Ed Miliband’s proposal to cap the profits of private sector providers of NHS services at 5 per cent would come up against EU legislation, lawyers have told HSJ.

The Labour leader pledged last week that a Labour led government would impose a profit cap on private providers of NHS “clinical services”.

Mr Miliband said the cap would form part of a “double lock” to protect the health service from the “tide of privatisation”, in tandem with the £2.5bn extra funding a year he announced in the autumn.

Ed Miliband

Ed Miliband will have to navigate ‘very carefully’ to avoid legal challenge to his profit cap plans

Lawyers with extensive experience of NHS and public sector procurement rules have said European law and UK legislation passed by the coalition government would make it difficult for a new government to impose such a cap.

Lindsay Draffan, associate at Hempsons and a specialist in competition law, said that under EU law all providers of NHS services must be treated equally, making it very difficult to impose a profit cap on one type of provider but not others.

Ms Draffan said: “There are a few legal hurdles here, which I don’t think can be dealt with very readily.

“Under European law, any policy to cap the profits of ‘private’ or non-NHS providers - however that is worked out - could be problematic.

Ms Draffan added that while Labour could repeal Procurement, Patient Choice and Competition Regulations 2013, it would still be bound by separate EU procurement law which forms part of UK legislation.

“That means providers must be treated equally and you can’t discriminate between them, unless on objective grounds,” she said. “That is true whether you run a formal tender process or not.

“If commissioners propose a profit cap for a non-NHS provider but not for NHS providers, it is difficult to see how this could be justified and they could risk a legal challenge in the UK courts for unlawful discrimination.”

Helen Randall, a partner at Trowers and Hamlins, said that while it would be possible for Mr Miliband to achieve his policy goal, he would need to navigate “very carefully” to avoid legal challenge under UK law as well.

She added that a Labour led government would likely need to amend Public Contracts Regulations 2015, which prevent public authorities acting in a way that would appear to discriminate against a particular type of provider.

“But, I think [Mr Miliband] could achieve his policy objectives within EU law. Quite a lot of the law that gets in the way is UK coalition government law,” she added.

A Labour spokesman told HSJ the party had been advised the policy would be legal, and added that it planned to consult further on the details. He pointed out that the complexity of procurement meant there may be various potential ways to achieve Labour’s policy objectives.

A senior private sector source told HSJ they had doubts about how effective the policy would be, given that many providers do not make a 5 per cent profit margin on their NHS contracts.

They said: “For a number of providers in the market, making 5 per cent would be quite nice. Many make rather less than that.

“If that cap was a crude ceiling and you’re an investor looking to put money into quite an innovative, high acuity service with high capital costs, actually there’s no point because we’re not going to be able to make more than 5 per cent.”

Labour's 'profit cap' policy faces European legal hurdles, say lawyers