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The franchising of Hinchingbrooke Health Care NHS Trust

The National Audit Office has found that while the first private company to be awarded a franchise to run an NHS hospital has made early improvements in some clinical areas, a number of financial challenges remain.

Circle is the first private company to assume the management functions of an NHS Trust. Today’s report examines how the NHS East of England Strategic Health Authority designed, initiated and managed the project to franchise Hinchingbrooke Health Care NHS Trust, and highlights early lessons that can be learnt from the procurement process and creation of the franchise agreement.

The Trust developed a cumulative deficit of £39 million between 2004-05 and 2007-08, on an annual income of around £73 million. Before deciding to pursue an operating franchise, the Authority considered a number of options to address the Trust’s financial difficulties. In November 2011, the Authority awarded the ten-year franchise to Circle.

According to today’s report to Parliament, the Trust’s performance against standards for cancer and accident and emergency waiting times has improved since the franchise began in February 2012. However, the Trust had generated an in-year deficit of £4.1 million by September 2012, which was £2.2 million higher than planned to that point.

Circle plans to achieve £311 million in projected savings over the ten-year life of the franchise, which is unprecedented as a percentage of annual turnover in the NHS. However,  Circle is not committed to delivering the proposed savings initiatives submitted during bidding, such as reducing the lengths of hospital stays.  Most of the savings are expected to be made in the later years of the ten-year franchise.

The NAO found that, although the Authority assessed the reasonableness of bidders’ savings proposals, it did not fully consider the relative risks of bidders’ savings proposals. Assessing schemes in this way has the potential to encourage over-optimistic bids. However the agreement transfers all demand and financial risk up to £5 million to Circle.

The report also found that the Authority rejected a guaranteed payment towards the Trust’s cumulative deficit in favour of an ambitious bid that aimed to repay the debt in full. The cumulative debt stood at £38 million (at the end of March 2012).

"While Circle has made early improvements in some clinical areas, the company will have to generate savings at an unprecedented level. The final judgement on the value for money of the franchise will depend on how successfully Circle makes the projected savings and repays the cumulative deficit, while maintaining clinical quality. “This franchise agreement is the first of its kind in the NHS and it is important that lessons from this procurement process and early operational experience are used to improve future contracts."

Amyas Morse, head of the National Audit Office

Notes for Editors

  • Key facts :

    £38 million was the size of the Trust's historic deficit as at 31 March 2012

    £311 million is the saving Circle projects it will achieve over the ten-year life of the franchise

    £31 million is Circle's projected franchise fee over the ten-year life of the franchise (excluding any performance payments or deductions)

    £107 million was the annual income of the Trust in 2011-12

    £0 is the amount Circle will earn over the 10 year life of the franchise, unless the Trust achieves a surplus under its management

    £5 million is the amount of additional capital Circle has at risk if the Trust makes a deficit under its management

    £9.9 million is the current cost improvement plan target for the first year of the contract, which is greater than the £5 million savings anticipated in the bid

    160,000 is the size of the local population served by the Trust

    1,674 staff are employed by the Trust, as at 31 March 2012

    £39.8 million of working capital (cash) was given to the Trust by the Department in the form of public dividend capital between 2006 and 2008

  • Press notices and reports are available from the date of publication on the NAO website, which is at Hard copies can be obtained from The Stationery Office on 0845 702 3474.

  • The National Audit Office scrutinizes public spending for Parliament and is independent of government. The Comptroller and Auditor General (C&AG), Amyas Morse, is an Officer of the House of Commons and leads the NAO, which employs some 860 staff. The C&AG certifies the accounts of all government departments and many other public sector bodies. He has statutory authority to examine and report to Parliament on whether departments and the bodies they fund have used their resources efficiently, effectively, and with economy. Our studies evaluate the value for money of public spending, nationally and locally. Our recommendations and reports on good practice help government improve public services, and our work led to audited savings of more than £1 billion in 2011.

PN: 66/12