At first glance the £214m (US$410m) South East Independent Sector treatment Centre (ISTC) project may look an unassuming healthcare project –  but for private participation in UK public health service, this scheme could very well be a sign of things to come, writes Simon Ellis.

The UK government’s controversial ISTC programme – under which the private sector will conduct operations for the National Health Service (NHS) at purpose-built clinical care centres –  has faced a critical reception under the surgical spotlight of the media and the PPP industry.

The £5bn (US$9.6bn) scheme to procure a total of 34 ISTCs around England has been cited in the press both as an harbinger for increased liberalisation of the healthcare system and a stop-gap solution to plaster over gaping holes in the health service.

The market too has been cautious towards a business model offering what appears to be an unnecessarily labour-intensive, small-scale and short-term investment.

However the policy – the first proposed by the UK government to allow private clinical care in the NHS – has drawn out some innovative solutions from the market

The private sector partner is required to act not only as builder and financier but for the first time to assemble a consortium including a body capable of sourcing and managing qualified healthcare professionals.

One of the first companies to respond to the scheme that was proferred in 2003 was Tribal Group – which assembled a team of international medical service providers including US healthcare firm Ascent Health, healthcare recruiter Match group and building contractor AMEC. 

Tribal drew support from its own ranks through internal healthcare architects Nightingales and healthcare consulting arm Secta.

In September, Mercury clinched preferred bidder status on the two prize projects – the eight treatment centre Spine Chain stretching from the Cornwall to Northumberland and the five-centre South East chain.

As is the case with many water testing initiatives, things did not go entirely to plan. In February 2004 Mercury was jetisonned from the Spine Chain contract due to a failure to agree terms

Licking its wounds, the consortium proceeded to sign the South East Chain with the Department of Health (DoH) on 9 December 2004.

The project

Under the contract terms, Mercury Health will manage five treatment centres based at a mixture of new-build, refurbished and existing facilities across south east England.

The centres will treat 19,000 patients each year for five years. Nearly 5,000 per year of these operations and procedures will be additional to current NHS activity - the rest will transfer from the NHS.

The showpiece for the contract is the £15m (US$28.7m) new-build treatment centre on the site of the Princess Royal Hospital, Haywards Heath in Brighton which carries out more than 5,000 orthopaedic procedures.

Mercury will also refurbish a general surgery facility on a Portsmouth industrial estate which will treat 6,000 patients per annum.

The consortium will refit a general surgery at Medway, Kent which will carry out more than 4,000 procedures each year over the 5-year contract period and a centre in High Wycombe, Buckinghamshire, which will carry out 18,500 diagnostic procedures per year.

Finally, Mercury will provide 3,700 diagnostic services at a Medical Centre in Havant before relocating to a permanent treatment centre that will be built on the site of the 2007 Havant LIFT scheme.

The financing

The scheme is the largest ISTC deal to close so far and is also the first multi-site ISTC project to reach financial close using limited recourse debt.

The financing is immediately distinct from a traditional PFI or PPP model due to the high human capital and equipment costs.

The banking team faced the challenge of balancing a low construction cost – £30m (US$57.8m) –  against a high overall contract value set at £214m (US$412m).

The Royal Bank of Scotland – acting as an established senior banking partner of Tribal group – acted as lead arranger for the £33m (US$63m) senior debt package. Bank of Scotland co-underwrote the debt with RBS on a 50:50 basis.

Overall the funding package amounted to £50m (US$96m), with Mercury Health contributing a £17m (US$33m) equity stake.

RBS-subsidiary Lombard provided an undisclosed debt finance facility for procuring medical equipment.

The banks arranged the senior-term debt in tranches to match earnings through the contract and encorporated a back-ended bullet repayment. On hand-back to the NHS, the banks will receive a residual value payment payable by the DoH to the provider.

The debt:equity ratio on the project was a capital-rich 67:33.

However despite the lucrative appeal of the ISTC contract, doubts over the short contract lengths are hard to sway.

Peter Martin, chief executive of Mercury Health, says: ‘There is a real open question at the moment of what happens after five years, we very much hope that in five years time we are providing a scheme of sufficient quality to ensure continuing business.’ 

Outlook

The Labour Party’s recent ‘Forwards not Back’ election document confirmed plans to procure a further 250,000 operations a year from ISTCs - subject to victory in the forthcoming election.

In real terms this means the opening of a £2.5bn (US$4.6bn) market over five years to ISTC providers and the procurement of at least eight new ISTCs by the end of the year.

Also, the ISTC could be the thin end of the wedge for private clinical care – with the government committed to increasing the number of elective operations conducted by the private sector to up to 15 per cent and likely to include clinical care in fourth wave LIFT  – sponsors might be wise to develop clinical care capabilities sooner rather than later.

The market may be yet to embrace the concept of ISTC, but the attraction of the short-term profits – £42.8m (US$82m) per year on South East ISTC for a funding input of £50m (US$96m) – scepticism may abate whether or not government offers the longer term security demanded by the market.

The project at a glance