The Voice of Business Services BSA Health Policy Paper Saving the NHS 1 billion by outsourcing support services April, 2011 Introduction Despite the government s commitment to protect public spending on the National Health Service (NHS), the scale of the financial challenge which the NHS faces means it cannot be exempt from reform, with a current predicted shortfall of 21 billion for the NHS. 1 Indeed, in the recent Spending Review, the Chancellor of the Exchequer, George Osborne, said that 2 : The NHS will need to make efficiencies to deal with rising demand from an ageing population and the increased costs of new technology. The NHS has already committed to make up to 20 billion of annual efficiency savings by the end of the Spending Review period through the Quality, Innovation, Productivity and Prevention (QIPP) programme. Pressures on NHS finances will be compounded over the coming years through: an ageing population; increased levels of obesity and related health problems; the rising cost of treatments; increasing patient expectations. A further pressure on the NHS budget is the decreasing level of productivity within the service. Estimates by the Office of National Statistics indicate that NHS productivity declined by 3.3% between 1995 and 2008. 3 Factoring in the above pressures, the Institute for Fiscal Studies and the Kings Fund recently estimated that, with only minimal real terms increases in NHS spending, and no improvement in productivity, the shortfall in NHS funding could stand at 21 billion by 2013-14. 4 The NHS therefore needs to drive efficiency and improve productivity in order to halt and reverse a rapidly escalating budget deficit. This paper highlights the potential for increased outsourcing of NHS support services to offer improved productivity and consequently, potential savings of over 25%. Support services include cleaning, catering, linen and laundry services, and grounds maintenance. Recent figures published by the Department of Health reveal that 38% support services are outsourced. 5 Support services which are not outsourced account for approximately 4 billion per year. 6 Outsourcing this portion of the sector which is delivered in-house could therefore save 1 billion. This paper advocates increasing competition in the delivery of NHS support services. It is argued that: 1) Private providers can deliver NHS support services for less than in-house providers. 2) Private providers can deliver NHS support services to a greater standard than in-house providers. 1 Kings Fund Improving NHS productivity: More of the same, not more with the same July, 2010. 2 HM Treasury Spending Review 2010 October, 2010. 3 Office of National Statistics Public service outputs, inputs and productivity: Healthcare 2008. 4 Kings Fund Improving NHS Productivity: More with the same, not more of the same July, 2010. 5 Department of Health Hospital Estates and Facilities Management Statistics Report 2010. 6 FM World NHS Spend: 38 percent is outsourced November, 2010. BSA The Business Services Association 2 nd Floor, 130 Fleet Street, London, EC4A 2BH T: 020 7822 7420 W: www.bsa-org.com The Business Services Association Limited is registered in England No. 2834529 Registered office as above.
3) Administrative support services within the NHS offer a relatively unexplored opportunity for private provision. 4) To encourage the expansion of private support service provision, certain barriers to competition need to be overcome to create a level playing field on which to compete with in-house providers. Competition is not new to the NHS. For example, General Practitioners (GPs) are essentially private sector providers and have traditionally been paid on a per-capita basis according to the number of patients registered with their practice. Building on this, policy announcements by the coalition government have encouraged competition, seeking to deliver care which is centred on the patient, regardless of the organisational structure of the provider who delivers that care. For example, during his recent speech to the Conservative Party Conference, Health Secretary Andrew Lansley said: We are giving patients the right to choose their doctor, and their treatment, anywhere which meets the standards of the NHS and costs the same as NHS prices or less. That means any social enterprise, charitable organisation, public or independent provider - the right to choose where to be treated at any provider in what will become the largest social enterprise in the world. 7 This offers a welcome shift in rhetorical emphasis from the previous government which in 2008 stated the NHS should always be the preferred provider of services. 1. Private providers can deliver NHS support services for less than in-house providers The BSA has analysed the costs incurred by Primary Care Trusts (PCTs) in the following areas of support services: cleaning; linen and laundry; catering; and grounds maintenance. Using data supplied through the NHS Information Centre, 8 an average cost of these services was calculated across all PCTs. This average was then compared with the average cost for those PCTs which had outsourced 75% or more of their estate management and hotel services. The findings show that: Cleaning The average annual cost per PCT of cleaning services was 806,922 The average annual cost per PCT which outsources 75% or more of their estates and hotel services was 697,417 PCTs which contract out 75% or more of their hotel and estate services have annual cleaning costs which are, on average, 13.6% lower than the average for all PCTs. Linen and laundry The average per-item cost per PCT of linen and laundry services was 0.57 The average per-item cost per PCT which outsources 75% or more of their estates and hotel services was 0.41 PCTs which contract out 75% or more of their hotel and estate services have per-item laundry costs which are, on average, 28.1% lower than the average for all PCTs. Catering The average catering cost per patient, per day, per PCT, per patient, per day was 8.25 The average catering cost per patient per day, per PCT which outsources 75% or more of their estates and hotel services was 7.58 7 Secretary of State for Health Speech to Conservative Party Conference October, 2010. 8 NHS Information Centre Hospital Estates and Facilities Statistics 2008/09 2009 - http://www.hefs.ic.nhs.uk/ 2
