Interview: Circle Holdings FD Paolo Pieri

TAKING ON A PROJECT labelled as a “financial basket case” would be a daunting prospect to any finance director. When that project entails the running of a failing NHS hospital, the prospect becomes that bit more daunting.

Last year, Circle Holdings became the first private company to take over the running of an NHS hospital when it began a ten-year contract to run Hinchingbrooke Hospital in Cambridgeshire. The task facing Paolo Pieri, group finance director of Circle Holdings, was a mammoth one.

Earl Howe, the health minister, described the hospital as a “financial and clinical basket case”. And he had a point. Its difficulties were so profound that it had amassed a debt mountain of £40m at the end of 2011 and was losing a further £4m a year.
The financial targets at the heart of the agreement were challenging. Under the terms of the deal, Circle will need to find savings of £311m over the next ten years, guarantee the first £5m if the hospital continues to lose money, while delivering a full range of NHS district general hospital services.

In many ways, what happens at Hinchingbrooke will not just be a judgement on Circle in a hitherto untried area, but a test case for using the private sector to save other beleaguered NHS hospitals. With plenty of NHS trusts identified by the National Audit Office as “not financially or clinically viable”, the benefits for Circle are obvious.
But rather than “feeling enormous amounts of trepidation”, Pieri explains there “are amounts of opportunity” for the privately held company whose main holding is an employee-owned healthcare provider.

“We have seen how you work this model in Nottingham [where the company runs a NHS day surgery] and we know how much we can transform the productivity and benefits to the quality as well,” he tells Financial Director.

As the man tasked with turning the ailing hospital’s finance around, Pieri says the numbers around Circle’s bid had to be “credible”. However, he attributes the success of the bid – Circle was the preferred bidder in a 14-month process that started with 19 companies vying for the contract – to Circle’s employee-owned partnership model, which forms the largest partnership of healthcare professionals in Europe.

Through its partnership of 2,500 clinicians, doctors and nurses, Circle is able to allow business units within its private hospitals run those units as they see fit, which includes taking responsibility for their own balance sheets. It was a no-brainer to implement the same method at Hinchingbrooke, particularly as its doctors and nurses had identified ways of saving millions of pounds.

“We involve the commissioners and the key medical staff in determining how to run their facilities and drive efficiency and deliver what’s best for the patient,” explains Pieri. “By empowering that wider group of clinicians and having them involved in the running of the company, we get a much better level of engagement, much better productivity and a much better patient outcome.”

While this may sound like an HR issue, Pieri argues that it is important to running an efficient financial operation. After all, he asks, why put an accountant in front of buying hips and knees rather than a doctor? By empowering the right people, the right financial and patient care decisions are taken.

“If you go into the NHS and you ask probably anybody in a standard hospital whether they have seen the budget, the business plan, less than 1% will have seen the business plan or understand the budget. In Hinchingbrooke, almost every single person, more than 90%, knows the business plan and knows what their role is,” Pieri explains.

By handing clinical units the autonomy to manage their own budgets, Pieri says Hinchingbrooke has tackled the financial mismanagement that plagues so many NHS facilities, chiefly too much bureaucracy, high staff costs and poor procurement spend.

Power to the staff
While Hinchingbrooke may not have had nine people changing a light bulb, it did take up to three weeks to make a requisition for a new type of prosthetic. Given that Circle had earmarked savings of about £2m a year from a review of its procurement operations, this needed to be addressed.

“Now, each clinical unit determines what it needs. So if a light bulb’s out, you can tell one person and it gets changed. If they want to use a different type of knee in knee operations, they make that decision there and then – they don’t fill out forms that go up to the board and all the way back down. They control their own budgets,” he says.

In turn, this has fed directly into saving from staffing costs. “When we walked in, there were 50 managerial nurses and these are people who are not patient-facing and who are probably getting paid £50,000 a year. There is no need for that level of bureaucracy in the system,” Pieri says.

“Those people have got into the system of filling out forms and creating patterns of working with each other – you don’t need to do that stuff. We have been able to transform most of those roles into patient-facing nurses and get rid of temps and locums.”

The success of the strategy is there in black and white. According to Circle’s annual report, the projected yearly deficit of £10m will be reduced to £3.7m and, through its transformation project, it made about 7% annualised savings against a £100m budget, including a 50% decrease in locum costs.

