Under the microscope: pathology gets the Serco treatment

by Corporate Watch / News, Public Services / 09 Nov 2011

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GSTS Pathology, the joint venture between Serco, ‘the biggest company you’ve never heard of,’ and two London hospital trusts, was supposed to show what the private sector could bring to healthcare. Serco CEO Chris Hyman said he saw healthcare as a “major growth area” and talked of the “critical role” his company could play in helping the NHS. So staff at King’s College Hospital in Brixton, London were surprised to find out in September that instead of the “efficiency savings” Serco had promised, the hospital had actually lost money in the first six months of the partnership.

Frank Wood, a biomedical scientist and Unite union steward at King’s, said the hospital’s £217,000 loss was a “stunning turnaround from a successful income generating service,” and called the partnership with Serco a “reckless adventure” that “risks damaging irreparably a high quality clinical service.” The trust should “pull-out now, not later,” he said.

With the GSTS business model dependent on severe cost-cutting, the negative consequences of privatising pathology may not only be financial. With the number of clinical “incidents” apparently rising as experienced scientists are lost and not replaced, staff say morale is at “an all time low” and complain their new managers appear more concerned with marketing than laboratory work. Corporate Watch gets its microscope out to find out exactly what Serco is bringing to pathology.

A £2.5 billion ‘market’

When a doctor or nurse takes a sample of your blood, body tissue or other fluids, they send it to a pathology laboratory to be analysed. Encompassing a range of disciplines – such as biochemistry or haematology – pathology is vital for the diagnosis and treatment of a number of diseases and conditions, from cancer to multiple sclerosis. With more than 70% of all clinical decisions based on results that come from the pathology department, it is central to modern healthcare.

Seen from a different perspective, this makes it potentially huge business. Richard Jones, the Chief Executive of GSTS Pathology, eagerly talks of a £2.5 billion “market” for pathology in the NHS and, happily for him, both the previous and current governments have thought along the same lines. A Department of Health commissioned investigation into pathology in 2008 recommended pathology services “develop in line with the Government’s wider strategy for health reform based on .. creating greater choice … with more contestability and greater plurality of provision.”

This was commissioned under Labour but as the investigation was chaired by Lord Carter of Coles, currently chairman of the Cooperation and Competition Panel, which has been eagerly castigating NHS trusts for not giving the private sector enough business (see a previous Corporate Watch article here) its conclusions are very similar to those reached by the current government’s Health and Social Care Bill for much of the rest of the NHS. A business man with a long history of investment in private healthcare (see here), and who retains significant interests in it, Carter’s report argued that, to “modernise” pathology, it needed to be delivered by “stand-alone pathology service providers”. In other words, hospitals should allow their pathology departments to be managed independently of them and then pay the new “provider” for the work it does. Competition between these new providers to win such contracts will, Carter argued, lead to greater efficiency and quality for all.

Making the deal

Established in January 2009 as a limited liability partnership, initially between Serco and the Guy’s and St Thomas’ hospitals’ trust, with King’s College hospital trust joining in October 2010, GSTS Pathology was the first test of of Carter’s theory. It promised to bring together the “undisputed clinical and scientific expertise of two leading NHS Foundation Trusts with the public sector and business acumen of a FTSE 100 Company.” Chris Hyman, Serco’s Chief Executive said he was “delighted” and promised: “Serco’s skills in service management, transformation and logistics will complement the Trust’s clinical and scientific excellence.”

Hyman had several reasons to feel happy about the deal. Described as an equal three-way partnership, according to the annual accounts, while the hospitals have provided labs, equipment, staff and over £3m in capital between them, Serco has provided no capital and is actually being paid by GSTS – £8.4m in the first two years – to send its management consultants to “transform” the service and then market it across the country. Serco has provided loans, as have the hospitals, but as the interest rates are 2% above the average market rate the company stands to gain from them also.

And even though Serco is not putting any capital up front, it has nevertheless managed to negotiate a controlling, 51% share of the voting rights, with King’s and Guy’s sharing the other 49% between them. The distribution of profits is a closely guarded secret, impervious to Freedom of Information requests as it may prejudice “commercial interests”, but given the way the voting rights ended up, do not expect Serco to have done badly from it.

Mixing skills or cutting them?

