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War of independents

ISTC providers face tough negotiations with trusts as contracts come up for renewal. Max Rashbrooke reports

Health secretary Alan Johnson, in a recent interview, raised the possibility that the independent sector treatment centre (ISTC) programme might have run its course. “When you introduce these centres, you find that performance suddenly zooms in the local NHS hospitals that had previously said they couldn’t do any more hip replacements,” he said. That meant, he added, ministers had to decide “if taxpayers’ money would be well spent on a lovely spanking new centre that very few people would use”.

In fact, the private operators argue, ISTCs are now valued and accepted members of the NHS family. As the process of renewing the first wave of ISTC contracts gets underway, providers know that how they operate in future may be very different from the early years of the programme. That doesn’t mean they are going to go away – but they will want their investment in new buildings and equipment recognised.

The ISTCs’ work has represented a small but significant part of the total NHS spending with the private sector, estimated by market research firm Laing & Buisson at £26 billion in 2007. ISTCs were paid £270 million by the NHS in 2007 and £360 million last year, Laing & Buisson estimates. It expects that figure to rise to between £435 million and £515 million in coming years as more centres come on stream.

But change is in the air. The first-wave ISTC contracts were five years long and are starting to come up for renewal. Two come to an end this year, 18 next year, and the remaining seven in either 2011 or 2013. The key question is over what conditions the ISTCs will have to accept if they want their contracts renewed. The first-wave centres were controversial because they guaranteed providers payment for a set level of operations, regardless of how many were actually carried out; and because providers got what was known as ‘tariff-plus’, a higher payment per operation than the standard NHS rate.

The Department of Health (DH) has consistently said that once the initial contracts ended, so too would the guarantees of work and the higher payments. If ISTCs wanted to keep on working, they would have to do so on an equal footing with other parts of the NHS. However NHS chief executive David Nicholson recently admitted to MPs that in the current economic climate, removing the private sector’s props could “create them some difficulties”. He added: “We will have to think about how we manage those difficulties if we want to keep choice and contestability in the system, which I think we do.”

David Worskett is director of the NHS Partners Network, an alliance of firms that work in the health service. He says that the discussions about the future of ISTCs are taking place against a backdrop of “a very full agreement between the sector and the department that ISTCs have brought real benefit to the NHS”.

A “significant number” of ISTC providers, he says, would be happy to keep working without the guarantees – but will need to be compensated for their initial investment in the centres. How that works out will depend on a complex web of negotiations around future workloads, tariffs and volumes of work. It is these negotiations over coming weeks and months that will determine exactly where the ISTC providers will continue to have formal contracts, or whether they will be independent operators in an NHS contracting free-for-all.

Some ISTC operators certainly want to keep working in the NHS. “There has been limited or almost static growth in private medical insurance,” says Douglas Watson of private provider Ramsay, “so the NHS has provided us with a greater opportunity for growth.” However, providers invested millions of pounds in new equipment and buildings – a cost that isn’t recognised by the standard NHS tariff, they argue. If they are to operate at the standard tariff, they want their investment paid back.

Fortunately for them, they can insist that happens. The ISTC contracts committed the DH to pay out £187 million for 14 of the centres if their operators decide they don’t want to renew their contracts. That is the option most seem to feel that officials will take. Having paid out the £187 million to buy back the buildings, they could then either use them directly to treat NHS patients or lease them back to the ISTC providers. The other option – risking the inevitable political outcry by continuing to pay ISTCs more than the standard tariff – is seen as less likely, despite Nicholson’s hints.

Leasing the buildings from the NHS would suit operators such as Circle, which runs three centres under the Nations brand. The firm’s business development director, Jonathan Pearson, says it could work under either system, but it’s fundamentally a medical services company, not a property manager. “We are not a property company, we are not organised in that way,” he says. “If the NHS effectively wanted us to act as a provider [of services only], we would be very happy with that.”

Buildings aside, the other big question is where the ISTCs’ work will come from, and how much of it there will be. Again, there are a couple of options. The centres could compete with NHS trusts for patients, on what is known as an ‘any willing provider’ basis. That would mean they were reliant on patients choosing to use ISTCs through the rapidly expanding choose and book initiative that gives people more control over their own treatment.

ISTCs may be reluctant, however, to take a chance on enough work coming their way, and could argue for some volume guarantees. It’s unlikely they would get the same level of security as in the initial contracts, Worskett says; instead they could, for example, be offered guarantees dropping to a much lower level over, say, three years. “The discussions [with the DH] will have to cover whether [ISTC] providers move to ‘any willing provider’ and take demand risk, or whether you don’t move to any willing provider and demand risk is mitigated by some kind of volume guarantee.” Again, if the government refuses to provide that mitigation, ISTCs can insist on the £187 million buyback and walk away.

How interested ISTCs are in renewing their contracts may depend on how much work they think will come their way. The latest DH figures show that the wave-one ISTCs were on average operating at 85 per cent of capacity in September last year, under the current system, which relies on primary care trusts referring patients.

Pearson says all Circle Health’s ISTCs are doing well. One, in Nottingham, is running at just 72 per cent of capacity, but has only recently opened and will have more work coming on stream this year and next. He says operating at 80 per cent or over is “a rough rule of thumb” indicating which centres could survive in a competitive NHS market. Though he won’t comment directly on rivals’ centres, he adds: “If a treatment centre was running at very low capacity, we would be looking very hard at whether it would be viable under free choice.”

Of the 27 wave-one centres, 13 are less than 80 per cent busy; one, the Will Adams centre in Medway, is running at just 49 per cent of capacity. Its operator, Care UK, says each ISTC “was commissioned to work in a specific individual market and the future for each needs to be assessed on an individual basis”.
Whatever happens, Pearson says, he expects to be competing for NHS patients in coming years. Adding that his firm’s promotion of its centres to patients and GPs will increase as choose and book expands, he says: “If we don’t do a good job, patients won’t choose us. Equally, if we do a cracking job, they will.”

Posted on: 06/03/2009

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