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Exclusive: Circle deal means Hinchingbrooke needs over £70m to clear debts

The deal struck between Hinchingbrooke Health Care Trust and its private sector operator means the trust needs surpluses of at least £70m over the next decade to pay off its £40m debts.

Figures uncovered and analysed by HSJ reveal the scale of the returns needed by Circle to meet its plans to clear the financially challenged £100m-turnover hospital’s debts.

The firm took over Hinchingbrooke in February, making it the first NHS district general hospital managed by the private sector. On signing the deal, health minister Simon Burns told Parliament: “If Circle achieves its forecasts, the whole of the trust’s accumulated deficit will be repaid by the end of the 10-year contract.

“Circle is paid from the trust’s surpluses, so if there are no surpluses, Circle does not receive a fee. Furthermore, if the trust makes a deficit under Circle’s watch, Circle must fund the first £5m.”

£70m:

Minimum surpluses Hinchingbrooke will need to make over the next decade to clear its £40m debts

44%:

Share of those surpluses that Circle would get

Mr Burns did not reveal the firm’s share of any surpluses. However, a letter from health minister Lord Howe to Lord Haskel found by HSJ in the House of Commons library explains that the first £2m of any year’s surplus goes to Circle. The company takes a quarter of surpluses between £2m and £6m, and a third of surpluses between £6m and £10m.

The terms mean that in any year Hinchingbrooke makes less than a £6m surplus, more than half will go to Circle. In the past decade, Hinchingbrooke has never recorded a surplus above £600,000. The terms also mean the minimum surplus Hinchingbrooke needs to clear its debts over the next decade is £70m.

That would be possible only if the trust recorded £10m surpluses for seven of the 10 years. If surpluses are spread more evenly over the contract term they would need to be higher overall, because a larger proportion would go to Circle.

Hospital turnaround specialists described the target as “very challenging”. Bill Upton, head of healthcare at Grant Thornton, said: “It’s going to be extremely difficult, given all the pressure on trusts in terms of [reductions to the] tariff and things like that.”

But Circle chief executive Ali Parsa said Hinchingbrooke’s performance and efficiency had already seen big improvements since the firm took over. “If I had told you that the number of serious incidents at the hospital would drop 73 per cent within three months you would have thought I was smoking pot, right?” he told HSJ.

Circle says Hinchingbrooke has gone from being the worst performer in Cambridgeshire on accident and emergency waiting times to being the best, reduced average length of stay for hip and knee patients by 2.1 days, and identified purchasing savings of £1.5m.

Mr Parsa said Hinchingbrooke had needed £4m “one-off payments” to break even last year, and would need £10m savings to avoid deficit in 2012-13.

£598,000:

Biggest annual surplus recorded by Hinchingbrooke in past decade

£38m:

Net deficits recorded by Hinchingbrooke over past decade

He added: “Projections in the bid process showed the potential losses facing Hinchingbrooke in the coming years could reach many tens of millions. We have been tasked with stopping taxpayers losing this money. Our plan is not only to do this and make the hospital sustainable, but to turn it into one of the best DGHs in the country.”

Circle expects the trust to “more or less” break even this year.

NHS Midlands and East strategy director Steve Dunn said Circle’s plans had been scrutinised by 54 evaluators during the tender, half of them clinicians. “These are the best available plans after quite a rigorous competition,” he said. There would be “no subsidy” for the trust, and “no requirement to pay Circle’s management fees if the trust underperforms”.

But Labour shadow health secretary Andy Burnham said he was concerned the plan “simply cannot be safely delivered”.

“Taking a massive £70m out of a small and fragile acute hospital is akin to asking the impossible,” he said. “Circle has a financial incentive to make eye-watering efficiencies and the onus is on ministers to ensure this doesn’t compromise the quality and safety of patient care.”

Readers' comments (21)

  • If you check back into Circle's past health dealings they have posted quite large losses year on year, so what has changed??? to assure the DH that this time it is going to be different?

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  • phil kenmore

    Very interesting to gain an insight into the actual make up of this deal. Thanks Crispin - a good find in the Commons Library! Many working in the private sector have wondered how this could be made commercially viable - and on the basis of this, whilst it looks like Circle could theoretically make good return on their investment, the risk profile still looks very high indeed. Interestingly the model works best with complete clinical engagement in the changes (and incentivisation?) - a great follow up story to write would be what are they actually doing at Hinchingbrooke now to create the performance improvements Ali mentions.

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  • Does the surplus come after paying interest on the debt. Positive point the NHS would not have kept the hospital open as CEO of east of england SHA couldnt justify that size of deficit on hospital so close to Addenbrooks.

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  • I don't know whether the point of Circle's involvement with Hinchingbrooke is to turn a profit on this particular hospital. Perhaps the idea is to show willingness to engage with the Government on NHS reform by means of an initial investment, then reap the goodwill returns when more profitable services are up for tender?

