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Year 2005 No. 134, December 5, 2005 ARCHIVE HOME JBBOOKS SUBSCRIBE

How the "Budgetary Problem" in NHS Is Being Used by the Government

Workers' Daily Internet Edition: Article Index :

How the "Budgetary Problem" in NHS Is Being Used by the Government

Capital Charges:
A Tax on the NHS – Worse May Follow as NHS Assets Are Privatised

RCN Judicial Review Hearing on PCTs

An Example of a "Healthcare Provider"

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How the "Budgetary Problem" in NHS Is Being Used by the Government

Reports this weekend say that the Health Secretary Patricia Hewitt revealed on Thursday that she had asked City Financial firms to compete over the weekend to provide teams of advisers to help sort out the "budgetary problems". The Companies have been commissioned by the Department of Health after it "found" NHS trusts in England were likely to run up debts of £620m in 2005-2006. The government wants to appoint a company to run the teams by early next week.

What is surprising about this latest report is that people are expected to believe that this is a "budgetary problem" and that it has just been "found" out. The fact that it is not a recent "budgetary problem" as far as the government is concerned is confirmed by further reports that when a number of GPS and hospitals have complained that they have been told to defer operations and only perform them within government waiting list times so as to save money, the response of the Department of Health was that the decision to save money in this way is an "operational issue for the local NHS".

Far from being a "budgetary problem" requiring the intervention of the City accountancy firms the real issue is that the government is supporting measures which put cutting costs ahead of the right to health care and is introducing city financial firms both to obscure this fact to the public and as an cover to bring in these firms which will take the cuts further.

What is happening is that the scale of the under-investment in the revenue budget to the NHS caused by the expansion of funding to facilitate the increasing involvement of private monopolies in various ways has reached a critical point this year. It is this "investment" which has sent almost every part of the publicly funded NHS into huge deficits. Having caused this crisis to the public health sector the government is trying to fool the people in thinking that this crisis in the NHS is not of its making, but that of incompetent budgetary control in the NHS by NHS managers.

This big lie is being compounded by the fact that the under-funding crisis in NHS revenue, which is causing hospital and bed closures, health rationing and cutbacks in services and staffing levels, is to be addressed only by more aggressive cutbacks using city accountants. Whilst the income to the private sector will reach £1.5 billion this year in addition to the huge profits of the drug companies and hospital leasing deals (through PFI), the revenue to the NHS is reduced each year through various mechanisms. These include the funding of hugely expensive PFI schemes, unfunded consultants pay rises, the new staff pay system, increased pension contributions, repayment of capital representing the value of hospital infrastructure to the government, and a yearly "cost improvement programme" of around 3% reduction a year started by the previous Conservative government and continued by New Labour.

It is a matter of public record that health workers and the majority of the British people, in the face of successive governments who want to turn public services into an appendage of big business, do not accept this involvement and demand that investing in health means investing in the National Health Services to safeguard its future. The only "budgetary problem" is that the "debts" of the NHS be abrogated forthwith and a moratorium imposed on investment in the private sector and immediate steps taken to bring back all private health care under public control, and a public investigation launched into with a view to reclaiming the huge profits made by big business for further investment in health.

Article Index

Capital Charges:

A Tax on the NHS – Worse May Follow as NHS Assets Are Privatised

By Allyson M Pollock, Senior lecturer in public health medicine, and Declan Gaffney, Researcher, St George’s Hospital Medical School, London, British Medical Journal, July 18, 1998

Under the new national framework for assessing performance in the NHS trusts will be compared partly on the basis of their costs per unit of care and of the productivity of capital estate.1 Unit costs and productivity of capital are crucially influenced by two factors: the capital charging system under which the government plays shareholder and banker to the NHS, recovering a 6% return on all capital used by the NHS,2 and the current and future purchasing decisions of primary care groups. Other changes, however – notably, the private finance initiative and the freedom of primary care groups from capital charges – raise questions about the appropriateness of these measures of efficiency.

The main argument for the introduction of capital charges in 1992 was that NHS assets were being used inefficiently. Requiring NHS trusts to pay interest and dividends on their assets, and to recoup those costs through the prices charged to purchasers, would, it was argued, lead to greater cost effectiveness and allow comparisons to be made between the NHS and the private sector.3 This, however, relies on two arguable premises – firstly, that an NHS provider is sufficiently similar to a commercial enterprise that the imposition of a private sector financial regime will lead to greater efficiency; secondly, that NHS capital charges realistically represent the cost of the buildings and equipment needed to deliver services.

