Feature / A question of ownership

Do hospitals need to own their own buildings? And do they make the most of asset disposal? These questions have been asked before, but, as Richard Darch explains, they are now commanding renewed interest  

There is no doubt that even in a time of financial and economic constraint, the pace of change and development in UK healthcare continues unabated. Some of the changes being demanded by government and the public, such as access to new technologies and care closer to home, require new types of infrastructure, which brings its own pressure. 

A prime example is vertical integration, where, for instance, one organisation takes on responsibility for all services along a particular patient pathway – an idea that has gained backing from leaders at the Department of Health. While not necessarily about acute ‘takeovers’ of primary care trust provider arms, vertical integration could in these circumstances lead to services being moved out of hospital and into the community.

There are asset and infrastructure implications of such a move, both in terms of securing new and more appropriate facilities and in disposing of surplus hospital capacity. Put simply, the existing capital procurement routes are inadequate to support the systemic changes occurring in the NHS.

What NHS trusts require is access to specialist expertise that can manage the property aspects of rapidly changing models of care. They need a partner that can deliver best value from disposals as well as provide value for money in new developments through transparency and open market tendering of the design and construction, and potentially the facilities management of new schemes.

Such a partnership – a joint venture between the NHS trust and private sector partner – could align incentives and give access to property expertise covering the full spectrum of funding (through access to capital), disposal, redevelopment of surplus estate, design, construction and property management.

Significant investment has been made in new healthcare buildings over the past 10 years, with the UK enjoying the largest hospital rebuilding programme in the world. Arguably, this has almost sated  the country’s need for whole new hospital developments. Most major UK conurbations have benefited and are now served by modern hospital facilities.

Changing needs

But new types of development will now be needed. The changes in the way healthcare is delivered will potentially demand very different facilities to deliver specialist care, extended primary care, diagnostics, elective treatment, therapy, intermediate care and rehabilitation.

The buildings needed to deliver this comprehensive range of services need new thinking and planning. It may be inappropriate for such buildings to have a single occupier providing all services. Instead they could be seen more as ‘health malls’ with a range of alternative providers taking space and providing services and care. The procurement route for such facilities needs careful thought, but the current routes may well be unsuitable.

There is a related issue. As we move into a health service with different pathways and services provided in different settings, large parts of the existing healthcare estate – valued at £32bn in 2005 at existing use value – will become redundant or unfit for purpose. Although the NHS adopts much good practice in terms of the sale of surplus estate, the development gain achieved following the sale through change of use or redevelopment has, historically, been taken wholly by the private sector developer.

Managing the retraction and disposal of estate will arguably be more of a challenge than procuring new buildings. Furthermore ensuring that best value is achieved through disposals will require skill sets that are not core to hospital and healthcare management.

New methods of procurement and disposal of surplus assets will be the key issues in refreshing the NHS estate.  The private finance initiative (PFI) has been used to deliver most of the whole-hospital redevelopments in the past decade. For some, the new on-balance sheet treatment of such schemes makes them less attractive for future developments. But even without this accounting wrapper, the initiative is a poor fit for projects that will be required. 

Campus developments

Hospital systems are focusing more on master planning, estate development and rationalisation and this is leading to more campus style developments – providing diagnostic or urgent care centres, say. Often these plans are to be delivered over a long timescale with a phased approach dependent on affordability and the support of patient choice.

PFI simply does not suit this strategy well, either for the public or the private sector. The schemes are smaller, which makes it difficult to support the critical mass of bidding cost. And a series of 25- or 30-year concessions procured by a single hospital is a costly and inflexible way of managing change. 

The local improvement finance trust (LIFT) initiative was set up to accommodate smaller scale developments – at least in primary care. But it may not provide the flexibility the acute sector will need in future. Although LIFT presents a more ?exible vehicle on the development side, LIFT companies are not structured to manage the large-scale disposal of assets and the realisation of development gain. As a development vehicle, LIFT is supporting the modernisation of the estate in some areas. But it arguably still applies an inflexible, structured finance (PFI) approach to funding schemes.

LIFT also remains focused on individual buildings and assets rather than providing a mechanism to deliver value from wholesale estate rationalisation. The LIFT companies themselves do not have the organisational structure in place to manage the wider estate; particularly to be able to address the strategic changes to support service recon?guration.

This is not to say the private sector partners and investors in LIFT would not be interested in pursuing the joint venture model outlined here. What is needed is a new type of partnership that brings private sector expertise into the management, development and disposal of estate, using that expertise to deliver value back into the healthcare system.

The property management and development industry in the UK is well developed. Many sectors in the UK economy have recognised the value of allowing assets to be managed by joint ventures or private sector partners that focus on delivering value from property, leaving firms to concentrate on their core business. Banking, retail, hotel and leisure have all moved away from owning property.

There is no reason why this could not work in the NHS, creating a new type of public-private partnership that benefits from the wealth of private sector expertise in property management and development, while allowing NHS bodies to focus on healthcare. By being responsible for raising senior debt finance for new developments, the private sector partner will also be able to access large property funds, explore alternative investment structures such as real estate investment trusts (REITs) as well as accessing traditional bank lending.

The inclusion of ongoing estate and facilities management can be determined venture by venture, with provision by the healthcare or hospital operator or the private sector supply chain. Such a decision should be based on local circumstances, availability of workforce and value for money criteria.

Such a venture – first explored in a Social Market Foundation discussion paper* published in 2007 – would be a true partnership with clear delineation of expertise. There are big benefits for the NHS: it would get up-front cash for its disposals but could also look forward to a half share in future profits from assets that have been developed and sold.

Clearly, the formation of such partnerships will need to ensure value for money. Any NHS body would also need to be protected so it could continue to operate from sites at the end of any lease through pre-emption agreements.

This is not far-fetched. A similar model has already been set up by the London Borough of Croydon in a joint venture with John Laing. Under such a system, hospital and healthcare systems would continue to be property owners through a stake in any joint venture. And healthcare delivery on site could be protected by using a buy-back option. Tried and tested approaches for estate valuation would provide additional safeguards.

Healthcare needs high-quality buildings run professionally and located in the best place for patients. The model proposed here may seem radical for healthcare but exists in other sectors. Breaking the link between owning the buildings and providing the service would have consequences (some unintended) and disadvantages. But many providers and developed healthcare systems could use this model to create imaginative ways of providing care.