Serco’s “transformation programme” is mainly concerned with achieving the 30% cuts in the cost of pathology tests the company estimates it needs, both to meet targets set by the Carter report and to make a profit.

Carter noted that the “single largest element” of the £2.5 billion spent on pathology was the workforce and, while GSTS CEO Richard Jones talks of the efficiency savings “first class IT and logistics” will bring, he seems more focused on introducing, as he puts it: “new workforce arrangements to address the skill-mix imbalance and high cost of delivering 24 hour access.”

The practical consequences of this have provoked talk among staff of a “brain drain”. While a review of the partnership by the Guy’s and St Thomas’ trust’s management in 2010 said “in general” pathology tests were completed “on time and to standard,” Frank Wood worries there has been a “significant loss of specialist staff” and that “time is running out quickly on how long we can maintain standards.” He told Corporate Watch he estimated King’s had lost “80 staff out of some 300 who transferred [to GSTS].” Although some of these posts have been filed through internal recruitment, he says there has been a “net reduction in staff” and that specialists have been lost in the key areas of toxicology, genetics and blood transfusion.

This was echoed by another member of staff, who told Corporate Watch, on condition of anonymity, that the “skill-mix” being encouraged by GSTS means, in practice, less training for staff and a subsequent decline in expertise. Describing training as “a mess”, he says far less emphasis is put on training higher level staff such as biomedical scientists, and accuses GSTS of trying to replace “experienced and costly staff” with less qualified Medical Laboratory Assistants. Instead of being given trainee scientist posts as before, new recruits are put in “jobs with no prospect of development or promotion.” He worries this will have “a direct effect” on the quality of care provided for patients.

When questioned by Corporate Watch about the loss of specialist staff and consequent increase in laboratory assistants, Serco said all departments are supported by highly skilled and knowledgeable scientists (neglecting to mention how many specialist staff have been lost) and that MLAs have replaced agency workers (neglecting to mention the new ratio of MLAs to scientists).

Frank Wood has no doubt that at King’s “the majority of those who have left are qualified professionals … For me the loss of these staff is a ‘brain drain’ from Kings and may set us back significantly. I can see clearly the number of people who have left when we meet on Tuesday mornings as a department.”

Relations between staff and management have been poor since the start, when GSTS tried to transfer the Guy’s and St Thomas’, and then King’s, pathology staff over to it on less favourable terms, especially regarding pensions and out of hours work, to those they had previously. Worries over industrial action before the venture had even got going led to “Retention of Employment” agreements, allowing staff at the hospitals to be seconded to GSTS from the NHS, allowing them to keep their previous terms.

However, recruits joining since the mergers are GSTS, not NHS, employees, which staff worry will make maintaining the quality of the service that bit more difficult again. When specialist staff on higher pay grades leave, their suitable replacements will most likely be scientists working in NHS hospitals (as they employ by far the most pathology staff), and they will be unlikely to want to leave their NHS pension for the GSTS equivalent. King’s, Guy’s and St Thomas’ are big hospitals that take a wide range of complicated, specialist cases that demand a wide range of highly-trained and experienced specialist scientists. If the GSTS “skill-mix” leads to a decrease in expertise, the concern is that this will lead to an increase in mistakes and misdiagnoses.

Worryingly, the Guy’s and St Thomas’ 2010 review, of just the first year of the partnership, when Serco’s “efficiency savings” were just starting to kick in, reports “concern” over a “small but significant number of clinical incidents… some of which could have had serious consequences for patients.” It goes on to talk of a “general lack of understanding of the potential consequences that some incidences have for patient safety.” Staff fear the next set of reports will show a further increase in the number of “incidents”.

‘A number of investments’

And for all the talk of the efficiency savings brought by the private sector, costs are created that otherwise would not be there. Staff complain that, on top of initial set-up costs of at least £1.5m (a nice pay-day for accountants KPMG and Deloitte, plus various corporate lawyers), the £8m paid to Serco consultants for their transformation and marketing work has created an extra layer of managers, often with no background in healthcare and who have “no understanding of the motivation behind laboratory staff, being more concerned with the search for efficiencies.”

