An increasing number of NHS Trusts are setting up wholly-owned, private subsidiary companies (SubCos) to which they transfer Trust assets (such as services, including staff, or property).
What is a SubCo?
A subsidiary company or SubCo is a company (or a state-owned enterprise) that is owned by, or controlled by, another company or organisation (the parent company).
A SubCo can be a publicly traded company, which means
- it can be traded on the open market;
- its shareholders are the owners of the company and have a final say in the decisions taken by the company; and
- it has greater access to financing than other companies.
A SubCo is a separate legal business that allows the parent company to be isolated from risk: any losses made by the SubCo do not necessary transfer to the parent company. Having said that, to maintain its reputation, the parent company may have to pay for the subsidiary’s debts, even if it has no legal obligation, and it could be liable for damages if a subsidiary violates the law.
NHS Foundation Trusts have had the authority to set up wholly owned subsidiaries since 2006, with little oversight from NHS Monitor (now NHS Improvement). However, NHS Trusts, unlike Foundation Trusts (FTs), are not independent legal entities and have had to apply for permission from NHS Improvement (NHSI) to create SubCos. (For simplicity, in what follows, and unless specifically talking about FTs, we use the term ‘Trust’ to refer to both FTs, and those NHS Trusts with permission to set up SubCos.)
Until recently, the option to set up SubCos was little used. Now, the situation is changing rapidly. By March 2018, 42 Foundation Trusts had either set up, or were in the process of setting up, SubCos. This expansion may have been quietly prompted by NHSI. It also seems it’s been made easier by changes in legislation. The Health and Social Care Act (HSCA) of 2012 allowed FTs to sell off assets, even those needed for what are called “Commissioner Requested Services” (or essential health services). In the initial period following the HSCA, interim arrangements were set up to protect these essential services and the buildings used to provide them, but this transitional period expired in April 2016. The expansion of SubCos may also be a response to the Carter Review (2015), which sought to drive efficiency through the sharing of administrative functions across NHS bodies within an area, which some SubCos aim to do.
NHS SubCos vary in size (both in terms of turnover and number of staff transferred) and the services they offer. So far, services include facilities, estates and property, GP services, procurement, respite care, medical services such as diagnostic or pathology services, equipment management, pharmacy, IT and back office functions. Both the extent of services and the number of staff involved is growing.
Many NHS SubCos are wholly owned subsidiaries, where the Trust owns all the shares and retains control over major decisions. But although the subsidiary’s Chair may be a member of the Trust Board, the SubCos might be run predominantly by staff employed from outside the Trust because they have a commercial background.
Not all NHS SubCos are wholly owned by Trusts. For example, Viapath is a company set up by Guys and St Thomas’ Foundation Trust as a joint venture with Serco to provide pathology services. It is majority owned by the NHS (66.6%).
A Trust can directly award a contract to its SubCo (i.e. without having to tender) as long as 80% of the business that the SubCo provides is to the parent Trust.
Why set up SubCos?
The key reasons given for setting up subsidiaries are
- to reduce expenditure;
- generate income;
- improve services;
- manage risk;
- provide savings through ‘efficiencies’ and economies of scale;
- gain ‘regulatory advantages’ (e.g. tax reduction); and
- provide access to equity, borrowing and other external investment.
A SubCo can be seen as a way of reducing a Trust’s deficit and complying with NHSE’s agenda for rapid ‘transformation’: separating the management of the SubCo from the parent Trust Board means that ”a SubCo has more control and is able to drive its own agenda more swiftly”. A SubCo can also be used to seek business in new areas, join with another body in a separate venture (for example, to provide back of house services across a number of Trusts), and bid for other services.
NHS SubCos, savings and ‘efficiencies’
i) Value Added Tax (VAT) savings
Unlike an NHS body, a private company working for the NHS can reclaim some of the VAT it’s charged. Being able to exploit this tax loophole appears to be the main stimulus for some NHS Trusts to set up SubCos. This is despite clarification from the Department of Health and Social Care that Trusts should not enter into tax avoidance arrangements and that any VAT savings made should always be merely a by-product of setting up a SubCo. But as one Labour Lord has pointed out, “It seems perverse that NHS bodies are spending energy reducing VAT payments when HMRC itself has stated that the cost will come out of public expenditure”.
ii) Transferring NHS staff to a SubCo
Usually, when an NHS service or department is transferred to a SubCo, its existing staff members are also transferred. This happens under TUPE regulations, so that staff remain on the same terms and conditions that they had with the NHS. However, the length of time staff retain their original terms and conditions can vary between SubCos. What’s more, TUPE agreements do not come with a cast iron guarantee: terms and conditions can be altered by the company by arguing that there have been economic, technical or organisational changes. If NHS terms and conditions improve, it may not be clear that transferred staff will see the same improvements.
Where SubCos will clearly make savings is with the employment of new members of staff – in almost all cases they will not be on the same terms and conditions or have the same pension arrangements as the staff they work alongside who have transferred from the NHS. In addition, transferred staff on NHS terms and conditions who get promoted may find that they have to accept the terms and conditions of those directly employed by the SubCo. It’s likely that this kind of two-tier workforce will have a negative impact on team-work and staff morale.
