EXIT plans in contracts - does the NHS need to improve?

Planning the exit

In the excitement of starting a new partnership, it is easy to overlook that this contract will end in 10, 15 or however many years, and that the organisation will need either to procure a new partner or bring the service back in house at that time.    I have over the past year become aware of several NHS/ Private Partnerships which are coming to an end, where the NHS partner is struggling to achieve a smooth exit.  

For a couple of contracts which we have been supporting, we have been working with the client to run exit scenarios to maximise the chances of a smooth exit down the road.

So what are the types of problems that might arise?

-         Some relate to not being able to obtain information and data in order to run a successful procurement. 

-         Others relate to it becoming impractical or very expensive to switch providers at the end of the contract

Examples would include:

-         A contract whereby a private provider is operating a private patient unit.  The Trust looking to reprocure the service needs to be in a position to give potential bidders the information needed to maximise the value of bids. This is likely to include: detailed activity data by type of procedure and consultant; prices and revenues; staffing levels with salaries and on costs etc. But what if your current contract doesn’t obligate the current provider to provide this data?

-         A pathology contract where a private provider/ JV is running a lab, and the equipment/ reagent rental deals and IT systems in the lab are owned by or supplied to the private provider. At the end of the contract the Trust will need a seamless transition to an in-house or new outsourced service. New lab equipment takes weeks to install and validate, and space constraints and the time involved generally mean that this is done on a staggered approach where a new piece of equipment is introduced and run in parallel with current equipment. Implementing a new Laboratory Information Management System (LIMS) takes months, and access is needed to historic results.

So how should NHS Trusts plan for exit? Its not rocket science, but it is worth getting a group of people involved in procurement and the service to run contract exit scenarios.  This should flag areas which need to be factored into agreements in order to facilitate a smooth exit.

Clearly every contract is different, but from our learning in this area so far, we would suggest breaking it down as follows:

Re-procurement:

The Trust needs to consider how they would run a reprocurement process in eg 10 years time, and what they would need from the partner/ supplier at that stage.  This is likely to include staff and activity data, as well as reasonable access to any facility to show prospective bidders at that stage.

The Transition:

This is more complex and there is a need to think through what would be involved in transitioning to another provider or bringing the service in house in ten years time, and what needs to be in the contract to facilitate that. A non exhaustive list of the types of issues which we have come up against:

-         IT. Who will own the IT system in the service? Will the Trust have the right to buy this back or use of it for an interim period? What legacy data will the Trust need (Pathology services need access to historic tests, and PPUs will also need access to historic records if patients come back). This can eb problematic if the contractor is using a system which is shared across the rest of their business.  Alternatively, should there be access ahead of the contract end to set up parallel systems?  How will the Trust or a new contractor achieve a smooth transition?

-         Key skills and staff. TUPE will govern who transfers after the end of the contract. The Trust needs to consider what will happen if mission critical services are transferred to a central team run by the contractor (eg billing and accounting, but possibly clinical – they may transfer radiography or histology interpretation) where staff work across multiple contracts and won’t TUPE across?

-         Assets. What assets are critical to the service? Who will own these (usually the contractor)? What would be needed on day one to continue running the service? How easy is it to replace these assets at the end of the contract (new lab equipment and items like radiotherapy equipment cannot be replaced overnight – they need time for validation etc). Should the Trust negotiate the right to purchase any assets at eg net book value? What if assets are shared with other businesses run by the contractor?  Pathology, imaging and radiotherapy equipment may be leased (or on a reagent rental) as part of a much larger procurement undertaken by the supplier, often at lower prices than the NHS. Can the Trust build in a flexible option to access equipment under these terms for a reasonable transition period? Will the contract require that assets are renewed/ maintained such that the partner doesn’t let them deteriorate towards the end of the contract?

-         External revenues/ contracts. The partner may be generating revenue from third parties, eg selling specialist pathology tests, or a private hospital group operating a PPU may have included the unit within a network deal. The Trust need to consider what will happen to these arrangements after the end of the contract.  

-         Reliance on the contractors core business.  There are contracts where the partner may undertake activities in areas of its business outside the contract with the Trust. For example a private hospital group running a PPU may undertake some aspects of a pathway in its own hospitals and other aspects within the PPU, or a private pathology contractor may send specialist tests to its own reference labs. What arrangements should be made to continue these after the end of the contract – what are the consequences if these arrangements don’t continue?

-         Competing after the contract.  Contracts to manage PPUs in some cases include clauses that the private hospital operator will not set up its own facility within an agreed radius. Should the contract prevent them from doing so within eg 1-2 years of the contract end? What are the risks that they would be able to successfully compete?

-         Residual liabilities. How will liabilities arising after the end of the contract be handled?

I am sure that there are many other issues which have come up in other contracts, and it would be interesting to share other’s experiences.  Anyone who has read a Michael Porter book will realise that the MBAs in the contractor organisation are likely to be looking for opportunities to ‘raise switching costs’, and the Trust need to think through what these may be and how best to neutralise them.

Whilst lawyers will obviously consider exit provisions, they may be unaware of some of the practical difficulties which are unique to each contract, unless these are highlighted to them. In our experience it is perfectly possible to negotiate reasonable exit provisions – most private organisations are eager to win the initial contract and will agree to these once the scenarios which the Trust are trying to prevent are pointed out.