Outsourcing will not be the panacea for the NHS funding crisis
Source: NHE Jan/Feb 17
Vivek Kotecha from the Centre for Health and the Public Interest (CHPI) considers the argument for and against greater outsourcing in the NHS.
In England, a recent addition to the list of Christmas traditions (mulled wine, Christmas pudding, carols and crackers) seems to be an annual NHS winter crisis. The fear is that that what was once only a winter crisis is at risk of becoming a year-round fixture, exacerbated by the £22bn shortfall between NHS funding and the cost of meeting healthcare needs by 2020.
To address these concerns, England has been split into 44 geographical ‘footprints’ and in each one a team drawn from hospital trusts, CCGs and local councils, assisted by staff from NHS England’s regional teams and planning consultants from the private sector, have published sustainability and transformation plans (STPs). These aim to set out how they will provide healthcare until 2020-21 whilst contributing their share of the spending cuts needed to meet the £22bn shortfall. The scale of the cost savings needed has necessitated ambitious proposals and rethinks of how healthcare is provided.
One option that will be considered to cut costs further is the contracting out of NHS services to independent providers, the voluntary sector and local authorities. This seems likely because the use of outsourcing has steadily grown over recent years and many of the services that could be outsourced are non-tariff, i.e. there is no fixed price per treatment and so bidders can compete on price. In 2015-16, £12.2bn was spent on non-NHS providers (10.7% of the Department of Health’s expenditure limit), up from £4.4bn in 2005-06 (5.8% of the expenditure limit). The use of non-NHS providers has been growing since the 1990s, but the question is: does the NHS have the capability to effectively outsource services without compromising on quality?
Outsourcing is not the same as privatisation
It is important to note that outsourcing is not the same as privatisation. Privatisation is usually a complete and permanent transfer of the governance, control, and operating risk of an asset or service to a private provider, whilst outsourcing usually involves transferring responsibility for managing an asset (but not ownership of it), or providing a service to a private provider for a finite contractual period.
The arguments for outsourcing rest on the different incentives that operate in the private and public sectors. Studies by economists have found that outsourcing does generally lead to cost savings (estimates range from 6-20%), but these are of similar magnitude regardless of whether a private or public body wins the contract. This suggests that private firms aren’t necessarily more efficient than public bodies, which raises the question: how are these savings achieved?
One hypothesis is that quality of service is reduced in order to cut costs. There is evidence of this taking place and it is most common in contracts of services where quality is a subjective judgement and performance hard to monitor. For example, what counts as a high standard of cleanliness varies from one person to another. A recent study has found that outsourced cleaning services are associated with lower costs but a higher incidence of MRSA. This is an example of how savings made must be weighed against any impact on quality and safety.
Another hypothesis suggests that cost savings are achieved at the expense of workers’ pay and conditions. There is mixed evidence, but even if actual pay rates don’t drop, work intensity does increase and the likelihood of industrial accidents or repetitive strain injury – and injuries to patients or users of social care – goes up too.
For the NHS these are important considerations as healthcare is a service industry, and if quality is compromised directly or indirectly through overworked staff, the risk of harm to patients increases. The aim of outsourcing may be cost minimisation but not at the expense of service quality. So what are the characteristics of a successfully outsourced contract?
Outsourcing works best when contracts can be complete, i.e. when they account in advance for different future scenarios such as higher than expected demand; when they can clearly allocate risk between the contracting parties; and when they have goals that are realistic to monitor and enforce. A good example of an easy to outsource service is refuse collection. Generally, they are complete (most scenarios can be predicted, such as more homes to collect from, or adverse weather), risk can be easily shared (the collector is responsible for collecting the refuse), and it is easy to monitor (residents can see if their refuse is not being collected).
In healthcare it is a lot harder to meet these conditions. More complex tasks (such as providing GP services or community care) are now being outsourced. Quality is often hard to measure and enforce for these services. Analysis by the CHPI has shown that contracting out by NHS bodies is often not effective because they lack the expertise to negotiate terms, don’t have the capacity to monitor performance, and are often reluctant to punish failure due to a dependence on the provider because of a lack of alternatives. Worse yet, they might create incentives for providers of outsourced services to engage in fraudulent behaviour.
One example is Serco’s out-of-hours GP contract in Cornwall, where performance targets were falsified and the service was short-staffed. Performance was not scrutinised and when concerns were raised no fines were made by the NHS body for fear of making the service worse.
As 2017 progresses and STPs look to make up for the £22bn funding shortfall the temptation to outsource more services will grow. However, the increasing complexity and need for quality in the services not yet outsourced, along with the lack of monitoring capacity in CCGs and hospital trusts, makes the benefits of outsourcing less likely to materialise.
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