Written evidence submitted by Dr Peter Holden (FGP0398)

Practice premises managed equity transfer scheme - a concept paper

Ever since 1966 there has been an explicit funding stream for general practitioner premises for both capital and revenue consequences. Since 1952 following the Danckwerts judgement the principle has been that the medical profession should receive back from the state those professional expenses it incurs on behalf of the state in the provision of general medical services. (This includes PMS but not APMS).

Revenue issues

Sophisticated mechanisms exist to ensure that the revenue expenses of GP practices are recorded in an anonymised fashion by NHS data (formerly the NHS information Centre and before that the Office of Manpower Economics) by trawling data from the Exeter computer system and comparing it with a 100% sample of the expenses side of Inland Revenue practice tax returns. Over the years this system has produced a surprisingly accurate source of information on practice expenses even during the periods of extremely high inflation of the 1970s. Between 1966 and 2003 the error was only £3000 per GPp or put another way £81 per principle per annum.

Capital issues

At the outset it must be stated that ever since 1947 it has been illegal to buy and sell goodwill in a practice and both parties commit a crime should this occur. Therefore when parties join or leave partnerships it is usual to have the practice valued in terms of its premises at open market plus fixtures and fittings and a certificate from HM Customs and Excise district valuer is sufficient to defend the claim against an allegation of purchase and sale of goodwill.

The valuation of surgery premises is the subject of a specialist paper and committee of the Royal Institute of Chartered Surveyors but essentially there are two ways the premises can be valued one is at open market for their alternative use and the other is on a multiple of the notional rent received. The baseline identification of the sums is at the end of the day not a hard science but there is consistency in the way that chartered surveyors value and that brings confidence to the system sufficient for all parties including banks and the government to be satisfied.

From 1945 at the end of the Second World War to approximately the end of the 20th century putting money into bricks and mortar of any description was regarded as a one-way bet. The reconstruction costs after the Second World War coupled with a marked shortage of property of all types meant that inflation within the UK economy was a perennial problem and reached its peak at the end of the 1970s at around 22% per annum. Increasing financial discipline coupled with economic growth has meant that by the end of the millennium inflation by historical standards had been squeezed out of the system. The consequence of this scenario is that for many years doctors in particular and those with whom they negotiated never really looked at whether there was a real rate of return on capital invested in surgery premises because inflation was doing the work for them. General Practice itself has had almost no significant consistent investment in practice premises since 1995 and what has happened since then has been sporadic. The consequence of this approach has been that the National

Health Service has never really had to pay for GP surgery premises in any real way and a changed environment is described below.

During the early 1960s it became clear that for general practice to progress it could no longer be conducted in the front room of a GP’s house and that proper surgery premises were needed. The issue was how to fund these premises given that a GP has to serve the community in which they practice and property values vary massively across the country. As a consequence it was quite clear that the broad brush approach adopted for revenue issues would not work when it came to capital provision for premises. In some locations the cost of building purpose-built surgery premises would not for many years if ever reach their open market value whereas in other areas of the country that cost would be met in around 6 to 10 years. The problem with this situation was that in prosperous areas GPs could manage with difficulty to borrow money from the bank in order to fund premises but that in less prosperous areas it was almost impossible. It should be remembered that until 1966 general practitioners were only very modestly paid and the banks were not falling over themselves to lend money to GPs for surgery premises. This arose because the GP contract was cost plus and whilst the costs were reimbursed the plus element amounted to the GP salary which for many reasons had got off on the wrong foot in the National Health Service and was never really put right until 1966 at the earliest. It has to be remembered that money which is borrowed has to be paid back and the only source that the GP has to repay capital is from their take-home pay. Unlike any other business a GP is not free to set his prices, control his expenditure in any meaningful way, or amend their professional offering to maximise profit. Indeed there are many things which GPs do that are commercially crazy and under normal commercial rules simply would not be undertaken or would be cut out of the professional routine at the earliest opportunity. Because of this there needed to be a system of capital provision which worked for GPs.

