Response to consultation: Oversight of NHS-controlled providers - DAC Beachcroft

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Response to consultation: Oversight of NHS-controlled providers

Published 13 octubre 2017

Dear Sirs,

Response to consultation: Oversight of NHS-controlled providers

We write to respond to the consultation document issued by NHS Improvement (NHSI) in respect of its oversight of NHS-controlled providers.

DAC Beachcroft LLP is a full-service law firm with offices throughout the UK and internationally; we are a market-leader in the UK health sector. We advise many NHS and independent sector healthcare providers, as well as commissioners and other types of organisations.

Context

We have advised a number NHS trusts and foundation trusts ("Trusts") on the incorporation of wholly and partly-owned subsidiaries for a range of purposes, including to establish accountable care organisations and new care models, as well as the provision of services such as pathology, pharmacy, primary care and estate management.

Among other advice connected with subsidiaries we have advised Trusts on the governance and contractual arrangements through which they are able to ensure that both parent Trusts and their subsidiaries are compliant with regulatory requirements and good practice in respect of governance and related matters. As part of this we have advised Trusts on NHSI's likely expectations in respect of their oversight of subsidiaries, whether wholly or partly-owned, and when doing so we have highlighted the likelihood that NHSI would in due course increase its regulatory oversight of certain subsidiaries. This reflects the increasing use of such models as a means of innovation including, but not limited to, in the provision of healthcare services.

Rationale for increased regulation of NHS-controlled providers (Question 3)

We agree that where an entity is incorporated to provide healthcare services (which are the responsibility of the trust parent(s)) it is appropriate for that entity to be regulated by NHSI to the extent necessary. 

At its best regulatory oversight should ensure that providers are offered guidance and support, and held to account so that they are well-governed and therefore services are of high quality, risks are managed and providers are financially secure. In our view it would be preferable to achieve this through regulation of trust parent(s) but we recognise that, as described in the consultation document, there are limitations which render this difficult. As an alternative approach it seems reasonable to us that NHSI should use the (amended) NHS Provider Licence ("Licence") as the basis for its increased regulatory oversight of NHS-controlled providers.

Scope of regulatory oversight and requirements (Questions 1, 4, 5, 7 and 8)

Whilst we agree that it is appropriate for NHSI to regulate NHS-controlled providers to some extent it is important that regulatory oversight is proportionate to: the status of those provider entities as controlled by but legally independent of Trusts; the services that the providers offer; and any broader commercial purpose for which they are established by the Trusts concerned.

A number of Trusts have incorporated subsidiaries to provide healthcare services to their patients but also to other NHS and non-NHS customers, the latter generating profit which is transferred to the parent Trust for investment in NHS services. This model is adopted partly because these providers are at present free of a significant proportion of the legal, regulatory and policy requirements that attach to Trusts, to which significant overhead costs are attached, and can therefore operate at a lower cost than is possible for Trusts. This is key to the providers' ability to compete in commercial markets and therefore to generate the profit we describe above.

We are aware that even where providers are not established to provide services to third-party customers, Trusts incorporate them to introduce a more commercial approach to service provision. For example, in these circumstances a provider may attract senior and experienced staff from the private sector to introduce (from that sector) innovation in services. It is sometimes necessary for providers to remunerate such individuals at higher rates than would be possible in the NHS; whilst such remuneration should be proportionate, providers regard higher rates of pay as appropriate if it enables them to improve services to patients or otherwise deliver benefits to the NHS.

The proposal to adopt the Single Oversight Framework (SOF) as the basis for NHSI's oversight of NHS-controlled providers is logical because it will align regulation of Trusts and their NHS-controlled provider subsidiaries. It is also logical to align the approach to enforcement action where that is necessary, although we recommend that NHSI provides guidance on this to NHS-controlled providers and parent Trusts (particularly where action in one may lead to intervention in the other). This is subject, however, to the likely material differences between the measures (of performance and compliance) that apply to Trusts and those that are likely to be relevant to NHS-controlled providers. The consultation document recognises this but we highlight it nevertheless as an area in which further work is likely to be necessary to make requirements clear to Trusts.

