Editorial Thursday 19 January 2012: The great ratings agency fiasco

The Guardian splashes this morning on the proposals by Monitor to allow credit ratings agencies to assess the financial viability of hospital providers in the private and NHS sectors, encapsulaed in the Developing the Continuity of Services licence conditions: stakeholder engagement document.

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This is part of the licensing service that Monitor will operate of all NHS-funded providers. The Care Quality Commission will continue its role in quality regulation.

Monitor's proposals "explain how the licence conditions we are proposing would enable us to take a risk-based regulatory approach to protecting vital services. This approach will allow us to focus our attention on those licensees most likely to run into difficulties ... The licence conditions we are proposing have been designed to encourage licensees to minimise risks that could lead them to become financially distressed".

Longstanding readers will recall that Health Policy Insight analysis found that Monitor will be involved in giving above-tariff bungs to distressed providers under the DH's proposed failure regime. We called this "the bungs formula".

Monitor is now "proposing a licence condition that would ensure that, if a licensee becomes insolvent (Stage 3), a pool of funds would be available to the special administrator. This would allow the licensee to maintain services while a long-term solution is found. Costs associated with the implementation of a long term solution might also be met by this pool of funds (e.g. restructuring costs)" (page 7).

To the bungs formula, we can now add the fuck-up fund.

Further definition is required here of commissioner-requested services: "initially this will comprise mandatory services currently provided by foundation trusts. Subsequently, commissioners may request that other services, provided by any licensee, should become Commissioner Requested Services, or that services should no longer be treated as Commissioner Requested Services. Licensees providing Commissioner Requested Services will be subject to all of the Continuity of Services licence conditions".

There are also "protected services: key services which would only be formally identified when a provider of Commissioner Requested Services becomes insolvent. Their withdrawal would be likely to have a significant adverse impact on the health of patients or lead to an increase in health inequalities".

And of course, Monitor's licence conditions "apply to all providers of NHS-funded services, irrespective of their financial position or performance" (page 5).

So, if they are a commissioner-requested service, private sector licensees will be able to access the fuck-up fund, which all licencees will be obliged to fund ("licensees will be obliged to contribute to the risk pool so that they, and not the patients they serve, would bear the costs of failure" - page 7).

So. Who's for nationalising private sector failure?

To be fair to Monitor, there is sensible material in licence condition 3 – restriction on disposal of relevant assets.

Two main reasons why credit rating providers won't work
The headline-grabbling licence condition 4 – Risk rating reads as follows:
"This licence condition would require licensees to maintain an ‘investment grade’ credit rating, either from one of the major credit ratings agencies (Standard & Poor’s, Moody’s and Fitch) or from another agency that we would approve. Investment grade is defined in the licence condition as all ratings above and including ‘BBB-‘ by Standard and Poor’s, ‘Baa3’ by Moody’s and ‘BBB-’ by Fitch. The ratings would exclude government support, whether implicit or explicit, as we would be using this licence condition as a means of measuring licensees’ intrinsic financial strength.

"If licensees are unable to get a credit rating from one of the ratings agencies, they would apply to us for a rating, paying an appropriate fee, and would be required to maintain a rating equivalent to investment grade.

"If a licensee’s rating falls below the investment grade standard at any time, it would be required to notify us as soon as possible".

So far, so new public management.

However, there is one slight problem with the idea that credit rating agencies will be able to meaningfully rate providers.

Which is that they won't be able to do it.

Sigh. Here we go: the main cost of providers is staff wages.

The Government clearly wishes to move away from national pay negotiations, as Chancellor George Osborne signalled in last year's Autumn Statement:

"Public sector pay
1.109 Public and private sector organisations compete for employees in different markets across the UK. However, while private sector pay is set in accordance with local labour markets, public sector pay is usually set on a national basis. As a result, in many areas, public sector pay does not reflect local labour market conditions. For example, the Institute for Fiscal Studies have found that public sector workers are paid similar wages to private sector workers in some parts of the country, but over 10 per cent more in other locations.15

1.110 Such differences between public and private sector pay can adversely affect private sector businesses which have to compete with higher public sector wages. It also leads to unfair variations in public sector service quality and limits the number of jobs that the public sector can support. Some public sector organisations, such as Her Majesty’s Courts and Tribunals Service, have already successfully taken action to ensure that their pay is in line with local labour markets, but there is the potential for others to take a similar approach.

"The Autumn Statement therefore announces that:
• the Government will ask independent Pay Review Bodies to consider how public sector pay can be made more responsive to local labour markets, to report by July 2012; and
• the Minister for the Cabinet Office will review how more local, market-facing pay could be introduced in civil service departments. Secretaries of State may then choose to take forward recommendations for their departments".

But it is not there yet. Nor is the culture in NHS providers: since 2003, FTs (the brightest and most entrepreneurial, remember?) have had the freedom to vary from national terms and conditions of pay etc; only one did (Southend FT, take a bow). Bit of a clue there.

So for the foreseeable future, national contracts will continue to determine the major part of providers' cost base.

But there's another lack of flexibility for providers: the national tariff. Monitor is going to have to work with the Nicholson Commissioning Board to set the tariff, which is to cover more and more provider activity with increasing granularity and detail.

And it is wholly clear that the heavy lifting of 'The Nicholson Challenge' (copyright S Dorrell, 2010) £4 billion annual productivity and efficiency gains will be done via the national tariff.

Clinical commissioning is not going to re-shape the business model of what happens in hospitals. The tariff reductions, which is what we can anticipate over the coming financial years, will - as Simon Stevens cogently observed in our interview last year.

It is wildly unclear how a credit ratings agency would be able to offer meaningful information without the loss of national pay bargaining and inside knowledge on the future shape of the tariff.