David Lock QC looks at the legal lessons for NHS commissioners procuring services.

Local resident Michael Lloyd’s legal challenge to NHS Gloucestershire’s decision to outsource its community services to a community interest company raised serious questions for commissioners.

The case was settled on day two, so there will be no court judgment explaining how the law works in this area. That may be a relief to those who do not welcome a judge giving a clear ruling on the impact of EU procurement law on NHS (and possibly wider government) outsourcing decisions.

Procurement law is now a big issue for the NHS and I suggest there are some points that can be drawn from the arguments advanced in the case.

Procurement issues need to be carefully considered before a PCT enters into a legally binding contract with a potential provider, possibly including foundation trusts. Companies based in the EU are now looking at the NHS market and it would be difficult, if not impossible, to argue that an NHS provider contract will not interest a healthcare provider located in another EU country.

Hence, even before the competition provisions in the Health Bill have been passed, contracts for delivering NHS services are already subject to EU procurement law.

The duties of transparency, equal treatment and non-discrimination imposed by the EU treaty and the Public Contracts Regulations 2006 mean that all contracts placed with a body outside an NHS trust should be subject to a “degree of advertising” to allow healthcare providers located in another EU country the chance to bid for the contract. This obligation applies to every general or personal medical services GP contract as much as it applies to a large scale acute services contract.

The special exemption from procurement rules for contracts with new employee-led social enterprise companies outlined in Social Enterprise – Making a Difference: a guide to the right to request appears to give rise to substantial legal problems.

First, the policy document is focused on “employee led” schemes, as opposed to management-led schemes. Where NHS management has led a proposal to create a community interest company and, in effect, imposed the new structure on employees, it may be an unlawful departure from the guidance.

Second, and perhaps more importantly, there appears to be no proper basis in EU procurement law to support the exemption from a tender exercise. In fact, it could be argued (although this was not part of the Lloyd case) that this type of support for a CIC amounts to unlawful state aid and is in breach of the EU treaty. Hence, any PCT contracting with such a company without a tender process potentially acts in breach of EU and domestic law.

However, the real lesson from the case is that there is almost certainly a stage for NHS bodies to consider before they decide if they want to undertake a tender process. PCTs are almost certainly entitled to conclude arrangements with an NHS trust to deliver services without a tender, because such a process is arguably entirely outside EU procurement law.

The secretary of state controls both bodies and the arrangements do not give rise to legally binding contracts, so there is no “contract” on which the procurement process can bite.

Foundation uncertainty

There are accordingly strong arguments that it is perfectly lawful for a PCT to make an arrangement with a local NHS trust for delivering NHS services without a tender, and without procurement obligations affecting the process. This is part of the first step that the PCT agreed to explore as part of the settlement in the Lloyd case.

It is less clear whether this exemption applies where a PCT contracts with a foundation trust. This is because it involves a legally binding contract and not an “NHS contract” under section 9 of the NHS Act 2006. It is also because the secretary of state does not have effective control over the foundation trust, because it may not be given instructions by way of directions.

No PCT likes having its processes opened up to the minutiae of judicial scrutiny. In this case, the PCT was commended by the judge for listening to the legal objections raised to its process and for agreeing to start it all over again. The PCT has agreed to restart the process for looking for the best arrangements for its community services, including the option of making arrangements with a suitably experienced NHS trust.