCTs in such a way as to match their pattern of purchasing. For providers, the impact of applying their specific MFF to the national tariff prices is obvious and fairly dramatic. For a trust such as St Mary's in London, the national average 'fixed' healthcare resource group price is inflated by just over 28 per cent; while for the Cornwall partnership trust, prices are deflated by around 12 per cent.

Such differences between London and Cornwall are not too surprising. But even within London, MFF-adjusted prices will create differences of up to 20 per cent or more between hospitals. Faced with such variation, what might purchasers be tempted to do? Move contracts in order to get more bangs for their buck?

There is an obvious limit to this approach, however.

Lower-price hospitals will not be able to increase activity by much in the short term. And of course, the residents of Paddington and its environs may not think much of travelling to Walthamstow for their inpatient care.

While the principle of adjusting purchasers' allocations and providers' prices to take account of unavoidable differences in costs is clearly sound, there is the question of how to do it. MFF relies on, for example, pay variations in labour markets supplying NHS staff - with data drawn from the Office of National Statistics' new earnings survey.

An alternative method would be to monitor variations in actual costs incurred by different trusts in 'producing' their HRGs. But as costs will vary for a variety of reasons which are within the power of trusts to change, disentangling those which are not would be difficult.

MFF is not the perfect solution to the issue of unavoidable cost variations, and the Department of Health plans to keep this method under review.

© Copyright 2004 Emap