This investment in managers does not, so far, appear to have been balanced by a significant injection of investment by the venture. When asked by Corporate Watch, Serco said GSTS had made “a number of investments in various operational areas at all its sites,” including the “refurbishment” of the Blood Sciences and Molecular Oncology laboratories at Guy’s Hospital and the Central Specimen Reception at St Thomas’ Hospital. However, the amount of new pathology equipment that it has brought is not clear. One staff member told us while there was a “refit” at the Guy’s site, the refurbishment, which was part-funded by the hospital itself, was “basically cramming two labs into the space formerly occupied by only one.”

As King’s had already invested £8m to make its pathology labs among the best equipped in Europe before GSTS took over, little investment was required there and Frank Wood thinks the refurbishment across GSTS’ London sites has been little more than cosmetic: “apart from some aesthetic improvements and an entire floor [at St Thomas’] which is now corporate HQ, it’s hard to see any major changes.”

Perverse incentives

The irony of this is that, from a business perspective at least, this isn’t as bad for the managements of the Guy’s and St Thomas’, and King’s, trusts as it may appear. Run as foundation trusts, a status originally established by New Labour, to encourage hospitals to operate as independent, self-contained, commercially viable entities (and what current Health Secretary Andrew Lansley wants every hospital to achieve by 2014), their main requirement is to balance their books and not spend more on healthcare than they can afford to pay for themselves (so they do not have to ask the government for more money). Entering into the joint venture with Serco will, they hope, save their hospitals money as Serco makes the savings it promises.

Indeed, the £217,000 loss that King’s revealed in its annual accounts does not seem to be worrying the King’s management as much as the union. A spokesperson told Corporate Watch: “As with any new business, there are set-up and development costs in the early years. Longer-term, we will use our share of the profits generated by GSTS Pathology to re-invest into hospital services for NHS patients at King’s.”

The profits are those expected to come from the expansion of the business. CEO Richard Jones calls GSTS “one of the contenders for market leadership,” with the potential for “growth overseas” and foresees the number of pathology providers actually decreasing significantly. He thinks London, for example, can “reduce from 28 to 5 providers”. The venture has already won pathology contracts for the Bedford and Central Manchester University hospitals and is currently trying to win contracts from NHS South East London and NHS East of England, as well as in Milton Keynes and the South East Midlands. These are not mergers, as with King’s, and Guy’s and St Thomas’: GSTS will take over the pathology departments and run them independently. As such, profits made are shared exclusively between the partners of GSTS. So the more business GSTS gets, the more revenue will come back to King’s and Guy’s.

And if there is one thing Serco is undeniably good at, it’s getting business; 90% of its turnover comes from a range of public sector services, ranging from swimming pools to atomic weaponry. Although GSTS made a £1.1m loss in its first year, after its initial set-up costs, it was £171,000 in the black in its second.* The hospitals will hope the marketing Serco is being paid to do will lead to more business and a healthy return from hospitals across the country.

‘A disaster’

The success of the GSTS business model as a profit-making venture for its partners will be clearer by next year. But the concern is that complicated, highly specialised departments like the ones GSTS took over are easier to dismantle than create.

Serco had no prior experience in pathology and the presence of only one qualified doctor among the eight members of GSTS “executive team” (the rest coming from management roles in public or private healthcare, as well as well known healthcare providers Sainsbury, Sony and National Express) does not back-up claims that it is “clinically-led.” The Guy’s hospital review, quoted above, describes the GSTS management’s engagement with the hospital’s clinical staff as “poor” saying: “Pathology consultants do not feel involved in the decision making process as much as they would like and there is not sufficient engagement with the wider clinical community within the Trust.”

Running a pathology service without involving pathologists does not sound like a blueprint for success. Contrary to the current government’s frequent promises that its reforms will put medical practitioners at the centre of decision-making in the NHS, involving private companies like Serco seems to do exactly the opposite, giving more power to non-medical managers. GSTS has been going for less than three years and yet it has already, as promised, shown what involving the private sector will do to the NHS. The coalition can say its Health and Social Care bill will bring a better future for the NHS only if it ignores the consequences of similar reforms by the previous government. It’s hard to disagree with the conclusion of one GSTS staff member: “any form of privatisation of pathology is a disaster.”

* The King’s accounts run on a different time period from GSTS’ – April to March as opposed to January to December – and it isn’t clear whether its loss comes from it taking a share of the venture’s start-up costs or from a loss made by GSTS in the first three months of 2011 (as GSTS appears to have been in profit at least until December 2010). The response from King’s indicates the former.