Labour Will Restrict NHS Suppliers’ Margins – A Few Questions

The Labour Party launched their campaign for the forthcoming UK General Election with an announcement from leader, Ed Miliband, that suggested-procurement related issues are going to feature in the campaign.

Under a Labour government, profits on all private sector contracts worth more than £500,000 will be capped, he said, suggesting that private sector involvement was "draining money away" from the NHS. The cap will be set at a default level of 5%, although this could raised or lower to reflect the specific terms of different contracts. Any returns that firms make above this level would apparently have to be ploughed back into the NHS to support patient care - while NHS commissioners will have the power to terminate private contracts early in the event of unacceptable performance.

Without even getting into the strategic question of whether private sector involvement is the fundamental problem with the NHS, here is a very quick list of the practical issues that immediately came to mind:

- How will that apply to contracts already in place, including PFI or multi-year service contracts, where the price has been contractually agreed some time ago?

- How will the government buyers arrive at a fair allocation of corporate overheads (such as senior management and head office costs, advertising, sales and marketing, etc) when assessing the 5% margin figure?

- How will interest charges be handled? Fund your business through an inter-company loan, preferably from a tax haven, and you can show zero profits very easily.

- If I am making 5% profit already, what is my incentive to innovate or look for any cost saving if that will simply be confiscated from me?

- Where a service is provided to a number of different organisations, of which the NHS is just one, how will the costs for that service be allocated?

- If a firm wins a legitimate competitive process, with the best value bid, will that be refused if it shows a margin of over 5%? Would Labour choose a less efficient supplier with a higher price - but a 4% margin?

- Will the 5% margin apply independent of how much development expenditure has been linked with that particular supply? (Pharmaceuticals being the classic case here - average sector profit margin of around 18%).

- What will Labour do when Pharma firms refuse to supply at a 5% margin?

- Will the government guarantee the 5%? So if a supplier can show their margin is less than this, will prices be increased?

Now I have sympathy for what Labour is trying to do. The corporate sector has done very well out of government and the "citizen in the street" for some years now, and this sort of headline may indeed play well with large numbers of the electorate. However, it is totally impractical as an initiative, I suspect Labour have no idea how they would implement it, and I would bet that it is an idea which will be quietly forgotten if they get into power. Perhaps more worryingly, it does raise the question of whether senior Labour Party leaders have any real understanding of how business (and procurement) works.

Share on Procurious

Voices (3)

  1. Dan:

    Do you really think they’ve thought about it in even that much detail?

  2. Bill Atthetill:

    Before we all get very excited, Red Ed was referring to private sector’s involvement in front-line provision…

  3. Dan2:

    Does this clause get flowed down the supply chain to sub-contractors including SMEs?

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.