Circle is aiming to overcome Hinchingbrooke’s financial problems by achieving a break-even position. That will require further operational savings if NHS jobs are to be protected. As part of Circle’s five-year plan for Hinchingbrooke, the hospital’s back office could be diverted to other facilities run by Circle, while reorganising its 17 operating theatres will also generate revenues by increasing patient turnaround.

According to Pieri, one of the NHS’ failings has been a lack of understanding in how to efficiently use its estate. There is no need for a hospital to use a huge estate simply because it has one.

“Because we also build new hospitals in the private arm of our business, we have a real understanding of how to optimise facility utilisations, how to optimise surgery time, how to optimise workspace,” he explains. “That also drives efficiency. If you have effective patient flows and effective use of space, you can create a much healthier environment for your patients and also a much lower cost environment and you can use the rest of your estate for other things.”

Clinical basket case
Driving down costs is only half the solution. The clinical side of the “basket case” also needed to be addressed. That, again, comes back to having patient-facing staff who understand the budget.

“You can’t change something in the NHS in a top-down fashion. That top-down fear culture of ‘you must do this’ completely goes the wrong way,” Pieri says. “At the same time as transforming the productivity and efficiency, you also want to improve quality. Without improving quality, you won’t get the revenues.”

Despite the cuts, Circle has achieved results at Hinchingbrooke. Since taking over the contract, the hospital has ranked among the top of the east of England’s 46 hospitals, including in the top ten for patient experience, while in the last year it was also named as one of the five most improved hospitals in the country for patient safety, with a 60% year-on-year reduction in clinical incidents.

“Looking at the finances isn’t just about the cost line; it’s about the quality. If you can’t get the quality right, you can drive out as much cost as you like but patients will vote with their feet,” says Pieri.

Circle is not just an employee-owned business. The holding company is listed on the London AIM market and has investors to answer to, particularly as the company trades at a loss. In 2012, Circle posted an operating loss of £29.3m, up from the £18.5m operating loss it accrued in 2011.

However, the company has earmarked an operating profit for 2014 and £11.3m of the loss came from one-off costs related to the opening of its new private hospital in Reading. Though running at a loss isn’t ideal, Pieri explains he doesn’t need to worry about disgruntled investors hammering at his door every quarter.

According to Pieri, it is important to remember that “healthcare is not a cheap sector”. It requires a lot of investment in kit and personnel.

“We are very fortunate that since we IPO’d (in 2011), we have hit our expectations, but we have spent a lot of time educating our investors despite what some of the press may say about our financial results – educating our investors about the costs of entry and how long it takes to actually show the returns because it’s not an overnight success healthcare. We need to do it in stages,” Pieri says.

“We have new facilities opening and we’re still in that investment stage. We’ve set the benchmarks we expect to be at every year and we have delivered so there is no reason to doubt the trajectory will not be the same that we have made in Nottingham, which was proven and has been retendered.”

Whether building a new private hospital or taking on an NHS contract, the start-up costs are significant and funding has been highlighted as a potential risk to the business. However, in the last year the group raised £46.5m by way of equity funding to, in part, pay down a £14.5m loan owed to JCAM and complete the commissioning of its private Reading hospital and Hinchingbrooke.

Pieri says Circle has had to be innovative in its approach to funding. “The property company side of things is generally funded by third parties, our private hospital is being funded by a pension fund, and the one in Bath is funded by a mixture of bank debt and some equity,” he explains.

“We try to engage with property infrastructure companies to help fund the private hospitals. We see ourselves as an operating company but we need the support of people who believe in our model to invest in cap ex. We’re talking to other types of funders about how we develop the rest of the infrastructure estate because gone are the days of traditional bank debt. We have to be innovative and different in how we are funding our facilities.”

For Pieri, combining innovation – whether in finance or product delivery – with customer care is at the heart of Circle’s success. He picked this up in his earlier career as finance director of the Virgin Megastore business and lastminute.com and, before that, working in Silicon Valley.

“Silicon was about innovating for the future, Virgin was about giving the customer what they wanted. lastminute.com was about trying to combine the two – the innovation of technology and the customer and putting that together,” he says.
“You get that culture into you all the time– you are always thinking about your customer in what you are delivering because that is what the most successful businesses in the world are doing.” ?

IN BLACK AND WHITE
2010 – present Circle, FD
2005 – 2010 Lastminute.com Group, FD
2001 – 2005 Virgin Retail, CFO
1998 – 2001 Virgin Entertainment Group
1993 – 1998 Price Waterhouse