Public-private partnership arrangements can be the right alternative to PFI for some trusts’ equipment upgrades, say Stephen Lansdown and Shelley Thomas
The need to balance finances, manage risk and drive efficiencies are common themes in today’s NHS. Delivering high quality, safe patient care while achieving the 18 week target is a constant demand.
Despite the introduction of international financial reporting standards, carefully structured managed equipment replacement projects which transfer significant technology, financial and other risks to the contractor may still be off the NHS balance sheet
Technology in radiography, diagnostic imaging and nuclear medicine is developing fast. Indeed, the NHS’s electronic system PACS demands hospitals have up to date equipment, training, and support and maintenance services to achieve the Department of Health’s objective of joined up, modern healthcare provision.
But such equipment is often costly, expensive to maintain and quickly superseded by newer technology.
A trust considering an equipment upgrade might implement a managed replacement project. Nothing new there. New medical equipment has been procured through larger private finance initiative schemes for some time. Trusts which have engaged specialist contractors for this have been able to call on private sector expertise.
Expected constraints on capital expenditure budgets beyond 2012-13 will reduce the amount of PFI. And for some trusts that is not in any event the right solution.
A standalone managed equipment replacement project based on a public-private partnership allows a trust to manage the cost and spread it across the life of a contract with an external provider (typically 15-20 years). The project is “stand-alone” in the sense that it is procured without a larger private finance scheme.
Radiology and diagnostic imaging are where the equipment is most suitable for this type of project, but the principles can be applied elsewhere in the trust’s operations, such as anaesthetics, patient monitoring, ophthalmics and endoscopy.
In essence, the contractor takes on responsibility on an outsourced basis for supplying, maintaining, repairing and ensuring the operation of the equipment, for a regular payment from the trust. Typically the contractor will fund the equipment replacement programme using asset finance.
The public-private arrangements typically involve the contractor, as well as bearing the capital cost of the required upgrade, providing services such as maintenance, support and training to the trust.
Some new or replacement equipment is usually installed at the start of the project and then, working around the life cycle of the current equipment, other equipment is replaced on a pre-agreed rolling basis.
- delivering cost savings;
- removing unpredictability in long term capital expenditure;
- offering certainty as to equipment uptime and service quality (most payment mechanisms in these projects are based on equipment availability times and monthly performance measurements);
- providing new and up to date equipment at regular, pre-agreed intervals;
- reducing capital charges (if off balance sheet treatment can be secured).
Despite the introduction of international financial reporting standards, carefully structured managed equipment replacement projects which transfer significant technology, financial and other risks to the contractor may still be off the NHS balance sheet. Some examples of major risks that the trust should expect a contractor to bear include:
- supply, maintenance and repair of the equipment
- equipment downtime
- technology updates
- equipment obsolescence
- changes in maintenance and support charges, interest rates and other costs
- removal of the equipment on expiry or earlier termination.
Southport and Ormskirk Hospital trust entered into a 20-year managed equipment replacement project in 2007.
The contract involves the diagnostic imaging equipment at the trust’s two main hospitals being replaced and refreshed with the latest technology, following a pre-agreed phased programme. Service and training are included, and significant technology, financial and other risks are transferred from the trust to the contractor. New equipment in the initial phase includes: digital, general and mobile X-ray; fluoroscopy; digital mammography; ultrasound and mobile C-arms. At the end of the lifecycle of the current equipment, the trust’s CT scanners, MRI scanner and direct digital chest X-ray will also have been replaced.
This contractor financed programme is allowing the trust to reorganise services and improve the patient experience.