Taking the latter premise first, NHS assets are valued at current value for land and current replacement cost for buildings, plant, services, and equipment rather than at historic cost (which would be the usual practice in the private sector). The effect of this overvaluation of assets is to make capital charges (paid from the trust’s revenue) cripplingly high. The 6% rate was chosen "to ensure that there is no inefficient bias against private sector supply"4 and not to reflect the real cost of capital to government. Bringing public sector capital accounting in line with private sector conventions in respect of returns on capital makes the substitution of private for public provision a logical move since it disguises the most significant differences between the two sectors.

What of the incentives for efficiency supposedly created by capital charges? The effect of the system on individual trusts depends on the relation between their income and the asset base on which they pay capital charges: the greater the proportion of a trust’s income taken up by capital charges, the greater the risk of financial non-viability.2 On average NHS trusts are paying out 9% of their annual revenue income on capital charges. Only two options exist for adjusting the income:asset ratio: increasing income or reducing assets.

To increase income trusts can compete for market share with other NHS providers or attract private sector income. Competing for market share destabilises neighbouring NHS providers because, without expansion in purchasers’ budgets, trusts can gain only at the expense of other providers.

Trusts can reduce their assets through disposing of them or taking facilities out of service. This has led to capital charging being compared to a "windows tax," with facilities being withdrawn to avoid charges.5 A more radical approach is to liquidate all assets (and thereby avoid paying capital charges altogether) through public-private partnerships and the private finance initiative. Under the private finance initiative NHS assets and land are sold or transferred to private sector consortia which design, build, and operate new hospitals. The NHS becomes a tenant, leasing back the premises and services for 30-60 years.6 Payments for the lease of the new hospital and services are financed by land sales, government subsidies,7 and, crucially, the capital charges paid by NHS trusts. As they are not public sector assets, private finance initiative hospitals will not be liable for capital charges, but the equivalent of the trust’s current capital charges will still enter into the prices charged each year to purchasers.

This has created a leak of NHS funds from the public to the private sector. Previously the capital charge "returns" the Treasury received from NHS trusts (around £2.5bn a year) were passed to the Department of Health, which included them in health authorities’ revenue allocations for hospital and community health services.8 They then entered into payments to NHS trusts, which made returns to the Treasury, thus closing the circle. When NHS services are provided by the private sector, which does not pay capital charges to the Treasury, the funding leaves the system, reducing the annual circulating fund out of which other trusts must make their returns. Unless there is a concomitant increase in NHS revenue to offset this leakage – and so far there has not been – this will lead to the bizarre phenomenon of privately financed hospitals being funded through what is in effect a tax on hospitals in public ownership.

Ironically, the use of the private finance initiative has the potential to increase unit costs since it increases the amount of income that goes on buildings and equipment even while cutting capacity. Bromley Hospitals Trust’s projected private finance initiative lease payments represent 14.7% of its current income, compared with the 11.4% it currently spends on depreciation and capital charges, despite the fact that the trust will reduce acute beds by a fifth.

The shifting of services from acute and community hospitals to the primary sector will have the same effect. General practitioner fundholders (and future primary care groups and primary care trusts) are free of the capital charging regime of the NHS. Since the introduction of fundholding an increasing number of general practitioners are either undertaking, or contracting with the private sector for, services formerly carried out by NHS trusts.

Current policies on disposing of NHS assets and introducing primary care trusts will accelerate these trends. All NHS assets deemed surplus to requirement have to be offered first to other NHS bodies. Around the country fundholders with private sector backing and NHS revenue are buying up this surplus NHS estate. As primary care trusts develop, general practitioners with a cash limited budget may be tempted to mortgage NHS community trust sites to the private sector under private financing arrangements and to gain a commercial stake in the enterprise. The transfer of NHS assets to private ownership and management is, of course, ultimately funded from NHS revenue. The effect will be to create serious financial instability in NHS trusts and potential for enormous inequities in access to service provision.9

Concerns about the potential effects of public-private partnerships and primary care trusts are not misplaced. The direction of current policy suggests that in the medium term many NHS assets will transfer to private ownership. The question is whether, as with long term care, liquidating public sector assets will be followed by the privatisation of the costs of care.10


1. NHS Executive. The new NHS: a national framework for assessing performance. Leeds: NHSE; 1998. (EL(98)4.) .

2. Shaoul J. Charging for capital in NHS trusts: to improve efficiency? Manage Accounting Res. 1998;9:95–112.

3. Department of Health. Working for patients: working paper No 8. London: DOH; 1992.

4. HM Treasury. Appraisal and evaluation in central government. London: Stationery Office; 1997.

5. Shaoul, JE. NHS trusts: a capital way of operating. Manchester: University of Manchester, Department of Accounting and Finance; 1996.

