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Outside Investors Eye Up the NHS

16th May 2007

The healthcare market place in the UK is increasingly open for business, with a growing number of outside investors setting up stall - including some from overseas. But what’s in it for them, and how will the NHS handle the competition?

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How is the NHS market developing?

The NHS has been accustomed to an ‘internal’ market for many years now, with NHS commissioners and NHS providers agreeing and delivering contracts for patient services. In recent years, though, providers from outside the NHS have been welcomed in to the market place. The Department of Health set up its commercial directorate in 2003 to control the developing market, leading negotiations with private providers from the centre to try and get best value for money. Outside investment has taken various forms including:

  • Use of private hospital capacity – where NHS activity is contracted out by trusts or PCTs directly to meet demand. This has happened particularly in surgical specialties to help meet waiting time targets.
  • Independent Sector Treatment Centres / Clinical Assessment Treatment and Support Centres (ISTCs/CATs) – where the independent sector is commissioned to build and run stand-alone facilities to provide a certain range of services. Again this is usually surgical treatment along with a range of diagnostics.
  • Alternative provider medical services (APMS) – where PCTs can commission primary care services from non-NHS providers.
  • PFI/LIFT - where private capital has been used to build new hospitals and primary care facilities. There has been talk recently of LIFTCo briefs being expanded to include the provision of GP out of hours services.
  • Facilities management – can often be contracted out, including cleaning, catering and other ‘hard’ and ‘soft’ FM services. This often forms part of a PFI deal.
  • Outsourcing and offshoring business services – some trusts have outsourced their medical typing work to private contractors, including those whose typists are based overseas. In February Peter Coates, NHS Deputy Director of Finance, announced that he had given permission in principle for up to 60% of clerical work to be offshored to India. In 2005 NHS Shared Financial Services, which was set up to centrally manage back office functions such as VAT accounts and supplier invoicing for NHS organisations who opted in, merged with Xansa - a leading outsourcing company. It became a new private joint venture company. The Department of Health announced in September last year that it had appointed DHL to manage its supply chain in place of the NHS bodies which had been doing so. Savings of £1bn are forecast. IT services have a long history of being contracted out to specialist technical providers.
  • EU ruling allowing patients to seek NHS funded treatment abroad – this 2001 ruling gave patients an option to go outside the UK for treatment to be funded by the NHS if they had been subject to ‘undue delay’ here.

NHS use of private hospitals is at an all time high, rising by 8% on the previous year to £2.7bn in 2005/06. Spend on ISTCs was £335m that year. One quarter of beds in the private sector are now used by NHS funded patients. Eventually half a million procedures (10%) are expected to be carried out in ISTCs.

Some parts of the NHS are beginning to challenge the assumption that it is only service provision that the private sector may be useful for. Hillingdon PCT, which is carrying a large financial deficit, has examined all of its functions and concluded that there is only a small core of its business that it needs to provide itself. They announced in February this year that they are considering outsourcing their commissioning and performance management activities to the private sector. Last June the Department of Health published a controversial advertisement in the Official European Journal inviting companies to bid to provide support to PCTs in the following areas: assessment and planning, contracting and procurement, performance management settlement and review, and patient and public engagement. In February of this year the Department clarified that PCTs would be allowed to outsource their entire commissioning function only in 'exceptional circumstances'. The full list of selected suppliers is due to be complete by 1 June 2007. BUPA, McKinsey, and Dr Foster are believed to be amongst those who have applied. The Health Service Journal has recently reported on proposals for SHAs to be monitored on the extent to which PCTs use private organisations to help with commissioning as part of the performance metrics for 2007/08. If commissioning as well as service provision is outsourced it could open the gates to American-style Health Maintenance Organisations (HMOs) setting up shop in the UK.

Why is the market opening up?

