Profit-making in English health services after the 2012 Health and Social Care Act.

Nick Krachler (Cornell University) and Ian Greer (University of Greenwich)

This is a summary of our paper published (fully referenced)  in Social Science and Medicine, Volume 124

The current UK Government sought both to marketise (i.e. increase price-based competition between providers) and privatise (i.e. increase provision carried out by non-government providers) with the Health and Social Care Act 2012 (referred to here as ‘the Act’). The Act’s supporters argued that competition will provide innovation, better management, and improved quality but its critics argued that it would exacerbate health inequalities and service rationing, end comprehensive public-sector health service provision, and worsen democratic accountability

Will the Act deliver on these hopes and fears? In our paper, we try to assess the impact of these health reforms by relating them to the structure of the overall healthcare market in the UK. We argue that many barriers to profitability remain despite the Act while also showing how profits are made in English healthcare. Overall we argue that the privatisation that occurs is significant (especially for workers) but better understood as incremental rather than comprehensive and radical.

Marketisation and privatisation in English healthcare

Marketisation is, as we define it, a change in transactions, through the introduction or intensification of price-based competition. Privatisation, by contrast, is a change in ownership in which non-state actors become increasingly involved in provision, usually through a transfer of assets (e.g. the sale of a hospital) or an increase in work contracted out. While the opening of the market to private-sector providers is an important aspect of healthcare marketisation, intense price-based competition and an expanding non-state sector do not always go together.

UK Governments have introduced market logics into the NHS, including price mechanisms and competition, since purchasing was separated from provision under the ‘internal market’ of the early 1990s. Despite years of marketisation processes, the state is still dominant, both as funder and as provider, with private-sector involvement in the NHS estimated at around 19% for provision including general practitioners or 12.3% of government secondary care expenditure (which in 2011/2012 meant £5.22bn of expenditure on for-profit providers by Primary Care Trusts).

The introduction of the internal market in the early 1990s was accompanied by directives limiting purchasing and borrowing by Trusts, and it was plagued by various problems such as geographic monopolies, healthcare workers’ persistent professional ethos or public pressure against destabilising traditional providers.

Governments have also attempted to stimulate competition by creating private-sector entry points such as the 1983 mandate of competitive tendering for ancillary services or the 2002 introduction of Independent Sector Treatment Centres (ISTCs) in secondary care. However, regarding the ISTC programme, negative media reports, pressure from campaigners, hostility from NHS staff, and the unwillingness of some Trusts and Primary Care Trusts to send patients to ISTCs led to a reduction in ISTC contracts in the second wave from 24 to 10 so that in 2007/2008, ISTCs provided only 1.8% of elective care.

One reason for the limited efficacy of marketisation policies is that the NHS is adept at containing costs. For example, around £29bn of services are commissioned using ‘Payment by Results’, a pricing system for particular diagnoses also known as ‘the tariff’, introduced in 2003/2004. Since 2006 these reimbursement rates have incorporated annual efficiencies of 3%. Another policy limiting funding for for-profits is the Government’s austerity programme of £20bn of savings by 2015, which is around 18.5% of the NHS’s budget.

At the same time, the Act attempts to universalise Foundation Trust status, which increases management autonomy by, among other things, allowing private patient income to increase to 49% and allowing the retention and reinvestment of surpluses. Accordingly, the NHS Support Federation showed around 70% of contract awards from April to December 2013 were awarded to non-NHS providers. However, the volume of the work and the degree of change this represents is unclear. So while marketisation and privatisation form the core of the Act’s logic, the practical consequences of this legislative change is uncertain.

The conditions of profitability

We argue that profitability depends on specific conditions, the first of which is the availability of resources to private providers. The politics of austerity might constraint available resources for private providers. On the one hand, austerity could be conducive to privatisation, since it creates gaps in provision or investment backlogs that are then compensated through private means. On the other, austerity may not be conducive to privatisation, since it reduces the overall amount of money available to contractors.

