Managing PCT provider arms is not a straightforward matter, as Jeremy Roper explains

It is probably an understatement to say that for most primary care trusts the issue of what to do with their provider arm remains problematic.

There are many options, but none offers a straightforward solution. These include keeping the provider arm within the PCT but as an arm's-length body, converting it to some form of social enterprise, transferring it to an independent sector provider, or converting it into a community foundation trust.

Ringfencing provider arms is really just the start. Trying to establish what the value of the "business" is in terms of assets and liabilities, let alone net earnings, is not easy. That in turn creates difficulties for any potential acquirer, whether from the independent or third sector or another NHS body.

Additional problems for would-be acquirers are the cost of offering comparable pensions (where staff cannot remain in the NHS pension scheme) and uncertainty over future contracts. In a situation where market testing of services is becoming the default position, there may be no guarantee that the provider arm will retain services and that will deter banks and other investors.

At arm's length

All this is problematic for PCT boards. As long as provider arms remain in house, even as arm's-length providers, there are difficult issues over confidentiality, conflicts of interest, accountability and transparency.

The chief executive of the PCT remains the accountable officer for both the commissioning and provider arms of the PCT. Provider arms usually have a significant turnover but lack the internal expertise and resources to manage themselves as standalone business units.

Even if a provider arm can do this, it does not relieve the PCT board of its responsibility for the actions and finances of the provider arm. This creates potential difficulty at PCT board meetings where the chief executive and others may feel obliged under the PCT's standing orders to withdraw from the meeting while the affairs of the provider arm are discussed.

When provider arms are bidding for PCT contracts, internal and external issues arise. The PCT will need to isolate the provider arm to be able to show it has no access to information that is not available to other bidders and that no-one involved with the provider arm has had any role in bid evaluation.

Level playing field

It is equally important to demonstrate to other bidders that there is a level playing field and that the provider arm does not have an unfair advantage. If the marketplace has no confidence in the process, it could lead to fewer companies prepared to bid and an increase in procurement challenges. The arrival of the Co-operation and Competition Panel and the Remedies Directive (giving courts powers to overturn contracts awarded where procurement procedures were flawed) is expected to lead to an increase in challenges.

PCTs have to demonstrate transparency in their commissioning. Sometimes the person best qualified to draw up a contract specification has a connection with the provider arm, for example through practice-based commissioning arrangements. This may be acceptable under procurement law, providing it does not give the provider an unfair competitive advantage, but being able to demonstrate this will not always be easy.

There are no easy solutions to these problems. PCTs should have in place clear protocols as to how to manage these issues and ensure that in each case there is a full audit trail to demonstrate the relevant protocol has been adhered to. The test in each procurement is whether the process has been transparent and whether all bidders, whether they are provider arms, third sector, independent sector or NHS, have been treated equally.

In the recent consultation document on unsustainable NHS providers, the Department of Health included PCT providers on the basis that they are part of the wider NHS system and "not free-floating, commercial organisations". Time will tell whether the proposed failure regime will extend to provider arms, and in what circumstances.