Running out of steam? By Noel Plumridge

22 May 08
Not so long ago, ministers were wild about independent sector treatment centres and their success in bringing down waiting lists. But plans for more seem to have slowed, if not stalled. So is the relationship waning or just maturing? Noel Plumridge reports

23 May 2008

Not so long ago, ministers were wild about independent sector treatment centres and their success in bringing down waiting lists. But plans for more seem to have slowed, if not stalled. So is the relationship waning or just maturing? Noel Plumridge reports

The Department of Health approved the development of three more independent sector treatment centres last month, at an estimated total cost of £50m.

Care UK, which currently runs five treatment centres in the south of England and bought out another provider, Mercury Health, for £77m last year, will run two centres in Manchester. The third, in Southampton, is to be run by Partnership Health Group, a joint venture between Care UK and a South African company, Life Healthcare. Advance publicity suggests the centres will carry out more than 1.5 million clinical procedures and outpatient consultations over the next seven years.

Meanwhile, the jury is still out on a possible fourth centre in the west of England, where UK Specialist Hospitals (which already runs the high-profile Shepton Mallet treatment centre) is the preferred bidder. Proposed schemes in London, Essex and Hertfordshire are also being considered.

Unless you live in Manchester or Southampton, you are unlikely to have seen or read a great deal about these developments in the media. They do not arouse the banner-waving protests against 'privatising the NHS' that Private Finance Initiative schemes have long incited and that proposed 'polyclinics' are now beginning to provoke. Yet ISTCs operate in direct competition with NHS hospitals. For instance, Southampton University Hospitals Trust has agreed to transfer 7,500 elective procedures a year (worth some £4.5m under the national payment by results tariff) to the new centre in the town. And in Nottingham the opening of another large centre – to be run by Nations Healthcare – has recently been delayed because of concerns about the possible financial impact on the local NHS.

The announcements might also cause a little confusion. After all, Health Secretary Alan Johnson announced the abandonment of a planned third wave of ISTCs as far back as July 2007. There has been widespread comment about the cooling of the department's love affair with independent sector provision – and lobbying from the CBI and others to reaffirm the importance of the relationship. The income of private providers grew by only 2% in real terms in 2007, compared with 9.5% in 2006 – and this when average NHS funding growth was running in excess of 9%.

So, what are ISTCs? Who are these firms? And why are new centres still being commissioned when, with the high-profile target of a maximum 18-week wait from diagnosis to treatment all but in the bag, the NHS in England would appear to have the hospital capacity it needs?

The original business model for what was then termed a 'diagnostic and treatment centre' (some unkindly suggested the phrase was simply a long-winded way of saying 'hospital') was the health care equivalent of the supermarkets' 'pile it high and sell it cheap'. Borrowed from the production-line approach famously used for eye surgery in the former Soviet Union, it suggested that 'straightforward' pre-planned operations ('cold surgery' in the jargon) could be separated from the general workload of NHS hospitals – where they were jostling for theatre time with emergency procedures – and managed slickly and efficiently in dedicated specialist units.

As well as being efficient, the centres would also be effective in curtailing the political embarrassment of cancelled operations and long waiting lists. Five years ago it was not uncommon to wait more than 12 months for one of these 'straightforward' yet life-changing operations. The new centres were to transform access to orthopaedic procedures, especially hip and knee replacement, and cataract surgery.

They would also have significant side effects, including a drastic cut in the private income of orthopaedic surgeons, and a longer-term impact on medical career paths. From the patient's viewpoint, in the absence of a daunting wait, why go private? And, from a management perspective, if the clinical work genuinely lacks complexity, why employ the most expensive consultants to do it?

None of this, of course, implied private sector management. The first treatment centres sponsored by the department were NHS-run, and some have proved very successful. The 65-bed South West London Elective Orthopaedic Centre at Epsom, for instance, opened in 2004 and remains one of the largest such units in Europe. It is managed in partnership by four southwest London NHS trusts.

The 'independent sector' element of the treatment centre concept was a product not of clinical priorities but of political imperatives. Faster access to health service care and improving the public perception of the NHS were at the top of the political agenda. By 2003, there was growing scepticism about the NHS's ability to fulfil ministerial ambitions.

