Efficiency initiatives: key issues to consider

Hempsons and Aldwych Partners are pleased to publish this article about key issues for the NHS to consider in efficiency initiatives

NHS organisations continue to search for ways to improve efficiency and ultimately to save money. The Carter Review provided potential methodologies, and opportunities for savings, and Trusts are implementing various strategies. NHS Improvement has also recently pushed for consolidation in the provision of pathology services with its proposals for new networks of laboratories.

So what are the key initiatives Trusts can explore and what are the main legal and commercial issues they need to consider?

In our work with NHS trusts and foundation trusts the four most common approaches currently are:

  1. Pathology consolidation – Trusts are implementing networking and/or outsourcing solutions for pathology services in response to NHS Improvement’s proposals to consolidate services into 29 networks across the country
  2. Back office consolidation – Trusts are consolidating back office functions to achieve efficiency savings, in particular procurement departments
  3. Establishment of wholly owned subsidiary companies – Trusts are setting up companies for estates management and clinical support services in order to exploit new market opportunities and to provide efficiencies
  4. Establishment of strategic estates partnerships – Trusts are entering into arrangements with private sector partners to maximise the efficiency of estates and generate potential value.

If you are considering, or undertaking such or similar schemes, we can help you achieve the anticipated costs savings and gain wider benefits.

In our experience, the key lessons are:

  • Early consideration of procurement law issues
  • Early consideration of competition law issues
  • Consider your staff
  • Plan to be flexible
  • A good contract saves money
  • Good governance is a priority
  • Consider tax and VAT opportunities
  • Deal with transitional costs
  • Consider seeking partners beyond the NHS.

Early consideration of procurement law issues

The Public Contracts Regulations 2015 (“Regulations”) will apply to most arrangements.

There is a market for back-office services and likewise for clinical services including pathology services, so setting up a shared service arrangement without complying with the requirements of the Regulations is to run a risk of challenge. The risk is heightened if you are considering terminating any service or supply contracts in order to set up newly consolidated arrangements with your neighbours. Your existing suppliers will scrutinise the basis upon which the new arrangements have been entered into.

We consider that this is specifically a risk in relation to pathology contracts. Trusts working together should carefully consider their respective contracts for equipment and consumables and take care when seeking to amend such contracts.

You may be able to structure your arrangement to benefit from “shared service” and/or “in-house” exemptions, both of which are recognised by the Regulations. We have helped NHS organisations to navigate the complex issues involved in setting up valid, workable “in-house” companies – including where the new company is jointly owned by a number of public sector organisations.

It is also important to future-proof your contracts insofar as possible to manage potential procurement law risks associated with any change.

The establishment of wholly owned subsidiaries also needs careful consideration from a procurement law perspective, with a need to carefully consider the rules around “in-house” awards. The wholly owned subsidiary is highly likely to be a contracting authority for the purposes of the Regulations and so will need to comply with procurement law. Careful consideration should also be given to how wholly owned subsidiaries are able to call off from existing framework agreements.

Early consideration of competition law issues

As with procurement law, the presence of a market for back-office, clinical support, and estates services means that rules on merger control and anticompetitive behaviour apply. That said, competition law risks in these areas are relatively low given the fragmented nature of many of these markets.

As with procurement, the main risk area is pathology. Already, the Competition and Markets Authority (CMA) has reviewed pathology joint ventures between NHS organisations and private providers. Aggregation between NHS organisations, without any private involvement, may also be reviewed by the CMA.

While the CMA has cleared pathology transactions to date, NHS organisations that are aggregating pathology services across a wide geographic area, and particularly those where customers, such as GP practices, would find access to neighbouring providers more difficult (e.g. coastal areas), should give careful consideration as to whether they should seek upfront clearance from the CMA for their transaction. Upfront merger clearance is preferable to having a transaction called in by the CMA at a later date, with the risk of the CMA requiring that it be unwound.

Consider your staff

The push for efficiency will inevitably mean change and a move towards increased flexibility from your workforce. In many cases, this will be resisted by employees and their representatives.

The common approaches set out above are likely to involve TUPE transfers, secondments and changes to terms and conditions of employment. They could also require significant restructure and redundancies.

