– Part 6 –

By 2004 New Labour reforms were so far-reaching they appeared to threaten to reduce the NHS to little more than a “brand name”, a centralised fund  commissioning and paying for patient care. 

The model seemed to be a tax-funded version of the “sickness funds” of European social insurance-based systems: that could reduce NHS hospitals to providing care for emergencies and the chronic sick, while competing on ever less favourable terms with private sector companies for a share of the budget for elective services – and for the staff needed to sustain basic health care. 

Back in 2002 a new policy statement from the Secretary of State Alan Milburn, Delivering the NHS Plan, had argued that “the 1948 model is simply inadequate for today’s needs”:

“We believe it is time to move beyond the 1940s monolithic, top-down centralised NHS towards a devolved health service, offering wider choice and greater diversity bound together by common standards, tough inspection and NHS values” 

By 2004 Tony Blair’s former advisor on NHS policy, Simon Stevens, ten years later of course to be NHS England chief executive, was setting out a full-scale scenario for a ‘mixed economy’ in health:

“Government is now stimulating a more mixed economy on the supply side, to expand capacity, enhance contestability, and offer choice. Free standing surgical centres run by international private operators under contract to the NHS are a first step. Private diagnostics and primary care ‘out of hours’ services are next”.

However some of the harsh reality of privatisation and competitive tendering was also beginning to hit home. 

In 2004 the Department of Health itself explicitly recognised the link between competitive tendering and the falling quality of what remain labour-intensive services. Its document Revised Guidance on Contracting for Cleaning noted:

“Following the introduction of compulsory competitive tendering, budgets for non-clinical services such as cleaning came under increasing pressure, and too often the final decision on the selection of the cleaning service provider was made on the basis of cost with insufficient weight being placed on quality outcomes.

“Since NHS service providers were in competition with private contractors, they too were compelled to keep their bids low in order to compete. The net effect of this was that budgets and therefore standards were vulnerable to being driven down over an extended period until, in some cases, they reached unacceptable levels.

“… there remains concern that price is still the main determinant in contractor selection.” 

In October 2004, then Health Secretary John Reid argued that one reason for the proliferation of one of the most serious HAIs, methicillin resistant staphylococcus aureus (MRSA) had been the Tory government’s decision to contract out cleaning work, with contracts going to the lowest tender. 

A survey showed that while just over a third (440 of the 1184 hospitals surveyed) employed private contractors, 15 of the 24 hospitals deemed “poor” were cleaned by private contractors. This suggested very clearly that the incidence of poor cleaning was twice as common among privatised contracts.

However these lessons were not applied to other services that were still being energetically contracted out.

One of the most decisive areas for contracting out was elective surgery – as new Labour went much further than Thatcher had dared, and began to outsource clinical care.

In 2003-4 ministers were driving the establishment of ‘Independent Sector Treatment Centres’ (ISTCs), the coy New Labour-speak for a chain of 26 privately-owned and run units previously known as Diagnostic and Treatment Centres (DTCs).

20 NHS-run DTCs had been quietly established and were on course to operate successfully.

But the kernel of New Labour’s plan was to allocate a substantial share of routine NHS elective surgical and diagnostic work to the private sector –the same private sector that routinely poached NHS-trained nursing and medical staff, and which cherry picked the patients and the procedures which offered the most profits, leaving all of the costly, long term and intensive treatment to the NHS.

After the ‘Concordat’, which proposed a greater use of private hospitals to treat NHS-funded patients, the ISTCs were to be different: they were to be new units, set up and run from the outset by the private sector.

Under the original specification, they were supposed to make no demands on the local pool of qualified health workers, but bring all of the necessary staff with them: so many of the corporations submitting the first bids were overseas or multinational companies.

According to the Department of Health document Growing Capacity the ISTCs were supposed to ensure ‘additional clinical activity, additional workforce, productivity improvements, focusing specifically on additional capacity’:

“It will be a contractual requirement for providers to define and operate a workforce plan that makes available additional staff over and above those available to the NHS.” 

In fact none of this happened.

By autumn 2003 ISTCs had been told that they were free to recruit up to 70% of their workforce from the NHS, potentially stripping local hospitals of staff, and lumbering them with sky-high bills for agency staff to fill the gaps. 

Creating a brand new element of the private sector was argued by New labour advisors and ministers as a vital step to create “contestability” – the coy phrase for competition, which New Labour was even more committed to as a principle than Margaret Thatcher had been. Ministers were convinced competition would drive trusts to cut costs and improve quality – while all it achieved was diverting hundreds of millions out of NHS budgets into private pockets.

NHS Trusts and Foundation Trusts increasingly had to compete not only against other NHS providers, but also against private hospitals which had a much less complex and costly caseload. 

But the competition was even more unfair than this suggests: ISTC contracts were ring-fenced … so that only private sector providers are allowed to bid for them!

The profit-seeking ISTCs would each scoop up a share of the projected 250,000 procedures a year to be diverted from existing NHS units. 

The nationally-negotiated contracts were on a ‘play or pay’ basis, meaning that the PCTs were required to pay the full contract price to the ISTCs over the 5-year period, even if the NHS sent fewer patients for treatment.

Of the preferred bidders announced in September, five were from overseas – Canada, South Africa and the USA – and two British.

They were contracted to treat only non-urgent cases where waiting times were a problem, including orthopaedics (hip and knee replacements), ophthalmology (mainly removal of cataracts) and minor general surgery such as hernia and gall bladder removal.

The private units had no obligation to after-care: and they could fix their own terms and conditions, with some offering consultants four or five times what they’d get from the NHS.