Pay reform – notably the new consultant contract – was proving hard to achieve and did not appear to offer the hoped-for lever for a radical improvement in productivity. The British Medical Association's ability to safeguard its members' financial interests remains the stuff of legend – witness recent tussles over extending the opening hours of GP practices.

Then, NHS acute providers were asked to provide information on the extra capacity needed to trim waiting lists. Scenting extra funding, they chose to present the situation in the worst possible light.

It was a serious error of judgement. The then health secretary, Alan Milburn, had secured Treasury funding for the NHS Plan, but needed a plausible 'plan B' in case the NHS – and the DoH – proved unable to deliver. So did the Cabinet. The treatment centre programme offered the ideal vehicle for a material expansion of private sector hospital provision, demonstrating to the NHS that achieving access targets was non-negotiable.

As if to emphasise the point, their procurement wasn't to be allowed to sink into Richmond House bureaucracy. It was handed instead to Ken Anderson, a brash Texan with a background with Private Finance Initiative contractor Amey, who had recently been appointed to lead the DoH's newly established commercial directorate. The civil servants also needed to understand that ministers meant business: the new directorate's allegiance was as much to the policy office at Number 10 as to the department.

The impact was swift. Early in 2005, John Reid, Milburn's successor, told Radio 4's Today programme that: 'From the patient's point of view, the monopoly of the NHS has meant waiting lists for years.' By May that year Patricia Hewitt, who had replaced Reid, was able to boast of more than 20,000 cataract operations per year being performed by the independent sector, and no elderly patient having to wait more than three months for cataract treatment. Faster treatment for orthopaedic surgery, ear nose and throat surgery and urology procedures became the norm.

Some of the new centres were extremely productive: the Shepton Mallet centre carried out 10,127 procedures in 2006/07 (101% of its contract) while the smaller centre at Kidderminster achieved 108%. Long waits for surgery in the English NHS were becoming a memory.

Yet the initial procurement sowed the seeds of much subsequent controversy, and of recent political ambivalence surrounding the future of the ISTC programme. Prices and conditions for the first wave of treatment centres, centrally negotiated, were deliberately made generous enough to entice large multinational providers into the fledgling NHS market. In the wake of the collapse of private rail firm Railtrack in 2001, when the government refused to bail it out, and subsequent City anxiety, this required hard cash.

Much to the annoyance of NHS providers coming to terms with a national payment by results tariff based on average NHS costs, firms running the early ISTCs were able to negotiate prices that were an average 11.2% higher than the tariff. This rose to around 30% more, once their simpler case mix was taken into account. On any rational basis, a straightforward case mix and economies of scale should have meant below-average costs and hence prices below the national tariff.

But the higher rates were perhaps justified by set-up costs. David Worskett, director of the NHS Confederation's NHS Partners Network of independent providers, points out the high capital outlay needed for state-of-the-art medical equipment. 'No one would contemplate making such an investment if the return had to be secured within five years,' he argues.

But it aroused envy, and set a level of expectation on revenue returns that was never likely to be sustainable.

It wasn't just about pricing. Unlike NHS providers, the new ISTCs were guaranteed payment whether or not the contracted levels of activity were delivered. The contracts were known as 'take and pay': whatever the 'take', primary care trust commissioners were obliged to pay. And, in 14 out of the 27 first-wave schemes, there were also 'residual value guarantees', obliging the NHS to buy back buildings if required at the end of a five-year contract, reducing the exposure of investors.

PCT commissioners were left in no doubt that referrals should flow to the new centres, irrespective of any consequential financial harm to local NHS providers. In a survey of PCT and trust chief executives, published in January 2005, 61% described the approach to implementing the ISTC programme as 'prescriptive' and 37% said it was being enforced by 'bullying'. Among the losers were some of the original NHS treatment centres, which never received the volumes of referrals they had anticipated.

The ISTCs' contractual terms have subsequently been roundly criticised for offering poor value for money. The Commons health select committee accused Patricia Hewitt of being secretive and using 'commercial confidentiality' to justify not releasing the methodology used to evaluate contract bids. In performance terms, first-wave ISTCs carried out some 53,000 operations in 2005/06 and some 67,000 in 2006/07: around 50,000 fewer than projected by the DoH.

