Keeping it straightforward: a discussion paper on social enterprise in the NHS and Transforming Community Services

Transcription

1 Keeping it straightforward: a discussion paper on social enterprise in the NHS and Transforming Community Services 1. Introduction 1.1 Similar to private enterprise, social enterprises are organisations that aim to make profit. However, the distribution of these surpluses marks social enterprises out as being different from private business. Profits from the business are not distributed to shareholders, but are reinvested to meet the social objectives that are central to the purpose of the social enterprise. 1.2 Social enterprises that deliver health and social care services are also frequently characterised by structures and entrepreneurial spirit that enable them to respond quickly to business opportunities. This, allied to flexibility in relation to borrowing and use of capital, imbues social enterprises with considerable advantages over traditional public sector service providers. 1.3 Indeed, social enterprises have been quick to successfully establish themselves as providers of health and social care services, offering innovative new ways to tackle local health needs and inequalities. 1.4 However, from a legal perspective, the division of suppliers of health services implicit in the agenda regarding health and social enterprise could, at worst, lead to a highly complicated contractually-based system where large amounts of money is spent on lawyers in the negotiation and management of the contractual nexus that replaces the old unified system. 1.5 Consequently, it is vital that the arrangements that are put in place to encourage social enterprises to undertake health services are as simple, straightforward and robust as possible and do not become a lawyers delight to the cost of the public purse. 2. Policy context 2.1 The government has determinedly put social enterprise firmly on the NHS agenda through a number of key documents and policy directives. 1

2 2.2 Practice-based commissioning (PBC) aimed to bring commissioning to a more local level, embodying the government s drive towards subsidiarity in healthcare delivery and commissioning. PBC has led to some innovative results, with some PBCs developing into social enterprises. However, the implementation of PBC has been patchy and has not been as successful as the government had intended. Numerous factors have contributed to this, not least the quality of information that has been made available to PBC clusters from PCTs. 2.3 Our health, our care, our say, published by the DH in 2006 explicitly recognised the value of the third sector and social enterprises. This also heralded the establishment of the Social Enterprise Unit (social enterprise) at the Department of Health, specifically to support the development of social enterprises in health and social care. A fund, initially for 76 million over three years was announced, which was later expanded to 100 million over four years. The Next Stage Review of the NHS Final Report (June 2008), however, represented a more fundamental shift in policy. 2.4 The right to request provides PCT staff with the opportunity to request to set up a social enterprise to deliver services. The PCT is obliged to consider such requests and if approved, support the development of a business case that may lead to the creation of a social enterprise. 2.5 Furthermore, the PCT will be obliged to offer the social enterprise a contract for up to five years with phased market testing of services. Alternatively, it could award the social enterprise Any PCT- Accredited Willing Provider status, whereby the social enterprise will deliver services for an indefinite period to agreed quality standards. 2.6 In addition to providing a guaranteed income for up to five years, which is a benefit not accorded to other third sector healthcare providers, staff will be able, under strict regulations in relation to the social enterprise working on NHS contracted work, to maintain eligibility for the NHS pension scheme. 2.7 These incentives are aimed at making the opportunity to develop social enterprises more attractive for staff, with the ultimate aim of developing the healthcare market, enabling more choice for patients. 2.8 This promotion of social enterprise can also be seen in relation to the Transforming Community Services (TCS) programme, announced in January This lays out the options for PCTs to 2

