Going full Circle: Hinchingbooke collapse raises outsourcing questions

This morning, it was announced that Circle is withdrawing from the contract under which it manages Hinchingbrooke, the UK’s first privately run NHS hospital. Announcing the withdrawal, which is permitted by the terms of its contract, Circle said: “There have been significant changes in the operational landscape for NHS hospitals since the contract was originally procured in 2009, including unprecedented increases in accident and emergency attendances, insufficient care places for patients awaiting discharge, and funding levels that have not kept pace with demand.” Circle explained that, to keep the hospital running, it has so far paid out £5m more in costs than it has received in revenue, the point at which a contractual clause allows it to exit the deal. Circle will need to make a final support payment of £160,000 to the hospital, and is liable for costs resulting from the termination of the contract, though these are capped at £2m. The blame games are likely to start immediately. Andy Burnham, Labour’s Shadow Health Secretary, will argue it is both further evidence of an NHS crisis and confirmation that his own policy position – which is broadly sceptical of the benefits of private involvement in the NHS – is correct. He will point to this as a failure of government contracting because the deals were signed under the current government. Meanwhile, Health Secretary Jeremy Hunt will point out that the process of contracting out the hospital’s management started before Burnham became Health Secretary in 2009 and continued for the year he was in the job. Rather than working out who is to blame, it is more useful to focus on what went wrong and whether this is indeed a “failure”. The job Circle took on when it accepted responsibility for managing Hinchingbrooke was always going to be extremely challenging. As the National Audit Office’s thorough report on the deal explains, the hospital was running a multi-million pound deficit and struggling to attract patients. And it seems that Circle – and not the Government – are the main loser from the fact they’ve failed to turn Hinchingbrooke around. At first glance, they look likely to end up £7m poorer and their share price has already fallen by double digit percentages.* What’s more, we have to ask ourselves the counter-factual question of what would have happened if a NHS-managed trust had found itself in a similar position. Many NHS trust are running deficits and the honest answer to what happens when they do is that they are usually propped up by additional taxpayer funding, though they are required to often undergo organisational change as well. In other ways, however, we see reason to question whether government really managed the franchising process well. The NAO’s 2012 report points out that the process encouraged those bidding for the contract to be highly – and we now see excessively – optimistic, rather than realistic. This tendency of commissioners to encourage providers to overpromise is common, according to our past research, and can lead to a scenario where it is the most bullish, rather than the most capable, provider who wins work. Working out what went wrong will therefore require more detailed work and the National Audit Office should conduct a further investigation as soon as possible. NHS England meanwhile must act still more quickly. First, they must come out and explain what happens now. They should already have a clear failure regime in place – so any delay will suggest that they overlooked this essential piece of planning in the commissioning process. The other immediate task is to ensure continuity of service while finding someone to take over what seems to be a chronically embattled organisation. That will raise the question of whether that should be a private company or an NHS provider. Whether the hospital itself is still viable – or needs to be closed down – also needs to be established. There would certainly be private companies interested in running the hospital at the right price. But the real question appears to be whether future NHS funding will be sufficient to attract private investment – or is it so tight that only non-profit-making providers will be willing to provide services? The jury is out on these questions but Circle’s difficulties suggest that the idea of accelerating private involvement in NHS provision has been dealt a considerable blow. * Note: The question of financial losses is never entirely simple. With Hinchingbrooke receiving an annual income of around £100 million, it is feasible (though we have no evidence this has happened) that Circle could have reduced its net loss by cross-selling the hospital some of its other services. And it is not impossible that the cost of refranchising could cost the NHS more than the £2m for which Circle are liable.