Explained: Labour's ‘profit cap’ to prevent 'tide of privatisation'

The opposition leader said the cap would stop what he described as a “tide of privatisation”.

Here HSJ explains how Labour expects the policy to work in practice.

Application of the cap

A Labour spokesman told HSJ the cap would not apply to tariff funded services.

He said the intention of the policy was to prevent companies providing clinical services from making what Labour sees as excessive profits, and to remove an incentive for providers to make large returns by reducing care quality.

For tariff services, he said, large profits tended to be a result of providers “cherry picking” simpler cases, which are cheaper to deliver but currently have the same tariff payment as some more complex cases.

Labour proposes separately that, to prevent this, and separately to the “profit cap” policy, it would develop more “cost reflective” tariff prices.

Labour has said the cap would apply to “clinical services” only, not to back office services or suppliers of drugs and devices.

It has said the cap would not apply to GP practices – which are mainly independent contractors to the NHS – but would apply where GPs set up a business – for example, those that have developed from GP cooperatives providing out of hours services.

It has also said the cap would not apply to social enterprises or charities which provide services.

However, shadow health secretary Andy Burnham has criticised the example of a recently agreed contract with Alliance Medical for PET-CT imaging, indicating the cap would apply to clinical support services such as diagnostics.

Preferred provider framework

When asked about the number of contracts with private providers Labour would expect if it formed a government, the spokesman said they would have a limited role in adding capacity or providing particular services where the NHS could not.

He said Labour’s proposal to replace current procurement regulations under section 75 of the Health Act 2012 with an “NHS preferred provider framework” would mean that overall the NHS could expect fewer contracts awarded to the private sector.

The spokesman said the framework would state that, when new services were needed or changes made, NHS organisations would have the first chance to present a proposal.

He said this differed from the existing approach which, he claimed, involved an automatic process to run competitive tenders.

Practicality

Asked about how it could be enforced given the lack of transparency about profits from a given contract, and the potential for providers to manipulate this, the spokesman said Labour would insist on open book accounting, so commissioners and others could see what profit was being made.

He said the ability of commissioners to lower or raise the 5 per cent cap would be used to take account of factors such as the level of risk or innovation involved in a contract – but commissioners would have to justify any variations.

The Labour spokesman said measures to prevent excessive profits were increasingly being used in public procurement.

He said a Labour government would work with commissioners to ensure they had the skills and support necessary to implement the cap.

He said Labour had been advised the policy would be legal, contrary to concerns raised by some lawyers, and added that the party planned to consult further on the details.

He pointed out that the complexity of procurement meant there may be various potential ways to achieve the party’s objectives.