3 pursue as part of the policy directive for PCTs to become solely commissioning bodies, separating their provider function. 2.9 By April 2009, PCTs are required to have achieved internal separation of provider and commissioning functions and by October 2009, they are required to have commitments in respect of the managed dispersal of provider services. By April 2010, it is expected that PCTs will have contractual separation in place Social enterprise is a recognised organisational form that provider services can adopt, along with other options for horizontal and vertical integration, Community Foundation Trust and direct, arms length provision through contractual relationships with the commissioning arm of the PCT. 3. Cultural change 3.1 The TCS programme is still in its infancy, in spite of the very challenging timelines to which PCTs must work. It is clear that whilst social enterprise is an option, it is one that is relatively new to many staff working within PCTs and that it is not well understood. This applies to both managers and clinical staff. Indeed, clinical staff may well have never considered the possibility of providing services through a social enterprise. Whilst entrepreneurial talent is not uncommon within the NHS, it has seldom been fostered - and the bureaucracy of the NHS has undoubtedly militated against the emergence of entrepreneurial talent. 3.2 The DH is addressing this issue by procuring providers of transformational support to assist PCTs and staff in developing their business model and PCTs will be free to procure whatever other support they feel they need from the open market. The quality of the support will be vital, particularly in relation to ensuring longterm sustainability and working with commissioners. 3.3 Further, the DH is also working with SHAs to co-produce an assurance framework for social enterprises set up under the right to request, to ensure that innovation and sustainability are at the heart of any new enterprise. How effective this will prove will only become clear in the coming years. 3.4 However, social enterprises coming out of the NHS will have to learn and develop quickly, in order to survive in a marketplace which is fundamentally different from the one in which they now operate. To a greater or lesser extent, this will be true of whatever organisational form provider arms take as the relationship with commissioners will be very different in the future. 3

4 4. Commissioning and contractual risk 4.1 In addition to the understandable reticence of provider staff, commissioners do not have a history of effective commissioning from the third sector; nor an understanding of how the third sector operates. Whilst World Class Commissioning may offer a solution to some of the issues around commissioning effectively from the third sector, the results of the first round of the WCC assurance process it is not as yet fully developed into many PCTs. 4.2 Clearly, commissioners needs have to be recognised and addressed in the same way as service providers needs. Without this, it is possible that whilst social enterprises might be set up, there will be a shortage of skills to commission those services. The ability of commissioners to successfully work with emerging provider organisations is fundamental to the success of social enterprises in health and social care. 4.3 One aspect of this is commissioners understanding of their obligations under EU procurement rules. Health services are subject to a much less onerous regime than other services, and this freedom needs to be more widely used. 4.4 It is also vital that PCTs understand that they do not have to always award contracts based on the lowest possible price. Rather, PCTs can take into account other factors to see whether or not they are getting appropriate value. Consequently, PCTs should be encouraged to consider procuring services through asking the question What can you supply for X? ; rather than saying We want you to supply service Y, what is the price? The former allows would-be-bidders to specify the range and quality of services that they will seek to provide and which may well reveal that different providers are prepared to give more than others for the same price, hence improving outcomes for patients. 4.5 Further in some cases a procurement process is not necessary at all. Commissioners should rely on a common-sense interpretation of the true irrelevance to the EU rules (which at the heart are about encouraging a free market) in relation to the procurement of some public services. In areas of market failure or the creation of a new market, there can be no unfairness because there has been no market previously, and a market is now being created. Educating PCTs in this regard is very important. 4.6 New social enterprises will be entirely dependent for their work on contracts from state players. It is therefore vital that those contracts are drawn up in a straightforward, easy-to-understand and consistent manner - as in the case of GP contracts. These could 4

5 be adapted. This will facilitate organisations seeking to obtain working capital from banks or other funders, because if this is being done to a standard contract which everyone understands, this will make life much easier for lenders (as compared to them having to try to understand a myriad of varying and different contracts). We would therefore urge that there be a standard agreed contract, which can have different schedules for different types of provision used by all entities which are contracting with social enterprises in the health field. 5. Partnerships with third sector organisations 5.1 Charities, through NAVCA (the National Association of Councils for Voluntary Service) have already voiced concerns over the right to request and the move toward establishing social enterprises out of PCTs. Not only are there concerns over what can be perceived as preferential treatment for newly-emerging social enterprises from the NHS, such as guaranteed contracts, but there are also worries that it will mean replicating existing service in organisations that are not truly social enterprises: that is, the drive to establish them is not informed by a social or environmental mission. 5.2 This represents an opportunity for existing third sector bodies and social enterprises to partner nascent or aspirant social enterprises emerging as a result of the TCS programme. Not only will strategic partnerships provide more weight behind new social enterprises, it may enable them to access new sources of funding and enable knowledge transfer between the bodies: new social enterprises would thus benefit through access to experience and skills required to run a social enterprise; and existing organisations would benefit from experience in understanding the NHS and how to work with PCTs. 5.3 Given this, there is an opportunity to develop exchange networks to allow organisations to benefit from each other and ultimately provide improved health outcomes. 6. Legal structures and the pension regulations 6.1 There are, of course, a range of legal structures which any social enterprise can use, but in the case of social enterprises operating services that have hitherto been the preserve of the NHS, the choice is severely limited. That is because of the impact of the NHS Pension Regulations 1995 and the definition of an Employing Authority. In broad terms, only general partnerships (which do not have limited liability protection) and companies limited by shares, where shares are held by individuals or bodies within the NHS family will qualify. It seems particularly strange that a limited 5

