What does Hinchingbrooke tell us about markets in health services?

Today Circle announced that its ‘involvement in Hinchingbrooke [hospital] does not have a sustainable future in its existing form’.

The external provider (half privately-owned and half employee mutual) has withdrawn from its contract, after putting in more than £5m to cover deficits since it took over the hospital in 2012. Given that this is the only NHS hospital run by an external contractor, this is proving a high profile culmination to a week of headlines about the NHS and poor performance against A&E targets.

The Hinchingbrooke case raises a number of important questions about how the market in health services does and should operate:

1. The deficit being run at Hinchingbrooke is nowhere near the largest deficit being run by a hospital trust in England and Wales. Figures from the National Audit Office show that in 2013-14, 29 trusts operated with deficits of more than £10 million or more than 5% of their income. This represents more than one in ten of all trusts. Eleven of these trusts were in deficit in both 2012-13 and 2013-14. Two trusts – remarkably – were in deficit by more than 15% of their income. In all, a quarter of trusts ran a deficit in 2013-14.

Judged against these comparators, Hinchingbrooke’s finances do not look awful. Over the last three years it ran up a debt of £5m – and thus presumably was running a deficit of approximately £1m to £2m per year. These figures are much smaller in absolute terms than the other performers set out above and also lower as proportion of operating income.

2. The whole episode should make us think more thoroughly about what happens when things go wrong financially. At the least we might wonder at the marked discrepancy between the expectations made of an external contractor (Circle) which must cover all its deficits; versus the leniency permitted in the internal market where NHS Trusts and Foundation Trusts are bailed out routinely by the taxpayer. In 2013-14, the Government spent £511m on ‘short-term support for trusts in financial difficulty’.

National policymakers have various ways to intervene to support struggling institutions. Where such help does not work, there can be recourse to the Trust Special Administrator. Yet, this has only been invoked twice since 2009 (and once was in the case of Mid Staffs). The threat of intervention in is therefore probably distant.

3. Despite the obvious claim that the state is being abandoned by a private sector provider, one could conclude that the NHS has come out quite well financially compared to the counterfactual of retaining the institution in the public sector. Circle (rather than the state) has had to cover the £5m debt. Moreover, Circle is liable for a fine of up to £2m for exiting the contract – this should cover at least one year of the operating deficit as the state finds a new provider.

4. If one is worried about the disruption caused by the private provider exiting, one wonders whether Circle should have had a get-out clause at all or whether there could instead have been a matching scheme whereby the state shared the additional financial debt burden (beyond the initial £5m) with the provider. It could then be up to the state to decide whether a different contractor would be worthwhile. Of course, it is not impossible that the services at Hinchingbrooke were as bad or worse than its finances – and there is some speculation that this may demonstrated to have been the case in a forthcoming inspection report. In which case, the contractor should be held to account for these failings.

5. Finally, the episode raises questions of whether this was the best way of introducing more diversity of provision into the NHS. If we think there may be merit in voluntary, mutual and private providers forming part of the market in health services, wouldn’t we be better to let them compete to run contracts that haven’t previously failed?

The SMF is currently undertaking a project addressing many of these issues, Future scenarios for health and social care, which will be published early this year. For more information on this project contact Nigel Keohane.


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