Britain’s first Public Private Partnership Announced

Growing healthcare company Circle Health was awarded a landmark £1 billion contract to run the NHS Hospital in Hinchingbrooke. This will form the first Public Private Partnership agreement in the UK in a bid to turn around the failing hospital in Cambridgeshire. The announcement was met with huge applause by the staff at Hinchingbrooke hospital who relish the prospect of managing the hospital as co-owners under the Circle Partnership scheme.

Circle are proposing to turn around the Hinchingbrooke hospital which has been making significant losses to date and faces mounting debt and the risk of closure. Any profits made from running the hospital will be returned to the NHS under a profit share agreement with Circle after servicing the debt. The government stress that this is not a privatisation and that the taxpayer will not be forced to bail out Hinchingbrooke. The NHS will continue to employ the hospital’s staff and own its land and assets. Circle will be liable for the first £5m of any further losses at the hospital and the government has the right to terminate the contract at any point. Circle would be required to pay an additional £2m on exit, capping their exposure to £7m.

Circle will take over the running of the NHS hospital on 1 June 2011 under a 10 year contract. The 369-bed Hinchingbooke hospital currently generates revenues of approximately £100m per annum but has accumulated historic debts of £40m. The efficiency gains proposed by Circle will be used to repay the debt over the 10 year term of the contract. The district general hospital serves 130,000 patients a year and provides a range of clinical services including an accident & emergency department, cancer treatment and a maternity ward. No private operator has previously run an A&E department.

This represents the first NHS acute hospital in the UK that will be run by a private company and is a huge success for Circle who were awarded the contract ahead of larger rivals Serco and Ramsay. Iranian born chief executive Ali Parsa hailed the agreement as vital for the future of healthcare in the UK and “is convinced that highly-geared rivals are going to struggle over the next couple of years leaving opportunities for more nimble firms like Circle” who have a greater proportion of equity funding.

Ali Parsa was a former investment banker at Goldman Sachs prior to becoming a founder of Circle. He was inspired by a surgeon friend who complained that he was fed up with the poor management of healthcare institutions and the idea led to the development of Circle who now build and run their own group of hospitals.

Circle’s investment vehicle, Circle Holdings was floated on the London Stock Exchange on 17 June 2011 following a £95.4m equity raise. Circle’s innovative model is based on the John Lewis partnership where staff are issued shares in the company and have a 49.9 percent stake in the running of the business. The concept has been received well by the market as evidenced through significant financial backing by Circle’s financial and institutional investors. Circle’s initiative is to include doctors, nurses and clinical staff in the decision making and running of the business, thereby increasing their capacity to deliver a greater standard of care for patients. The philosophy of forming small teams of doctors and nurses in clinic units has worked well in the past. Circle already have a track record of turning around loss making hospitals at their sites in Nottingham and Burton and this is likely to have been a contributing factor to the award of the Hinchingbrooke contract.

The deal is seen as an example of David Cameron’s “big society” solution to turn around the NHS. Earlier in the year, the government announced the “any willing provider” scheme whereby private companies are able to bid to provide NHS services in order to improve efficiency and choice for patients. However, the idea of allowing private companies to provide specialist services to the NHS actually originated under Tony Blair’s Labour government.

The future of healthcare continues to evolve in the UK.  Under the health and social bill released by Health Secretary Andrew Lansley, Primary Care Trusts and strategic health authorities are set to be dismantled in 2012 and their powers handed over to a regulatory group of GP’s. It is intended that all of the larger hospitals in the UK will become NHS foundation trusts. This will provide significant opportunities for innovative companies such as Circle and is expected to generate significant savings for the NHS.