6. Pollock AM, Dunnigan M, Gaffney D, Macfarlane A, Majeed AM. What happens when the private sector plans hospital services for the NHS: three case studies under the private finance initiative. BMJ. 1997;314:1266–1271. [PubMed] [Free Full Text]

7. Gaffney, D.; Pollock, AM. Can the NHS afford the private finance initiative? London: BMA Health Policy and Economic Research Unit; 1997.

8. NHS Executive. 1997/8 Health authority revenue cash limits exposition book. Leeds: NHSE; 1996.

9. Pollock AM. The American way. Health Services Journal 1998 Apr 9: 28-9. 10. Price D. Profiting from closure. BMJ. 1997;315:1479–1480. [PubMed]

Article Index

RCN Judicial Review Hearing on PCTs

The Royal College of Nursing (RCN) is seeking a judicial review of the government’s failure to carry out public consultation on the proposals for changing the role of primacy care trusts (PCTs) in England. The Department of Health’s proposals were set out in "Commissioning a Patient-led NHS", published in July. The hearing on the RCN's application is to take place at the High Court in London on Friday, December 9. A judicial review challenges the lawfulness of the way in which the decision or action by a public body has been made

The government’s proposals stated that PCTs’ role in provision of services will be "reduced to a minimum and that Primary Care Trusts will act as the provider of services only where it is not possible to have separate providers". The RCN points out that this policy was decided without prior consultation.

RCN General Secretary Dr Beverly Malone has described the decision to seek judicial review as one not taken lightly, particularly given the strong relationship the RCN has with the current Secretary of State for Health.

However, the decision was made by senior council members and the RCN's Executive Team, after the government failed to answer the RCN's call for clarification on whether there would be a "significant change in policy".

Beverly Malone said, "We know from our members that there is a great deal of anxiety about the lack of consultation around these proposals and indeed about the future of primary care services."

The 300 primary care trusts are local groups which receive about 75% of the total NHS budget. In the internal market, they purchase services from hospitals and GPs, as well as directly employing nurses and other medical staff.

The plans published in July – after parliament broke up for the summer recess – by Sir Nigel Crisp, the NHS chief executive, provide for the merging of PCTs and making them purely commissioning bodies with no role as direct providers of health care. Patricia Hewitt has failed to withdraw Sir Nigel's instruction for PCTs to reduce their provider role "to a minimum" by 2008.

Howard Catton, the RCN’s head of policy, has said, "We have been under incredible pressure from our members who are deeply concerned and anxious about the future of primary care and their personal futures as well."

Article Index

An Example of a "Healthcare Provider"

The increasing privatisation of the health service, the PFI deals and the consolidation of the "internal market" in health care with so-called commissioners, purchasers and providers, is not providing and is not designed to provide solutions for the problems facing the NHS, least of all its "budgetary" problems. On the contrary, it is exacerbating the problems, creating new ones and is designed to provide "investments opportunities" for the rich, the private sector and the drug monopolies and other capitalist concerns. The "profits" gained by these monopolies and businesses are a direct drain on the social product, a siphoning of wealth out of the public treasury into the pockets of the rich.

The bottom line for private companies and contractors providing healthcare, cleaning, food and other services is the maximisation of profits. Within the NHS Trusts, there is also a burgeoning accounting industry, treating the Trusts as though they were business concerns rather than providing healthcare as an inalienable right. The so-called "budgetary crisis" is at root one caused by diverting NHS "investment with reform" from the public purse into the coffers of the financiers, privateers and health industry monopolies.

With an endless supply of sick people and an aging population, the "healthcare providers" have a guaranteed "market", provided the government is in their service and not in the service of meeting the claims of society for a universal decent health service available to all at the highest standard. It is no wonder that the direction the government is taking the NHS, far from solving the issue of providing funding for healthcare, is leading to a "budgetary crisis".

Care UK, highlighted below, is by no means the biggest fish in the healthcare provider pond, but it has recently published its results and illustrates the growth of the private sector in hospitals, health clinics and care homes.


Care UK

Care UK, according to its publicity is "a leading independent provider of person-centred care to a broad spectrum of service users throughout the UK".

It enthuses: "Working in close partnership with local authorities, PCTs and NHS Trusts, we draw on our extensive experience and expertise to deliver highly specialised tailor-made service solutions including residential, community, acute and primary care. We operate 90 community-based care homes and independent hospitals supporting older people, those with learning disabilities, mental health problems and children. Every week we supply over 60,000 hours of support to people in their own homes. We have also been contracted to build and operate NHS treatment centres in Trent and Plymouth. In addition, we operate a range of primary care services including a GP out-of-hours service in Essex. We employ over 8,500 staff."

