Do hospitals need to own their buildings?

Buildings can be an obstacle to reforming services for patients. The design of the payment by results (PBR) system, particularly the fact that it is based on full costs, means that any loss of income creates a significant problem for Trusts. Not only does income fall faster than costs can be reduced, there are a number of costs– particularly those associated with the estate – that cannot be shed at all without a major reconfiguration of the site.

This gives hospitals an incentive to ensure that the assets are fully utilised. While this may appear efficient, it may well mean that even more efficient options for delivering care are discouraged and this may be at the expense of the clinically best options for patients. For example, rather than being admitted to hospital, patients with heart failure might be better served by having their care either self-managed at home or managed by their GP with the support of specialist staff from the hospital and technology to remotely monitor their condition.

This is clinically the right thing to do and more cost-effective for the NHS generally, but it is potentially financially ruinous for the individual hospital. The absence of a good method for sharing the risks and benefits of these models, and the need to keep assets fully utilised, creates perverse incentives which run counter to the overall direction of policy to reduce the use of hospitals.

Payment by results

Including capital in the payment by results system has some potential problems. Including it in the tariff gives excess windfall gains to providers with low overheads or very old buildings that are fully depreciated. The most logical solution, basing payment on what the value of a functionally suitable estate should be, would require a large one-off injection of money and then lead to the accumulation of this in reserves until providers were ready to replace their assets.

A significant difficulty in implementing quasi-market based approaches to reform is that hospitals in their current form represent significant geographical monopolies. Practice based commissioning offers some solutions to this, but even in outpatient care setting up alternative services that require back up from diagnostics or other hospital-based care may be difficult and can require expensive duplication.

The basic design and purpose of hospitals has remained unchanged from the Middle Ages until the early 19th Century. A well-constructed hospital built in the 1500s could have 300 years life with little need for significant modification. The pace of change in medicine, the development of new technology and changes in society have meant that the design and function of the hospital has changed more in the last 50 years than in the whole of the previous 1000. Even 30 years now seems a long time to expect to see a hospital exist without being subject to major changes. Indeed, in many cases, hospitals are frequently modified to accommodate new services and technologies while they are still being built.

Changes in technology, the need to centralise some functions to improve quality and the opportunity to take work out of the hospital are leading to a major reconfiguration of many hospital services. The existing procurement routes do not fit easily with the scale of change associated with reconfiguration. PFI in the NHS has been used to deliver many of the wholehospital developments that were required. Most of the major conurbations of the UK have benefited from PFI schemes and are now served by modern hospital facilities. However, the need for additional whole-hospital developments in the UK is now limited. Many Trusts are voicing caution over the use of the standard PFI model to support estate development, as the model can be very constraining and is not considered flexible enough to respond to longer-term estate strategy and developments phased in over time.

Development

Many Trusts are now turning their attention to a programme of estate development and rationalisation that is leading to more campus style developments, e.g. developing a new diagnostic centre or urgent care centre. Often these plans are to be delivered over a long timescale with a phased approach dependent on affordability and the support of patient choice. PFI does not suit this strategy well for either the public or the private sector providing the buildings. The schemes are smaller, which makes it difficult to support the critical mass of bidding costs, and a series of 25 or 30 year concessions procured by a single NHS Trust is a costly and inflexible way of managing change.

PCT provider functions also have significant estate and although they are less subject to some of the problems of inflexibility that apply to hospitals, there may also be advantages in adopting new approaches to development. NHS LIFT presents a more flexible vehicle on the development side but LIFT companies are not structured to manage the large-scale disposal of assets and the realisation of development gain as, unlike PFI, in the LIFT model the property transferred by the NHS represents its equity in the LIFT company. Furthermore, LIFT remains focused on individual buildings and assets rather than providing a mechanism to deliver value from wholesale estate rationalisation.

Often there is not the organisational structure in place to manage that estate effectively and address the strategic reconfiguration required to support service reconfiguration. LIFT is supporting the modernisation of the estate in some areas but remains focused on delivering individual building schemes, and LIFT Companies have found it difficult to take on responsibility for wider estate management. However, the separation of services from assets, and a willingness of PCTs to divest themselves of estates as they focus on commissioning, will provide the impetus for LIFT companies and their shareholders to gear up and develop the capability to acquire and actively manage PCT estate.

Challenge

It is likely that large parts of the NHS estate will become redundant or unfit for purpose. The value of the NHS estate now stands at more than £30 billion at existing use value. Although the NHS has adopted much good practice in terms of the sale of surplus estate, the development gain that is achieved following the sale through change of use or redevelopment has, historically, been largely taken by the private sector developer.

