Intended for healthcare professionals


Profiting from closure: the private finance initiative and the NHS

BMJ 1997; 315 doi: (Published 06 December 1997) Cite this as: BMJ 1997;315:1479

A covert, untested, and destabilising way of restructuring health care

  1. David Price, Research fellowa
  1. a Social Welfare Research Unit, University of Northumbria, Newcastle upon Tyne NE7 7XA

    Private investment is efficient when it maximises the returns on capital. Public investment is efficient when it maximises returns within the constraints of public policy goals, like meeting the population's healthcare needs. Given these different aspirations, what does partnership between the private and public sectors mean in practice? Specifically, what happens when private finance funds hospital redevelopment, as the private finance initiative attempts to do? In a BMA report published this week, Declan Gaffney and Allyson Pollock of St George's Hospital Medical School address this question in what is the most detailed independent study to date of the 14 private finance initiative schemes approved in June this year.1 Reliance on private investment, the authors say, inflates the scale of capital schemes to levels which far exceed more prudent public proposals as bidders try to improve their rate of return. This cost escalation puts new demands on public revenue, which in turn leads to the search for new economies and new subsidies. The economies inspire bed reductions and unpiloted innovations in healthcare provision, while the subsidies entail transfers from other health sectors and raids on the very public funds that private finance was meant to replace. Returns on capital come to predominate over other policy considerations, and the health service ends up paying more for less.

    The figures are striking. From relatively modest beginnings, the estimated costs of the 14 schemes rose on average by 72% as investors proposed bigger schemes involving larger loans and more equity. In Swindon the cost rose by 229%. Hospital closures and bed reductions of 7% to 44% helped meet the cost by releasing land for sale and allowing economies to be made in the new buildings.

    But asset sales and conjectured “efficiency savings” have proved inadequate to bridge the affordability problem which cost escalation had created, and a series of new subsidies have been introduced. Some health authorities increased their annual commitment, taking money from other schemes and from sectors, such as community services, most likely to bear the burden of cost shunting out of the hospital system. Regional offices translated block grant capital into revenue payments, which meant subsidising privately financed projects out of the equipment and maintenance budgets of hospitals without privately financed schemes. In several cases equipment replacement was dropped from the deals even though equipment formed part of the estimated capital cost. And finally, the NHS Executive introduced a direct annual subsidy for the first 30 years of the private finance contract, a subsidy almost large enough in the case of Swindon to have paid for the original public scheme which the private finance initiative scheme had replaced (£42m compared with £48m).

    The private finance initiative, says the report, has been bailed out and the cost borne by other parts of the health service. It has become not just a mechanism for reducing hospital services but also a costly burden. This state of affairs is unlikely to be exposed by the system of appraising the initiative, as that overlooks the costs which the scheme shifts out of the hospital sector on to others.

    These are important findings. They suggest that the private finance initiative results in commercial returns unduly influencing the conduct of capital planning and the determination of asset size. In Edinburgh, for example, efficiency savings tied to the proposed new hospital imply patient throughput approaching 88 finished consultant episodes per bed per year compared with a national average for England that has levelled out at 54.2 There is no precedent in Britain for such levels of activity. The planning base, staffing, and resource implications of the new model of care on which the hospital depends are unclear and the practical arrangements remain unpiloted. This is not healthcare planning as it is traditionally understood.

    The Department of Health knows this, of course, so why is it prepared to accept the cost and the risk? The signs are that the private finance initiative offers a vehicle for another agenda that is gaining ground among NHS managers. Under this agenda, largescale capital investment provides an opportunity to redesign the hospital sector. What are the problems to which large (and costly) capital investment is supposed to be a solution? In Birmingham, where the health authority started consulting last month on its own private finance initiative plan, the problems are said to be constantly increasing referrals to relatively expensive hospitals.3 Their solution involves reducing the size of the hospital sector by half and substituting cheaper alternatives. This means building a new health infrastructure—which is where the private finance initiative comes in.

    What Birmingham's analysis omits to mention is the role of capital charges in the pressure felt by hospital budgets. Capital charges, which force hospitals to earn commercial returns, were introduced by the previous government to make transfer to private health provision that much easier. This rump of a privatisation policy continues to influence the NHS asset base by encouraging ward and hospital closure in much the same way as the old window tax encouraged bricking up windows (D Mayston, paper in preparation). To pay for the privately financed project in Birmingham, the expected rate of return on redeveloped hospitals has been increased from the current 6% to 13%.3 So hospital costs are artificially inflated rather than hospitals simply being too expensive.

    The problem for Birmingham and Edinburgh, and the other areas which are using capital spending to drive out labour from the hospital sector, is that no one is yet clear what sort of health service will result or whether it will save money. In the past the impact of capital charges was felt by chronically sick and elderly patients. The impact of the private finance initiative will be wider as early discharge and prevented admission have their effects across the board. How will these patients react when they are directed to cheaper alternatives and what sort of care can they expect to find there?


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