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Financial risks and rewards of federating

Accountant Christine Newitt outlines the financial issues to bear in mind when federating.

Federating may help practices protect or increase income and reduce expenses (image: iStock)
Federating may help practices protect or increase income and reduce expenses (image: iStock)

GP practices are being encouraged to work together and to develop a joined-up approach to delivering care, via federation. Commissioning bodies unwilling to manage multiple contracts with individual GP surgries has been a driving factor in federation.

So how do practices begin to tackle the financial question of making this new model of primary care work?

First, a federation is not a merger of practices, it is purely a facility to hold a contract to deliver a particular service. Funding then passes to the members of the federation based on an agreed formula to reflect the part each practice plays in delivering that service. The core services currently delivered under PMS and GMS contracts remain with the practice.

The CCG or other commissioning body negotiates a contract with the federation which, in turn, enters into service level agreements with each GP practice member of the federation.

What, then, are the financial risks and rewards for GPs in implementing this model and what must be considered?

Protecting income

If commissioning bodies refuse to negotiate with several practices, which has proved to be the case in some localities, the only way a GP practice will retain income from extended services will be to negotiate one contract to deliver that service.

Increasing income

Forward-thinking GPs acting through a federation will be in a better position to consider the development of new services. They will have a more streamlined process for tendering, which will allow them to compete successfully with private providers.

Reducing expenses

Although there will inevitable be costs in setting up the federation, in the long run there will be scope to reduce the costs of delivering the service to larger populations. A larger entity will have better buying power when negotiating on insurance, utilities, telecommunications and consumables.

Clinical efficiencies

While each practice will continue to deliver core services, there is greater scope for better use of the clinical skill sets from all practices by working collaboratively across larger populations. Practices need to consider the synergy that coming together to deliver services will require.

Back office function

Administration can also be streamlined to avoid duplication of functions across GP practices. The federation would need a core team of administrators to ensure smooth service delivery. Most of these individuals would probably be already working within the GP practices, so practices would need to examine the staffing resources to support both the continued functioning of the core services and the collaborative delivery of extended services. This will require good leadership by the GP practice and the federation to achieve optimum results. The time involved in setting up and running a federation cannot be underestimated, and those appointed to drive working arrangements forward must be prepared for this.

Financial control and forecasting

Managing the contracts within the budgets laid down will be paramount in making the federated model pay for all partners to the agreement. Healthcare is a demand-led service but there are finite resources. GPs will not be paid for anything they deliver outside of the terms of the contract. Clear reporting systems with good financial governance are therefore vital to ensure the viability of the federation.

Communication and engagement

Most GP practices are small businesses run from single premises. The federated model will bring challenges in communicating information and decisions across a larger entity. To deliver services effectively and profitably all practices must be engaged and communication channels must be open.

Tax matters

Clear advice will be required in relation to taxation. Most GP practices operate on a partnership or sole practitioner model. It is likely that a federation will be a company in which each GP practice holds shares. A company operates in a very different tax regime to a partnership; the federation must seek advice on how it will be taxed and how this impacts on individual GP practice members. Particular attention is required in relation to VAT to ensure that a VAT charge is not created where one did not previously exist.

Share capital and loans

Advice should be taken on how the federation’s initial capital should be contributed. Some share capital will be required, but once the federation is up and running practices will not want to tie up their funds in share capital, because of restrictions on repayment. Practice loans may be useful in this respect as they can be repaid as cash is generated.

Pensions

Particular attention should be paid to staffing arrangements and employment contracts to ensure that staff are still able to access the NHS pension scheme.

While a federated model will bring challenges, especially given already overstretched resources within the primary care sector, there are likely to be significant efficiency benefits in the long run for those practices that are prepared to drive the new model forward. It will require an appetite for change and a can-do attitude to ensure NHS primary care funding remains to the greater extent with GP practices.

  • Christine Newitt is a partner at chartered accountants and business advisers Duncan &Toplis 

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