In our experience the key to a successful change programme are:

  • Good preparation and project management – a lot of the concerns and objections can be anticipated from the outset and good employers should know how they will respond right from the start. For example if an employer intends to establish a wholly owned subsidiary company unions are very likely to oppose the move and may threaten industrial action, collective grievances etc. It is important to have a plan to manage these responses
  • Communication – managing the messages to your staff can be just as important as managing the process. If employees understand why change is necessary and what it means for them personally success is more likely
  • Ensuring your HR team has the skills and knowledge to manage the processes and has access to good legal support to minimise the risk of successful litigation. We often provide tailored training for HR teams ahead of major change programmes.

Plan to be flexible

An ambitious plan might identify many opportunities for shared services, but not necessarily at the same time or within the same contract. If you are proposing to share multiple back-office services, you should consider whether it makes more sense to do so under a single contract or separate ones.

Although there may be apparent pricing efficiencies to be had by outsourcing high value, multi-service contracts for long periods, these benefits can turn out to be illusory – one reason for this is the risk of over-pricing, but the flip-side risk of supplier under-pricing may ultimately rebound on the service recipients. Neither outcome is desirable when the objective is to share benefits between NHS organisations.

The temptation to resort to side agreements and informal measures should normally be resisted, as they can tend to make impressions of imbalance even more intractable. The contractual and governance arrangements of the shared service need to be clear and easy to operate. It is well worth doing the hard up-front work that makes for a smoother relationship afterwards.

Make sure you weigh the benefits of immediate cost savings against the longer-term potential income-generating possibilities. This is often an issue for Trusts with ambitions to redevelop their patient welcome and retail offering, if the funding is not available to achieve those goals now.

A good contract saves money

If a neighbouring trust is delivering a back-office service to your own trust, or vice versa, you will both want a contract that is proportionate, clear, and enables you to demonstrate that good value for money is being achieved.

That means you need a contract that is in all commercially significant respects, identical to the type of contract you would enter into with a private sector supplier or service provider. If you are concerned that this recommendation brings to mind a form of contract that would be too cumbersome for you to operate with your NHS neighbours, it is worth examining why.

A contract check-up can show you where savings and improvements can be made in your on-going outsourcing contracts, often by simplifying your management processes.

Unless you have the right contract and sound contract management systems in place, you cannot be sure that your customer/supplier relationships with neighbouring trusts are going to be smoother than your relationships with non-NHS suppliers and service providers.

Good governance is a priority

A well-governed collaboration is a decisive one. Good partnership working will flush out differences and resolve them early and cost effectively.

Where two or more NHS organisations share decisions, you will need to put in place a partnering board (or steering board) with clear Terms of Reference to suit your specific requirements. The high-level principles of good governance are generally applicable, but there is no one-size-fits-all governance process and there are numerous possible organisational forms.

You need to select the most suitable structure and establish the communication and accountability procedures that will enable your organisations to work together with speed and clarity.

Consider tax and VAT opportunities

Tax and VAT considerations may encourage the formation of subsidiary companies to deliver shared services, but not in all circumstances. Specialist financial advice is recommended, so you can balance the legal and commercial risks and benefits of each organisational form before deciding the most appropriate way to proceed.

Deal with transitional costs

A well-planned project to reduce costs by sharing services needs to identify the base-line costs and service levels. Financial and legal due diligence will reveal what is really involved in delivering the back-office service, as well as what an efficient delivery model should will look like.

The process of moving from the current structure to the target structure will need to be carefully managed. This means that responsibility for any unavoidable transitional costs (such as “stranded” services) needs to be allocated. A Business Transfer Agreement can help to avoid nasty surprises. Meanwhile, with specialist support, you can mitigate avoidable costs in respect of:

  • Staffing – via TUPE compliance, and allocating redundancy costs on consolidation
  • Supply contracts – by novating some supply contracts and properly terminating others
  • Premises – confirming your on-going obligations, negotiating the most cost-effective exit, including by mitigating substantial dilapidations costs
  • IT, data and information sharing.

Consider seeking partners beyond the NHS

Sharing services does not necessarily mean keeping the delivery of back office services within the NHS family, nor should you insist on keeping the decision-making about contracting-out of the services purely within the NHS.

For example, you might want to consolidate and enhance your commercial expertise when looking to realise estates efficiencies and generate revenue from your capital assets. To that end, a Strategic Estates Partnership (SEP) between a trust and a private sector “integrator” is an additional option well worth exploring. A SEP can bring commercially-focused insight to trust decision making as well as efficiency to back-office service delivery.

For more information please contact:

Article co-authored by Andrew Taylor from Aldwych Partners.