The drive by politicians and commissioners to maximise value for money can also reduce profit margins. This squeeze of prices for contracted work is facilitated by changes in funding arrangements. There is evidence that the privatisation of GP services by New Labour was limited due to a top-down price squeeze by commissioners which resulted in limited profit-making.

A condition for investments being made is the degree of uncertainty built into the market structure which shapes the calculation of risks and potential returns. Without stability or predictability, private providers are less likely to enter the market.

Competition from the public sector is also important, since for-profits have to match the production costs of NHS providers in order to gain market share. Public provision has the in-built advantages of economies of scale and not needing to distribute profits. In the NHS there is also a traditional public-sector ethos which promotes high quality services at a low cost. The benefit from this ethos can be eroded by performance-related pay when workers transfer into for-profit organisations. Another effect of state dominance in funding (i.e. the fact that revenue from self-payers or private insurance is low) is that private providers depend on winning government contracts, so that they have to compete with the NHS’s extensive service portfolio (which means they predominantly provide only elective treatments).

A condition for policy changes is that policymakers are able to depoliticise their proposed changes. This depoliticisation in turn is based on the importance of the issue at stake to voters and its exposure in the news media. Market reforms are especially politicised, since they tend to undermine the power of public service workers, but have varying effects on public-sector managers, private providers, and service users; they may empower one or more of these actors, but not all of them. Despite policymakers’ attempts to depoliticise reforms by drawing attention away from the core principles of marketisation and privatisation, campaigns in England against privatisation are widespread and ongoing.

Finally, certain managerial practices constitute another condition of profitability. These practices can be divided into increasing revenues and reducing costs. Expected cash flows from demand are weighed up against costs stemming from several factors such as infrastructure investment, a need for economies of scale, the size of demand in a market, or the quality of labour regarding skills, wages, and unit costs. The ISTC programme provides some indication of how profits are made in English healthcare, namely by lowering unit costs, standardising work and having a strong performance regime. The little evidence that exists indicates non-NHS providers are able to match the quality standards of NHS providers, without, however, providing higher quality services or medical innovation. These studies indicate that profits are made by lowering unit costs, but the NHS seems to be more innovative and cost-effective.

Methodology  

Our study is based on interviews conducted 6-10 months after the passing of the Act. We focus on England, leaving aside the UK’s three devolved countries, since the 2012 Act does not apply to them, and since marketisation has gone furthest in England.

We conducted 32 semi-structured interviews with 34 participants including 15 private-sector representatives, of which 10 were senior managers (in radiology, pathology, hospitals, global service provision and home care) and 5 were management consultants (including 4 partners). We also interviewed 6 public-sector representatives and 5 trade unionists. Additionally we spoke to 4 clinicians, 3 campaigners and 1 healthcare researcher. The private-sector participants all had at least 5 years’ experience working in senior management positions in profit-making enterprises and 10 years of experience in the private healthcare market. Additionally, several had extensive clinical experience, and/or experience working in the public sector, and/or experience abroad, in Australia or the USA.

All interviewees were asked about the impact of the Act and austerity measures and the relevance of campaigning and unionisation for their work and their organisations. Private-sector participants were asked about their competitive advantages compared to the NHS and whether the Coalition Government’s health policies had created better conditions for developing business and winning contracts. Interviews with unionists and campaigners focused on labour issues and campaigning, while interviews with civil servants scrutinised policy intentions and the new regulatory framework.

Findings 1: Perceived profitability barriers

Our interviewees talked about four areas in which market dynamics frustrated profit-making.

Uncertainty in rules. Our interviewees were disappointed by a lack of clarity surrounding competitive tendering requirements. While CCGs are bound by competition law and EU regulations, a lack of bids does not require re-tendering if the process is transparent, “the providers were able equally to bid for it” (CCG GP Member), and the value of remaining with incumbent providers is demonstrable. Moreover, attempts to reduce external tendering were reported and litigation by private providers against the NHS is thought to strain the relationship with the funder.