PCTs which contract out 75% or more of their hotel and estate services have perpatient, per-day catering costs which are, on average, 8% lower than the average for all PCTs. Grounds maintenance The average annual cost of grounds maintenance per PCT was 46,672 The average annual cost of grounds maintenance per PCT which outsources 75% or more of their estates and hotel services was 39,622 PCTs which contract out 75% or more of their hotel and estate services have annual grounds maintenance costs which are, on average, 15.1% lower than the average for all PCTs. 2. Private providers can deliver NHS support services to a greater standard than in-house providers The importance of delivering more, not just less In any policy area, but particularly healthcare, being able to deliver services at a lower cost is not sufficient. Private providers have consistently shown the ability to offer true best value i.e., a service at the same standard or better than an in-house provider, at a lower cost. The independent review of the public service industry conducted by Dr DeAnne Julius found that shifting pubic services into a competitive environment creates cost savings for the taxpayer of around 10 to 30% with service quality staying the same or improving, reflecting the potential for private providers to boost standards in the delivery of public services. 9 Evidence suggests that this statement holds true in the context of NHS support services. Analysis todate indicates the potential for substantial innovation from the private sector, acting as an engine for improved quality in terms of the patient experience a patient receives when attending hospital. The importance of Patient Environment Patient environment has tended to receive less attention than the other two key areas of quality clinical effectiveness and patient safety. 10 A high quality patient environment can have a significant impact on a patient s wellbeing and recovery. Prior to, or following treatment the availability of good quality food to eat, well landscaped grounds to enjoy, a clean environment and a friendly porter service can make a significant difference to a patient s outlook which can in turn lead to better health outcomes. There is evidence that traditional attitudes to patient environment are shifting, with the inclusion of a patient environment indicator in the new Outcomes Framework proposed in the recent Department of Health White Paper Equity and Excellence: Liberating the NHS. 11 Patient environment data uses feedback from patients in what actually happened in the course of receiving care or treatment, both the objective facts and the subjective views of it. 12 The Department of Health uses a PEAT (Patient Environment Action Team) score between 1 and 5 (1 being the lowest, 5 the highest) derived from patient satisfaction surveys in order to rate hospitals patient environment. A PEAT score provides a useful measure for the quality of support services delivered to a hospital, as it encompasses both the quality of the environment (including cleaning) and catering. 13 Evidence of better performance from private providers 9 Dr DeAnne Julius Public services industry review 2008. 10 Dr Foster Intelligence Patient Experience 2010. 11 Department of Health Equity and Excellence: Liberating the NHS 2010. 12 Dr Foster Intelligence Patient Experience 2010. 13 National Patient Safety Agency, 2010. 3
In two studies, PEAT statistics show PFI hospitals to be delivering a better quality patient environment than traditionally procured hospitals: A recent report by the National Audit Office showed that PEAT scores for PFI hospitals in 2009 were, on average, higher than for hospitals which were procured through traditional methods. 14 A report published by KPMG which compared PFI and non-pfi hospital PEAT scores made this same case more strongly, arguing that there are statistically significant differences between the PFI and non-pfi averages [for PEAT scores] in 2005, 2006 and 2008, concluding that patient environment in PFI hospitals is better than in non-pfi hospitals. 15 It should be acknowledged that a straight comparison between PFI and non-pfi hospital PEAT scores is not a perfect measure of the added quality that privatised support services can offer the NHS. However, it does provide a useful indication of the quality delivered by private providers, because the majority of PFI hospitals use private providers to deliver support services, whereas the majority of non-pfi hospitals do not. 16 3. Administrative support services within the NHS offer a relatively unexplored opportunity for private provision In addition to facilities management support services, there are increasing opportunities for the NHS to make substantial savings through outsourcing back-office administrative functions such as bookings, reception management, and clerk services. At present these are mainly provided by inhouse providers. A number of studies have already provided supporting evidence for this argument. For example, the Kings Fund has suggested that, through the NHS Shared Business Services (SBS) programme, outsourced functions such as finance, e-procurement and payroll are predicted to make savings of 250 million over 10 years. 