Virtuous Circle?

For the first time ever, a private company is poised to take over the management of an NHS hospital. Following a decision finalised last week, Circle Health will begin running the debt-ridden Hinchingbrooke hospital in Cambridge in February 2012. The company will have a ten-year contract and will be expected to cut the hospital’s debt and make a profit by reducing costs and increasing business from within the NHS.

Part of the story is the ongoing debate about ‘privatisation of the NHS’. Health Minister, Simon Burns, quoted by This Is Money makes clear that – from the government’s point of view – this is not what’s happening: “No NHS staff are leaving and assets remain within the public ownership. Hinchingbrooke Hospital will continue to deliver the same NHS services, as long as commissioners continue to purchase them, adhering to the key NHS principle of care being free at the point of use. This is not a privatisation in any shape or form.

This article in The Observer seems to be a pretty weak attempt to use a recent Circle share prospectus as a hook for union leaders and Labour politicians to offer predictable objections to the deal. You don’t have to have extensive knowledge of the business world to know that when a company invites people and institutions to invest their money, it’s legally obliged to give them a clear picture of the challenges the company faces in delivering its objectives.

Circle’s statement in its June 2011 prospectus that: “Circle’s growth has placed, and its anticipated growth will continue to place, a strain on its managerial, administrative, operational, financial, information technology and other resources and could affect its ability to provide a consistent level of service to its patients” is an explanation of a potential risk (to shareholders) not a company policy. Failing to provide a consistent level service is precisely what they’ll be trying not to do in order to successfully fulfil their contracts and provider investors with a return.

The complicating factor in this story is that Circle claims to be, or at least is often described as, a social enterprise. The Observer redeems itself with this informative explantiation of the company’s structure. The majority owner of Circle Health is Circle Holdings, a company owned by chief executive, Ali Parsa, and a range of venture capital and hedge funds. The minority owner, holding 49.9% of shares, is Circle Partnership, which is owned by Circle staff.

The Observer is clear about what this means for decision-making: “Both Partnership (ie the staff) and Holdings (ie the hedge funds) have an equal number of seats on the board of Circle Health, but the small print makes it clear, on almost all issues, that it is Holdings that makes the decisions,” while Christina McAnea, Unison’s head of health, makes the point even more forcibly in the This is Money article: “The company is pushing the line that staff are getting involved, while avoiding the fact that merchant bankers are the ones calling the shots.

Leading social entrepreneur, Craig Dearden-Phillips, MD of Stepping Out, a company that supports the creation of public sector spin-out social enteprises, is a strong supporter of Circle’s takeover of Hinchingbrooke. Part of his argument is that Circle offers something that the NHS does not have available in terms of management expertise: “The NHS can’t do this. There is abundant evidence to show that it cannot deliver simple economies and is endemically incapable of dealing with lower growth in resource. The NHS could not, for years, balance the books at Hinchinbrooke. This is why, in desperation, it was tendered out.

The other part of his argument is that Circle offers a winning combination of private cash and staff ownership which is ideally suited to the current financial climate: “The government is bust, in case nobody noticed. Circle have been able to bring new money to table. In addition, through its co-ownership model it is also bringing employees own energy to the equation, as co-owners of the company. Study after study attests to the benefits even of part-ownership like this.

Given that their contract hasn’t started yet, it’s too soon to say what impact Circle Health will have on Hinchingbrooke hospital. Previous experiences of private managment of public services (such as local education authorities) suggest that the most passionate predctions on both sides of the argument – from supporters that private managers have a magical insight into the running of public services that public managers couldn’t possibly imagine, from critics that private managers will put service users in danger with nefarious acts of amoral profit-maximising inhumanity – usually prove to be incorrect.

As an organisation on the social enterprise spectrum – it’s probably safest to avoid a tighter definition than that – Circle Health offers a new approach to managing healthcare. I’m not quite as optimistic as Craig Dearden-Phillips but, for me, the fact that Circle is backed by private money, and majority controlled by the people who put up that money, is not enough of a reason to dismiss the model before it’s been given a chance.

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7 Comments

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7 responses to “Virtuous Circle?

  1. Sorry, David, but I can’t share even in your tepid welcome to Circle. The soc ent bit is mere window-dressing for them, a means to securing contracts and market share, not something in which they believe. And C.D-P is mistaken about the supposed inefficiencies of NHS management. Now, I’m not going to say it’s uniformly excellent, as it isn’t but the NHS has to do one thing that the private sector doesn’t and won’t (and indeed not many soc ents do): universal service.
    The economics of universal service provision are completely different.

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  2. “For the first time ever, a private company” – wrong, see below

    You rubbish the concerns of people without actually looking at what Circle do.

    Let me be clear. Circle do easy stuff. From a management point of view electives are easy: you know your resources (theatre time, clinical staff, etc), you schedule the patients and the operation gets done. Simple! If anything goes wrong you lift the phone, dial 999 and tell the NHS it is now their problem (assuming the patient is still alive). Even better: you don’t even have to treat the patient! If the patient notes says that they have complications you can simply tell their GP that you don’t treat such patients! How can you not make potloads of money! As a private provider of electives you do not have the pesky issue of having junior doctors to train. And you do not have the irritation that everything you do is wide open to scrutiny by members of the public through FoI and from the DH, the SHA, PCTs and local politicians. Easy!

