PRIVATE hospitals face a massive shake-up as competition from abroad and a resurgent NHS threaten their future.

Cost-cutting, lower fees to surgeons, a better deal for patients and a decline in health insurance premiums could all follow as private medicine feels a chilly draught of change. Two big groups have already cut their charges to win NHS business and yesterday BUPA announced plans to sell ten of its smaller hospitals in order to reposition itself in the market.

Years of emnity by Labour health secretaries have failed to dent the private sector. But the new policy of NHS co-operation with private health providers has done what ideological oppositon never did. Falling NHS waiting lists, the chance of bidding for NHS work, and the arrival of foreign competition have stirred up the market for private medicine, and threatened the future of the big operators.

BUPA has responded with a plan to make itself an off-the-peg rather than a made-to-measure supplier of healthcare. In future, its customers will be offered a choice: if they want Rolls-Royce treatment, they can have it, for a limousine price.

But if they are prepared to wait a few weeks, take the surgeon they are offered, and settle for a standard hip implant, they will find the bill agreeably reduced.

The company denies that it is the arrival of low-cost foreign operators such as Netcare, imported by the NHS to run independent-sector treatment centres, that has triggered the changes. But these companies doing routine operations at NHS prices, has exposed the big mark-ups enjoyed by BUPA, Nuffield, BMI and other private hospitals. To reposition itself, BUPA is selling hospitals in Farnham, Reading, Hythe, Hastings, Halifax, Leeds, Hull, Macclesfield and Wrexham. All are profitable, but, with about 30 beds, half the size of BUPA’s 22 other hospitals.

To improve the others, the company will invest £100 million over three years to produce greater consistency in the way they operate, and to drive costs down. Investing this kind of money in the smaller hospitals would not have produced an economic return, so they are to be sold.

Two of three other big players in the market, Capio and Nuffield Hospitals, cut their costs this year and won a deal for 25,000 NHS operations. The other, BMI, the largest and most profitable, has yet to announce any changes.

For years all four groups had done well, their businesses fuelled by long waits in the NHS and growth in medical insurance and self-pay patients. But fast-rising insurance premiums have hit consumer resistance. The analysts Laing&Buisson reported that in 2002 the market was static. During 2003, says Philip Blackburn, the company’s senior economist, “self-pay slowed sharply and may have reached a peak”.

At the same time, he says, NHS use of private hospitals grew strongly, accounting for 8.5 per cent of the patients they treated. Mostly, these were operations bought at prices 40 per cent or more above the NHS rate to help to reduce waiting times. The effects have been dramatic.

In heart operations, for example, waiting times have dropped dramatically, largely as a result of the use of private hospitals. An executive of one of the major groups claimed yesterday that 80 per cent of the reduction in NHS cardiac waiting lists was due to the use of private capacity. But this very success poses the private sector a dilemma. Does it try to cut costs to chase more NHS business? Or does it rely on widespread scepticism among the public about the future of the NHS to keep the private patients coming?

On the horizon is the threat posed by the independentsector treatment centres. They have five-year contracts with the NHS to do routine surgery, a perfect opportunity to establish a low-cost, high-throughput operation at the public expense. Faced with this, most analysts believe that the private hospitals have to do something. But their problem is their promise of instant care. To make this possible, they cannot operate at much more than 60 per cent of capacity.

BUPA hopes to solve the problem with its two-tier offer.

Clare Hollingsworth, managing director of BUPA Hospitals, signalled the need to change last year, the company says. Polling for BUPA by MORI found that when people were asked: “Do you think the Government will deliver its NHS promises?” 76 per said no.

“That is another reason for confidence,” a BUPA executive said yesterday.

HOW THE PRIVATE SECTOR ADDS UP

They do 30 per cent of all hip replacements, 14 per cent of all heart operations, and 44 per cent of all vein removals.

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