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Lessons for the NHS from Lloyd v Gloucestershire PCT

Thu, 03 May 2012

Barrister - david lock
By David Lock QC
The legal challenge by local Gloucestershire resident, Michael Lloyd, to the decision of the Gloucestershire PCT to outsource its community services to a Community Interest Company raised serious questions for NHS commissioners. The case was settled on day two, so there will not be a court judgment which explains how the law works in this area. That may (and here I speculate) be a great relief to the Department of Health who may not have welcomed the Judge expressing her views on whether the PCT was acting lawfully or not, and thus constraining future NHS management decisions. However EU procurement law is now a big issue for the NHS and, on a purely personal basis, it seems that the cases raises serious issues for the NHS.
 
Gloucestershire PCT decided to separate its community services from its commissioning function in accordance with Transforming Community Services policy which commenced under the last government and was continued under the present government. The PCT Board's favoured model was the creation of a Community Interest Company (“CIC”) to take over the services. This proposal received, at best, a lukewarm reaction from the staff because it would mean that they ceased to be NHS employees. Nonetheless the PCT pressed ahead with the proposal and prepared to enter into a contract with the CIC to a value of approximately £80 million per year.
 
Mr Lloyd challenged the lawfulness of the decision to enter into a contract with a company outside the NHS without any competitive process. He wanted other NHS organisations to be given the opportunity of expressing an interest in the provision of the services so that the services would remain provided by NHS staff. He also pointed out that the decision to create the CIC would result in a substantial VAT liability, owing by the CIC to HMRC, of around £1 million per year which would denude the resources available to fund services. Finally he was concerned that staff joining the CIC would not be entitled to be members of the NHS pension scheme and that accordingly, in the competition for the best staff, the CIC would be in a significantly worse position. The essential issues in the case were whether an NHS organisation could enter into a contract with a CIC without a competitive process.
 
The following points can be drawn out of the arguments advanced in the case:
 
1.    Procurement issues need to be carefully considered every time a PCT is considering entering into a legally binding contract with a potential provider (including possibly NHS Foundation Trusts). EU based companies are now looking carefully at the NHS market and so it would be difficult if not impossible to argue that an NHS provider contract will not be of interest to any healthcare provider located in another EU country. Hence, even before the present Health and Social Care Bill comes into law, NHS contracts are already subject to the full rigours of EU procurement law.
 
2.    The duties of transparency, equal treatment and non-discrimination imposed by the EU Treaty and by Regulation 4 of the Public Contracts Regulations 2006 mean that all such contracts should now be subject to a “degree of advertising” to allow healthcare provider located in another EU country the chance to bid for the contract. This obligation applies to every GMS and PMS GP contract as much as it applies to a large scale acute services contract.
 
3.    The special exemption from procurement rules for contracts with new employee-led social enterprise companies outlined "Social Enterprise – Making a Difference: a guide to the "right to request" appears to give rise to some substantial legal problems. First, the policy document is focused on “employee led” schemes, as opposed to management-led schemes. Where NHS management has led a proposal to create a CIC and, in effect, imposed the new structure on reluctant employees, it may be an unjustified and hence unlawful departure from the Guidance. Secondly, and perhaps more importantly, there appears to be no proper basis in EU procurement law to support the exemption from a tender exercise. In fact it could be argued (although this was not part of the Lloyd case) that this type of support for a CIC amounts to unlawful state aid and is in breach of the EU treaty. Hence any PCT that contracts with such a company without a tender process potentially acts in breach of EU and domestic law.
 
4.    However the real lesson from the case is that there is almost certainly a stage for NHS bodies to consider before they decide if they want to undertake a tender process. PCTs are (almost certainly) entitled to conclude arrangements with an NHS trust to deliver services without a tender because such a process is arguably entirely outside EU procurement law. The Secretary of State controls both bodies and these arrangements do not give rise to legally binding contracts, and so there is no “contract” on which the procurement process can bite. There are accordingly strong arguments that it is perfectly lawful for a PCT to make an arrangement with a local NHS Trust for the delivery of NHS services without a tender, and without procurement obligations impacting on the process. This is the first step that the PCT agreed to explore as part of the settlement in the Lloyd case. 
 
5.    It is less clear if this exemption applies where a PCT contracts with an NHS Foundation Trust because (a) this involves is a legally binding contract and not an “NHS Contract” under section 9 of the NHS Act 2006, and (b) the Secretary of State does not have effective control over the NHS Foundation Trust because it cannot give the Foundation Trust instructions by way of Directions.
 
No PCT likes having its processes opened up to the minutiae of Judicial scrutiny. In this case the PCT was rightly commended by the Judge for having listened (albeit only at the trial stage) to the legal objections raised to its process and for agreeing to start the process all over again. The PCT agreed to explore the option of concluding arrangements for its community services with a suitably experienced an NHS Trust, and will only then take the decision whether it wishes to run a tender process at a second stage.
 
David Lock QC has long experience of advising acting for NHS bodies. He acted for the Claimant, Michael Lloyd, in the Judicial Review brought against Gloucestershire PCT. He can be contacted at dl@no5.com 
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