Volume control

Major independent hospital groups have reported a slowdown in NHS activity over the last 12 months as the financial noose tightens and the service turns its attention away from electives and onto A&E. However, while NHS demand may have weakened Maria Davies discovers that rumours of its death are much exaggerated

The private hospital sector has undergone a slow metamorphosis over the last 15 years. Where once, it was the preserve of fee-paying and insured clients almost exclusively, it has transformed into a truly mixed economy with NHS-funded patients making up between 30% and 40% of independent sector hospital activity outside of central London. In theory then, figures coming out of the major groups that point to a slowdown, should set alarm bells ringing among the provider as well as the investor community.

Towards the end of last year, both Spire and BMI reported that the dampening in NHS demand, together with the reduction in tariff prices, was beginning to impact profits.
Both groups reported that NHS revenues had grown in the first half – up 5.9% at Spire and 4.9% at BMI. However, in the second half, Spire said that ‘lower than anticipated NHS activity’ could have a material impact on full year margins as revenue for July and August dipped 0.1% on the prior year.
At the same time BMI, which reported a 0.9% drop in revenue to £887.1m for the full year, confirmed that NHS revenue began to slow in the second half, indicating that, in the short-term at least, the trend looked set to continue.

And it is not just BMI and Spire that are experiencing a cooling in NHS demand. Ramsay, Nuffield, Care UK and Circle have all reported varying degrees of a slowdown in their NHS businesses. Ramsay, where over 70% of hospital activity is NHS funded, said tariff reductions had hit margins in last year, slowing EBITDA growth to 1.7%.

In 2017/18, the national tariff underwent a major restructure. Instead of pricing routine orthopaedic procedures under three headings: minor, standard and major, NHS England brought in 17 different categories. Since independent sector hospitals tend to treat the less complex patients, the net effect is that they are being paid around 4% less than in previous years.

Dr Victor Chua, partner at consultancy firm Mansfield Advisors, said the reduction was to be expected as the NHS looked to make savings from a sector which has grown increasingly reliant on NHS business.

‘The NHS is not stupid. Across independent hospitals, around 30% of revenue is derived from the NHS so they have had to take the hit. And that shows that NHS England is flexing its muscles,’ he said.

Volume decline

What is perhaps of more concern is the apparent slowdown in NHS volumes following the removal of penalties for breaching waiting times targets. The big question is whether this is a temporary blip caused by the NHS taking its eye off waiting times work while it tries to put its urgent care house in order or a sign of a seismic shift in its stance on the independent sector.

Anecdotal evidence suggests commissioners and trusts have been under pressure to keep their increasingly limited resources ‘inside the NHS family’.

Rumours abound of strange behaviour by commissioners, from rationing procedures on the basis of lifestyle and pain score to interfering with patient choice by asking independent providers to artificially extend waiting times. Although independent providers have been reluctant to confirm these reports on record, they have reported a subtle, if only-to-be-expected, shift in their relationship with an NHS under pressure.

Speaking to HM last year, managing director of healthcare at Care UK Jim Easton said: ‘Most of the industry feels that after a year or so of progress it’s quite a troubling time. We were moving from a period in which the NHS sometimes saw providers like us as the enemy or were reluctantly forced to use us when there were challenges. From that, we were moving to a period where there was much more of an openness to working together in partnership.’

As well as subtle changes in commissioner behaviour, there have been indications from NHS Improvement that the tide could be turning on independent sector involvement in the NHS. Last year, its national director of clinical quality and efficiency Professor Tim Briggs said NHS trusts were at risk of ‘going broke’ because money for electives was being ‘leaked’ to independent providers.

He suggested that NHS trusts should be doing more to retain the £450m a year spent on orthopaedic surgery in the independent sector.

It might be a rhetoric that belies the capacity constraints but could the tone hint at an NHS which is backing off of independent sector provision?

Stephen Collier, a non-executive director at St George’s University Hospitals and former CEO of BMI Healthcare believes the reality is more complex, but perhaps less worrisome.

‘What independent sector hospitals are experiencing are exactly the same pressures as many NHS trusts and FTs, largely because – at 40% of caseload – private sector providers are significantly exposed to those shifts in NHS priorities. Those recent changes are a result of the NHS tending to focus on its A&E and its cancer targets, rather than its elective surgery target of 18 weeks. The abolition of the absolute 18-week target (and its replacement by a 92% balance, and a weakening of the fines regime), have shifted attention and focus away from NHS elective surgery, where the private sector has been a very strong and successful player, and onto cancer targets and A&E, where the private sector barely operates.’

