Where next for independent treatment centres?

Late last year, in a report for the Nuffield Trust into understanding competition and choice in the NHS, the Institute for Fiscal Studies concluded that “the expansion of independent sector treatment centres is not a marginal policy reform”.

‘Many acute trusts are raising their game in response to the competition’

Indeed so. Over the five years to 2010-11 the number of ISTCs grew from 10 to 161. By the end of that period they were providing 3.5 per cent of all first outpatient appointments, totalling almost half a million attendances, and were providing 17 per cent of all hip replacements, 6 per cent of cholecystectomies and 17 per cent of elective unilateral inguinal repairs funded by the NHS.

Research conducted by the Royal College of Surgeons and the London School of Hygiene and Tropical Medicine last autumn suggested that earlier concerns about the quality of service provided by ISTCs have been addressed. So while debate continues about whether treatment centres and NHS trusts compete on a level playing field in relation to the procedures they must provide and whether ISTCs provide genuine value for money, it seems likely they are going to remain a part of the provision mix for the foreseeable future.

At the same time, many acute trusts are raising their game (doubtless as intended by the Labour government when ISTCs were introduced) in response to this competition.

This means that some existing ISTC contracts are not being extended by the Department of Health. It remains to be seen how commercially viable the ISTC market will remain when the current wave of direct contracts entered into centrally between ISTC providers and the DH are replaced by more conventional contracts with clinical commissioning groups on standard NHS tariffs.

Opportunities for providers

It seems reasonable to assume that in some areas well run ISTCs will continue to make inroads into the local market for health provision, but that elsewhere contracts will be terminated early or will find the going tougher and wish to withdraw from the market. This will create opportunities for traditional healthcare providers, but also risks.

The risks are highlighted by the cautionary tale of Burton Hospitals Foundation Trust, which was put on special measures by Monitor in November 2011, in part because of financial difficulties arising from its acquisition of an ISTC from Circle in July.

‘Whether the trust is prepared, and whether it should “take over” an ISTC, is not a straightforward question to answer’

The current centrally negotiated arrangements tend to involve a complex combination of inter-relationships. These include a lease of premises on a site operated by an acute trust to which the secretary of state is a party, a contract between the secretary of state and the ISTC provider to which the trust is not privy and the involvement of the local PCT (soon to be CCG) as the local commissioning body – with whom the ISTC provider will have to contract if it wishes to remain in the market post expiry of its current contract – and the local referrer community.

Being prepared

One significant issue for entrants into the market is ensuring an adequate return on their investment in the facilities they might create or acquire to deliver the services they are required to pursuant to their contract. 

For this reason early exit provisions tend to include the depreciated value of those facilities and in the event of the ISTC contract not being renewed, or ending early for some reason, the presumption originally seems to have been that an alternative provider would be found to whom the lease would be assigned on the direction of the secretary of state, and who would pay the original provider the depreciated value of any such facilities.

In reality, however, it seems that the local acute trust on whose site the ISTC is located is often put under pressure to simply “take over” the ISTC.

‘Clearly the temptation to pick up additional “market share” will be an enticing prospect for many trusts’

Whether the trust is prepared, and whether it should do so, is not a straightforward question to answer. It is often a matter of hard bargaining between the DH, the PCT, the outgoing provider and the local trust regarding the practicalities of any such “takeover”. These include the novation of material contracts and the funding of the potential liabilities – including the liability for the depreciated value of any facilities created by the outgoing provider.

Clearly the temptation to pick up additional “market share” will be an enticing prospect for many trusts. However, that should be balanced against the loss of revenue from the lease and the potentially significant cost of inherited liabilities – including the potential obligation to take on the outgoing provider’s staff if the transfer of undertakings (protection of employment) regulations 2006 (TUPE) apply to the “takeover”. 

Diverse market

Whether TUPE applies will depend on a multiplicity of factors. These include whether – given the patient choice drive and the catchment area of the ISTC – there is an identifiable service being provided (and if so to whom) and whether it will continue in broadly the same form in the hands of the trust and whether any assets will be transferring to the new provider – which will usually be the case unless any facilities created by the outgoing provider are being dismantled.

If, however, TUPE does apply the potential staff liabilities could be significant and, unlike in a normal commercial transaction, there appears to be minimal chance of any party being prepared to indemnify the trust that takes on the ISTC “business” and thus chooses to accept them.

It is certainly reported that in the Burton case potential TUPE costs obligations were among the factors urged on the trust by Circle to deter it from “taking over” the ISTC. This may well make the trust inclined to argue that TUPE does not apply – thus raising the spectre of TUPE litigation, which is usually in neither party’s interests.  

‘Being clear about how the services are currently provided and how that will change is only the first step in the process’

These issues, or issues like them, are likely to arise whenever an ISTC closes or its provider changes, whether that is because the provider wishes to withdraw from the market or its contract is not renewed.

Anyone prepared to contemplate stepping in to “take over” an ISTC must therefore be prepared to undertake rigorous due diligence in respect of what they might be taking on and for robust negotiation with a range of parties regarding the terms on which they might be prepared to do so.

Perhaps more significantly, however, the increasing variety of providers and the increasing complexity of their relationships with each other and with commissioners seem likely to multiply exponentially the opportunities for the kinds of issues described to arise in an increasingly diverse healthcare market.

The issues we have seen arising as the ISTC project evolves is, therefore, likely to be no more than an illustration of the commercial issues that all participants in the market are likely to have to deal with increasingly in the future.

Being clear about how the services are currently provided and how that will change is a key, but only the first, step in that process. 

Emlyn Williams is partner in the employment team and leads the healthcare sector at Weightmans LLP