NHS reforms: the legacy of PFIs

NHS lanyards

Since unregulated healthcare markets are prone to failure and tend to result in underprovision, welfare states generally become directly involved in the provision and management of health services. Throughout much of post-war Europe, the public sector assumed the function of healthcare’s chief provider and left the private domain with only a marginal part to play in this sphere. This paradigm has been challenged for some time now. Most recently, the Coalition Government’s healthcare reforms have called for the private sector to get more involved in the provision of clinical services as it is believed that the increased competition will lead to efficiency gains and better value for money.

This proposal has been met with unprecedented levels of opposition in recent weeks; however, the private sector involvement in the NHS in itself is not an entirely new phenomenon. The private sector already performs a small number of elective operations and delivers a wide range of support services. In terms of spending; however, the Government’s reliance on private agents to fund, deliver and manage NHS infrastructure through Private Finance Initiatives (PFIs) is by far the most significant form of private sector participation in the UK health system. Even though the PFI contracts have little-to-nothing in common with proposals to extend the private delivery of NHS-funded services, the experience of the PFIs is not only likely to shape stakeholders’ attitudes towards the proposed reforms but could also have an impact on the way in which the reforms function in practice.

The proponents of PFI highlighted its potential to deliver cost-efficiency gains. However, the evidence for these gains in practice has never quite materialized. The available empirical evidence suggests the PFIs fail to generate better value for money in relation to all of their project phases. Even though the estimates tend to vary, the available data indicates that private finance is more expensive than public, given the public sector’s ability to borrow capital at cheaper interest rates. The costs of asset construction are higher in PFIs than in conventional public procurement while the build quality remains the same. The evidence on the ability to provide high quality support services (hospital cleaning, portering, laundry and security) shows some improvements in the services’ quality, which is, however, matched by increases in costs. And finally, there’s no evidence of higher degrees of technological innovation brought about by the private sector involvement.

Many observers are happy to interpret this data as evidence of the inherent undesirability of private sector participation in healthcare provision. It needs to be conceded that these findings do little to promote the appeal of the private sector participation in healthcare; however, one should be very prudent when universalizing the PFI experience across different types of contractual relationships. The PFIs differ greatly in both their nature and their scope from the kind of contracting that is proposed by the Coalition Government. Given the scale and the all-encompassing nature of PFIs, the high entry costs put off many potential bidders and limit the levels of ex ante competition. The complexity of these contracts in conjunction with the public authorities’ limited ability to monitor contractors’ compliance leaves the projects exposed to accusations of suboptimal performance in terms of cost-efficiency.

These threats are significantly reduced in relation to commissioning of clinical services. The higher number of bidders will contribute towards creating a much more competitive marketplace. In addition, the high specificity and the comparatively short term nature of these contracts should go a long way towards preventing the kind of contractual loopholes which have bedeviled PFI.

The challenge for the Government is that, although negative experiences of PFI should not impact upon views of greater private sector involvement in the provision of NHS care, they inevitably will do, adding to public and stakeholder scepticism about the power of the private sector to improve quality or efficiency.

There may be a longer lasting legacy from PFI as well. PFI contracts tend to be expensive and are notoriously inflexible, neither of which makes them a good asset for a provider seeking Foundation Trust status or simply the flexibility to compete in an increasingly competitive NHS market. Even small changes to a PFI contract can require exhaustive renegotiation, potentially deterring providers from trying new things.

The challenge that the PFIs pose to the current health service reforms should not be underestimated. The public is instinctively mistrustful of privately-delivered public services and the ongoing controversy about the value delivered by PFI will not help this. Equally – and perhaps more significantly – at the same time the Secretary of State is trying to liberate providers, many will continue to feel shackled by restrictive PFI contracts.