17 Work by Capita with four NHS Trusts revealed that, including delivery of these services, administrative and related non-clinical costs constituted approximately 20%, and possibly as much as 25% of trust spending. 18 With the current UK budget for Hospital and Community Health Services currently some 100 billion, a business services market of around 20 billion suggests a significant potential market in which savings could be achieved. The recent Department of Health White Paper has proposed to shift an 80 billion commissioning budget to GPs as part of a radical reform in the purchasing of healthcare. However, managing contracts, human resources issues and assessing local demography all crucial to ensure that the white paper s reforms function in the interest of the patient are outside of most GPs expertise. The BSA recommends an increased role for the private sector which has significant experience in managing commissioning processes. This would allow GPs to focus on their core responsibilities of patient healthcare. 4. To encourage the expansion of private support service provision, certain barriers to competition need be overcome This paper has demonstrated the potential for private providers of NHS support services to deliver a better standard of service at a reduced cost in short, more for less. However, certain barriers to competition need to be removed to allow private providers of NHS support services to compete. 14 National Audit Office The performance and management of PFI hospital contracts June, 2010. 15 KPMG Operating healthcare infrastructure 2009. 16 Ibid. 17 Kings Fund Improving NHS productivity: More of the same, not more with the same July, 2010. 18 Capita estimates. 4
Current barriers to competition fall into three categories: a lack of fair competition; inadequate procurement and commissioning skills within the NHS; and restrictive employment regulation A lack of fair competition To encouraged competition, both private providers and in-house providers need to be competing on a level playing-field based on fair competition, where equally efficient providers of a given service and a given quality have neither advantages or disadvantages (e.g. higher costs or restrictions on their business) relative to other providers. 19 However, a recent report which surveyed a sample of over 40 people drawn from Primary Care Trusts, NHS clinicians and private providers found that no interviewees believed there was a level playing field between the NHS and private/voluntary providers. 20 Two issues combine to militate against fair competition between in-house and private providers when bidding to deliver NHS support services: a) pension liabilities; b) cultural resistance to private providers within the NHS. Pension liabilities Private providers of NHS support services face greater pension liabilities than in-house providers. These additional liabilities have to be factored into bids made for support service contracts which, in turn, reduces the competitiveness of those bids. HM Treasury figures reveal that unfunded pension liabilities in the public sector are estimated to be at 650 billion and growing. 21 Whilst it is not clear how much of this total liability is made up of the NHS pension scheme, reports suggest that it is a significant amount. 22 In contrast to in-house providers, private providers of NHS support services who transfer employees into their charge under Transfer of Undertakings (Protection of Employment) (TUPE) regulations, are required to offer broadly comparable schemes. Furthermore, the private sector has to bear further costs in connection with managing pensions, which are not borne by in-house providers. For example, private providers have to fund the administration of their pension scheme, whereas the cost for in-house providers through the NHS Business Services Authority is met by the taxpayer. BSA estimates based on a Prudential Scheme suggest that private providers operate at an approximate cost disadvantage of 34% when bidding for a contract, as compared to an in-house provider. Cultural resistance to private providers within the NHS Compounding this practical hindrance to fair competition, the cultural resistance of NHS commissioners to working with the private sector also creates a barrier to competition. For example, a recent report by the think-tank Civitas, found that, amongst NHS practitioners interviewed, there existed a preference for working with a single provider over a long period, and not using the threat of exit i.e. ending a provider s contract in order to improve value. 23 As a result, cultural resistance to using the market in order to commission services prevents that market from functioning as it should i.e. encouraging competition to ensure best-value for the taxpayer. 19 Office of Health Economics How Fair? Competition between independent and NHS providers to supply non-emergency hospital care to NHS patients in England September, 2009. 20 Civitas Refusing Treatment October, 2010. 21 HM Treasury Long term public finance report: An analysis of fiscal sustainability 2008. 22 Office of Health Economics How fair? Competition between independent and NHS providers to supply non-emergency hospital care to NHS patients in England September, 2009. 23 Civitas Refusing Treatment October, 2010. 5
