The case of Circle vs. the NHS – why NHS and private providers do not compete on a level playing field

Vivek Kotecha | May 16, 2019 | Blog


Photo by Jonathan Petersson on Unsplash

Under the current rules governing the outsourcing of NHS services (primarily The Public Contracts Regulations 2015), NHS commissioners are required to offer opportunities for any NHS or private provider to bid to run NHS-funded health services. Commissioners are obliged to carry out a fair and transparent procurement process and can be sued if this is not the case. This is what happened in 2017 when Virgin Care successfully sued six Surrey Clinical Commissioning Groups (CCGs), after not being awarded an £82m contract for children’s health services, and won an estimated £2m of compensation from the state.

Last week another legal claim was launched against the NHS, this time by Circle Nottingham, part of one of the UK’s largest private healthcare groups. At the centre of this legal action against a group of NHS commissioners, Rushcliffe CCG, is a £320m contract to run the Nottingham Treatment Centre.

Following the procurement process the CCG awarded the five-year contract to the local NHS trust, Nottingham University Hospitals Trust (NUH), thus ending Circle’s 11-year management of the centre. As the Nottingham Treatment Centre has been described as the largest Independent Treatment Centre in Europe, the loss of the contract by Circle is a big blow to the private sector’s hopes of winning future NHS contracts and to Circle in particular.

The basis of Circle’s claim is that the current financing arrangements for the NHS hospital and, in particular, the ‘subsidies’ it receives from central government put it at an unfair advantage when bidding for NHS contracts.

Circle considers the choice of NUH to be unfair as it takes the view that NUH is not financially viable (as it is unlikely to meet its target deficit for the year), that its loans from the Department of Health and Social Care (DHSC), via the Secretary of State, should be classified as state aid (which under EU rules means these should not be included when assessing NUH’s financial viability), and that its cost savings plans for the centre (16% total cost savings) are unrealistic.

Circle does have a point. NUH is, financially, a poorly performing trust: by December 2018, it had a deficit of £33m – £17m worse than planned; £68m of interim revenue support loans outstanding from DHSC in 2018; and it is struggling to find cost efficiencies of 3-4%, never mind achieving 16%. In comparison, Circle Nottingham made a profit before tax of £2.9m in 2017, a 5.3% margin on £55m of revenue, and has been running the centre for eleven years.

However, the financial performance of an NHS hospital trust cannot be usefully compared with that of a private provider because they are very different organisations. Competition and tendering rules may call for measuring the financial strength of different bidders, but ignore important differences between them.

Acute NHS hospital Trusts and Foundation Trusts report financial results just as private businesses do, but in many crucial ways they are far from being ordinary businesses. They cannot turn away the bulk of their ‘customers’ (e.g. emergency admissions); they do not set the majority of their prices (indeed the health regulator cut the average price trusts are paid for treatments by 4% in real terms each year between 2010/11 to 2015/16); they are burdened with maintaining an aging estate and (in many cases) excessive PFI payments; their staff terms and conditions are protected; and they have quality standards to meet.

Many of these trusts lose money when performing work on emergency and complex admissions, but these are cross-subsidised by surpluses made on straightforward elective (non-emergency) and outpatient procedures. However, in recent years, their ability to sufficiently cross-subsidise themselves has come under strain due to rising patient numbers (especially emergency admissions), insufficient growth in funding, and the loss of ‘profitable’ services to private companies.

For the majority of Acute trusts this has led to persistent deficits, a direct product of funding not meeting the true cost of providing care. In the absence of government willingness to find the necessary funding the DHSC has chosen to provide short-term income support loans (with interest) and one-off conditional funding in order to keep trusts going, whilst ignoring the underlying issue that the price paid per treatment is too low.

By 2017, 96 trusts (41% of the total) had incurred £4.7bn of debt to the DHSC from these interim revenue support loans. As this demonstrates, running a financially balanced NHS hospital is a tough balancing act – as Circle knows well, having handed back the management of Hinchingbrooke Hospital to the NHS in 2015, five years earlier than planned, citing financial issues.

Private health providers, on the other hand, are usually run as for-profit businesses. In general, they can choose their customers (usually picking low risk and low complexity patients); they often use purpose-built out of town estates which are not burdened with debts of the kind imposed by PFI; they can pay their staff less, and private hospitals don’t have to pay their consultants (they are paid directly by private patients, not by the hospital, which also allows them to avoid paying compensation if malpractice occurs); and the NHS subsidises them by providing them with a trained consultant workforce for nothing.

And private providers can, and often do, walk away from NHS contracts which they no longer find profitable enough – in stark contrast to the NHS’s obligation to always provide care regardless.

So how do the private providers manage to make a profit when NHS prices are fixed? Firstly, healthcare is a labour-intensive business and so their main tool is to keep their pay bill down. It is significant that Circle in their legal claim estimate that NHS terms would increase staff costs at the Treatment Centre by no less than 15-20%. This might be because out of the 175 consultants who could carry out work at the Circle-run Treatment Centre in 2015, the centre only employed 12 directly, with the rest being “directly employed in the neighbouring NHS trusts”.

Secondly, they often use relatively fewer and less experienced staff than NHS hospitals, which is cheaper but raises issues about the quality of care and patient safety. For example, in 2015 the Nottingham Treatment Centre relied upon a Resident Medical Officer – a junior doctor – with responsibility for post-operative care whilst the responsible consultants were off-site. Typically, these RMOs work 168 hour a week shifts, well in excess of the European Working Time Directive which is enforced in NHS hospitals and another added labour cost which private hospitals are able to avoid. These staffing and pay differences add up, with Circle Nottingham’s staffing costs totalling 32% (£17.6m) of their revenue in 2017, compared to 63% across all NHS hospital trusts in 2017/18.

Thirdly, in the case of private hospitals, by choosing the less complex patients they are more likely to make a profit on the fixed NHS price paid which is an average of the costs of treating both high and low complexity patients. However, the Nottingham Treatment Centre takes on more complex patients than average for some operations. This is part of a growing trend where some private providers are investing in treating more complex patients as they pivot towards private self-payers and broader population-based NHS contracts.

Ultimately the direct financial comparisons necessitated by the tender and competition rules and the system of competitive procurement are irrational: the provision of an essential public service cannot be evaluated financially in terms of a commercial business model.

The need to bid against for-profit providers hinders integration across the NHS and financially destabilises NHS hospitals when they lose ‘profitable’ health services to narrowly-focused private providers. One solution would be to increase the prices paid for the currently unprofitable treatments so that losing services wouldn’t financially destabilise NHS hospitals, but this then risks leaving residual, hollowed out, NHS hospitals. Alternatively, instead of perpetuating NHS England’s current practice of trying to ‘work around’ the law, the law needs to be changed: the competition framework of the discredited 2012 Health and Social Care Act should be scrapped, and the NHS should be enabled to focus on how to integrate healthcare in a way that values innovation without eroding the ethos of public provision or risking patient safety.

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About the author

Vivek Kotecha

Vivek Kotecha

Vivek is CHPI's Research Manager. He has previously worked as a manager in Monitor and NHS Improvement analysing and reporting on the operational and financial performance of the provider sector. Prior to that he worked as a management consultant at Deloitte for 4 years. Vivek holds a BSc Economics (Hons) from the LSE, a MSc Economics, and is a chartered accountant.See all posts by Vivek Kotecha