How to become a provider?

Posted on December 7, 2009. Filed under: News stories | Tags: |

Pulse | Practical Commissioning | Focus on…..Becoming a provider | 7 December 2009

Emma Wilkinson presents a guide to setting up your PBC group as a provider and the pitfalls to avoid

Why be a provider?

Dr Shane Gordon, national co-lead for the NHS Alliance’s PBC Federation, believes the future of primary care rests on how well GPs set up as providers of services.

‘The future of the GMS practice doesn’t look very good, with a diminished stock of resources for doing standard GMS work. Plus if there is a change of government in the new year, as looks likely, there will be renewed focus on testing the market.’

He adds: ‘When new services are proposed, inevitably there is overlap with something we do already. So if you don’t win that contract you effectively lose that bit of your work.’

PBC consultant Scott McKenzie agrees.

‘In the current climate, it’s entirely possible to argue that future income may depend on GPs’ ability to become providers.

Where else are they going to find new income?’

What needs to be considered before taking that first step?

Mr McKenzie says GPs need first to work out why they want to become a provider.

‘You have to be clear in your mind why you are starting up. Is it to protect current services, stop others getting in, or to get more income? You have to have a rationale, because that will determine how you proceed and the advice you are given.

‘And you need to find like-minded individuals because this is your own money at stake and there are very real consequences if you get it wrong.’

Dr James Kingsland, national PBC clinical network lead, warns GPs to be clear about what additional benefits they expect from setting up a company. It may be they can achieve their goals by extending what they do under their existing contracts.

‘Look at your current skills. A lot of GPs set up companies because they are frustrated. But in, for example, dermatology, a massive amount of relatively routine outpatient work can be done in the community at a lower cost.

‘But you can assess what you can do yourselves and upskill to repatriate the work that shouldn’t be done in hospitals.’

What sort of company?

Mark Johnson, managing director of TPP Law, says choosing the right legal format for the company is key and GPs will need to get legal and financial advice early on.

‘You could be a company limited by shares, or by guarantee, a limited liability partnership or a social enterprise.

‘A lot will depend on whether you and your partners want to develop value and sell your enterprise on, or reinvest profits for community benefit.

‘The choice of company format can affect your ability to source certain types of funding and your access to the NHS pension scheme. It may also affect your ability to recruit and incentivise high-quality senior staff as the organisation develops.’

What does setting up a company involve?

Anyone setting up a company has to jump through a host of regulatory hoops (see box below). This can take weeks and there are severe consequences if any of it is wrong.

‘You can do the set-up within a couple of days but you need to register the share certificates, and then there are processes to demonstrate you’re not laundering money,’ says Mr McKenzie. ‘I would advise getting a company lawyer to take you through it.’

Next, you have to establish the structure of the company. Mr McKenzie says: ‘The shareholders need to appoint directors – there is a huge difference between shareholders and directors. The directors have to sign guarantees for money borrowed and they need to understand the consequences of that, hence the need for legal advice. And they will have to make decisions for the good of the company.’

How about financing?

It may be tempting to limit the amount that shareholders are investing in the company because then there is little to lose. But Mr McKenzie warns that that is setting the company up to fail. ‘There is no point in everybody saying we’ll ask £1 a share and issue 20 shares – as then you only have £20 worth of capital. The PCT will want to see a financially stable and viable company.

‘If you go in having raised 100k or more you are in a far better place to start. If you try to do it on the cheap, it doesn’t make you look attractive and you may have problems with cash flow and so on.’

The company will need working capital to pay salaries and overheads, and possibly loans for premises and equipment. Consider the usual sources, such as banks and venture capital, and also social enterprise investment funds and private investment.

Mr Johnson says: ‘Remember that funders will need to see strong evidence that a contract is secured before they will release funds.’

Any other legal issues to consider?

Companies will need to establish a clear understanding of how profits will be shared.

Mr Johnson says: ‘In the early stages, a start-up venture may need to retain profits for reinvestment in services and infrastructure.

‘A shareholders’ agreement should set out the dividend policy – it might, for example, set a profit threshold that must be reached before dividends can be paid out.’

Also it is important to lay down an exit strategy from the start, outlining what everyone expects to achieve from the company in the medium to long term – for example, whether the intention is eventually to sell or merge the venture.