This cultural resistance is most clearly enshrined through the policy of the previous government, which stipulated that, in the health sector, the NHS should always be the preferred provider. As the Office of Health Economics has argued, this approach is fundamentally anti-competitive. 24 The BSA therefore recommend more interaction between NHS commissioners and private sector providers to help overcome cultural resistance. Inadequate procurement and commissioning skills within the NHS Competition in public services can deliver better value, with the exposure of a service to competition on average delivering savings of between 10 and 30% - even when an in-house provider wins that contract. 25 However, for the savings offered by competition to be realised, officials who commission and procure public services must be able to use competition to its optimum effect. Procurement and commissioning capability regarding NHS support services is inadequate. This has created a barrier to increasing competition, as commissioners are unable to see and therefore reward the better value which provide providers offer. Commissioning in the NHS is undermined by: a) the inadequate availability of data; b) insufficient skill sets of commissioners; and c) a lack of suitable market regulation. Inadequate availability of data As part of the Department of Health s recent White Paper, the renewed NHS Outcomes Framework stipulated that, to win contracts to deliver health services, private providers would be required to deliver a better service for the same money or less. 26 The BSA supports this approach. However, in order for commissioners to commission services on this basis, it is essential that they know the true cost of delivering a service for both in-house providers and private providers, to enable a thorough cost comparison. There is currently inadequate data within the NHS regarding the cost of in-house teams delivering support services. This means that those in-house services cannot be tested for value-for-money against potential private providers to ensure that the most suitable provider wins a contract. For example, when a recent Civitas report surveyed IT experts working closely with the NHS, on specialist commented quality of data is extremely poor...trusts have base IT administrative systems...there is much duplication; and records are incomplete and held in unconnected systems that require armies of people to collect. 27 The same report notes that inadequate data sets allow some in-house providers to undertake predatory pricing strategies by shifting their overhead costs around to remove costs from services where they will want to win competitive contracts, downloading them on to others where there is no competition. 28 The BSA recommends mandatory benchmarking within the NHS so that the true cost of delivering support services in-house can be identified and compared with already available data from private providers. Benchmarking is based on the collection of key data measures; which are compared and contrasted...aimed at identifying the best practices for specific processes. 29 A similar strategy is already working well within the NHS and its use should be significantly expanded. For example, the Audit Commission s National Benchmarker programme has been praised by NHS professionals for its ability to manage activity and information, and, externally, to pre-empt and investigate potential questions for commissioners. 30 24 Office of Health Economics How fair? Competition between independent and NHS providers to supply non-emergency hospital care to NHS patients in England September, 2009. 25 Dr De Anne Julius Public services industry review 2008. 26 Department of Health Equity and Excellence: Liberating the NHS 2010. 27 Civitas Refusing Treatment October, 2010. 28 Ibid. 29 KPMG Benchmarking Report 2010. 30 Audit Commission http://www.auditcommission.gov.uk/health/audit/paymentbyresults/pages/pbrbenchmarking.aspx. 6
Insufficient skill sets of commissioners To achieve best value in the delivery of NHS support services, it is necessary, but not sufficient, to increase the quality of data available to commissioners. To unlock the full potential savings and innovation from the support service providers, the skills of the commissioners themselves need to be substantially improved. It has been widely observed that the central problem with commissioning in the NHS is that it is relying on a commissioning system which almost all commentators agree lacks the skills necessary for the task. 31 For example: In a recent Care Quality Commission report, 47% of commissioners were rated fair or weak with regard to their financial skills. 32 A Kings Fund study found that 52% of NHS managers believed that external support would be required to develop high-quality commissioning within the NHS; only 28% of those surveyed disagreed with this statement. 33 As part of the same study, 86% of health professionals questioned believed that it would take a further three to four years to obtain sufficient commissioning skills without external help. 34 The Department of Health has recognised the need to boost commissioning capability within the NHS. Initiatives such as World Class Commissioning (WCC) and the Framework for External Support for Commissioning (FESC) are welcome. However, the success of both WCC and FESC has been patchy: The WCC programme has been criticised by the House of Commons Select Committee on the grounds that over one-third of PCTs have decided to focus their commissioning efforts on areas where they are already performing above the national average. This would suggest that WCC is not encouraging PCTs to be ambitious enough in improving their commissioning capability. 35 The FESC was similarly criticised for its overly-bureaucratic structure. It was found that, of PCTs who used external support to aide their commissioning activities, only 27% procured that expertise through the FESC as it was considered too time-consuming. 