Should prospective payments be differentiated for public and private healthcare providers?

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Abstract
The English government has encouraged private providers – known as Independent Sector Treatment Centres (ISTCs) – to treat publicly funded (NHS) patients. All providers are to be remunerated under a prospective payment system that offers a price per case treated, adjusted by the Market Forces Factor (MFF) to reflect geographical variation in specific input costs. This payment system presupposes that any remaining cost differentials between providers result from inefficiencies. However, the validity of this assumption is unclear. This article describes the constraints that could cause public and private provider costs to differ for reasons outside their control. These constraints may be regulatory in nature, such as taxes and performance management regimens, or relate to the production process, such as input costs, the provision of emergency care, and case mix issues. Most of these exogenous cost differentials can be rectified by adjustments either to the regulatory system or to the payment method. However, differences in capital costs appear less tractable and further investigation into possible solutions is warranted.