More and more PCTs are looking to integrate their community provider operations with an existing hospital or mental health provider. This can be traced back directly to David Nicholson’s comments in an address to the NHS Confederation in October 2009 when he speculated that integration between community and acute providers, which has long been taboo in the NHS, should be given serious consideration. Allied to the requirement set out in the 2010/11 Operating Framework that, by 31st March 2010, PCTs must have agreed proposals for the future organisational form of PCT-provided community services, this has provided a real stimulus to such solutions.
The underlying motivations for vertical integration vary from PCT to PCT: some believe that it will be a quick and cheap way to meet the Operating Framework obligations; some think that it will buy them time or will save them money. Others believe it will deliver more integrated care or even help shore up weak local secondary care provision, especially where a local hospital is having trouble achieving Foundation Trust status.
In our view, securing better integrated care and/or achieving cost efficiencies are the only truly persuasive reasons for PCTs to seriously consider vertical integration, at least from a patient and taxpayer perspective. Achieving such goals is also likely to help rather than hinder the PCT deliver its strategic commissioning priorities in what ought to be, at its heart, a commissioning-led process.
A number of different vertical integration models are possible. The simplest model and the most popular is where an existing NHS provider acquires the PCT’s community health business. Other models include merging elements of primary, secondary and community care into a newly created joint venture entity or of creating new community-based entities by pooling, in their entirety, the operations of the local secondary and community care providers.
Depending on the model chosen, there are different methods of implementation. In general though, the basic choice for the PCT is between bilateral negotiations on the terms of the transfer with a single preferred provider or of running some form of competition to identify the preferred partner and secure the terms of transfer.
We argue that PCTs can derive substantial benefits from competition on both cost and quality grounds, but this does require greater up-front time and effort in structuring the deal. This may be off-putting for some PCTs although too few, in our view, are giving it sufficiently serious consideration. It is also somewhat perverse because we believe that much of the work that a PCT needs to do in defining and agreeing the terms of the transaction is unavoidable. It will be done therefore, either when the PCT still has choices to make (through competition) or at a time when the PCT has no feasible alternative – never a pleasant place to be when negotiating change.
This paper also highlights that in each case, the externalisation exercise involves a PCT entering into detailed negotiations, whether during competition or in bilateral discussions, about the terms of the transfer and that there are two distinct contractual elements to the externalisation exercise that need to be carefully considered by the parties. These are:
- The Business Transfer Agreement (BTA) – in other words the transfer of the PCT’s provider services to the new provider
- The Medium Term Service Agreement (MTSA) – in other words, the placing of the underlying services agreement for the ongoing provision of community health services which the new provider will be under contract to supply.
The paper notes that some PCTs will be able to secure a good deal for taxpayers, patients and staff if they select vertical integration as the path for their community services. However, they need to be doing this for sound, service transformational reasons, and they should work hard with their preferred partner to design an integration model that will deliver the desired benefits, preferably, in our view, in advance of the transfer.
The paper concludes by suggesting that PCTs are under-estimating the amount of work that they need to do to define their ‘transformed’ requirements, are being under-ambitious in the level of innovation and service improvement they are expecting the new, integrated suppliers to offer as a result of the externalisation process and are under-valuing the contribution that competition between potential providers could make.
This paper analyses the implications of vertical integration for community health services in England. By ‘vertical integration’ we mean the merger, acquisition or integration of community health services with or by an NHS acute or mental health services provider. For the avoidance of doubt, this paper does not focus on models of vertical integration between community and primary care providers.