Until recently private providers could afford to be choosy about what NHS work they took on. Now, as the economy shrinks, the health service will become a vital source of income. Alison Moore reports

NHS work is now the second biggest source of income for private healthcare providers in the UK - and is likely to have doubled as a proportion of their income in the past five years.

In 2007 the NHS spent£615m with the private sector, according to industry analysts Laing and Buisson. This accounted for 19 per cent of the sector’s income, and may have increased by 20 per cent last year and a similar amount this year.

Much of this has come from contracts with NHS trusts -£305m in 2007 and potentially more last year as they struggled to reach the 18 week target. Independent treatment centre programmes were also important. However, just on the horizon in 2007, but growing rapidly since then, was the phenomenon of patients being able to choose to undergo NHS funded treatment in private hospitals.

Getting figures on this is difficult: the Department of Health says it does not collect data centrally when patients opt for a private hospital, but it does have figures for the number of patients doing so through the extended choice network - one of several ways to choose an independent hospital.

Dramatic rise

These figures show a dramatic rise over the past 12 months to nearly 4,500 procedures a month, with a bill for the NHS of around£9.5m a month. This has more than doubled since April 2008 - when patients were allowed to freely choose any accredited provider - and is four times the figures of a year ago, when patient choice was more limited. There are now 149 independent hospitals accredited for choice, and 91 of these are on the choose and book system.

But these figures may hide the full extent of the work being done: Ramsay Health Care, one of the big private chains, says that 16,000 bookings were made in September 2008 under choose and book with private providers - around a third of those in its own private hospitals. Many of these patients will not be included in the DH’s extended choice network figures.

David Worskett, director of the NHS Partners Network, which represents private providers, says: “To a degree it is about the public and patients doing what the government policy hoped they would and beginning to exercise some choice.”

Shifting sands

But how far will this shift of work into the private sector go? The work under choice is at tariff, which makes it less financially attractive for firms than running independent treatment centres. Many are only interested in taking it on when they have spare capacity.

Most will be choosy about what procedures they offer at tariff. Nuffield Health medical director Andrew Jones says: “It is just technically not possible to do an anterior cruciate ligament at tariff price. There are other areas where we talk with our consultants and make certain we can do it at tariff.” BMI Healthcare also says the full cost of delivery is not reflected in the tariff.

Spire Healthcare has seen its volume of NHS work rise to more than 40,000 procedures a year, around 15 per cent of its income. But commercial director Richard Jones insists this NHS funded work is supplementary to its main income from private work. The company is “perfectly capable” of doing some work at tariff, but it depends on its nature and timing. “We are selective in what we do… we would not do some specialties at tariff.”

HCA International, which runs six hospitals in London, has chosen not to go on choose and book, although it does do contract work for trusts. It says the tariff does not make it attractive to do large amounts of elective work.

Risks and benefits

But Ramsay, in particular, is bullish about the potential for work: when it took over the former Capio hospitals in 2007 it said NHS opportunities were a primary reason for its move into the UK market. It is making a£28m investment in expanding theatre capacity and has seen NHS work grow rapidly.

But there are also dangers for private hospitals in developing the NHS as a major customer - both economically and in terms of their “unique selling point”.

Private hospitals doing work under choice will only be paid at tariff and will probably have low profit margins on these patients, so replacing private patients with NHS patients could affect the bottom line. “If we were trying to run our business at NHS tariff we would not be able to provide the sort of service we do to private patients,” says Mr Jones. “If all our business was provided at tariff it would not be attractive… but as a supplement it works well. But we are careful not to let it cannibalise our private work.”

When private hospitals take on work from NHS trusts they are often using the tariff as a starting point for negotiations, and then push for higher rates. The other danger is around mixing private and NHS patients in the same hospital. It may cause private patients to question whether they too should access care through the NHS - especially if the person in the next room is getting the same care and facilities, within a reasonable time, without having to pay for it.

NHS patients often have limited choices and may not be able to opt for a particular surgeon or operation date. Even an 18 week referral to treatment time will deter many private patients from switching to the NHS. Mr Jones says many would “put the phone down” if a private hospital told them to wait that long. Guaranteed dates of their choice are a deciding factor for many patients considering the private sector.

Stormy waters

The economic downturn could change companies’ attitudes. Most private operators say their business is holding up well - but it is likely self-payers will decline over the next 18 months. The declining value of the pound will make the UK more attractive to overseas patients, but they tend to be concentrated on London. Medical insurance makes up the bulk of private companies’ turnover - 61 per cent in 2007 - but this income is also vulnerable.

Smaller hospitals may see NHS work as a useful top-up to get them through a rough patch, but turn to more profitable work when the upturn happens. Some firms are reluctant to invest too much capital for fear something in the NHS will change. Mr Worskett says there would need to be a period of demonstrable, sustainable growth before investments are made.

Private companies could develop facilities aimed at the NHS market, perhaps operating at a lower cost than the average private hospital. But independent treatment centres may be a better model. Philip Blackburn of Laing and Buisson says: “They may be able to compete more effectively than providers with higher operating costs.”

What of the NHS in all of this? For PCTs and trusts a significant shift of work into the private sector could have unwanted consequences.

Tony Harrison, fellow in health policy at the King’s Fund, points out that losing work to the private sector could threaten the viability of some NHS hospitals. NHS Confederation policy director Nigel Edwards says: “There seems to be quite a big shift since extended choice started. However, there must be some kind of capacity constraint.”

Impact on the NHS

The effects on NHS trusts will vary. Research for the Department of Health suggests accessibility and transport are the top consideration for patients exercising choice, so private hospitals in prime locations may attract a significant number of patients over harder to reach NHS hospitals. Cleanliness is the next most important factor, which is also an area where private hospitals tend to score highly over the NHS.

NHS Alliance chief officer Mike Sobanja expresses concern that even a marginal movement of work could affect NHS providers. “What does that do to their ability to provide other services that may be very necessary?” he asks. There is already disquiet among some foundation trusts about this, he adds.

The extra work required to reach 18 weeks and the increase in referrals over the past year may have masked some of these shifts away from NHS providers. If the number of patients going into the private sector continues to increase, trusts may feel the effects more.

PCTs, which bear the bill for work done under extended choice, have little control over where patients choose to go. In effect, by getting the work at tariff, they lose the ability to influence other elements of the package such as slot availability or volume of work on offer. In many other sectors, an organisation that was buying a significant proportion of a producer’s output would have considerable leverage over what is produced and at what price.

Mr Sobanja says it could affect their ability to manage contracts, although PCTs are mindful of this. “It’s a weak purchaser situation,” says Mr Harrison. “Purchasers have never got the role originally envisaged for them… they thought they were going to set the agenda but that has not happened.”

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