Meanwhile, concerns about the quality and safety of clinical practice in some ISTCs began to circulate. In March 2006, Angus Wallace, professor of orthopaedic and accident surgery at Nottingham University, claimed that the NHS was having to fix the mistakes of inexperienced and poorly supervised foreign surgeons taken on by the ISTCs. 'We expect failures of hip replacements at approximately 1% a year and knees at about 1.5% a year,' he told the Guardian, 'but… some of the ISTCs… are looking at 20% failure rates.' Although the first wave of ISTCs was contractually required to report key performance indicators to the NHS, in practice many failed to do so, a shortcoming criticised in July 2007 in a much-delayed Healthcare Commission report.

It couldn't last. When the second wave of ISTCs was launched in 2005, the 'take and pay' provisions had gone. Seven of the intended 24 schemes were dropped in April 2006, and a further four subsequently.

Second-wave ISTCs have tended to be smaller facilities, often located on existing NHS sites. Contracts are still being negotiated, with considerably tighter terms and conditions and much greater local NHS involvement.

The CBI has protested volubly about the 'mismanagement' of this round of procurement, and at the framework for compensating companies that had bid for the cancelled schemes. Meanwhile, the DoH commercial directorate has seemingly had its teeth drawn, with most procurement resources transferred to strategic health authorities. Anderson himself has moved on, joining Swiss investment bank UBS at the end of 2006.

Yet beyond the protests, the independent sector appears sanguine about future prospects. More far-sighted firms must always have wondered whether the ISTC programme was anything more than a useful stick with which to beat the NHS, and hence ultimately expendable. But the programme continues, and perhaps what is noticeable is the absence of noise it now generates.

Even if the premiums paid to firms are falling, there are sound business reasons for the companies to stay in the NHS market. One is that the private hospitals' continuing popularity with patients, attracted by low hospital infection rates, single rooms and free parking, is underpinned by the government's recently reaffirmed commitment to 'patient choice'. This suggests a stable and relatively generous income stream for years to come. The payment by results tariff plus market forces factor, if less than ISTC owners have earned to date, must seem appealing when marginal capacity is being used and hospital overheads are already covered by other income.

Certainly market sentiment appears optimistic: witness the relatively high sums paid by General Healthcare Group when purchasing nine hospitals from Nuffield Hospitals in January 2008.

A second reason for firms to stay in the NHS market is the wider business environment. Pressure from the turmoil in the global financial markets is translating into intense competition for funds, with banks beginning to shore up their own liquidity via calls on investors through rights issues. Margins are being squeezed between rising running costs and commissioners' expectations of efficiency gains. And, as the cliché has it, when the going gets tough, the tough get going. Recent growth in the independent hospital sector seems to be driven by foreign firms – Netcare from South Africa, Ramsay Health Care from Australia (which acquired Capio UK last year) – used to delivering high volume throughput in state-funded or semi-insured health systems.

And there is a third reason: potential for growth. Not all NHS trusts will successfully leap through the regulator Monitor's hoops into the competitive new world of foundation trusts. So what will become of the perhaps 100 or more that fail? Some will, no doubt, be devoured by successful foundation trusts: the accounting model for such acquisitions was pioneered in Birmingham last year when Heartlands took over the Good Hope hospital trust. But that would lead inexorably towards local NHS monopolies; and monopoly is the antithesis of free choice.

To avoid political noise and accusations of 'privatising the NHS', boundaries might need to be blurred a little. So another possibility is emerging: perhaps the unsuccessful trusts could also become the growth potential for the independent sector. Instead of outright acquisition, commercial management skills could be introduced to struggling hospitals while formally they remained in the NHS, in an offer that trust boards would be rash to refuse. In fact, much the same process is already under way in the PCT sector. Channing Wheeler, now leading procurement for the DoH, is probably enthusiastic. He is, after all, a former vice-chair of United Health, parent company of United Health Europe – one of the 14 firms recently approved as a supplier of such services.

Steady income and growth potential in the context of a tightening market: it's attractive to the most demanding of venture capitalists.

Noel Plumridge is a former NHS finance director and the author of CIPFA's Payment by results


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