It is probable that managing the retraction and disposal of estate will be more of a challenge than procuring new buildings in the NHS. Furthermore, ensuring that best value is achieved through disposals will require skill sets which are not core to NHS management. Our proposal is for a new type of partnership, which brings private sector knowledge and skills into the management, development and disposal of NHS estate and uses that expertise to deliver value back into the NHS.

However, it is likely that any disposals of this sort will be made on the basis that the property is no longer required.

Re-investment

The property management and development industry in the UK is well developed, with significant levels of expertise. Many sectors in the UK economy have seen the value of releasing assets to be managed by joint ventures or private sector partners who focus on delivering value from property, leaving firms to focus on their core business.

Banking, retail, hotel and leisure are all sectors of the UK economy that have moved away from owning property and have released value for re-investment into the core business. In the UK private healthcare sector it is no different, with the best example being Capio Healthcare, which agreed a sale and leaseback of all of its UK hospital sites that raised £200 million to fund its UK expansion. There are also many international examples of healthcare organisations and hospital groups in the public and not-for-profit sectors that have funded development of their operational business through the sale and leaseback of facilities to private sector property companies or specially created joint ventures. A number of such examples can be found in Scandinavia, Canada, Australia, New Zealand and the US.

The opportunity exists to take this model and develop it further to create a new type of public-private partnership that benefits from the wealth of private sector expertise in property management and development whilst allowing NHS partners to focus on the delivery or commissioning of healthcare. This would not be a sale and leaseback; rather it is the creation of social ventures. The focus of this social or community venture would be to manage existing estate effectively whilst maximising value through estate management, disposals and development, in order to deliver development gain back into the NHS, which can be invested in additional or new services. Such a model could also encourage the private sector to create supply chains designed to maximise value from estate disposals. For instance, the inclusion of specialist developers of elderly care villages can allow for site development with residential level returns whilst maintaining a healthcare-related use of the site. The private sector can also use its expertise through the planning process to construct a supply chain that will deliver appropriate development for sites, whether residential, retail or commercial, in order to enhance value and drive up returns for investment back into the NHS.

Partnerships

The opportunity exists to take this model and develop it further to create a new type of public- private partnership. The inclusion of day-to-day estate and facilities management would be determined on a ‘venture by venture’ basis in terms of whether such services are provided by the NHS or the private sector supply chain.

Such a decision should be based on local circumstances, availability of current workforce and meeting value for money criteria. The best arrangement might be a true public-private partnership with clear delineation of expertise. This would create the potential to deliver significant value back to the NHS for investment in healthcare: as well as an up-front cash injection through asset sales there would be the ongoing returns derived through property development following disposal. Such ventures would also allow the NHS to concentrate on what it does best, which is to deliver and commission healthcare, in the knowledge that the infrastructure required for such delivery is being effectively managed and developed according to future healthcare needs.

The choice of the private sector partner in the JV would need to be made through a mechanism of open procurement, which ensures value for money is being achieved for the NHS and the public sector as a whole. Selection would be made on agreed value for money criteria, such as valuation cost of capital and operational costs of the JV as well as a proposed mechanism for gain share between the JV partners. These criteria would sit alongside “softer” issues such as quality of the supply chain and ideas for future development of the healthcare estate. These criteria are not dissimilar to the NHS LIFT procurement process.

The right of the NHS to continue to operate from sites at the end of any lease would need to be protected through preemption agreements. The NHS would continue to be a significant property owner through its stake in any joint venture, and other protections to ensure continuity of healthcare delivery on any particular site may be put in place through the guaranteed buy-back option. There are tried and tested approaches for estate valuation, which have been adopted elsewhere, that will provide safeguards and would support this. An example of such an approach in the public sector is when the then Department of Social Security transferred the ownership and management of its estate to a private sector company, Trillium, now Land Securities Trillium (LST), in a £1.2 billion deal. Since the initial deal the amount of estate managed by LST has been expanded and both the initial deal and its expansion have been found by the National Audit Office to offer value for money to the public sector. Obviously a single deal of this type for the NHS would be far too large and unwieldy and there would be advantages to there being more than one operator of this sort. However, each operator would need to be sufficiently large to be able to take on some of the short-term risks associated with the provider’s fluctuating use of facilities, as well as having the resources to undertake an up-front purchase of the estate and the technical capabilities to manage a large leaseback programme. This represents an attractive model to the private sector, which is demonstrating a strong appetite for infrastructure investment and managing assets that are supported by clear future cashflows. There is an incentive for the private sector to build robust supply chains that demonstrate value for money and maximise shared development gain, as it is these successful consortia that will be rewarded with the opportunity to manage more assets, thus delivering value back to both their shareholders and the NHS through further development gains.

Advantages

The model we are proposing would have a number of significant advantages and deal with the issues we set out at the beginning of the paper that have the potential to hold back reform. The advantages include: