With most Private Patient Units (PPUs) now generating annual revenues ranging from £300k to £1m per bed there has never been a better time to set up a PPU. In this article I explain the options and the regulatory issues to consider when setting up a PPU, including procurement legislation, state aid rule interpretation and competition legislation. NHS based PPUs managed by private operators are becoming increasingly attractive for NHS hospitals. The arrangement often takes the form of a contractual joint venture. Private operators can generate significantly more revenue per bed than NHS Trusts running in-house PPUs and typically the margins on these revenues are higher. They also provide insurer recognition and marketing expertise.
Alternative models to contractual joint ventures are available, such as setting up a charity to run the private patient operations or setting up a special purpose vehicle with a private operator. Most NHS based PPUs provide dedicated private rooms or a private ward and access NHS clinical facilities such as operating theatres, pathology, radiology, pharmacy, critical care, as well as NHS non clinical facilities such as facilities management. Many PPUs prefer to source their own catering though, and sometimes other facilities such as laundry, to differentiate their offering from the surrounding NHS wards. This lowers the barriers to entry and allows relatively small PPUs to be viable, but it means private patients are competing with NHS patients for access to resources such as theatres and critical care. The commercial deal with an independent operator usually has three elements as follows:
In most circumstances of setting up a PPU there will be no TUPE, since there will not be a business transfer or service provision change transfer, which are the two principle tests for TUPE. The host Trust will need to ensure that it does not provide services to the private operator on preferential terms, or this could be deemed to be unlawful state aid. State aid occurs if a public body provides a financial advantage to a private sector organisation that has the potential to distort competition. To mitigate against the unlawful state aid risk the host Trust will have to provide any funding or aid on commercial terms in the same way as a private investor would in a market economy. This is known as the market economy investor principle (MEIP). The best way to achieve this is to conduct an OJEU procurement to ensure that the risk / reward distribution are the best available in the market. If the host Trust is providing services (eg theatres, pathology, pharmacy, IT etc), it is essential to ensure the correct VAT treatment. This is a complex area where specialist advice will be required, but involves identifying whether the host Trust is making an overarching single supply or multiple supplies, and then whether the supply or supplies is / are standard rated or exempt. HMRC’s approach is that where a transaction consists of more than one element, there is likely to be a single supply if most elements of a transaction are either ancillary to a dominant element or are working together to create a whole. If a single supply can be established, as long as the dominant components are medical the supply will be exempt. Therefore when considering the three elements of the commercial deal described above, it is important not to strip out too many medical elements into the category ‘c’ above (additional sums for services and consumables not covered by ‘a’ and ‘b’) otherwise the remaining elements are in danger of being classed as non-medical, and hence standard rated. There are very limited areas in which an independent operator can recover VAT, and therefore any VAT has to be passed on to customers, partners or investors as a cost. Given that most patients are covered by insurance and the insurance companies have fixed tariffs for reimbursement, there is little opportunity to pass on such a cost to customers. In 2014 the CMA published a Private Healthcare Market Investigation Order available from here. Part 2 of the Order covers PPU arrangements and its purpose is to prevent adverse effects on competition (AEC) and gives the CMA the power to review PPU arrangements even if they do not give rise to a relevant merger situation and to take action if the arrangements lead to or are likely to lead to a significant lessening of competition. The CMA may take whatever remedial action it considers to be reasonable and practical to remedy, mitigate or prevent the substantial lessening of competition. Therefore, if a proposed PPU arrangement may have an effect on competition, it would be sensible to engage with the CMA at an early stage. Also in 2014 the European Union published a new Public Contracts Directive (Directive 2014/24/EU) and a new Concession Contract Directive (Directive 2014/23/EU). The introduction of a new directive aimed specifically at covering service concession contracts brings increased regulation of concession type contracts. The directive introduces obligations to advertise concession contracts with an estimated value of 5,186,000 euros or above in OJEU. At the time of writing, the Concession Contract Directive is yet to be implemented into UK law. The position on whether a joint venture should be considered as a concession opportunity remains unclear. Clearly there are many factors to consider when setting up a PPU managed by a private operator. Please do not hesitate to contact me if you would like to discuss. Copyright © 2015 Magrath Consulting Limited, all rights reserved.
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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
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