6 liability partnership (LLP) cannot be used by medical practitioners when a general partnership can. 6.2 Whilst it is possible for social enterprises using a wider range of legal structures to apply for Direction Employer Status with the NHS Pensions Authority, this option reduces the benefits available to employees. 6.3 In order to ensure that social enterprises flourish in the long term, it is vital that their boards of directors are properly accountable to key stakeholders. Normally this would mean ensuring that the members or shareholders of the organisation include those stakeholders such as all staff, users, patients and other interested parties. However, the restrictive nature of the NHS Pensions Regulations in terms of who can control a company limited by shares means that this is not possible. Moreover, it would be highly desirable in order to encourage a sense of staff involvement for an Employee Share Owning Trust to be established for the benefit of all employees (whether healthcare professionals or not), e.g. cleaners, gardeners, etc. which could hold some of the shares in the social enterprise. This could enable such enterprises to have a John Lewis Partnership-type staff involvement. It may also be necessary or desirable to encourage third party investment in the form of share capital to underwrite the social enterprise s financial position, indeed the recent publication Social Enterprise Making A Difference refers to equity finance as a possible source of funding. But this is impossible if that equity is owned by anyone other than healthcare professionals, given the current configuration of the NHS pension rules. 6.4 One model which we have proposed to a group of doctors who wished to engage with the social enterprise agenda was considered to be very attractive, but falls foul of NHS Pension Regulations. This model involved doctors setting up a Limited Liability Partnership (LLP) and giving 20% of it to a charity which was concerned with issues with which the LLP would engage, e.g. diabetes. The charity s role would be hard-wired into the arrangements, by providing that the constitution could not be changed without its consent. This offered a flexible structure allowing partners to be self-employed and a commitment to the common good, but it is impossible under current rules for any employee of the LLP to be eligible to continue to participate in the NHS Pension Scheme. 7. Finance 7.1 Encouraging non-governmental sources of finance 6

7 7.1.1 Whilst, obviously, the existence of the Department of Health Social Enterprise Fund is enormously helpful in potentially providing capital for nascent or operating social enterprises, more needs to be done in our view to encourage the financing of them by non-state players Leaving aside the issue of eligibility for the NHS Pension Fund, we would suggest that serious consideration should be given to tax reliefs for investors in social enterprises. We would suggest that these tax reliefs should be linked to Community Interest Companies, as they are a recognised form of social enterprise and contain appropriate restrictive architecture to prevent excessive personal enrichment. Given the hair shirt of the CIC legal form with its limitation of 35% of distributable profits being available for payment of dividends and the cap on dividends, this seems appropriate. We would suggest that there should be tax relief at the basic rate for anyone who invests in shares in a CIC or who makes a loan to a CIC. This would address the anomaly that whilst charitable donations receive good tax reliefs and investment in high-growth businesses, which aim to yield large capital gains, also receive major tax advantages (e.g. through Enterprise Investment Scheme Relief and investments in Venture Capital Trusts), there is no such relief for investment in social enterprises. The Capital Gains Tax benefits available for investors in conventional companies are of no use to investors in CICs, since they do not enjoy any capital gain As CICs have to plough back into the business all profits not distributed to shareholders and as CICs operate in the community interest, we would submit that all their retained earnings should be free of Corporation Tax. 7.2 Financial support from government Where social enterprises are potentially receiving financial support from government, this is often hampered or delayed by government officials from various arenas who inappropriately apply State Aid Rules. The State Aid Rules prohibit public sector preferential support of business which might distort competition within the EU. Their principal application is to prevent major national industries receiving unfair competitive advantage through Government subsidy. However, a significant number of UK public authorities, in our experience, are interpreting the rules without confidence and with excessive caution. State Aid is now frequently cited by public authorities as an obstacle to public authority grants, preferential loans and development support, in a way that has 7