    They won't even need to clear the Hinchingbrooke debt to be in a good position for better opportunities - in fact, being able to point to a few years of propping up a beloved local NHS service might be a perfect riposte to the 'private sector carpetbaggers' argument.

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  • Thanks Phil. Totally agree about the follow-up idea, although I think it may still be too early to do that story yet. For what it's worth, the people I've asked - including a regional RCN spokesman - say Hinchingbrooke staff's view of the 1st 3 months of the contract is positive.
    Anon 9:19 - Good question. The surpluses come after financing costs, but my understanding at the moment is that interest is not added to the £40m for inflation. If that's the case, inflation should help to ease the burden of the debt over the life of the contract.

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  • The efficiency challenge is very large but if you listen to Circle it is clear that the business plan is to grow and take work from local NHS competitors. It is hard to consider the "benefit to taxpayers" of robbing Peter to pay Paul (and his investors)

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  • Give Circle credit for engaging staff and improving clinical standards. This is not just the DH cutting payments to acute trusts until they are unviable and taken over by vultures. Circle's strength is in decentralising power to local clinical groups, setting goals with them that they are measured against, and finding ways to recognise staff successes. This is being done at NHS run hospitals too.

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  • Intersting that Circle's plan is basically predicated on the ability to grow -aka for hichingbrooke to trade out of their problems. Everyone else in England is being told by SHA's -you musn't plan to do this' because PCT's have no money. Yes you can assume you'll take work off other trusts-but they of course are planing the same thing in relation to you!

    Good luck to Circle.They will need it

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  • Just how many serious incidents did this hospital have, I would have thought 2 to 3 was more than it should be, this is a DGH not a tertiary centre. I note actual numbers not stated. Come on HSJ get down to brass tacks. On finance, too many unanswered questions? If they adjust management charges they could limit the surplus to £2m per yr in which case there is no payback. What happens with depreciation and capital funding over the next ten years? Seems to me Circle will manage this to suit themselves.

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  • Hope that someone scrutinises all external non-NHS revenue streams to check they are not being manipulated. I'd imagine it would be very easy for some of the big private players to bung Circle a "loss leader" payment to help them succeed in the hope it strengthens the argument for opening up the market further. Things such as payments for consultancy services - e.g. courses on something like "the Circle way @ Hinchingbrook" at £££'s per delegate would be where I'd start...

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  • Good luck to Circle I say. What would be really refreshing is if they can have a successful model that truly works and can be used for other NHS Trusts to replicate. I'd rather see top notch private sector management doing it right and getting quality the best it can be than Trusts struggling on with mediocre NHS management. What would be tragic is if Circle turns out to be merely mediocre. All eyes are on them so this is a big challenge.

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  • For clarity - does management fee mean the profit Circle take or the total payment to Circle?

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  • Hi Anon 2:56. Have now attached the Earl Howe letter to this story, which gives some further detail. For clarity, the terms outlined in this story only described the agreed share that Circle takes of any surpluses generated by the hospital. Clearly, that does not give us any indication of what profit it will make on the deal, or if it will make a profit.

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  • Anon 2.56, there's also some rather dull reading in the NHS Costing Manual on management charges here http://tinyurl.com/d3h83dd
    which represents a change in how things are counted, that perhaps the other poster was referring to (how this is presented in the accounts, including capital and deprecation, can dramatically affect surpluses/ deficits).

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  • Is the 73% Ali mentions a 'reduction in incidents' or ' a reduction in REPORTED incidents'. Big difference, as any airline will tell you, high levels of reporting are good.

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  • Lets not forget that this is a partnership model. So wealth will be distributed through the payroll to members - thats why the local consultants like it. Surpluses will then never exceed £2m and the debt never repaid. The £2m will go to the Circle money men - not bad bearing in mind that they havent actually bought anything. Thats why Circle want more and more deals like this, a legal alternative to pyramid selling.
    The real shame is that an FT model would have kept the annual £2m in the NHS and spent on equipment. The scandal is that the SHA team who did the deal now see this as better for the taxpayer than an FT model due to the possible debt repaymeny, which they forgot to secure in the contract!!!!

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  • So on this basis, very moderate savings will generate the £2m surplus that Circle will keep. What incentive is there for Circle to go further when they only keep the minority of surpluses beyond this figure?

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  • A difficult conversation without all the detail of the finance arrangements, which will remain in part confidential to the parties involved in the deal. It would appear - thanks for the letter Crispin - that Circle are paid their costs so the management fee is in addition to that -ie true surplus/profit. This is not unreasonable provided service quality is maintained or improved noting this has been a "failing" Trust for some time. Even at break-even,the taxpayer would appear to be in a better position when compared to having to find funds year on year to support a deficit.

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  • For those that missed it, yesterday's Today programme interview can be found here at 8.32am: http://news.bbc.co.uk/today/hi/today/newsid_9718000/9718367.stm

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  • If you would like to watch a union rep for whom any change to how the NHS is run is anathema have a watch on the link below -
    http://www.hsj.co.uk/5044420.article?referrer=e88

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