‘Think about succession planning issues,’ says Mr Johnson. ‘If the founders want to retire, who will take over the management?’ How might you incentivise younger participants to stay for the longer term?

‘Be clear, too, about the consequences of winding up the venture, either by agreement or following a dispute. What would happen to the company’s valuable assets, intellectual property, name and employees?’

How do I make the first tender?

The company itself does not have to be set up before the tender process begins, says Mr Johnson, ‘as long as it is made clear that the company will be established in time for contract signature and the name of the contracting entity is clearly identified. Funders will normally only release monies to a properly constituted project company, or in some cases may allow the sponsoring PCT to hold budget (and be accountable for it) on behalf of the participants.’

But Mr McKenzie advises setting up the company first, after seeing GPs trying to put a tender together and set up a company at the same time. ‘GPs have tied themselves in knots trying to do both,’ he says.

The first step is to fill in the expression of interest. Do not assume that because the PCT knows you have set up a company for a specific purpose that you will be included in the process automatically.

Your company will then be sent a pre-qualification questionnaire (PQQ), which can be a very large document, and covers legal, financial and regulatory details. To find out more about PQQs, go to the NHS Purchasing and Supply website http://www.pasa.nhs.uk.

Mr McKenzie predicts this step can take one person two weeks, working full time. Some providers use external consultants to help complete the PQQ but Mike Orozco, a business manager at a Nottingham practice, argues it is possible to do a it in-house, if prepared to put in the hours. ‘No one person should do it all. When I came to the clinical sections of the PQQ I asked the GPs to complete those. I didn’t see we needed consultants as they would only be telling us to put in what we already knew we had to.’

Only if it meets the PQQ requirements will the company receive an invitation to tender. This should be treated as a stand-alone document, as though the PQQ was never filled in.

‘This could take one person six weeks working full time,’ says Mr McKenzie.

Dr Gordon agrees: ‘The tenders I have been involved in that have been successful have taken an enormous amount of input from the GPs to make them robust.

‘It’s not something to be undertaken lightly, as even for small companies the paperwork can be fiendishly complicated.’

GPs should avoid falling into the trap of pricing themselves too low when putting together a tender. They may win the contract but then find themselves operating a business that isn’t making a profit.

Dr Gordon adds: ‘I would get support from people who are used to drawing up tenders because it’s very complicated and the requirements can be very detailed.’

There may then be a shortlist and a series of interviews before the preferred provider is selected and contracts drawn up.

How do I avoid conflict of interest?

This is an area where GPs could get themselves in serious trouble. There are two possible conflicts:

• if a PBC cluster has both a commissioning arm and a provider arm

• if a GP stands to make a financial gain from referring patients to a service.

But both these situations are avoidable. ‘To avoid conflict of interest, you need to ensure the commissioning process is robust and work with the PCT to demonstrate the commissioning intention is based on need and not just because you can provide that service,’ says Mr McKenzie.

‘There are clear Department of Health rules on conflict of interest and I would advise erring on the side of caution.’

Dr Gordon adds: ‘You need to keep commissioning and provision separate.

So you need parallel structures at arm’s length from each other and clear water between the two.’

Dr Kingsland says you have to be very clear with patients about the service.

‘You must declare an interest when advising patients to use any service in which you have a pecuniary interest or you will be breaking GMC rules.’

What are the pitfalls?

‘The biggest mistake is to think one or two people can do this and to not set up a proper team,’ says Mr McKenzie.

‘This is very different from running general practice. You are running

a corporate organisation and it needs to be staffed as such. I’m not talking about a cast of thousands but you will need a team covering all aspects of the company.

‘Not raising enough money is the second most common pitfall. If you limit yourselves to a few hundred pounds you send out the message that you are not willing to take the risk – so why would anyone else take a risk with you?’

He adds that GPs who starting out as providers tend to fail to stick to the proper procedures when they are undertaking the tender process. ‘Do not assume the PCT knows you and make sure you answer the question that is being asked.’

Dr Gordon adds that GPs are at a disadvantage and may have to work harder than they expected to prove their worth.

‘You will be treated like any other provider and you have to assume no prior knowledge. When you’re not used to doing this, it takes a while to gather the information you need.’

Anyone expecting an easy ride will fail, he adds. ‘It takes commitment. You are starting a new business and you have to look at the big picture, do monthly reports and accounts. It takes a huge amount of effort and time.’

Emma Wilkinson is a freelance journalist

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