Uncertainty also exists regarding competition rules built into Section 75, other issues like when VAT can be claimed back by the private sector, and the reality of periodic top-down NHS reorganisations. Frequent reorganisations cause periods of revenue-losing inactivity: “it’s almost like the system takes a breath and stands still for a year […] everyone needs to find their feet, find out how the new system works” (Radiology Director).

The decision-making process within the NHS was described as slow and uncertain: “policies change by the time somebody’s made a decision, it’s quite frustrating” (Home Care Director). Frequent policy changes lead to uncertainty, since services may become redundant: “there have been some well-documented organisations who spent a lot of money and have withdrawn because they’ve not seen their return on investment [due to policy changes]” (Global Services Director). Contract lengths can also be too short to get returns on investment.

The lengthy and costly procurement process also contributes to uncertainty. Advertisement to contract award in the NHS generally takes 18-24 months, and interviewees report that the investment needed for participating in tenders can exceed the likely returns of the contract. In addition, four private-sector managers complained of losing upfront investment due to the NHS cancelling tenders.

The complexity and fragmentation of regulation also contributes to uncertainty. This fragmentation frustrated, for example, the creation of large regional contracts with multiple CCGs: “The whole East of England did a big procurement around GP pathology, it took two years and [NHS organisations] were going to lose 10 million pounds of revenue […] though results were announced and [private providers] spent 10, 15 million pounds doing it, it didn’t go ahead” (Pathology Director).

The top-down price squeeze. Interviewees also often reported a top-down squeeze on prices resulting from austerity, which reduced available resources. Margins on NHS commissioning were described as eroding or low compared to other revenue streams: “there’s definitely margin erosion. The margins in the NHS are much lower than they are in our pharma or private business” (Home Care Director).

The NHS as funder demands efficiency: “we have to work even harder, because we have to produce a margin and then we have to produce the gain and the efficiencies that the commissioner wants” (Global Services Director 2). Achieving profits through NHS commissioning is further complicated by the importance of quality, which can lead to the inability to deliver services according to contract specification: “[the for-profit provider] could not deliver the quality for the price agreed […] we re-tendered at the end of the contract. They chose not to bid and in fact stopped offering that service and the contract was then won by a consortium of a non-local NHS provider and a local voluntary provider” (GP).

The steady reductions in the tariff, which is calculated as an average of reported NHS provider costs, also squeezed resources.

State dominance of funding and provision. The third profitability barrier reported is the dominance of the state. Participants complained that the market had not really opened, and six interviewees described it as ‘immature’, despite marketisation and privatisation trends since the 1980s. They pointed to a lack of funding beyond NHS commissioning due to low private medical insurance coverage and the scarcity of patients paying out-of-pocket. Executives at multinationals pointed to countries with private medical insurance as more lucrative markets.

The nature of CCGs is one source of private-sector disappointment. Decision-making processes were described as more formal and difficult to influence after the Act. Moreover, CCGs tend to structure provision in detail rather than letting providers decide how to comply with contract specifications.

Our private-sector interviewees characterised CCGs as uninterested in stimulating privatisation. CCGs have “gone straight back to how it used to be” (Director Hospitals 1) with strong links to incumbent NHS providers. Equally, they were deterred by the possibility that, by switching to private providers, “you could destabilise a whole organisation” (CCG Lay Member). Moreover, GP interviewees were not interested in stimulating privatisation, and one private-sector interviewee argued that many CCG members “didn’t become GPs to manage a budget” (Consultancy Partner).

In addition, because of the range of high-quality services provided by the NHS and its ability to cross-subsidise, private sector interviewees reported difficulty competing with the NHS for certain treatments: “ think there are services that have to be provided by the NHS […] There’s specialist things that a private company will never do, it would be too expensive or too specialist” (Pathology Management Consultant).