According to Collier, it is not just independent sector providers that are experiencing a downturn in electives. NHS trusts are equally vulnerable. Barts Health NHS Trust, for example, saw its income fall 3% in the first half of 2017/18 as elective and daycase procedures declined by 10% against budget.

It is a similar picture across the NHS. And although the number of FCEs (finished consultant episodes) increased overall, so did the numbers waiting. Indeed, an increasing proportion of those patients being treated are non-elective and have come via A&E, meaning that the numbers of elective cases being undertaken is being squeezed, with waiting list clearance times being extended.

‘The reality is that almost all the operational focus and planning is on A&E and cancer performance. This puts NHS hospitals into a financial bind, as the funding system they operate in is highly reliant on elective patient throughput,’ Collier adds.

Crucially, he says, the independent sector’s share of FCEs currently stands at around 6% and, despite the slowdown in revenue terms, continues to rise.

‘Broadly, GP referrals to independent sector providers now sit at 6.7% of total referrals vs 6.3% a year ago. Unpick the figures from the Spire and BMI announcements and you see that spot purchasing might be slowing down but e-referral is generally growing,’ explains Collier.

‘What this tells us is that GPs are not backing off their use of the independent sector, in fact there is more of it. What there is less of is the ‘target failure’ anxiety affecting NHS hospitals (and the associated funding) which previously pushed them into sending longer waiters out to the private sector. In some geographies that outflow has slowed, in others it has come to a juddering halt.’

Chua agrees. ‘In terms of volume, around a quarter of independent hospitals’ NHS activity is local contract work and it is this segment that has gone down in volume because the Department of Health has made it clear that it won’t take action against trusts that breach the target,’ he says.

However, Chua believes that the current winter crisis could result in a surge in local contracting as NHS trusts outsource the surgery to which they have been forced to close their doors.

‘I think private hospitals will get a boost this winter but it’s not clear how much,’ says Chua.

‘But, in the longer term, NHS activity will continue to grow, certainly in volume terms. There is not much capital investment in the NHS and as people live longer and get sicker, the NHS will have to outsource more. There’s just no choice.’

His words echo the general consensus among providers and other stakeholders in the sector.

BMI’s South African parent company Netcare has described the demand management strategies currently being employed by the NHS as ‘demand deferral’ since these patients are not being treated in the NHS either.

‘Our view is that long-term demographic demands support private healthcare in the future, particularly given the NHS’s inability to meet this demand and some of the constraints within the British economy. We do think there will be some short-term pain in 2018 and we will continue to see some of the demand-led strategies to dampen down on elective surgery but we see that recovering towards the end of 2018,’ said its CEO Richard Friedland.

Easton agrees. ‘Ironically, this pressure doesn’t detract from the medium-term value of Care UK as a business. These patients are not going to go away and the more they build up on the list, the more they’ll need to be treated when waiting lists are brought back under control,’ he said.

Attracting investors

Nevertheless, with Brexit on the horizon and the prospect of a Labour government wholly opposed to private sector involvement in the NHS, could a dip in NHS business make the UK independent hospital business a less attractive proposition for investors?

Hedley Goldberg, managing director and head of healthcare at Rothschild believes it will depend on the investor. ‘Some will take a view that they want to focus on private pay in the UK and others will continue to see the NHS as an opportunity,’ he says. ‘The NHS is going through difficulties at the moment and many will take the view that the private sector is part of the solution rather than part of the problem.’

According to Dr Michelle Tempest, partner at consultancy firm Candesic, most investors with an interest in healthcare are taking a long-term approach so would be undeterred by short-term changes in NHS contracting.

‘If you are ever going to invest in healthcare, it doesn’t matter whether in physical care, mental health or community services, you have to acknowledge it is a dynamic business. It is not like sitting on a house and waiting for the value to increase. You have to be ambitious and evolve a business over the long term,’ she says.

Chua thinks investors may be cautious of a potential Labour government but says that, on the whole, confidence in the UK hospital market remains stable: ‘These are very, very profitable businesses and even if they become a little less profitable, they will still be very profitable. Average margins are around 25% and if you compare that with sectors such as construction, where they are around 2%, you can see this is still an attractive business to in.’