A financial analyst report says: "Full year results today cheered the market with a healthy rise in its dividend. The shares have had a good run since early October and were up again today, adding 4.75p to 451.75p. The company is hoping to get more contracts from the public sector in future."

The company reported pre-tax profits for the year to September of £12.5m, up from £10.7m last year with sales up 20.3% to £169.2m. The board has increased its final dividend by 9.5% to 2.3p, giving a full-year payout of 3.33p.

John Nash, Chairman of Care UK, commented: "Care UK has continued to strengthen its reputation as an innovative and reliable partner working across a range of health and social care services. Relationships with customers, on both local and national levels, have been further enhanced by our excellent service implementation and development. "The breadth of solutions that we are able to deliver is becoming increasingly important as the public sector adopts a more integrated approach across health and social care. "Our strong base of contracted income, together with an encouraging pipeline of new projects, underpins group prospects for the medium term. Beyond this, the Board is highly encouraged by the strong commitment of Government and the Department of Health to substantially extend the market for independent sector provision of NHS services."

The company report states that a key characteristic of Residential Care is that around 75% of the 2,567 beds are contracted for the long term by public sector commissioners. "This business model provides for a high degree of income visibility and, therefore, resilience for the group."

The company’s Clinical Care Services division was established in anticipation of the Department of Health’s strategy to "reform" the provision of both primary and secondary care services and the company says that it believes "that this will continue to result in a strong flow of opportunities for Care UK over the next few years. From a standing start, Care UK is now well established as a leading player in this emerging market."

It continues: "As models of healthcare change, shifting from an emphasis on hospital treatment to primary care delivered in community settings or at home, our Clinical Care Services strategy is to develop a range of services across the acute hospital and primary care continuum. Where required, we have formed consortia and joint ventures to provide the complete range of clinical competence and credibility necessary for optimal success.

Partnership Health Group ("PHG"), our joint venture with Life Healthcare of South Africa, is focussed solely on Independent Sector Treatment Centres ("ISTCs") and was the most successful bidder for the first wave of projects, winning four projects with a market share of over 15%. The second wave of projects is now being procured and is valued at around £600m per annum.

"In parallel, the Department of Health launched a second wave of central procurement for diagnostic services in July 2005, to include imaging, physiological testing and diagnostic endoscopies. Care UK has formed a bidding consortium that includes Alliance Medical, Europe’s largest imaging service provider, and a number of NHS Foundation Trusts to provide facilities and to support the various treatment services.

"A Government White Paper is in consultation looking at care outside hospitals, with particular focus on primary care, or General Practitioner (‘GP’) services. In anticipation of substantial change in this market over the next five to ten years, Care UK is seeking to establish relationships and exemplar services ahead of expected substantive procurement. To date, the group has won contracts for primary care walk in centres, out of hours services and prison healthcare."

The PHG contract was signed in October 2005 for a new treatment centre at the Goodmayes Hospital in North East London, was signed in October 2005 and is also now under construction with services due to commence in early 2007. This treatment centre will provide a range of services for PCTs in Barking & Dagenham, Havering, Redbridge and Waltham Forest.

Both of these contracts will be partially staffed through secondment of NHS consultants, anaesthetists and nurses, for which detailed secondment agreements have been negotiated. The report states: "As a number of the projects being procured in the second wave of ISTC procurement will include the secondment of NHS staff we are pleased that PHG has now gained valuable experience of the different features of this type of service model."

It continues: "The Department of Health commenced procurement in September 2005 for a further wave of ISTC project opportunities. Generally the projects contained in the second wave are larger than in the first wave and there are a number of interesting service developments. Whilst the first wave of projects was underpinned by volume and asset buyback commitments, the second wave is expected to offer reduced commitments over time. The view is that the market opportunity that will be generated by the patient ‘free choice’ policy implementation will afford sufficient demand to underpin investment.

The company also states: "Given the level of market interest, we were particularly pleased to be selected to negotiate two of the planned seven primary care walk-in centres for commuters and the local workforce, at London Victoria and Newcastle-upon-Tyne. We have made good progress towards financial close on these projects, with suitable properties having now been identified for both."

Preliminary Results for the year ended 30 September 2005

Highlights for the year

Year ended 30 September 2005



% Change





Turnover 1



+ 20.3%

Operating profit 12



+ 20.0%

Profit before tax 2



+ 17.5%

Profit before tax



+ 16.4%

Basic earnings per share 2



+ 16.6%








+ 9.5%




+ 9.2%

1 Including joint venture

2 Before goodwill amortisation of £1,279,000 (2004: £985,000)

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