Hospital chains: unlocking hidden value to improve patient outcomes

The Secretary of State has commissioned a review, led by Sir David Dalton, into how leading NHS organisations can establish hospital chains to expand their reach and deliver more for patients.

Specifically the review will consider:

  • The arrangements which could enable local and non-geographical networks of hospitals or services to be established under a single leadership team
  • A new framework for NHS providers who are certified as outstanding and the go-to people for turnaround projects and extended management responsibilities
  • Management contracts so that outstanding leadership teams can take on a more formal relationship with other providers
  • The extension of the buddying and mentoring schemes in the special measures hospital programme
  • Improving incentives for the best NHS hospital trusts to take on turnaround projects and extended management responsibilities.

The aim is not just to improve quality and safety, but to develop 7-day services and to centralise services where this will improve outcomes.

The review is expected to produce a progress report in June 2014 and aims to submit its findings and recommendations to the Secretary of State by end September 2014.

Hempsons has worked with clients to explore factors that may facilitate or inhibit NHS hospital chains, and the organisational models that may be appropriate for them. At first glance the foundation trust model may seem to run counter to the concept of hospital chains. Potential inhibitors are:

  • Localism – the membership model for most foundation trusts is largely based on local constituencies
  • Centralised management – foundation trusts are highly restricted in their inability to delegate decision-making beyond the board of directors
  • Autonomy – each foundation trust is an independent corporate body which is incapable of ownership or direction by a third party
  • Governance – a high performing foundation trust’s risk rating may be sensitive to the distressed balance sheet and performance metrics of a potential partner in a hospital chain
  • Competition – foundation trusts are treated as economic entities for the purpose of merger law regulated by the Competition and Markets Authority (CMA) under the Enterprise Act and there is a low threshold for a change of control that would trigger a merger inquiry by the CMA.

The traditional NHS model of corporate growth has been by way of merger or acquisition between adjacent neighbours – typically a large foundation trust acquires a smaller neighbour. But a foundation trust is likely to reach a maximum size beyond which one or more potential inhibitors will prevent it from further growth by accretion of neighbours.

Hospital chains are likely to require innovative service and organisational models. And in seeking standardisation of the highest quality of care, there may be some loss of localism and autonomy. NHS England’s Chief Executive Simon Stevens has indicated that there is a future for smaller, local hospitals, but that may be at the cost of losing local independence.

In the context of commercial takeovers and buyouts, the purchaser’s aim is to extract profit by unlocking hidden value: the purchaser achieves a return on investment because he or she has seen value in a business that the current owner has not been able to find or realise.

In the NHS context, the hidden value is likely to be the quality, compassion and volume of care: a successful NHS organisation will understand how to improve patient outcomes in another hospital or service line, which (for whatever reason) are beyond the reach of its current management. In a recent interview with the HSJ (reported 27 May 2014) Sir David indentified the requirement for a system – dubbed “credentialing” – to accredit a list of excellent providers who would be the go to candidates to take on ownership or management of challenged trusts.

There will not be a one-size fits all solution for hospital chains, but potential organisational models for a successful  NHS provider (Trust A) to realise hidden value in a challenged NHS provider (Trust B) by way of hospital chains will include:

  • Buddying arrangement – relatively informal sharing of operational best practice, but Trust A does not take on Trust B management functions
  • Interim management contract – similar to buddying arrangements, depending on the degree of formality.  Trust A would provide management support (which may include a limited number of managers on secondment)  but it would not itself provide a whole management team for Trust B
  • Management contract –  a significantly different arrangement from interim management. Trust A would contract with Trust B to provide the Board level management team to run it
  • Franchise agreement – A franchise contract would require Trust A to take full operational control of Trust Board to accept financial risks, up to an agreed level.  Trust B would operate in association with Trust A’s brand, but there would not be a transfer of assets to Trust A and Trust B would continue as a separate corporate body
  • Acquisition – an outright acquisition by Trust A of Trust B.  This model would definitely constitute a merger situation, but if Trust A and Trust B are not contiguous or close to each other, there would be a low risk of substantive competition issues regarding a reduction in patient choice and competition.

And hospital chains are not just for a successful NHS provider to take on a challenged NHS provider. There is no reason why two successful providers should not partner or merge to establish a hospital chain.  Looking to the future, by doing so they might be taking a big step towards setting up a regional or even national accountable care organisation (ACO) that will be well placed to bid for outcomes based commissioning contracts. The top level management role of the hospital chain ACO would be quality and financial assurance, potentially liberating its provider units from the current national regulators, and so achieving a new form of localism and autonomy.

Click here to read our articles on: The Jackson Reforms one year on, the importance of being compliant, persistent litigants, CCG governance, Monitor’s latest procurement guidance, saying sorry for mistakes and the future of the stethoscope.

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