Agency staff 1/3: Eight reasons the agency staff ‘price cap’ will not work

Monitor and the TDA have just published a consultation on a proposal to introduce price caps on agency staff working in the NHS. This follows weeks of news about dire NHS hospital finances and growing agency staff bills.

Sadly, a price cap on agency staff won’t improve the situation and may even make it worse for the following reasons:

1. Driven by quality. Spending on agency staff has been driven by staff shortages. The recent news of the CQC considering that 2/3rd of hospitals are offering substandard care highlights this. Agency staffing can provide much needed flexibility to organisations that are unable to recruit full time staff members (more on this below).

2. Unavoidable. The high rates paid to some (possibly the minority) of agency staff are in part driven by the high demand for these individuals in organisations that do not have alternative options. This may be justified during short run crises or challenging situations (e.g. while recruiting, or in an emergency). Unfortunately, it is unlikely that the individuals that can command an excessive rate of pay are the ones that are avoidable.

Perversely, the proposal to include a provision to “override” the price cap if there is a risk to patient safety may even drive up the high end agency prices – anyone able to charge over the cap would know they are providing an essential service. This may confer on them the knowledge that they are in a position to command almost any rate they like.

3. Limited supply. Behind the high prices, there is a lack of available people to recruit. This may in part be driven by a lack of training opportunities or limited places on relevant courses. Either way it is definitely also driven by the relative attractiveness (or lack thereof) of full-time employment in the NHS. There is no shortage of news articles setting out the challenges that front line employees are facing every day in the NHS. The march in London this weekend highlights some of the sentiment among doctors.

Relative wages in the NHS have fallen in recent years compared to the private sector. This has happened at the same time as demands have increased (not least due to an ageing population) along with reduced staffing driven by the need to control cost in the short run. This has made alternatives to NHS employment more attractive: some people may decide not to train to be a doctor or nurse in the NHS; others may decide to find an alternative employer; some might consider earlier retirement. The recent announcement that immigration restrictions won’t apply to overseas nurses may help in this regard.

4. Price cap on buyers not suppliers. The proposed ‘price cap’ is not a price cap in the classical sense. Price caps are usually applied to the price that an organisation chargesrather than the price that it pays. These are usually introduced to prevent an organisation with natural market power (e.g. due to ownership of infrastructure that cannot be replicated economically) from abusing their position. It is very odd to set a price cap on the buyer. Imagine the ORR (rail regulator) setting a price cap on the amount you are allowed to spend on rail tickets… It might stop customers from travelling, but may not change the price being charged – especially if it was possible to “override” the rules in emergency situations.

5. Failure in the agency market? As mentioned above, price caps are typically applied in sectors where there is an organisation with significant market power. It is not at all clear that the NHS staffing agencies that are charging the high rates have such market power. If they do, then this is something that should be investigated and addressed.

6. Perverse effects from regulatory intervention. If agencies are making excessive profits but there is no market failure, then these profits should attract new organisations to enter the market. Over time this would drive down costs and/or profits as firms compete with one another. This is a healthy dynamic, which may alleviate some of the high prices we are observing at the moment. Unpredictable government intervention creates uncertainty, which makes organisations suspicious about future risks and less likely to enter new markets. If they do enter, they require higher profits to compensate for the risk. Rash intervention by governments distorts the dynamics that may alleviate the problem in the medium term – this will prolong the underlying problem.

7. Cap could become a target price. Setting a cap at any rate will tell people how much they could potentially charge in the agency market. To some people this knowledge may make the alternative to full time employment more attractive (“I can charge how much?!”). This could result in some people switching from full time to agency – I’ve got one friend considering the move. The consultation is clear this is not the purpose of the cap… But in reality it sure helps provide some information on what can be charged.

It could be worse. The rate could provide a focal point for agencies to tacitly collude with each other (agree the rate they will charge for some agency staff). This could increase their profits in the short run while driving up the average price (or quality down) in the agency market.

8. What is the basis for the cap? The caps proposed in the consultation are based on rates relative to the national pay rate. It is not clear that these caps would actually bite the rates charged that are commonly charged by agency staff. Without understanding how the price caps relate to the rates that are being charged, it is difficult to understand the potential impact that they may have – e.g. will they affect less than or more than 10% of agency staff.

In summary, the proposal reads as being driven by the politics of “needing to do something” rather than confronting the true underlying causes. There are certainly efficiencies and productivity gains that can be made by hospitals, but placing yet more restrictions on day-to-day operations is unlikely to be helpful, will almost certainly be an unhelpful distraction and may at worse have perverse effects.

Intervention would be better targeted at improving supply or terms of employment for full time staff such as more flexible working conditions or better job rostering.

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Do you have any thoughts, comments or challenges to the logic above? Please feed back to me, or add as a comment. Thanks.