While Ministers claimed ISTCs would be paid the same cost per case as NHS hospitals, in practice they took on only the simplest and cheapest cases, leaving the NHS with an increasingly expensive caseload. Even the ISTCs’ start-up costs were subsidised.

It was also later revealed that the average ISTC treatment incurred an additional cost of 11.2% above NHS levels – meaning that for every nine ISTC patients NHS hospitals could have treated ten. Their profits were guaranteed.

While in NHS units such as the Oxford Eye Hospital the revenue from cataract operations helped underwrite the running costs of a department delivering a full range of services, any surplus created by DTCs would simply be pocketed as profit by shareholders.

The opposition to the plans was widespread. 

Private hospital chiefs were miffed that new units are being built instead of filling up their existing empty beds. Tory shadow health minister Liam Fox said the contracts were too expensive.

UNISON warned that they would drain resources and staff from the NHS. The BMA said ISTCs could destabilise the NHS. Even the Royal College of Nursing expressed concern over staffing levels.

To make matters worse, establishment of ISTCs came after an injection of new funds into the NHS to enable it to expand its own capacity. Just as some of these investments were starting to deliver, a small group of bureaucrats at national level decided where the new ISTCs were to be. 

Only bankrupt Bristol PCTs were allowed to refuse an ISTC: other local health commissioners were given no say, while the PCTs in Oxfordshire that objected to an ISTC for ophthalmic services were roughly slapped down.


Meanwhile in autumn 2004 the extent of the autonomy on offer to Foundation Trusts (see previous article in this series) was thrown into question, when Bradford Hospitals FT found itself facing a substantial deficit (predicting a £4 million deficit after just six months). 

This level of deficit was modest compared with the crisis situation then developing in many NHS Trusts, but the regulator Monitor immediately intervened – by calling in a firm of New York-based business trouble-shooters to sort out the trust. 

The company, Alvarez & Marsal, was chosen and called in by Monitor: but the costs of flying in the team of “turnaround management consultants” (who had to be told that British healthcare is priced in pounds and not dollars) had to be paid by the Bradford Trust.

The recipe for turning around included axing sandwich snacks for elderly patients and security guards on the hospital car park.

Ministers predictably washed their hands of the whole business. In the House of Commons Health Secretary John Reid issued a statement refusing to answer parliamentary questions on any foundation trusts, declaring that:

“Ministers are no longer in a position to comment on, or provide information about, the detail of operational management within such Trusts. Any such questions will be referred to the relevant Trust chairman.”

Nonetheless in the 2005 General Election: the Blair government made it clear that if they were re-elected then all hospitals would be pressed to become Foundations. 


As a vital part of its new, wider-reaching marketising measures, New Labour also moved to introduce a much more complex system for financing health care providers. 

The most important change was originally described in the NHS Plan as “reforming financial flows,” but became known (misleadingly) as “payment by results” (PBR). 

In fact the payments had nothing to do with the “results” of the treatment: the hospital secured the same fee whether the patient jogged out in a tracksuit or was carried out in a box. 

PBR is a ‘cost-per-case’ system, linked to a fixed national tariff of “reference costs” for each item of treatment they deliver. The new system was introduced firstly for Foundation Trusts in 2004, and later rolled out across other acute hospital Trusts.

The new structure was designed with two prime objectives:

  • to create a new framework within which Foundation Trusts could secure a wider share of the available contract revenue in a competitive health “market”, while Trusts less well resourced, or whose costs for whatever reason are higher than the reference price, could lose out.
  • and to open up a portal through which NHS funds could be extracted to purchase care from private providers such as ISTCs. 

By effectively commodifying health care at such a basic level, the PBR system fitted the New Labour objective of breaking down the barriers between the public and private sectors, and ensured that every NHS patient who chose (or was persuaded to accept) treatment in an ISTC or private hospital took the money with them … out of the NHS.

So the crisis and cash shortfalls remained within the NHS, while the private sector collected a guaranteed margin. 


Ministers attempted to create the illusion that the situation was being driven not by them but by patients: individual patients were offered a progressively wider “choice” of where they wanted to have their treatment. 

By the end of 2005 Primary Care Trusts were obliged to offer almost all patients a “choice” of providers – including at least one private hospital – from the time they were first referred. By 2008, the NHS’s 60th year, any patient was allowed to choose any hospital which could deliver treatment at the NHS reference cost. 

New Labour ministers made clear that they wanted at least 10% of NHS elective operations to be carried out by the private sector in 2006, rising to 15% by 2008.  

This policy was strongly criticised, not least by the BMA, but also by studies produced by London NHS managers for Health Secretary John Reid, which warned that the plans were “problematic, unaffordable” and of “no benefit” in London, since they would have serious impact on the financial stability and viability of NHS Trusts. 

The Commons Public Accounts Committee pointed out the obvious danger that the policy could result in private sector providers “cream skimming” the most straightforward and lucrative cases, leaving NHS hospitals with reduced resources to cope with the chronic, the complex and the costly patients.

There was growing concern that hospitals which lost out as patients chose to go elsewhere could be forced to close departments – or close down altogether: ministers and senior NHS officials said that they were willing to see this happen, arguing that it would not be their policy, but patients who made the decision. 

But the new system also represented the end of 30 years of efforts to equalise allocations of NHS spending on the basis of population and local health needs: the new market system emerged as the enemy of equality.

The prospect of widespread financial instability forced a delay and a phased introduction of the new payment system, which was to have applied to 70% of treatments by April 2005, but which by the time of the General Election had already been postponed by 12 months. 

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