    Circle have been doing all of this easy stuff at a time when the NHS had piles of money to throw around and piles more to throw if you are a private provider. Yet they make a loss? Really? All that free and easy cash and they make a loss? Is that really possible?

    Now they are embarking on doing the difficult stuff: a hospital with a maternity unit and an A&E. Circle have never done this before. They have clearly been over-promoted considering their experience. They have taken on a hospital with a historic debt (caused, let’s face it, from underfunding). A hospital in an area where there are plenty of other hospitals and “patient choice” where patients have chosen to go elsewhere. And, Circle are taking on this hospital at a time when funding is very tight (tariff – the payment for about half of procedures – was cut by 1.5% from April, so the income of the hospital *will* fall), and they are doing this when there is renewed encouragement from the government for fewer patients to be treated in hospitals and be treated “in the community” (ie GP surgeries – the very GPs who Circle expect to send their patients to Hinchingbrooke).

    Given all of these facts, would *you* put your money into Circle? Me neither. This scheme will fail, just like Good Hope did. (Heard of Good Hope? In 2003 their management was replaced by Tribal, this was the first time such a scheme was tried. It failed at a time of plenty.)

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  3. Easy stuff, is a good way of putting it.
    It could be seen in the IT industry when large scale outsourcing took on many public sector contracts and set about maximising profit by minimising service. Enter the like of EDS who’ve just cost the NHS $12.7 billion through the incompetence they’re renowned for.

    When we spun out public service to a private contractor with no market competition, it used to be called a quango. So far, we’ve been able to claim additional social value, but when benefit s constrained to the interests of a wealthy group of investors, it’s not what most of us would call social enterprise which is taking on an increasing broader definition, to perhaps become meaningless. .

    Social enterprise is often “easy stuff” which skirts around major issues such as human rights, organised crime and government corruption.

    There’s a case to be made for all business having some kind of social benefit, and the recent articles about Salesforce and others jogged my memory of having made this case. However, as we saw it, it went further in the extent to which we were ready to help each other help those who fall through the cracks which traditional capitalism fails to reach.

    http://www.ecademy.com/node.php?id=169617

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  4. Beanbags admin

    @Richard My best guess is that This Is Money, amongst others, are using descriptions such as ‘handed to a private company for the first time in history’ on the basis that in the case of Good Hope, as I understand it, an NHS board remained in place while private sector consultants took on top management roles.

    I’m rubbishing concerns based on risks detailed in a share prospectus because they are rubbish. The concerns about Circle’s depth of experience and the market the hospital is operating in are quite legitimate – at least in terms of whether Circle are likely to succeed in delivering a good service while also reducing the hospital’s debts and making a profit. That’s up to them to prove (or not).

    @Alasdair I’m with you in not accepting that private sector management is necessarily more efficient than public sector management. In this case, Circle will have the same obligations that an NHS management team would have so they’ll have to respond to the challenges than brings.

    Interesting thoughts here from Paul Corrigan.

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  5. @ david. Even better is Roy Lilley on this. Basically, he (and he is an expert) simply can’t see how Circle can possibly do waht they profess, unless they are given special (‘did anyone mention sweeteners…) treatment by the DH for political (not economic,not health,not even social) reasons.
    As he says “What happens when it goes wrong? Circle is liable for the first £5m of any further losses (but not the old debt) and would be required to pay an additional £2m on exit, capping their liability at £7m. I don’t see this as a downside risk. If it does fail Circle will liquidate and the DH will take their place in the queue of creditors, like the milkman and the paper boy. The law will not permit them to be preferred creditors.

    The DH can throw in the towel and terminate the contract at any point, without giving a reason, but why would they? They’d be left with a debt, a dysfunctional hospital, a mess to clear up and a public outcry.”

    So every effort will be made to save face, and ensure, even if means unfairly preferential treatment, that Circle are not allowed to fail. we’ve had banks that were too big to be allowed to fail here we have a provider too politically symbolic to be allowed to fail.

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    • @Alisdair

      “how Circle can possibly do waht they profess, unless they are given special treatment”

      Indeed. In the tranche of amendments that were rammed through Parliament after the Future Forum report were details of a “failure regime”. The government keeps saying that they want a “level playing field” where all providers are paid the same rate. This is pure and utter nonsense, as I have mentioned above, because a Circle providing hip operations for patients without complications costs a lot less than a NHS hospital that has to be able to schedule emergency operations from A&E admissions. The rate is called the National Tariff which (as I mentioned above) has been reduced by 1.5% this year (remember “I will cut the deficit, not the NHS”? Well this is a blatant cut – why is no one shouting about this?).

      However, the failure regime says that a failing hospital can be paid more than tariff. Do you see what the government have done there? By the way, the failure regime was buried in the thousand amendments made after the Future Forum earlier this year. These amendments, some very important and needing proper scrutiny, were pushed through the Commons in just two days of Report stage. The government refused to allow a proper Committee stage to scrutinise the implications. We really have an unconstitutional government.

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  6. Isn’t it all too good to be true. Circle are going to come in, service the debt, make money and still offer a good service. Am I the only one smelling a rat here.

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