Interview: Paolo Pieri, CFO of Circle Holdings
Paolo Pieri CA talks to Sarah Perrin about delivering private healthcare services with the NHS.
As CFO of healthcare sector "disruptor" Circle, Paolo Pieri has had what some would call a tough start to the year.
In January, the company announced it was withdrawing from its contract to run Hinchingbrooke Hospital in Cambridgeshire.
The surge in attendances at accident and emergency services that stressed National Health Service (NHS) hospitals nationwide also hit Hinchingbrooke.
While struggling NHS A&E departments received government aid, this wasn't forthcoming for privately-run Hinchingbrooke.
Paolo Pieri explains: "The way the NHS system works is that you don't get paid significantly for people who turn up at A&E.
"We can make all the savings we want and deliver the best care in the world, but when A&E attendances increase by 30 per cent per annum, when we have floods of people coming in the door that we can't get paid for, it's impossible to balance the books. When the contract was designed it never took into account this massive change in A&E. So largely because of that unsustainability, we chose to exit."
Paolo says Circle remains on good terms with the NHS, which understands the circumstances. "The lesson we take away is that if government really wants help in healthcare or any other sector, they need to contract and engage with flexibility, in a way that does account for changing dynamics."
The Hinchingbrooke experience does have some upsides
Circle has gained unique experience as the only private operator in the country ever to have run a full NHS A&E hospital. Hinchingbrooke has benefited too. Once described by health minister Earl Howe as a "financial and clinical basket case", the hospital improved on both counts under Circle's management.
"For the first three years we delivered just over 5 per cent efficiency savings every year – that's better than the NHS and in line with the original bid targets," Paolo says. "It was losing £10m a year when we took it on – but was almost breakeven last year before the A&E pressures. On the quality front, we were the best performing hospital in the country last year."
"The irony is that because we made such a good hospital and our A&E waiting times were so good, ambulances were coming to our hospital rather than to other hospitals."
The loss of Hinchingbrooke isn't likely to have much impact on Circle's financials, Paolo says. "Our first intent was to prove we could fundamentally change the value equation; we could change quality and could change what was a significantly loss-making hospital into a profitable hospital. And I think we achieved that."
The "value equation" concept is at the heart of Circle's business model. "Our view is that the value equation in healthcare is broken," Paolo explains.
"The costs continue to increase and generally the quality goes down, so something is going wrong. Circle came along and said, how do we produce a product that is better value than the benchmark in the system, but creates a better experience for the patient, the customer? That's what our journey has been about."
Building high-quality hospitals is key to this goal. By building modern hospitals (as in Bath – designed by Norman Foster, and then Reading) equipped to deliver treatments in modern ways (for example, more day surgeries than overnight stays), running costs are lower than in older NHS hospitals. A&E aside, because of the way the NHS prices and pays for services, as long as Circle performs in the top quartile for hospital efficiency, it should be able to make a positive return.
The hotel-like atmosphere is also designed to appeal to customers – patient choice is central to Circle's approach. "We ask all our patients if they would recommend us to friends and family. We publish all our feedback live on our website, whether it's good or bad. Ultimately, what we are offering is a hotel with operating theatres."
There are good clinical reasons for encouraging people to feel as if they are arriving at a hotel when they check in for surgery.
Paolo says: "If you can bring down patients' stress levels, guess what? The clinical results are better." Better clinical results are also linked to shorter hospital stays, he adds. The average stay in an NHS hospital for hip and knee surgery is around 5.5 days. In Circle hospitals, it's around 2.5 days.
Employee ownership is also central to Circle's model. Following a group restructure, staff and clinicians own 25 per cent of Circle Holdings plc. "We are the largest floated partnership in the UK," Paolo says. "This means our people on the front line have a stake in making the product better for the patient. If you are a nurse or a janitor and have shares, you feel a sense of pride that the hospital building is yours, these patients are yours – and you can fire the CFO if he is not doing a good job."
Local units also control their own balance sheet and P&L. "That level of self-empowerment is what we believe makes the long-term, sustainable difference," Paolo says. Rather than having cuts imposed from above, for example, local teams seek to sustain their own efficiencies.
Established in 2004 and joining AIM in 2011, Circle is now on a path of reducing losses and should break even "in a couple of years", Pieri says. Its accounts for the year ended 31 December 2014 show group revenue up 32 per cent to £111m and EBITDA losses before exceptional items down 25 per cent to £10.4m.
"We don't view our model any differently from Ocado or Asos or many other entrepreneurial disruptors in different sectors," Paolo says. "You have to invest a lot of time and capital upfront in sectors that are large and have big incumbents. You then start to see the rewards as people recognise the quality and the offer you have." Circle's strategy is to continue expanding. Planning work has been started for a new-build independent hospital in Edgbaston, Birmingham. Additional hospital sites are being considered, as are other ways to help the NHS in various service lines.
Challenges in the sector
Starting with overcoming cultural barriers. As Pieri explains, many people still aren't aware they can choose to attend a Circle or any other NHS-serving hospital, as long as it offers the procedure they require. "It's down to GPs to make people aware of that, and some GPs have an old affiliation to always using the NHS. That's one of the barriers we face."
The involvement of private providers in delivering NHS services is a political issue that can stir strong emotions. But Greenock-raised Pieri doesn't view Circle as posing any threat to the NHS. "I view it as a help to the NHS," he says. "The NHS has struggled for a long time with rising costs and poorer quality."
"We benefit the NHS because we accelerate the whole healthcare system, not just us, to move faster to deliver better care at a better value."
As an example, the NHS also now uses the friends and family recommendation test developed by Circle.
Raising capital for building new hospitals was once a challenge, but has got easier. "People realise they don't want to be investing in retail now, but want to be investing in healthcare," Paolo says. "The NHS has significantly slowed its capital investment, and hospitals as an asset class are pretty safe, given that everyone gets older and everyone gets sick."
Paolo Pieri - Curriculum Viate
Why I became a CA?
"I was always interested in doing entrepreneurial/ multinational type work. I realised early on that among Scottish CAs so many people had managed to travel the world and get involved in new and entrepreneurial businesses. I thought that passport would be a great ticket to have to get me