Internal public-sector restructuring posed an additional challenge to the private sector, because – together with public-sector management autonomy under Foundation Trust status – it intensified the NHS’s cost advantages. Due to pressures on terms and conditions, increased workloads, and downbanding, NHS workers felt “the restrain of resources, trying to stretch over those gaps by working an exhaustive number of unpaid overtime [but] there’s downgrading, removing their clinical worth” (Senior Unionist). Moreover, Foundation Trusts could establish new businesses to circumvent collectively bargained work hours and pay grades: “we’ve got through subsidiary companies out of Agenda for Change” (FT Finance Manager). Several London-based FTs had also established clinics in the Middle East to funnel private patients to the UK.

Failed depoliticisation. The last barrier is the inability of for-profit providers and pro-market policymakers to de-politicise the market. Because of the high value placed on the NHS by the British public, privatising healthcare is a risky proposition for politicians: “the NHS is probably the one area of public sector that’s absolutely sacrosanct” (Consultancy Partner 2).

The NHS employment relations system contributes to politicisation, due to high union density, collective bargaining coverage, and the high degree of professionalisation. Campaigning groups such as Save Our NHS and Keep Our NHS Public draw attention to privatisation and private-sector service failures. Several private-sector interviewees also bemoaned the orientation of staff towards professional autonomy and the public interest rather than performance as defined by management.

Negative media reports were also named as difficulties in growing business. The media was seen as reporting sensational stories of service failures and negative patient experiences: “They [the media] love it when we get it wrong, they’re not remotely interested when we get it right” (Radiology Director 2). Negative media reports could damage brand value and a company’s reputation: “those levels of scrutiny create newspaper headlines and stories […] of concern to boards” (Global Services Director 2).

Campaigning was generally seen as anti-privatisation and almost successful in stopping the enactment of the Health and Social Care Bill 2011. A top-down reorganisation by the Coalition Government had not been expected, as party manifestos explicitly rejected this. Enactment was therefore described as “one of the most aggressive, quick policy, rushing through things that have not been scrutinised” (Union Researcher) causing resentment and disappointment. Moreover, campaigning was fuelled by the impact of austerity and reconfigurations: “it’s very easy for the public to imagine what’s going to happen when someone says: ‘We’re going to close your local hospital’, they’ve got an immediate emotional attachment, often members of their family were born or died within that hospital” (Campaigner).

The degree of politicisation varied according to the type of service provided, with highly visible services attracting attention from patients, staff and the public. Clinical services and services directly involving patients are highly visible, triggering demonstrations, with the University Hospital Lewisham – the first time the Act’s “failure regime” was triggered – being an extreme case: “South-East London, they hadn’t had a protest like the Lewisham Hospital for years and years and years, 25,000 people to defend one hospital in one borough” (Campaigner 2). Where the private sector was established, services tended to be less visible and more removed from public scrutiny. Community health services, for example, were seen as opaque because they dealt with marginalised social groups, and pathology worked “behind the scenes” (Pathology Management Consultant).

Our interviewees reported attempts to avert attention by employing little public relations activity: “We take a marketing-by-stealth type approach [and] tend to just quietly grow our business” (Home Care Director).

Findings 2: Profit-making in particular segments

While the system restricts profit-making, segments do exist where profits are realised. The privatisation of the community health services sector, for example, started in the 1980s, and by 2000, 69% of spending was on private services. Radiology, pathology and mental health were also named by interviewees as profitable, and some reported an increase in tendering activity or contract size, as well as attempts in the hospital segment to profit from increased waiting times by serving self-payers seeking to jump the queue. The NHS’s reduced investment capacity was also described as a private-sector opportunity in some market segments, since it prompted Trusts to consider outsourcing. The bulk of the work reported, however, was repeat business by incumbents. In these cases there were two main avenues for profit-making: cost reduction through process optimisation and reduced personnel costs amongst others; and achieving high and stable volumes.

Reducing costs. Efficiencies are gained partly through managing staff differently from the NHS. Low pay in the NHS is compensated with a high degree of professional autonomy, which reinforces a public-sector ethos and upholds quality standards. Private providers depart from this formula through the avoidance of collective bargaining and tight performance management.