The policy drive for a more open market of providers comes from wanting to increase patient choice. But there are some other clear benefits:

  • Extra capacity comes on stream faster and on a scale that the NHS could not achieve by itself. This is giving the NHS a chance of hitting its access time targets by 2008.
  • Additional staff from overseas are brought into the NHS via private sector providers which is helping plug gaps in specialties where the UK staff supply is short.
  • Overseas providers bring with them expertise in running stand alone treatment centres which the Department of Health has decided is a key element of future service configuration, wanting to move away from the traditional district general hospital model.
  • Opening the market to overseas providers and investors is directly challenging the UK private healthcare sector. UK private healthcare companies have until now sold capacity to the NHS at a considerable premium - something they have been able to do because competition has been so limited. No UK companies were selected in the first round of ISTC contracts because their prices were too high. Since the market has been opened up, UK private sector prices have dropped markedly, and BUPA has now been selected as the preferred provider in the second wave of ISTCs for Cheshire and Merseyside.
  • Independent sector suppliers may be able to offer better value for money than the NHS.

What kinds of companies are investing in the NHS?

Some of the key outside investors are from overseas. In a number of cases they have teamed up in consortia with UK healthcare companies. They include amongst others:

New York Presbyterian Healthcare System - the New York based hospital has teamed up with W S Atkins and is running the surgical treatment centre in Shepton Mallet.

Netcare – part of South Africa’s biggest health provider. It led a consortium in 2006 which took over the UK based General Healthcare Group which included BMI.

Partnership Healthcare Group – a joint venture between Care UK and Life Healthcare, a South African private hospital operator, to bid for ISTC contracts. Care UK won the contract to run the Victoria NHS Walk In Centre in London.

United Healthcare Europe – with a major US parent company, this subsidiary has signed contracts to run a GP practice in Derbyshire via APMS agreements.

What challenges are being faced in bringing in outside investors?

The government is facing a number of challenges as it opens up the NHS market, and these are not just ideological. A King’s Fund report recently found that use of APMS is still limited because there are not many alternative providers out there. In the meantime, a patient mounted and won a legal challenge to United Healthcare Europe being appointed preferred provider to take over her local GP practice in Derbyshire on the basis that there had been insufficient consultation with patients and the public. The practice has subsequently been taken over by a UK based private company instead. UHE have since won a contract in Derbyshire to run a different GP practice.

ISTCs were offered far more favourable terms than NHS trusts supplying similar treatment centre services. In the first wave, private partners were offered guaranteed volumes and payment even if demand was less than those volumes – contrary to new Payment by Results terms that all NHS providers were beginning to get to grips with at the time. A 15% premium was also paid on top of the national tariff. Having such an uneven playing field caused huge upset amongst NHS providers already threatened by loss of market share to ISTCs. Competition was one thing, but such unfair competition was untenable, they argued. In the second ISTC wave, providers have only been paid for work undertaken and no premium rate has been offered.

But a more serious challenge awaits the government according to Ken Anderson. The Texan, who until late last year was the Department of Health’s Commercial Director, spoke to the Financial Times in January on the subject. So far the Department of Health has tightly controlled those parts of the health service it is exposing to the external market. But at some stage there may well be a legal challenge that this cherry-picking breaches European procurement rules and international trade law. The BMJ picked up as far back as 2002 that whilst monopoly public sector providers are exempt from the World Trade Organisation’s general agreement on trade in services, as soon as patients are offered choice outside of that monopoly, the sector arguably becomes commercialised and subject to trade rules. Such a challenge may force the NHS to open up more services to private sector competition than it wants to, including in so called core services such as A&E and paediatrics. More specifically, the NHS has recently invited third sector (not-for-profit) organisations to supply NHS services in a competition ring-fenced from private sector competitors. It has done so to positively promote the contribution of the third sector in health care. Such ‘sweet heart’ deals are clearly anti-competitive if found to be subject to procurement and trade legislation.

The healthcare market in the UK is huge, and private investors are going to continue to pursue a slice of that sizeable cake. The King’s Fund concluded in its report on the subject in June 2006 that there must now be less central control of the market place, and competition must take place on a level playing field for internal and external competitors. Whether the government can achieve this whilst holding true to the founding principles will have to be seen.

Latest news

  • BUPA has announced that it is considering selling off its portfolio of 26 UK based hospitals which makes up 11% of its sales. The sale could be worth £1bn

For further information on ISTC providers see article Independent Sector Treatment Centres on hc2d.

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