How private finance is moving primary care into corporate ownership

How private finance has triggered the entry of for-profit corporations into primary care

Allyson M Pollock, Sylvia Godden, Stewart Player

Health Policy Health Services Research Unit, School of Public Policy, University College London, London WC1H 9EZ

The concept of a primary care-led health service is not new. It was embodied in the Dawson Report of 1920 as the organisation of general practice into ‘primary health centres’.¹ Although the report was shelved, it prompted pioneering models of buildings for integrating community health and social care such as the Peckham (1935) and Finsbury Health Centres (1938).² But by 1948 the health centre was no longer central to the plans for the NHS due to the costs of buying out the capital infrastructure of existing primary care premises. The Treasury recognised the political and financial expediency of not adding to the burden of poorly maintained and neglected stock it had inherited as part of the NHS.³ GPs, unlike their hospital consultant counterparts, were allowed to retain their independent contractor status, owning and operating their practice premises, for which since 1966 the NHS has paid them rent. In a sense, the NHS has thus always had public private partnerships in the provision and delivery of primary care.⁴ This background article explores the financing mechanisms which underpin the three forms of ownership of primary care premises in the NHS and shows how the switch to private finance facilitates the entry of for-profit corporations (box).

Funding of primary care premises in the UK

Grants and loans

In 1948 almost all of the 18,000 GPs in the UK were male, single-handed and practising from their own homes. Although in theory NHS family doctors could design, build, operate and own premises for themselves, raising investment on the financial markets, there was no NHS income stream to pay for investment. The Danckwerts pay settlement of 1952 introduced interest-free loans from the General Medical Services (GMS) budget to group practices to improve premises but demand was greater than the number of applications that could be approved. Local authorities were building health centres using grants, but by 1974 only 15% of GPs worked in these centres, their numbers increasing by about 2.5% per year.⁵

The GP Charter of 1965, ratified in the Act of 1966, introduced the first real opportunities for GPs to invest in their own premises with the establishment of a Treasury loan scheme, the GPFC, and a mechanism for the repayment of capital rental reimbursement through the NHS revenue budgets.⁵ The GPFC was a statutory, non-profit making company raising money by borrowing directly from the Treasury and lending to GPs at the current commercial rate against the security of their property. However, loans were strictly controlled, with restrictions on the amounts that could be borrowed (figure 1).

Figure 1

Fig 1Loans to medical practitioners and private sector by General Practice Finance Corporation 1969-99. Year 1988-9 is omitted as this was the year it was bought by Norwich Union and accounts were presented only from April-December 1989. The reference date was changed to 31 December to coincide with that of the holding company

The switch to private finance

In 1986 the government sought powers ‘to change the constitution of the General Practice Finance Corporation to allow the maximum use of private sector funds’ with loans to GPs no longer counting against the Public Sector Borrowing requirement. The GPFC was sold by the Government in March 1989 to Norwich Union Life Insurance Society for £145m.⁶ Before privatisation, GPFC raised money in the form of a treasury guarantee. After privatisation GPFC provided capital by private finance from Norwich Union’s own annuities (pension funds). In effect the privatisation of the GPFC was a switch from government loans to private finance for investment in primary care. The effect was to take the brakes off government expenditure limits and the result was first an escalation in the volume of loans taken out by GPs (fig 1) and then the entry of for-profit corporations.

It was not until 1995, some three years after the launch of the Private Finance Initiative (PFI) across the public sector, that the commercial sector became actively involved in the direct ownership of premises. GPs hit by negative equity, high interest rates and the risks of private finance were increasingly reluctant to take on the risk of investment. The London Initiative Zone, a government initiative to improve primary care premises in the inner city, actively sought commercial partners by offering grants.⁷ Private property companies began to approach the GPFC for full development finance for anything from a site purchase loan to a £20m-plus portfolio. In 1999 some 50-60% of loans provided by the GPFC were to companies involved in building primary care premises compared with none five years before. The GPFC provides up to 100% loan finance, compared with 80% from normal lending institutions. The average size of the loans increased from £200,000 in 1990 to £800,000 in 1999 (Interview with GPFC). In contrast to the public finance regimes there are no restrictions on lending or borrowing.

As figure 1 shows, the trends in loans from the GPFC to medical practitioners and companies involved in building primary care premises increased following privatisation in 1989 from £158.8m in 1990 to £1bn in 1999. Figure 2 shows a fourfold increase in turnover on 1990 levels from £21.3m in 1990 to £95m in 1999. This is a partial overview as the government does not collect data on loans outstanding from other financial institutions.