Lower personnel costs result, first, from employing lower-skilled workers. In pathology, “a lot of band 6s and 7s manage the equipment [in the NHS]. You go to Europe or any of the new labs in the UK, you see band 3s and 4s” (Pathology Management Consultant). Deskilling is complemented by increased patient turnover achieved using lean management techniques. The advantage from avoiding unionisation is mitigated in cases where contractors employ former NHS staff under transfer of undertakings (TUPE) rules that protect their terms and conditions of employment. Contractors facing these requirements face increased production costs, according to one Hospital Director, of 12%.

At the same time work is tightly managed using IT, including to monitor: “we’ve got complete visibility about what [nurses] do, when they do it, how long it takes” (Home Care Director). Executives argue that work standardisation, and performance management of staff are a central part of strategy: “we can take the established infrastructure and personnel and deliver more quickly best practice [and eliminate] poor performance” (Global Services Director).

A final technique for reducing unit costs is intensive asset utilisation. In radiology, for example, private-sector interviewees reported a higher rate of average scans than the NHS, sometimes almost double the amount, due to limited working hours in the NHS.

Increasing volumes. Attaining large volumes in particular segments is the other avenue for profit-making. Obtaining large volumes is important for generating returns on investments, gaining access to capital, and reducing purchasing costs, especially in technology-driven areas such as hospitals and radiology, where austerity policies limit the NHS’ ability to borrow.

Large scale can be achieved in various ways. One is specialisation in one area and provision across a large geography. Another path to scale is the diversification of services – with some companies coming from outside the health sector – such that low-paying treatments are cross-subsidised by more lucrative ones.

Incumbent status was needed, according to our interviewees, to attain these high volumes. The NHS’s fragmentation made it difficult for new market entrants to build relationships: “We’ve seen a lot of people mostly from across the Atlantic who’ve tried to break in [the English market] and I think why we’re successful is because the vast majority of us, in particular senior positions, have been in the NHS, so understand it, can talk the language” (Global Services Director). Furthermore, incumbents could point to past success, which mitigated difficulties in demonstrating quality. Conversely, interviewees reported first-mover disadvantages due to high investment costs and lacking experience, track record, and relationships with the funder.

Conclusion

Our paper examines government efforts to increase privatisation in English healthcare through marketisation. By relating the market structure to general conditions of profitability we identify the barriers to profit-making and management strategies to mitigate them (all in all we identify 23 points with regard to barriers and profit-making avenues in a table, not cited here). Our assessment of the for-profit sector should be considered preliminary, and understanding the effects of marketisation on Trusts and non-profit providers is a matter for future research. However, much of what we find may persist due to the well-known path dependency of health systems, and our findings may resonate in other countries with NHS-style health systems.

For our private-sector interviewees, profits were difficult to realise partly because of austerity and the extraction of price concessions through efficiencies built into the tariff and through competitive tendering exercises that pit the private sector against low-cost and high-quality NHS providers. On the other hand, especially in technology-driven segments like radiology and pathology, austerity could also lead to investment backlogs in the NHS. The private sector’s access to capital was seen as creating opportunities to take over these services. Austerity thus had an ambivalent effect on profit-making.

Barriers to profitability identified by interviewees included the uncertainty built into the rules of this market, the dominance of the NHS as both funder and competitor, and the high degree of public attention and staff resistance directed at privatisation attempts. For-profits reported difficulty competing on the basis of price and quality with the NHS, and the complex relationship between politics and commissioning necessitated strategies by for-profits to avoid resistance from campaigners. Active profit-making strategies, according to our interviewees, consisted of cost-cutting and economies of scale, rather than qualitative innovation in care. This latter finding is striking, since innovation is one of the supposed reasons for marketisation and privatisation policies.

This study contributes to the international health policy literature by identifying profit-making as a precondition for privatisation in marketising healthcare systems and by generating a framework for understanding the conditions of profitability. While past studies have tended to assume that marketisation leads to privatisation, our framework helps to explain the limited extent of healthcare privatisation under marketisation in England.

