UK Healthcare PPP Model: Insights from the NHS and Implications for Global Public-Private Partnerships

On December 4, 2014, the National Development and Reform Commission (NDRC) released the “Guiding Opinions on Promoting Public-Private Partnerships” (hereinafter referred to as the “Opinions”), which explicitly stated: “The Public-Private Partnership (PPP) model is primarily applicable to public service and infrastructure projects for which the government bears responsibility for provision and which are suitable for market-based operation. PPP models may be implemented in municipal facilities such as gas supply, power supply, water supply, heating, sewage treatment, and waste disposal; transportation facilities including highways, railways, airports, and urban rail transit; public service projects in healthcare, tourism, education and training, and health and elderly care; as well as projects related to water conservancy, resources and environment, and ecological protection.”

With the introduction of a series of policies encouraging social capital to invest in healthcare, this guidance on the Public-Private Partnership (PPP) model is regarded as another significant policy initiative by the government to promote privately run medical institutions. However, there is considerable controversy among professionals regarding whether the PPP model is suitable for the healthcare industry. As many regions have successively introduced policies to advance PPPs in the healthcare sector, the debate over this issue has become increasingly intense. Due to the lack of extensive domestic reference experience in this field, most arguments against the PPP model focus on existing international experiences. Nevertheless, these criticisms rarely provide detailed data and analysis to clarify which countries’ experiences are being referred to as “international experience,” nor do they adequately explain what lessons these experiences offer for China’s implementation of the PPP model.

In this context, this report will explore how the NHS system utilizes the Public-Private Partnership (PPP) model and whether this model leads to adverse outcomes such as excessive hospital debt burdens.

I. Overview of Public-Private Partnerships in the UK’s NHS System

In the United Kingdom, public-private partnerships in hospitals primarily adopt the Private Finance Initiative (PFI) model, which was first proposed by the UK government in 1992. Under the PFI model, government departments identify projects required to meet societal infrastructure needs and, through a bidding process, grant the rights to construct and operate these public infrastructure projects to private sector entities that secure the concession. At the end of the concession period (typically around 30 years), the private sector transfers the operated projectReturn to the government free of debt., and to recover costs by charging service fees to government departments. After the Labour Party government led by Tony Blair came to power in 1997, a series of amendments and adjustments were made to the relevant legal framework, and the PFI model began to be widely applied in earnest.

In PFI projects, the government no longer purchases construction works but instead procures services. The project entities in PFI schemes are typically consortia of domestic private enterprises, reflecting the strength of private capital. The UK government encourages long-term debt and equity investors to participate in PFI projects; consequently, the project operator often serves as the primary investor, taking the lead in both the construction and operation of the entire project.

A series of mechanisms for evaluation, audit, reflection, and review are in place during the implementation of Private Finance Initiative (PFI) projects. Among the numerous external oversight bodies, the National Audit Office (NAO) of the United Kingdom exerts the greatest influence. In addition, institutions such as the UK Parliament, various universities, and think tanks conduct extensive research on PFI projects. Effective external supervision has become a significant factor driving the rapid development of PFI projects.

Overall, the UK’s Private Finance Initiative (PFI) has yielded significant results, generally improving the quality of infrastructure and public services, driving transformation across numerous industries, and accelerating reforms in governmental governance. By integrating a PFI implementation mechanism centered on the core principle of “Value for Money” (VfM), the UK government provided private capital with stable policy expectations and investment returns, thereby stimulating substantial inflows of private capital into the UK’s infrastructure and public services markets.

However, the Private Finance Initiative (PFI) has been subject to considerable controversy and drawbacks concerning project costs, financial transparency, investor returns, and risk allocation. In light of these issues, the UK government optimized the PFI framework in 2012 by introducing the PF2 model. The hallmark of the PF2 model is that the government takes an equity stake by contributing part of the capital, joins the project company’s board of directors to participate in project decision-making and implementation, thereby enhancing communication and collaboration with private sector partners throughout the project lifecycle.

Compared with the PFI model, the PF2 model has three significant differences:

First, the government would assume more risk, thereby reducing the high returns demanded by the private sector through risk premiums. By increasing the equity ratio and participating in projects as a minority shareholder, the UK government can both alleviate financing pressures on private investors and mitigate potential project risks.

SecondTo address the time-consuming and labor-intensive nature of the bidding and procurement phase in PFI projects, the PF2 model has significantly improved this process: first, by implementing centralized procurement leveraging the professional expertise of central government departments; and second, by streamlining, simplifying, and standardizing procurement procedures.

3.The PF2 model reduces costs by simplifying project planning and promotes the use of standard PF2 contracts to streamline cost estimation processes for government departments. Additionally, the PF2 model has introduced several measures to enhance transparency in the project tendering process.

II. PFI: The Main Culprit Behind the NHS Public Hospital Debt Crisis?

In discussions on whether the PPP model is applicable, the most frequent criticism is that the high interest rates associated with private capital will increase public hospitals’ debt burdens, and even slight missteps could trigger a full-blown debt crisis.