We recognise the logic of using the SOF as the basis for NHSI's regulatory oversight but in our view the extent of the other regulatory requirements which NHSI proposes to apply to NHS-controlled providers (which are listed on page 14 of the consultation document) is disproportionate. In our view NHSI's objectives could be achieved with significantly fewer requirements than it proposes to introduce. This applies to governance but also to other areas – for example, the proposal to introduce rules and caps in respect of expenditure on agency staff and consultants. Any proposal to introduce a cap on pay of senior staff (refer to our comment below on "All toolkits and good practice guidance) may impact the ability of NHS-controlled providers to attract individuals from the private sector (to which we refer above).

Compliance with the requirements is likely to increase the staff time and funds associated with NHS-controlled providers; this puts at risk NHS-controlled providers' ability to deliver efficiencies and innovation, and, where this is an objective, to generate profit for Trust parent(s) which is derived from services to other customers. And in our view the proposals do not reflect the status of some providers as commercial entities; many are owned by one or more Trusts but we are aware of providers that are owned partly by NHS organisations and partly by private sector shareholders. The proposals may be unacceptable to some private sector shareholders so may have the effect of discouraging future joint ventures which could be beneficial to the NHS.

The consultation states on page 14 that "All toolkits and good practice guidance" will apply to NHS-controlled providers, except where they apply only to NHS foundation trusts. We recognise that NHSI may not wish to amend and re-publish all such guidance documents but in our view NHS-controlled providers and their parent Trusts (who in many cases provide supports services to their subsidiaries) are likely to welcome a specific list of the toolkits and guidance that apply to NHS-controlled providers. Not only is this likely to be beneficial to Trusts but if NHSI publishes such a list it is likely to reduce the number of enquiries from Trusts to which it has to respond.

We would be pleased to discuss with NHSI the extent of regulatory oversight and requirements that we consider to be appropriate for NHS-controlled providers.

Definition of control (Question 6)

We note the definition of control that NHSI proposes to adopt when defining NHS-controlled providers. 

We recognise that there are some advantages in adopting option one, IFRS 10, but in our experience Trusts exert control over subsidiaries primarily through the means described in options two and three (which are similar in some respects) – for example, by appointing board members and through contractual arrangements (which define the governance structures that enable control in practice). In some circumstances arrangements such as these are required for compliance with procurement law. We also note that whilst it is important that NHS-controlled providers are financially sustainable it is not always the case that they are established by Trusts to generate profit; a service-providing subsidiary may be required only to break-even. In our view, therefore, option two is likely to be more meaningful and relevant to Trusts as a definition of control (although option three also has merit).

In connection with this point we highlight circumstances in which an entity is controlled partly by a non-NHS parent organisation, which the consultation envisages where it refers to joint ventures. Such an entity may not be, or may not be understood by a parent trust to be, within the definition of control which NHSI proposes to adopt. We recommend, therefore, that if option one is adopted (or even if options two or three are adopted) NHSI should provide supplementary guidance on this point for the benefit of Trusts.

Applications for the new Licence for NHS-controlled providers (Question 9)

We note that section six of the consultation states that (subject to the consultation) each NHS-controlled provider will be asked to revoke its Licence and to apply for a new one, including the additional condition. NHS-controlled providers are likely to find it more efficient to be issued with a new Licence so that they do not need to complete the application process. We recommend, therefore, that NHSI should reconsider its proposals in this respect.

Conclusion

We hope that this consultation response assists NHSI with the further development of its regulatory oversight of NHS-controlled providers.  Please contact Graham Lawrence in our Governance Advisory Practice (at glawrence@dacbeachcroft.com or 020 7894 6433) if you would like to discuss any of the issues which we have raised in this letter.

DAC Beachcroft LLP

Authors

Hamza Drabu

Hamza Drabu

London - Walbrook

+44 (0)20 7894 6411

Anne Crofts

Anne Crofts

London - Walbrook

+44 (0)20 7894 6531

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