Hinchingbrooke NHS hospital management contract "no longer sustainable", says private sector operator

In a statement to the London Stock Exchange (LSE), Circle said that it planned to exercise its contractual right to terminate its franchise to operate Hinchingbrooke Health Care NHS Trust in Huntingdon, Cambridgeshire in the event that it had to make "support payments" of over £5 million to the hospital over the lifetime of the contract. These costs have already reached around £4.84m, the company said.

Circle's chief executive, Steve Melton, said that the company's decision was based on a "combination" of factors; including funding cuts and the "unprecedented" increase in attendances at hospital accident and emergency units.

"We also believe that inconsistent and conflicting regulatory regimes compound the challenge for acute hospitals in this environment," he said.

"We have entered into discussions with the Trust Development Authority, and the patients of Huntingdon are our absolute priority in these talks," he said.

Healthcare expert Barry Francis of Pinsent Masons, the law firm behind Out-Law.com, said that the apparent failure of the contract "should not be seen as a failure of models involving private sector provision", but rather "the need for any model to be structured and costed to recognise the ever-changing needs in healthcare provision".

"Indeed, the exit arrangements described show that there was a balance of risk with the franchisee making substantial payments to the NHS," he said.

"Perhaps partnering is a more viable model in many cases. The underlying reality is that the NHS is responsible for ensuring that a health service is delivered, and I am sure that responsibility will be discharged," he said.

Hinchingbrooke was one of the first hospitals to be inspected under the Care Quality Commission's new procedures last year, and provisional findings were released in September. Although the final report has not yet been published, Circle said that it expected the results to be "unbalanced" and that the company would "disagree with many of its conclusions".

Circle took over the management of Hinchingbrooke in February 2012, in the first example of private sector provider becoming responsible for running an entire NHS hospital. The deal, which was worth £31m in franchise payments once the hospital returned to profit, required Circle to assume responsibility for an estimated £39m in existing debt and the financial risks of making the hospital more efficient. Staff and assets remained with the NHS throughout, while clinical and non-clinical services were provided by the NHS trust under Circle's management.

In a report into the arrangements six months into the agreement, public spending watchdog the National Audit Office (NAO) described Circle's projected £311m savings over the life of the franchise as "unprecedented". In its market statement, Circle said that the "operational landscape" for NHS hospitals had changed significantly since the franchise procurement process began in 2009, while public funding for the hospital had fallen by more than 10% over the past financial year.

"To maintain the standards that patients deserve will therefore require substantial investment for the foreseeable future, on top of the £5m we are contractually obliged to provide," the company said. "We believe that solving the problems facing Hinchingbrooke can only be achieved through joined-up reform in Cambridgeshire across hospitals, GPs and community services. We fully support the vision of NHS England chief executive Simon Stevens' 5-year 'forward view', but these proposed reforms are too far into the future."

The company said that the hospital, which had faced closure before it took over, had been "transformed" under its management.

"Now, it has won a number of awards," it said in its market statement. "It consistently hits the most important outcome measures, including low mortality rates, excellent patient feedback, and meeting all major waiting time targets. In the first two years of the franchise, Circle made financial savings significantly above the NHS average."

Under the terms of the contract, Circle could be required to make a final £160,000 support payment to the hospital, taking it up to the £5m contractual cap. The company would also be required to cover "termination and re-procurement costs" up to a maximum of £2m, it said.