In the United Kingdom, the public-private partnership model has ushered in new developments for NHS public hospitals. However, in November of last year, the UK National Audit Office released a report on the financial sustainability of UK public hospitals, explicitly pointing out that these hospitals currently face significant debt risks. So, are the PFI and PF2 models indeed the primary factors contributing to the debt crisis in NHS public hospitals?

As PF2 was only introduced in 2012, many projects have yet to be completed; therefore, current data cannot effectively demonstrate the actual impact of the PF2 model. In light of this, this report will focus on analyzing the impact of the PFI model on the debt of NHS public hospitals.

1. Introduction to the NHS Public Hospital SystemWithin the NHS system, the concept of a “public hospital” differs from its understanding in China. Specifically, public hospitals in the NHS can be categorized into two types: NHS Trusts and Foundation Trusts. The NHS Trust model was established under the 1990 NHS reform legislation, which integrated specialized hospitals within the then-NHS system to form numerous general hospitals designated as NHS Trusts. NHS Trusts are directly managed by the UK Department of Health and are required to achieve annual financial balance.The operational model for Foundation Trusts was introduced in 2002. The distinguishing feature of this type of public hospital is that it is no longer directly managed by the Department of Health; instead, local residents determine the hospital’s operational model. Foundation Trusts have their own management boards (commissioning boards), elected by residents in their respective areas. Financially, Foundation Trusts may retain their surpluses and are not required to balance their budgets every year, provided their debt levels comply with relevant regulatory requirements.Since 2004, the UK government has formally promoted the Foundation Trust model, initiating large-scale reforms in subsequent years to convert many NHS Trusts into Foundation Trusts. To date, there are 98 NHS Trusts and 147 Foundation Trusts within the NHS system.

2. Manifestations of the Debt Crisis in NHS Public Hospitals

(1) Surplus and Deficit Status of NHS Public Hospitals

According to statistics from the National Audit Office (NAO), the total deficit of all NHS organizations rose from £297 million in 2012 to £743 million in 2013. For hospitals that maintained a surplus, the surplus amount decreased in 2013 compared with 2012, with the average surplus falling from £4 million to £3.6 million. Based on NAO projections as of June 30, 2014, NHS Trusts were expected to incur a net deficit of £404 million in 2014, while NHS Foundation Trusts were projected to have a net deficit of £108 million.Focusing first on NHS Trusts: As shown in Figure 1, 18 hospitals shifted from profitability to loss-making status in the 2013–2014 fiscal year, and none managed to turn losses into profits. In terms of total debt, an additional £340 million in debt was accumulated within just one year. More notably, the entire NHS Trust system had already become insolvent during the 2012–2013 fiscal year. Although the shortfall was reduced from £150 million to £100 million in 2013–2014, there is no evidence to suggest that this reduction in overall debt is sustainable.

Figure 1: Comparison of NHS Trust Financial Positions in the 2012–13 and 2013–14 Fiscal Years

Source: NAO Analysis of Department of Health and NHS Trust Authority Development Data

Turning to NHS Foundation Trusts: As shown in Figure 2, similar to NHS Trusts, NHS Foundation Trusts saw their total debt increase by £630 million in the single year of 2013–2014. During this period, 26 hospitals shifted from profitability to loss, while only five managed to turn losses into profits.

Figure 2: Comparison of the Financial Status of Foundation Trusts in 2012-13 and 2013-14

Source: NAO Analysis of Monitor Data

(2) Changes in the EBITDA Metric

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a key indicator for assessing the financial sustainability of the NHS. Generally, an EBITDA margin exceeding 5% indicates that an organization’s financial position is relatively stable. According to statistics from the National Audit Office (NAO), the EBITDA margins of NHS public hospitals have been declining over the past four years: the average EBITDA for NHS Trusts was 5.4% in 2012, dropping to 4.2% in 2013; for NHS Foundation Trusts, this figure fell from 5.7% to 5.0% during the 2012–2013 fiscal year. By the end of 2013, 70 (48%) NHS Foundation Trusts had EBITDA margins below 5%.

As shown in Figure 3, there were significant differences in the EBITDA margins among different hospitals. Moreover, compared with the previous year, the EBITDA metrics for both NHS Trusts and Foundation Trusts declined in the 2013–2014 fiscal year. Within a single financial year, many Foundation Trusts fell below the 5% warning threshold.

Figure 3: Average EBITDA of NHS Trusts and Foundation Trusts from 2010–11 to 2013–14

Source: NAO analysis of NHS Trust Development Authority and Monitor data

(3) Expectations for Financial Status

According to a survey conducted in March 2014 by the UK’s authoritative think tank, The King’s Fund, hospital finance directors held pessimistic fiscal outlooks for the coming years, with significantly heightened concerns about achieving budgetary balance.