Figure 2

Fig 2Turnover of General Practice Finance Corporation 1990-99
  Paying for private finance in primary care

Value of primary care estate

Private finance is only a source of finance and not funding for new capital investment. Loans raised under private finance must be paid for out of NHS revenue or by generating new income streams such as user charges. In 2000 the total value of GP-occupied premises in England is estimated to be approximately £2.194bn, of which £1.74bn relates to owner occupied premises, £247m to premises rented from the private sector, and £207m to NHS-owned health centres.⁸ There are no data on loans outstanding.

Cost of primary care premises

The revenue implications of servicing interest payments on loans for primary care investment can be estimated from the three NHS rental reimbursement schemes known as cost rent, notional rent and actual rent. These schemes reimburse GPs for the costs of providing NHS services from their premises (box).

Overall expenditure on primary care premises by each of the health authorities in England are recorded on Finance Information Returns. Prior to 1989/90, expenditure was recorded annually in the NHS Summarised Accounts of Family Practitioner Committees, and in the Department of Health and Social Security Annual Report. Due to changing definitions, it is not possible to construct a consistent time trend for accommodation payments.

In 1998/99 total expenditure in England for spend on GMS practice premises was more than £319m (including £28m improvement grants). Figure 3 describes expenditure from 1990/91-1999 and shows how reimbursement through the actual and notional schemes has increased since the mid-1990s. The discretionary cost rent scheme has levelled out in recent years. The reason for the upturn in actual rent is the requirement that was introduced for GPs to pay actual rent to NHS health centre landlords. GPs also switched to notional and actual rent schemes because market based rents proved more lucrative than real rents based on interest rates.

Figure 3

Fig 3Trends in expenditure by reimbursement scheme for primary care premises in England 1991-9
  Are GP owned practice premises a thing of the past?

The entry of corporations into primary care premises is part of a wider trend across the NHS and the rest of the public services. The NHS Plan states that "there will be £7 billion of new capital investment through an extended role for PFI by 2010" It has promised that "up to £1 billion will be invested in primary care facilities [and] up to 3,000 family doctors’ premises will be substantially refurbished or replaced by 2004 ... New one-stop primary care centres will include GPs, dentists, opticians, health visitors, pharmacists and social workers. As a result of this NHS Plan there will be 500 one-stop primary care centres by 2004."⁹

However most of this investment will be undertaken by and on behalf of the private sector. The government has indicated that with the exception of the Treasury Capital Modernisation Fund there will be almost no up-front government capital for capital investment. The total capital in the Modernisation Fund is only £360m for the NHS over the three years 1999/2002 with only £20m-30m earmarked in 1999/2000 for improving primary care premises,¹⁰ the bulk of which will go to walk-in centres (letter from the NHS Executive). The combined and sustained use of private finance indicates that the transfer of ownership to for-profit corporations, which we observed in the first paper in this series, is likely to accelerate, with GP-owned practice premises rapidly becoming a thing of the past.

In any case, demographic changes in the workforce will accelerate the shift away from GP owned practice premises. Part-time employment has continued to rise from 5% of unrestricted principals in 1990 to 17% in 1999. Of the 27,591 unrestricted principals/equivalents working in 1999, 1740 (6.3%) are aged over 60 and approaching retirement and looking to sell their share in premises.¹¹ The government has put in place the provision and incentives for GPs to switch to a salaried service with the introduction of Personal Medical Services. The NHS Plan states: "By April 2002 we expect nearly a third of all GPs to be working to Personal Medical Services contracts. And we expect the number to grow steadily over the next four years to form a majority of GPs. Salaried GPs will come to form a growing number of family doctors providing that is what they choose to do."⁹

Until recently the traditional use of notional and cost rent schemes to reimburse GPs’ investment in premises was considered a low risk, high return capital investment for GPs. However, many GPs have been adversely affected by the privatisation of the GPFC and the imposition of redemption penalties. The risks and the scale of investment required in building new premises under the PFI are proving prohibitive to many GPs - the GPFC’s average loan size has increased from £200,000 in 1990 to £800,000 in 1999. The complexity of property negotiations and project bundling under private finance are deterring many GPs already overladen with administrative duties from ownership. This is part of the explanation for the trend which has seen 60% of private finance raised by the GPFC being accessed by commercial property developers and for-profit health care companies rather than GPs.

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6 Department of Health. The government’s expenditure plans 1990-91 to 1992-93. London: HMSO, 1990. (Cm1013.)

7 NHS Estates. London Initiative Zone, primary care premises handbook No 2: procedures, procurement and funding. London: Stationery Office, 1995.

8 Department of Health. Expenditure questionnaire 2000. Memorandum to the Health Committee, NHS resources and activity. London: Stationery Office, 2000.

9 Secretary of State for Health. The NHS Plan: a plan for investment, a plan for reform. London: Stationery Office, 2000.

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11 Department of Health. Statistics for general medical practitioners in England: 1989-1999. Statistical Bulletin 2000;8:3.