NHS SubCos and NHSE’s ‘transformation’ agenda
According to NHSI, the activities of SubCos may include managing financial assets and selecting, acquiring or disposing of assets. In fact, tens of millions of pounds of assets appear to have been transferred out of the NHS through SubCos. Business cases are often not available but Northumberland, Tyne and Wear is an exception in revealing that they have transferred land and buildings worth £33.5 million.
There are particular concerns about the motives behind such transfers, given the current pressures on Trusts to sell parts of their estate following the Naylor Review. For example, tax expert Richard Murphy suggests that setting up a SubCo could be a step towards the sale of NHS buildings and the service contracts associated with them.
These concerns are heightened by the fact that SubCos are expected to have a commercial bias rather than a public sector ethos. For example, while it’s part of an NHS Trust, the main purpose of an Estates and Facilities department is to provide support services. In contrast, as a SubCo, it enters into a trading relationship with the Trust.
Setting up a SubCo to supply Estates and Facilities services provides a way of speeding up the ‘transformation’ and ‘modernisation’ of the service: the SubCo has more control over a specific area, and can drive its own agenda more quickly and efficiently.
As Grant Thornton (a consultancy company keen to promote SubCos) points out, the SubCo can grow by offering its current services to new clients. They also see SubCos as likely to develop new services, such as Strategic Estates Management, which they claim is becoming more important with the move towards new care models such as Integrated Care Organisations.
ii) New care models
SubCos may play an important role in the introduction of the new care models called for in NHSE’s 5 Year Forward View and subsequent ‘Transformation and Sustainability Plans‘. For example, NHSI says that, with the advent of new care models, they anticipate that SubCos will become more common as vehicles to hold contracts – or even to deliver care -on behalf of one or more NHS FTs.
iii) Privatisation and commercialisation
Stephen Barclay, Minister for Health, has denied that SubCos constitute privatisation, while NHS Providers suggest that in many cases SubCos are being set up to avoid outsourcing to the private sector and to keep staff ‘within the NHS family’. But whatever the reasons given for setting up SubCos, they still transfer the assets of the NHS to non-NHS bodies that are vulnerable to take-over by the private sector. Significantly, Grant Thornton notes that Trusts may come under pressure to sell their shares in a SubCo, especially where the Trust is in deficit and the SubCo has high value assets. They advise that NHS SubCos must have a fully developed exit strategy that should include plans for the transfer of services, people and intellectual property rights.
The vulnerability of SubCos to privatisation is heightened by their deliberately commercial nature. As the Health Estates and Facilities Management Association (HEFMA) flags up, a SubCo is not just legally different to an NHS Trust, with different rules; it has to have a different mindset and behave like a business. As a private company, the directors of a SubCo have to promote the interests of the company – interests (especially in the case of a joint venture) that may not always be the same as those of the parent Trust.
According to Grant Thornton, one of a SubCo’s key aims must be to create a commercial culture that includes, for example, redefining patients as customers, and “raising the profile of finance among clinicians to see the benefits from their ‘profits’ as these are invested into the service.” They suggest that NHS staff transferred to the SubCo may find creating this culture difficult and so the subsidiary might need to recruit new people who have commercial expertise, particularly to senior positions.
Concerns about NHS SubCos
Concerns about SubCos include:
- The lack of scrutiny and public consultation (for example, see what happened with Gloucershire Hospitals NHS Foundation Trust);
- Weak long-term protection of pay and pensions for those transferring to new companies (for example, any change in the way that the SubCo operates could put transferred staff at risk, despite TUPE arrangements);
- The majority of new staff will be employed on less favourable contracts, outside Agenda for Change terms and conditions, with no access to the NHS Pension Scheme. (This may affect the long-term viability of the Pension Scheme overall, as well as individual employees);
- The creation of a two tier workforce, with staff carrying out the same work but having different terms and conditions, is likely to undermine morale and cohesion;
- The absence of clear information about the future of NHS SubCos;
- The possibility of transferring clinical staff and services to SubCos;
- Increasing commercialisation of the NHS is likely to mean a loss of the NHS ethos that underpins services;
- With SubCos, there are many unanswered questions about accountability and conflicts of interest;
- The VAT loophole reduces money to the Treasury, which then has less money to fund the NHS;
- Less transparency and accountability: as a private company, a SubCo can refuse to provide information about its practices (eg its terms and conditions for new staff) on the grounds of commercial sensitivity;
- SubCos provide the means for selling off NHS assets (such as land) to commerical third parties;
- SubCos further fragment the NHS, and insert yet another layer of management structure;
- SubCos provide new money-making opportunities for consultancy firms while removing vital resources from cash-strapped NHS Trusts. For example,
- The Clatterbridge Cancer Centre trust on Merseyside, spent £661,335 on setting up a firm called PropCare, with the help of consultants Hill Dickinson and KPMG.
- Gloucestershire Gloucestershire Hospitals trust spent £403,000 establishing Gloucestershire Managed Services, with a further spend of £15,000 likely.
- The Royal Free trust in London has also used an estimated £400,000 of its budget to set up a SubCo, though in April 2018 its board has yet signed off the creation of the company involved. (figures from Unison).