Figure 4: Projected Financial Position for the 2014–15 and 2015–16 Fiscal Years

Source: Appleby et al. (2014b) in King's Fund, Financial Failure in the NHS - What can be done and how to best manage it

Note: This survey covered 74 of the 249 NHS hospitals in March 2014. The survey questions were primarily directed at hospital executives, asking, “How confident are you that your hospital will achieve financial balance in the 2014–15 and 2015–16 fiscal years?”

3. Causal Analysis of Public Hospital Debt and the PFI ModelBased on the above analysis, it is evident that the debt problem of NHS public hospitals is indeed severe. However, can we attribute the current debt crisis to the implementation of the Private Finance Initiative (PFI) model? It is understandable that an observed social phenomenon may result from multiple different influencing factors, which constitutes the inherent challenge in social science research. Due to the absence of controlled laboratory variables, all hypotheses in social sciences face difficulties in verification. This report does not attempt to comprehensively explain the causes of debt in NHS public hospitals, but rather aims to explore whether the PFI model is the primary cause of the debt crisis. According to statistical data from the National Audit Office (NAO), among public hospitals participating in PFI projects, higher capital costs arising from PFI correlate with poorer financial performance. In contrast, among hospitals not participating in the PFI scheme, there is no correlation between capital costs and financial status.

Figure 5: Relationship between the financial status and capital expenditures of hospitals participating in the PFI program

Source: NAO Analysis of NHS Trust Department of Health Data

However, the correlation between capital costs and debt status does not indicate that the Private Finance Initiative (PFI) model is the most significant cause of the debt crisis in NHS public hospitals; rather, it merely demonstrates that PFI does impose certain pressures on the fiscal balance of public hospitals, though such pressure does not necessarily result in an inability to balance revenues and expenditures.

It should be noted that the deteriorating debt situation of NHS public hospitals emerged after the 2009 financial crisis. Due to reductions in government fiscal spending, investment in the healthcare sector inevitably decreased accordingly. According to research by the World Health Organization Regional Office for Europe, all European countries reduced fiscal support for healthcare in the aftermath of the financial crisis, leading to increased debt levels among healthcare institutions. The situation in the United Kingdom was more distinctive compared to other European nations, as Sir David Nicholson, then Chief Executive of the NHS, introduced the well-known “Nicholson Challenge” (hereinafter referred to as the “Challenge”) amid the impact of the financial crisis.

“The Challenge” is a reform initiative aimed at controlling NHS expenditure, requiring the entire NHS system to save a total of £20 billion over the four-year period from 2011 to 2014. The reform sparked considerable controversy upon its introduction, with many NHS healthcare professionals and UK media outlets warning that this “Challenge” would severely disrupt the normal functioning of the healthcare system. A key concern was its impact on the financial status of public hospitals. In discussing the impact of the “Challenge” on the finances of public hospitals with VCBeat, Sir David Nicholson acknowledged that such effects were inevitable, as overall spending cuts would inevitably exert significant pressure on public hospitals.

The actual impact of the “Challenge” on the debt levels of NHS public hospitals can be illustrated by comparing the statistical data published by the National Audit Office (NAO) in 2012 and 2014. As shown in Figure 6, during the first year of the “Nicholson Challenge” (the 2011–2012 fiscal year), although some public hospitals incurred significant losses, only a small proportion of NHS public hospitals were in debt overall. According to the data released by the NAO in July 2012, the debt of NHS Trusts amounted to £177 million in the 2011–2012 fiscal year, while that of Foundation Trusts stood at £130 million. The average debt of all public hospitals operating at a loss was £9.9 million, and 51 public hospitals reported profits of less than £1 million.

Figure 6: Financial Status of NHS Public Hospitals in the 2011–12 Fiscal Year

As shown in Figure 6, only a small fraction of hospitals failed to achieve fiscal balance during the 2011–2012 financial year. However, a comparison of Figures 1 and 2 reveals that by the second year of the “Challenge” (the 2012–2013 financial year), the financial positions of NHS Trusts and Foundation Trusts began to deteriorate significantly, with this worsening trend becoming even more pronounced in the third year (the 2013–2014 financial year). This comparative data corroborates Sir Nicholson’s earlier inference regarding the impact of the “Challenge.”

III. Report Conclusion

In summary, although the Private Finance Initiative (PFI) model may make it difficult for NHS public hospitals to maintain a balance between revenue and expenditure when capital costs are high, this correlation does not prove that the emergence of large-scale debt in NHS public hospitals is due to the application of the PFI model. Against the backdrop of the post-financial crisis era, coupled with the “Challenge”’s strict control over healthcare expenditures, the debt level of NHS public hospitals has inevitably increased.

[Author Biography: Xia Yuqing, Researcher at the VBInsight Research Center, holds an LLM from Durham University]

This article is republished by VCBeat with authorization from Health界. The views expressed are those of the author alone and do not represent the position of VCBeat.