36 The BSA believes that both WCC and the FESC require reform in order to make them more effective in encouraging PCTs to harness the benefits of external expertise when commissioning services. A lack of suitable market regulation To ensure that better skilled NHS commissioners use higher quality data in order to drive best value from NHS support services, the sector needs suitable regulation to overcome potential inbuilt and cultural bias towards in-house providers. Currently, competition in NHS support services is regulated by NHS England s Principles and Rules for Cooperation and Competition, which stipulate (among other things) that 37 : Commissioners should commission the best services from the best providers, who are best placed to deliver the needs of their patients and population. Commissioning and procurement should be open, transparent and non-discriminatory. 31 Richard Taylor Health and Technology cited in: Reform Delivering a new health agenda June, 2010. 32 Lord Warner More choice needs more competition cited in: Reform Delivering a new health agenda June, 2010. 33 Kings Fund Building high-quality commissioning: What role can external organisations play? July, 2010. 34 Ibid. 35 House of Commons Health Select Committee Commissioning in the NHS 2010. 36 Ibid. 37 Department of Health Principles and Rules for Cooperation and Competition 2007. 7
These principles should be fully supported. However, currently these principles lack enforceability through a thorough audit mechanism. Consequently, as Lord Warner has noted, there is no effective economic regulator who can drive competition, particularly where there is a persistent failure. 38 The BSA would support the placement of clear competition principles in the NHS on a statutory and enforceable footing. To this end, recent government proposals to develop the role of Monitor as an economic regulator for the NHS are encouraging. 39 Restrictive employment regulation The private sector is best able to deliver best value when it has scope to innovate. Low levels of productivity within the NHS workforce could be overcome through harnessing private sector techniques such as payment-by-results. However, currently, the Agenda for Change (A4C) programme which control NHS workforce terms and conditions restricts the potential for the private sector to innovate. A4C was introduced between December 2004 and December 2006, in order to reform and standardise the pay and conditions of 1.1 million staff in the NHS. 40 The programme was intended to boost productivity, in part through offering clear lines of promotion and pay scalability. It was anticipated that A4C would increase productivity from 1.1 to 1.5% year-on-year to produce savings for the NHS of around 1.3 billion across the five years following its introduction. The annual cost of employing staff under A4C rose by 26% between 2003-04 and 2007 65% if was due to higher levels of pay. 41 However, contrary to expectation, NHS productivity reduced. The experience of BSA members shows that A4C is an inflexible and expensive system which does not achieve its stated goals. We therefore advocate a more flexible and localised approach, which permits room for Trust-based negotiations between a workforce and their employer. A more flexible approach would permit a shift towards increased use of Payment-by-Results (PbR). This method has been advocated in other studies, where a system of staff appraisal...links incremental increases in salary to improvements in performance and productivity amongst staff. 42 PbR in the NHS still applies only to a limited number of activities and concrete assessments of progress to date are difficult given that it will be some time before PbR has been properly embedded into the NHS. 43 However, whilst there would be an increase in costs of data collection, negotiation and enforcement as a result of a PbR system being rolled out amongst staff, a study by the Audit Commission has suggested that the benefits resultant increases in productivity information and sharpness of incentives would justify and exceed those costs. 44 Summary of key recommendations 1. The impact of spending decisions, demographic pressures and declining productivity mean that the NHS is facing a significant funding shortfall. 2. Government should take steps to increase competition in NHS support services to take advantage of the improved quality and increased efficiency that private providers have 38 Lord Warner More choice needs more competition Cited in: Reform Delivering a new health agenda June, 2010. 39 Department of Health Equity and Excellence: Liberating the NHS July, 2010. 40 National Audit Office Department of Health Pay modernisation in England: Agenda for Change 2009. 41 Ibid. 42 Policy Exchange Research Note: Controlling public spending: The NHS in a period of tight funding January, 2010. 43 Sean Boyle Payment by results in England Eurohealth 13 (1) 2008. 44 Audit Commission Payment by results assurance framework pilot results and recommendations 2006. 8
proven they offer. Outsourcing the remaining 62% of the NHS support services sector could deliver savings of 1 billion per year. 3. Reform is required to the way in which pension liabilities are priced when contractors are bidding to deliver NHS support services, in order to create a level playing field between in-house and private providers. 4. Steps should be taken to improve commissioning within the NHS through mandatory benchmarking, more robust external support mechanisms for commissioners, and a more stringent regulatory framework. 5. Agenda for Change should be reformed to allow for more flexible, localised agreements between employers and employees. This would enable private sector innovation to help improve currently declining NHS productivity. 9