Our analysis implies that under the current framework private expansion in England will be concentrated at a few big players in the market segments with a previous history of privatisation and not as an encompassing takeover of healthcare. Achieving economies of scale is all the more necessary for these firms, since guaranteed payment above market rates, as in the early ISTC programme, is not practised anymore. Since this requires incumbent status, profit-making strategies may be reinforcing entry barriers, thus thwarting the Government’s efforts to promote competition.

A final implication of our analysis is that the agency of workers and citizens matters in marketisation and is a major asset for the NHS. Campaigners have mounted a vigorous defence of the NHS, its workers, and its principles, and have kept health policy highly politicised. Private-sector managers argued that these political dynamics make investors wary, thereby inhibiting privatisation. Although campaigners may lack a strong voice in NHS reform, they have made the NHS a remarkably resilient public institution.

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3 Comments

  1. Interesting paper but I think you make the error when you say “UK Governments have introduced market logics into the NHS, including price mechanisms and competition, since purchasing was separated from provision under the ‘internal market’ of the early 1990s.” This was not UK wide. There is no purchaser- provider market in Scotland. (also don’t think it exists in Wales or Northern Ireland).

    You also include GPs as “private providers” in one calculation of percentage spent by NHS on private providers , but later talk of the failure of GP “privatisation” under New Labour when various for profit companies decided they couldn’t make money out of providing GP services. So are GPs private or not? If they were already private how could they be “privatised”.

  2. Nick Krachler says:

    Thank you very much for your comments Marie Louise and for reading the post about our paper! It is true that the devolved nations do not have a purchaser-provider split anymore, but the abolition of this split was decided by the devolved governments at various times in the mid-2000s. If you’re interested, you could check out Scott Greer’s 2008 paper in the BMJ on this (which is quite short) or Nicolas Timmins’ 2013 King’s Fund which is longer.

    GPs are mostly self-employed business people contracting collectively with the NHS (though there are a minority of GPs that are salaried). They do have some special privileges like drawing public pensions or being heavily involved in regulation, but legally and formally, they are individuals making profits for themselves. When we referred to the privatisation of GP services, we meant general practitioner services, i.e. the function of going to a physician as a gatekeeper in primary care. This function can be fulfilled in different ways, but traditionally it has been fulfilled with the above-mentioned self-employed individuals.

    New Labour attempted to open the market to consortia of self-employed individual GPs or to profit-making companies that organise such primary care services. The difference here is between small businesses and bigger, more organised companies. You’re correct in saying that they are all profit-making entities at the end of the day, but we interpreted the special tradition of individual GP contracting and the special rights of individual GPs to render them different from consortia or companies, so that for us there is a difference in attempting to promote companies/consortia versus individual GPs. I’d also say there’s a difference in the orientation of individual GPs, since they often follow an ethos of public service or commitment to their patients while companies tend to be more abstract and more focussed on the bottom line without incorporating such orientations.

  3. Richard B. says:

    An excellent paper. The issue of purchaser/provider split is always hopelessly oversimplified and unnecessarily confused with privatisation (you could and might have to have the split in a fully public care system). The English system of today is very complicated and fragmented with many hundreds of public organisations, with little coterminosity between any of the bodies and many private providers under contract. Even if you remove markets and competition (and PbR etc) you still have to have some body of some sort to bring the multiple funding streams together and then allocate funding to multiple providers – that might be commissioning or planning with some elements of purchasing as total removal of all private provision is unrealistic however desirable. The idea that each locality has a single public provider for its population is totally unrealistic but there could be a single planning/commissioning body. And of course social care integration makes the planning/commissioning/ purchasing requirement real as well. This is all also true in Scotland and (less) true in Wales. Somehow decisions have to be made about how resources are allocated and what priorities are set.
    GPs are in an anomalous position but if you apply the WTO definition as many do, then they are private – they should also be subject to competition law though nobody has ever tried a case! The small business model, however constrained, is a barrier but not really an important one – the model can wither over time. The role of GPs is hugely important and the strengths cannot be lost.

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