The future of pathology services has been a hot topic since the Carter reviews of 2006 and 2008. Modern pathology technology breaks down the traditional demarcations between laboratory disciplines and allows for automation of pre and post analytical processes, but this kind of modern technology requires large scale pathology operations serving more than one hospital and its local GPs. Pathology consolidation has happened across large parts of Europe and in some other continents, leading to some large pathology organisations with state of the art automation, significant purchasing power and expertise. There are now signs that the UK is starting to follow this path. Having recently set up a pathology joint venture in Essex involving two NHS Foundation Trusts and a private sector pathology provider, here are my top tips and issues to consider for anyone thinking of outsourcing pathology or setting up a joint venture. Before embarking on an outsourcing or joint venture project like this it is essential to have robust baseline data. This includes activity, cost, contracts, staffing and budgets. My experience of pathology is that different laboratories count the same thing differently, and it is important to have an agreed baseline to issue to the market. It may therefore require a mapping exercise to translate activity into an agreed format for tenders to be based on. Similar translations may be needed for the financial baselines to take account of in scope and out of scope services.
Any project involving more than one NHS stakeholder needs to start with some commercial principles that are signed off at Board level. This is to minimise the risk of proceeding to the point of contract award only for one organisation to conclude that the proposed deal is not what they were expecting. For a joint venture, the commercial principles need to cover things like service scope, legal form (eg contractual joint venture or special purpose vehicle (SPV), and if a SPV any restrictions on the model eg limited company, limited liability partnership etc), shareholdings / membership, savings targets, profit share, restrictive covenants, tag along and drag along rights (tags and drags), lock in periods, staffing issues (eg any restrictions on who will employ the staff, TUPE, Directions status, employee share ownership programmes etc), ownership of assets, remedies for poor performance, step in rights, termination, reserved rights, parent company guarantee, source of funding (eg cash and non-cash assets committed by each shareholder / member, debentures etc). My approach is to have an opening or target position for each commercial principle, and a fall-back or minimum position. The debate with the NHS Boards then proceeds to explain that the eventual deal put to the Boards to sign off will be somewhere between the opening and minimum position on each principle, and now is the time to raise objections or propose changes if a Board is uncomfortable with the range of possible outcomes for each principle (in some cases the opening and minimum position can be the same, meaning no scope for negotiation). The project owner is then mandated to proceed and return with a deal within the commercial principles’ boundaries, and only needs to come back for direction if it becomes clear that a particular commercial principle cannot be achieved. Once the commercial principles are signed off by the stakeholder Boards, it is much more difficult for a Board to reject the final deal for reasons like, ‘we were not expecting our staff to transfer to another organisation’, or something similar. Once the commercial principles are agreed, the next stage is to issue a Prior Information Notice (PIN) in OJEU. This applies whether you are pursuing a straight outsource or a joint venture. For the latter, although a Trust can set up a joint venture with another organisation without competition, if it wants to place a contract for goods or services with the joint venture organisation it will need to follow a competitive process, so it is easiest to select the JV partner and place the contract all via the one competition. Including the selection of the JV partner within the competitive process also minimises the risk of accusations of unlawful state aid to a private sector partner. As part of the PIN for the project I led, I issued the opening positions of the commercial principles (the minimum positions remained confidential) as part of a potential provider briefing paper, and then invited potential providers to a market briefing day. On any project with a perceived high risk of not proceeding to completion, I can’t stress enough how important the PIN and market briefing day are. Potential providers will incur costs of £250k to £500k in taking part in a competition like this, for lawyers, architects and other professional advisors, and they will want to assess how committed the contracting authority is, whether it has really thought through what it is doing, whether it has the right leadership and expert resources, the extent of Board level commitment and therefore whether the competition is likely to lead to the award of contract or collapse along the way. The market briefing day is the contracting authority’s opportunity to demonstrate its commitment and thereby ensure a good response from the market. It is also an opportunity to get feedback from the market on the commercial principles and proposed procurement approach, to consider whether anything needs to be amended before issuing a Contract Notice in OJEU. Obviously, any material changes to the commercial principles would need to go back to the Boards of the stakeholder organisations. As part of early engagement with the market, keep in mind that early communications with internal and external stakeholders will be relevant later if the eventual transaction falls within the jurisdiction of the Competition and Markets Authority (CMA). Any inconsistency of message may lead the CMA to conclude that the contracting authority is telling different stories to different audiences. One of the inconsistencies of the failed Bournemouth and Poole merger was early external communications telling stakeholders that not much would change, but a relevant customer benefits case submitted later arguing for significant benefits from change. More on the CMA process follows below. An OJEU Contract Notice should follow quickly, and this is the formal start to the procurement. Due to the complexity of a pathology outsource or joint venture deal, I followed a competitive dialogue procurement route. Note that once the Public Contracts Regulations 2015 become law (expected 26 February 2015) and replace the 2006 Regulations, new procurement options will be available including competitive procedure with negotiation and innovation partnership. I’ll produce a separate blog on the 2015 Regulations. Potential providers that pass the pre-qualification questionnaire process are then issued with an Invitation to Participate in Dialogue (ITPD). One or two dialogue rounds should follow to allow potential providers the opportunity to sound out the contracting authority on their thinking regarding core and possible variant bids. The contracting authority should then issue an Invitation to Submit Initial Proposals (ISIP) document. This can be done before ITPD but better proposals are likely if one or two dialogue rounds precede ISIP. The ISIP must include draft legal documentation for potential provider mark up and a financial template to allow easy comparison across proposals. A word of warning here, the pathology joint venture that I recently set up required 23 separate legal documents, and I have seen other deals that required even more! Further dialogue rounds then follow on specific topics to provide potential providers with feedback on their proposals and contract mark up, focusing on what appeals to the contracting authority, what raises concerns and therefore may score poorly at final tender stage, and what would be incapable of acceptance due to being outside the boundaries of the commercial principles. During the dialogue sessions, potential providers can amend their proposals and marked up documentation. At the point where potential providers and the contracting authority are sure they understand each other’s stance, dialogue is closed and Invitations to Submit Final Tender (ITSFT) are issued. Ideally, the final tenders should contain no surprises or material changes from the dialogue stage, but of course this cannot be guaranteed. Material changes should be avoided as far as possible, because at this stage there is no scope to discuss them, only to issue post tender clarification questions. Evaluation of tenders against criteria based on the commercial principles issued at the start of the process will lead to selection of a preferred bidder, and the preferred bidder’s tender can be used to develop the Full Business Case (FBC) for sign off by the stakeholder Boards. However, my experience is that even after the procurement and FBC approval, significant hurdles remain, as follows. If a joint venture involves the creation of a special purpose vehicle it is likely to fall within the jurisdiction of the CMA, which I mentioned above. A contractual joint venture is less likely to fall within the CMA’s jurisdiction, although it depends on the detail, and a straight outsource almost certainly will not. A transaction that involves only NHS Trusts (as opposed to NHS Foundation Trusts) will not be within the CMA’s jurisdiction. Referral to the CMA is voluntary, but there are significant risks associated with not making a referral for a transaction that is within the CMAs jurisdiction. As part of the CMA referral, it is necessary to demonstrate that the proposed transaction will not create a reasonable prospect of a significant lessening of competition (SLC). In making this case, you will almost certainly need the input of expert advisors, including an economist and competition lawyer. If the referring party considers that there is a reasonable prospect of a SLC, a relevant customer (patient) benefits case should also be submitted. The CMA will take advice from Monitor on the relevant customer benefits case and if the benefits outweigh the SLC then the CMA can still clear the transaction to proceed, or may require undertakings before clearing the transaction. Regarding relevant customer benefits, the CMA’s view is that these must only be available via the particular transaction that is proposed and must be customer benefits, not benefits for the referring organisation. Monitor’s recent guidance (available here) in 2014 seems to take a slightly softer line, but the ultimate decision is with the CMA. Do not underestimate the time and resource needed for the CMA process. All arguments must be backed up by evidence, and the CMA will want to review all legal and procurement documentation, Board papers and related communications with stakeholders and customers. It is no use trying to argue that competition for pathology in your patch does not really matter. Competition is the CMA’s raison d’etre and at this stage of the process you will be operating in their world. Another approval or at least opinion likely to be required is from HMRC regarding VAT assumptions. Until 2012, HMRC considered the supply of contracted out pathology services to NHS customers to be standard rated for VAT, meaning providers could recover their input VAT by charging output VAT, and NHS customers could recover their input VAT under the contracted out services rules. In 2012 HMRC changed its view, making the supply of pathology services an exempt supply. In early 2014 the First Tier Tax Tribunal upheld this ruling. HMRC’s current position on VAT is available from here. The tribunal ruling means that an outsourced pathology service would have trapped input VAT that can only be recovered from customers via higher prices (or perhaps from investors via reduced profit share). As a result, novel approaches to achieve VAT neutrality have been developed by private sector pathology organisations. I won’t go into detail here as the approaches all differ slightly and I don’t want to give away any trade secrets, but upon request I can provide advice on what I consider to be the best approach to achieve VAT neutrality. If TUPE applies and staff are to transfer to a special purpose vehicle or a private sector provider, it should be possible to obtain a Directions Order to ensure continued access to the NHS Pension Scheme. Indeed without this, there is unlikely to be a viable business case as a Government Actuaries Department (GAD) equivalent pension would require employer contributions of 30 – 35%, compared to 14% within the NHS scheme. If pathology is a Commissioner Requested Service (CRS) within Schedule 2 Part D of the (2014/15) NHS Standard Contract, commissioner approval will be needed before any assets can be transferred to a new provider. Depending on the definition of a significant transaction adopted in each Foundation Trust’s Constitution, approval of the Governors may also be required. Monitor (or the TDA for non Foundation Trusts) will also need to be engaged, and Monitor has provided helpful recent guidance on this (available here). Finally, the Care Quality Commission (CQC) will need to accredit any new pathology provider. The above may sound complex, and in some respects it is, but a number of organisations are now successfully completing pathology joint ventures and outsource deals. The work involved should not be under estimated, but the prize is a sustainable pathology service with increased scale, excellent quality standards and lower unit costs. Please do not hesitate to contact me if I can offer any assistance with your future plans for pathology. Copyright © 2015, Magrath Consulting Limited, all rights reserved.
3 Comments
26/2/2015 12:41:30 pm
Thank you for the comment Jules. Not quite a deconstruction, but I've now published my thoughts on the innovation partnership procedure in the new regs and some more general comments on other changes.
Reply
13/4/2015 10:26:50 am
Hi Mark
Reply
Your comment will be posted after it is approved.
Leave a Reply. |
Mark Magrath MBAI am a management consultant with 12 years experience as an executive director in an NHS Foundation Trust, including 10 years as Deputy Chief Executive. I only write blogs on projects and assignments that I have personally led. My aim is to write amazing content that combines real world experience with insightful advice. Categories
All
Archives
August 2021
|