Independent sector involvement in the NHS has sparked fierce criticism. But consultants Andy Mullins and colleagues argue that it will be a catalyst for the innovation needed to ensure the long-term survival of the service

Spending on the NHS has more than doubled during the past decade but this welcome growth, during which output has grown more slowly than spending, is coming to an end. With demand continuing to rise, the future affordability of the NHS is now an urgent question.

One way for the NHS to survive is to improve its productivity dramatically. The evidence from every private sector market is that the two most powerful engines for increasing efficiency and improving services are competition and innovation. The gains to UK consumers in markets such as telecoms and car manufacture have been enormous (see below).

But competition does not always deliver the desired results. Evidence from around the world indicates that the wrong sort of competition can be disastrous. Compare, for example, the 16 per cent of GDP that the US spends on health to the 4.7 per cent that Singapore spends to achieve similar outcomes.

Competition needs to be based on customer decisions, not those of managers, planners, clinicians or politicians.

At the heart of the government's system reform agenda is the desire to create an environment in the NHS that will allow the two engines of competition and innovation to have an impact.

The underlying principles of choice, money following the patient, primary care-led commissioning and greater freedom to invest and innovate through foundation trusts are slowly moving into place. But while there is evidence that the components of reform are beginning to effect some improvements, it is not happening fast enough to avoid the crunch as spending growth slows. The system needs additional catalysts to drive faster innovation and lead to greater improvements in productivity. The independent sector could be this catalyst.

The national independent sector treatment centre programme was conceived to inject capacity into local health economies, providing choice for patients where waiting lists were long. The centres were also designed to make NHS providers sit up and take notice as competitors started taking away their customers.

A stream of articles in HSJ and national newspapers strongly suggest they are fulfilling the latter role. There is now good evidence that ISTCs can influence the NHS.

Despite isolated examples to the contrary, many ISTCs are delivering high-quality care for patients. In some specialties they have been instrumental in dramatically reducing waiting times. Even the threat of an ISTC is sometimes enough to drive the local NHS to introduce much more innovative ways of organising care.

To pretend that there are not very significant issues to deal with would be naive, so let us examine some of the most common objections.

Objection: ISTCs have an unfair advantage

To encourage new entrants to a sector dominated by a monopoly, it is necessary to provide incentives. This is done in the belief that the longer-term gains from the increased competition will more than compensate for the initial investment. What organisation would risk challenging an existing monopoly without some enticement to counteract the risk? Schemes will eventually have to operate at tariff if they are to survive beyond the initial five-year contracts, and they do want to survive.

The overall price of waves 1 and 2 of the ISTCs programme is projected to be similar to NHS prices over the full contract lives, partially from increased competition between the independent providers during the procurement process.

The Department of Health seems to have learned lessons from the way wave 1 contracts were structured. Wave 2 elective schemes, for example, have lower guaranteed volumes and the liability now rests with the DoH rather than local commissioners.

Objection: ISTCs undermine surgeons' training

There is a belief that ISTCs can cherry-pick easy cases, leaving hospitals with the more complex and expensive ones, and with few routine cases to train upcoming surgeons.

There are viable solutions, such as the independent sector sharing responsibility for training. The new contracts require ISTCs to make more than a third of activity available for training. The challenge for the NHS, deaneries and treatment centres is to explore creative ways of using this provision, which will require the support of the royal colleges.

As for the idea that ISTCs cream off cheap and easy cases, they have no right to turn away patients within their contracted case-mix. The overall case-mix is negotiated with local commissioners, and the patients who turn up are determined by choice, not by the provider.

The overall case-mix in a treatment centre may well be dominated by more routine procedures. This is because separating simple elective procedures from emergencies and complex cases makes for a much more efficient use of resources.

ISTCs provide only a small proportion of elective capacity in a health economy, but it is possible NHS providers will feel their case-mix getting more complex as a result. The challenge for them is to ensure they can deliver these at below tariff to make a return. This would be a good example of the catalyst effect of ISTCs.

Objection: patients do not want choice

This encapsulates two arguments. One is that patients simply want a good local hospital; the other that patients are not equipped to make informed choices on things like clinical outcomes.

In fact, not only do patients say they want choice in opinion surveys, but they also act on it when given realistic alternatives.

Waits are important to patients. The experience of current ISTCs is that many will choose to travel further than their local provider if the alternative offers a shorter wait. Not all patients move, but enough to encourage providers to improve fast.

As the drive towards 18-week pathways becomes a reality, patients will need even more, with information about quality of outcomes from providers as well as support in making sense of that information. Individual providers are beginning to publish outcome data unilaterally, and NHS North West chief executive Mike Farrar has recently moved towards commissioning services based on quality of outcomes.

Objection: the independent sector will destabilise the NHS

This argument concerns the idea that elective treatment centres are taking money away from struggling hospitals, which may be forced into cuts or closures as a result.

Most elective ISTCs will add less than 10 per cent of the current capacity in a health economy within the relevant specialties, which is also approximately the expected growth in demand over the life of the ISTC contracts. The larger ones have been designed only in economies with dire capacity problems in specific areas.

It is up to the DoH to work with strategic health authorities to strike an effective balance. That is to be a catalyst for change in the local economy; but not so much that the only logical conclusion is to shut down existing capacity rather than improve the way it is run. The real danger for NHS providers is if they do not recognise and respond to the competition.

The DoH has conducted impact assessments of health economies based on how patients say they will choose between providers. These assessments suggest it is not the ISTCs as such that will challenge the NHS, but the movement of patients among providers that looks likely to happen with choice. ISTCs will lubricate this flow but will not by themselves destabilise existing hospitals.

It is likely that the largest impact ISTCs will have will be on existing private providers, who look a lot less attractive when NHS-funded care can be delivered quickly and conveniently.

Objection: the NHS can do everything that ISTCs can do

Critics argue that the NHS could introduce the same innovations as ISTCs and the policy is all about government preference for profit-making private providers.

In reality, the NHS on the whole has been slow to adopt innovations and appears to need the spur of competition to drive progress. Innovation has not spread quickly in the NHS, probably through lack of adequate incentives.

It is also worth stressing that many independent providers are non-profit entities, such as BUPA and the charitable independent Nuffield Hospitals network. The benefits outlined in this article depend on the way all providers, including existing NHS hospitals, are incentivised by choice and competition.

The benefits of markets do not depend on profits, just incentives and competition. The real goal is to influence the way the rest of the NHS organises its work. There are several ways ISTCs can have that influence.

The influence of ISTCs

First, they offer the possibility of moving quickly to radically different models. The proposed clinical assessment, treatment and support (CATS) scheme in Cumbria and Lancashire, for example, is designed to leap from a patient pathway which often takes more than 23 weeks to one guaranteed to take four weeks or less. It is hard to imagine the same step change occurring in a conventional hospital as quickly (see box, below).

Second, they can act as proof or otherwise of the practicality of innovative models of care. If the ISTC down the road is using a new pathway effectively, a reason for maintaining the status quo is eliminated. Similarly, if a centre is failing because a new idea does not work well, it can be closed with a lot less fuss than a hospital and, in any case, there is a natural break in most ISTC contracts after five years: if the experiment worked it can continue and will thrive; if not, it is easy and cheap to close down (unlike private finance initiatives).

Third, they provide a strong and immediate incentive to the neighbouring NHS. Patients who can choose where to be treated are likely to be attracted to successful treatment centres, perhaps because of the shorter waiting times or greater convenience.

Conventional hospitals that fail to understand which aspects of their care are valued by patients will lose both the patients and the money that follows them. So, possibly for the first time, there is a sharp incentive to propagate good ideas.

The independent sector has to continue to innovate or ISTCs will not survive beyond five-year contracts. In the longer term, they will have to operate at the same prices as the rest of the NHS and maintain their appeal to patients. The NHS should be competing hard by then, so ISTCs cannot be complacent.

The big promised benefit from involvement of the independent sector is the potential rate of NHS improvement. A sustained 1 per cent improvement in NHS productivity is predicted to generate£750m per year savings even if confined to elective activity.

There is evidence to suggest this is happening. Trusts facing competition for their patients from a new ISTC are taking action to improve productivity. Yeovil District Hospital foundation trust, for example, began to re-engineer its treatment pathways when the Shepton Mallet treatment centre opened.

Yeovil is now one of the 13 local health communities committed to achieving the 18-week pathway target a year ahead of schedule. It has changed staffing practices, extended roles and increased the involvement of GPs with a special interest.

One-stop multidisciplinary clinics for orthopaedics, pre-assessments involving anaesthetists and an enhanced recovery pathway have all been introduced. MRI waits are down from 22 weeks in 2004 to three in 2007, and for ultrasound tests from 16 weeks to three.

The overall message is that independent sector involvement in the NHS is not threatening to the existing service unless it refuses to change. If the service responds and learns the efficiency and quality of the services will improve. and we as a nation will still be able to afford them in the coming decades.

Andy Mullins is a member the management group and Stephen Black and Peter Osborne are consultants at PA Consulting.

Telecoms privatisation: early incentives

People too young to remember waiting lists to get a telephone are missing a lesson in why monopolies should be broken up.

But the important knowledge from the 1984 privatisation of British Telecom is about incentives required to encourage new entrants and market diversity and avoid a private monopoly.

With telecoms the government created regulatory and price incentives to encourage competitors. Mercury was offered favourable terms to set up fixed-line competition. Cable TV companies were incentivised to build alternative networks.. In the long term this gave consumers better choice and lower prices.

The same principle applies to health, although it should happen faster as there is no natural monopoly in one hospital.

Early incentives need to be offset by a level playing field as soon as there is sustainable competition.

The automotive perspective:.why benefits outweigh costs

One big argument against competition in health is that it is wasteful: if providers and infrastructure are not planned there will be duplication of hospitals and so on.

Applying this to the automotive industry, then surely it would be wasteful to have dozens of manufacturers with surplus capacity and duplication of similar models? This is indeed a cost of competition, but the benefit is far larger.

Cars today are safer, more reliable and much cheaper than 20 years ago, largely because competition has forced bad manufacturers to improve or die.

All the indications are that the state planning alternative would have left the UK population driving expensive, unreliable Rovers.

Extrapolating this to health, if NHS productivity growth for elective care alone improved by 1 per cent a year, then in a decade the NHS would save more than the total size of the ISTC programme.

The CATS scheme: Cumbria and Lancashire

In Cumbria and Lancashire, the existing health economy has little prospect of meeting the 18-week target in some specialties. Patients often experience long waits to see specialists and undergo diagnostics.

There can sometimes be duplicate appointments as work spread over a long time needs to be redone.

The clinical assessment, treatment and support (CATS) scheme is designed to be a one-stop shop for the typical outpatient journey. Most will get an appointment within four weeks of referral, which will assess and provide most diagnostic procedures on the same day. In one visit and four weeks, the patient potentially avoids four hospital visits and six months of waits.

The private provider is obliged to deliver this level of service and can introduce it quickly; the NHS will be more likely to copy it faster because the it has to compete with it.

Opinion: Howard Foster on property

Too often the advantage that property can provide is vastly under-estimated. When property is well designed it can be a source of competitive advantage, bringing benefits to the host organisation, not least the ability to assist in increasing productivity.

The property and design aspect of a good independent sector treatment centre is intrinsic to its existence and purpose - high-quality, cost-effective services.

To deliver such important values, design and construction of the built environment is absolutely vital.

For ISTCs, choice of building can be anything from mobile units or residential homes to existing infrastructure, either public or private sector, right up to new bespoke facilities.

Historically, the NHS has resisted taking on board global best practice. ISTCs' independence makes them better placed to do this.

For instance, St Olavs Hospital in Trondheim, Norway, is particularly innovative in its design. It incorporates many features such as shorter travelling distances for staff and patients. Robotics are commonly used to deliver supplies throughout the hospital, providing an efficient service, particularly outside normal hours.

Boston's Massachusetts General Hospital also features patient-focused design, to the extent that staff accommodation is kept away from the front of house to shorten patient travelling distances.

A critical benefit of the introduction of ISTCs is the introduction to the NHS of more private sector methods, frameworks and market-sector thinking.

ISTCs have shaken up the NHS by introducing contestability into what were relatively flat clinical sectors. This has reinvigorated established thinking by bringing in private sector norms.

Examples of these are the recognition of the patient as customer and the emphasis placed on speed of access, cleanliness, choice and expertise. So, items such as patient information, signage, catering, choice of amenities and more single rooms become a priority.

This also follows the route already outlined by the Gershon efficiency review, through delivering increased value for public spending.

The Confederation of British Industry has recently called for a greater return from the billions in tax revenues that support the NHS.

The property investment to date needs to be seen as part of the solution in delivering increased productivity.

For that reason alone, the existence of ISTCs should be applauded.

Howard Foster is head of healthcare at EC Harris LLP.

Opinion: Richard Jones on the private perspective

This promises to be the year partnership between independent sector providers and the NHS is seen to offer greater choice and quicker access to care for patients all over the country.

For many of us in the independent sector, the last year was one of preparation as we negotiated contracts and implemented systems to support working with the NHS. Now we can mobilise new capacity to deliver services to NHS patients. This year we expect to see the completion of the first wave of ISTCs and new capacity coming on stream from phase two of the procurement.

But we know this will only work if we go forward in co-operation with other parts of the NHS. No-one has a monopoly on knowledge and many independent sector providers can point to valuable learning gained from early experiences delivering NHS services. Equally we are sharing our expertise with NHS colleagues to help them to use resources efficiently and nurture innovation - while maintaining high levels of quality care and patient satisfaction.

The first wave of independent sector capacity is already contributing to the improvement of care for NHS patients and reducing waiting times.

Over the last year, seven new independent sector treatment centres began treating patients, bringing the total now open to 23. So far, over 520,000 patients have benefited from diagnostic, elective and primary care treatment in ISTCs. But that is still a tiny proportion of those treated by the NHS.

There are some who seek to blame the independent sector for financial difficulties elsewhere in the service. But given the size of the programme and the record increases in funding over the same period, this is nonsense.

In the second phase of procurement, independent providers have also worked with the Department of Health and primary care trusts to establish new elective care services and diagnostics projects. The diagnostics procurements are a bold attempt to create a new type of service, making common diagnostic tests accessible to GPs before referral. This avoids a logjam and significantly improves the patient's experience and reduces waiting times.

The elective care services projects place less emphasis on building new capacity and much more on partnership with existing NHS providers, developing new capacity where required and providing enhanced choice for local people.

PCTs have been involved throughout, boosting confidence that services being provided are those needed in the local health economy.

Importantly, some of the main areas of contention from wave 1 - such as training and the additionality policy - have been refined.

Richard Jones is chair of the NHS Partners Network.