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Lansley’s plans increase the risk of a Southern Cross-style crisis in the NHS

One leading healthcare provider has worrying parallels with the struggling care homes company

Southern Cross, Britain's biggest care homes operator, hit the headlines this week over its dire financial situation. It is a classic case of how private equity firms make huge amounts of money by buying businesses and then saddling them with debt before selling them on at a profit. And there are worrying parallels with Circle Health, one of the key companies pushing for NHS contracts.

The rise of firms like Southern Cross (see box below) is the result of government policies over the last two decades to privatise elderly care. As Michael Meacher points out, during that period 110,000 beds were opened in private and voluntary homes, and 95,000 closed in local authority homes: a transfer from public to private. This is also the objective of the current government's NHS policy: a gradual transfer from public to private provision.

One of the main players in healthcare is Circle Health. Circle describes itself as a "social enterprise" but since more than half of its shares are owned by City investors, who share in the profits of the business, it fails on the most basic criteria for a social enterprise: to be not-for-profit.

Circle is often congratulated for its "boutique" hospital in Bath, with the hint that under Circle this could be the model for every NHS hospital. But Circle, like Southern Cross, does not own its properties. They are leased from a separate company, Health Properties, which just happens to have the same chief executive as Circle, Ali Parsa. Parsa does not even attempt to call Health Properties a "social enterprise". The Bureau of Investigative Journalism has recently published an article on Circle showing that the profits from Parsa's companies are channelled through tax havens.

Circle has a plan for 30 hospitals, developed by and leased from Health Properties. Under health secretary Andrew Lansley's “any qualified provider” policy these hospitals will compete with – and in some cases replace – NHS hospitals, mirroring the way private care homes have taken over from local authorities as providers of social care. In spite of the praise heaped upon it, Circle is not even a successful business. As BIJ point out "for the year ending 31 December 2009 the group made a pre-tax loss of £28.3 million on an income £63 million".

There is still time to avoid the threat of a Southern Cross-style meltdown occurring in healthcare. Plans to increase private sector involvement in the NHS must be rejected so that the services we rely upon are not at the mercy of private equity.

The Southern Cross story

US private equity company Blackstone bought Southern Cross in 2004 for £162m. At this time the company leased most of its care homes from a company called NHP, and a few months after it acquired Southern Cross, Blackstone bought NHP for £563m and took on net debts of £524.8 million. NHP leased properties to nine care home operators (including Southern Cross), but about half of the homes it operated itself.

In 2005 Blackstone bought the Ashbourne Group, another care home operator that leased its properties, for £85m. Blackstone then restructured these companies and significantly changed the leases held by the enlarged Southern Cross, in NHP’s favour. In 2007, NHP had debts of £1.17bn backed by its assets, and Blackstone sold the company for £1.3bn to the Qatari Investment Authority. Blackstone floated Southern Cross on the stock market in two tranches, in 2006 and 2007. It is reported that Blackstone made a billion pounds from the sales of these companies.

In November 2008 NHP defaulted on its debt and, as a consequence of its precarious financial situation, raised the rents on its properties. GMB estimate that in the four years to 2010 NHP raised its rents by 18.6%. This is a rent rise that Southern Cross could not sustain. There is a lot in the media about the catastrophe that would happen if Southern Cross goes bankrupt, but the catastrophe could be just as bad if NHP – Southern Cross’s landlords – goes bankrupt.

GMB have put together an excellent timeline of events.

Richard Blogger writes about the NHS and social policy at NHS Vault.

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