8 caused problems for several high-profile organisations and projects and a significant degree of uncertainty for others. 7.3 Encouraging social enterprise to have diverse sources of finance Unfortunately there are also major concerns about the status of employees NHS pension if the social enterprise diversifies its sources of income. For new social enterprises to flourish and to reduce the risk of solely relying on NHS contracts, they will need to seek to engage in a range of contracts. But the Pensions Rules state that the moment the social enterprise earns any revenues from outside the NHS it loses the right for its employees to participate in the NHS Pension Scheme. This is a total block to any hopes of social enterprises developing new income streams. 8. Support services 8.1 There is potential for huge amounts of time and energy to be soaked up in each of the social enterprises reinventing the wheel in terms of developing financial, HR and managerial systems, etc. We would strongly recommend that the Department of Health establishes and finances a new business or businesses to provide a range of services, to social enterprises such as: project administration; accounting; book-keeping and accountancy; financial planning and financial management (including the preparation of budgets, management accounts, etc.); education and training; general management development; and general administration. We believe this would give would be social entrepreneurs a huge degree of confidence in embarking on the Right To Request, as they would know that all these complex details were being properly handed. 8.2 A model to be considered in this is CDS Co-operatives which provides a range of services to registered social landlords, allowing them to avoid having to create all these services in-house. 9. Risk and insurance 8

9 9.1 For so long as services remain within the NHS, the NHS Self- Insurance Scheme applies. As soon as the service moves out from the NHS, the new supplier has to effect appropriate insurance arrangements to cover its risks. Again, a co-ordinated approach to this is vital. There needs to be appropriate guidance on: the range of risks to be covered; and the appropriate levels of insurance, in terms of indemnity limits. 9.2 We would urge the government to establish an insurance scheme with an appropriate provider which all social enterprises could use. This would be of enormous benefit. 10. VAT There have been some concerns that social enterprises providing health-related services to PCTs, might find themselves at a disadvantage, as compared to the PCT, since the social enterprise would have to charge VAT on services supplied to the PCT. This would increase costs. However, these concerns seem to be misconceived. On our understanding, all PCTs current activities would be exempt from VAT if supplied by a social enterprise. There may be a small VAT risk in the case of the provision of welfare supplies made by a body that is not state-regulated, but we would expect any social enterprise providing welfare services to a PCT to have the appropriate regulated status. 11. Conclusion 11.1 The government s push for social enterprise is understandable from a policy perspective that is encouraging services to be delivered through a plurality of providers, with the expectation that this will increase choice, whilst driving up quality and reducing costs The Right To Request provides an opportunity for developing this. Not only do PCTs have to divest themselves of their provider arms, social enterprise is a recognised organisational form that provider services can take. Furthermore, a degree of protection for staff could be guaranteed through the transfer of pensions and the promise of an uncontested contract for up to five years, which will help ensure cash flow To make the most of the opportunities that are available for staff and PCTs in relation to social enterprise, the issues described above will need to be effectively addressed This involves: 9

10 Resolving the difficulties with the NHS Pension Scheme set out above. Encouraging investment through tax reforms and ensuring that state aid rules are dealt with appropriately and flexibly. Ensuring a model contract form is used at all times. Ensuring commissioning is effective and that procurement rules are applied appropriately and flexibly. Establishing a Social Enterprise Support Squad, which has people with appropriate skills to advise social entrepreneurs on how to transition out of the NHS. Financing the establishment of a social enterprise support services company. Establishing an insurance scheme for social enterprise in the health sector. These steps will involve investment. But without them the aspiration of social enterprises providing a range of health services will remain a dream. Author : Mo Girach BSc(Hon),MBA, NHS Alliance Social Enterprise Special Advisor, with input and advice from Stephen Lloyd, Senior Partner at Bates Wells & Braithwaite London LLP 21 st April