.As part of the 1966 new GP contract systems were set up to reimburse the borrowing costs of those general practitioners who were prepared to invest in premises to a specification agreed with the National Health Service. In order to get round the capital provision problems for GPs at a time when the banks were beginning to struggle with a falling pound rising inflation and rising interest rates the government set up the General Practice Finance Corporation which effectively was an arm of Treasury. It’s problem was that the lending to GPs then appeared on the public sector borrowing requirement and was the reason it was privatised via a sale to Norwich Union later Aviva plc with a golden share held by the government in the early 1990s.

If a GP elected following necessary approvals to build a new surgery or make substantial improvements to a specification which was laid out in the statement of fees and allowances (the red book) then the government would pay the GP a rent for their surgery which equated to the interest payment on the loan. This is now known as borrowing costs reimbursement and used to be known as “cost rent”. Those GPs who owned their own surgeries for the first time could be paid rent for the use of their facilities by the National Health Service. Over a period of years those in cost rent premises would find that the rent on their premises where they have been rented to the NHS would be greater than the sum they received under cost rent and therefore they could make a one-time election to move from cost rent to notional rent. The benefit to the government of this was it released money back to the system and for

the doctors they would make a taxable profit on the margin between the rent they received and the interests that they owed which most practices used to start to defray the capital costs. Whilst it is accepted that at the end of the day the GP would end up very long term owning a sizeable asset the fact is medicine cannot be practised out of a cardboard box and either the state must provide the premises or another person must be rewarded for taking the risks and the responsibilities of maintenance and upkeep of premises.

During the 1980s the government decided to move the General Practice Finance Corporation into the private sector and it was sold to Norwich union now known as Aviva plc and was until 2012 operated as a subsidiary of Aviva. The government held a golden share and with it the right to nominate two directors and a deputy to the board of the GP FC in fact the government delegated the nomination of the directors to the general practitioners committee of the British Medical Association.

When the scheme started in 1966 general practice was a simpler operation than it is today and in those days perfectly adequate premises could be created from a property either built for domestic use or readily convertible to domestic use and it was by no means uncommon that surgery premises would look not dissimilar from two bungalows with a link corridor. The benefit of this was construction costs were relatively cheap and if everything were to go belly up it would not be difficult to convert the premises back to a pair of residential bungalows which would be easy to sell reducing the financial risk on all concerned. Such premises in the average location would probably have cost of the order of one year’s net profits to a practice.

As general practice has become more sophisticated and encompasses a wider team of professionals the buildings have become less to toti-potential and more specialised in their nature. The consequences of this are that the costs of building are greater and the residual values of the building less because of their specialised nature and the much increased cost of conversion to alternative use. The result has been that surgery premises now can easily cost multiples of the annual turnover of a partnership making them much less affordable.

During the halcyon years of the scheme it was estimated that general practitioners as a group had sunk at 2002 values almost £4 billion into practice premises yet they were receiving virtually no return on capital employed. This was an issue during the 2004 contract negotiations and as a compromise because the government was not prepared to provide a real rate of return on £4 billion profits made on notional rent became superannuable. Those of us involved in the negotiations believe that it is only because general practitioners as a group have been soft that they have been left behind and we notice that the notional rate of return on capital employed for hospital premises is 6% and on prisons 8% and that commercial providers under PFI are allowed similar rates of return. General Practitioners have been taken for a ride by the government when it comes to premises.

During the early years of the scheme and in fact almost until the financial crash in 2009 many banks became involved in lending money for GP premises because GPs were seen as copper bottomed loan prospects for projects underwritten by the state and indeed monies were often lent at only fractions of a percentage point above base rate and are an evergreen basis in the capital was never expected to be repaid because the next generation of GPs would take on the debt as had occurred since 1966.

This model began to fall apart in the late noughties. Generation Y doctors increasingly do not not want a job in the same partnership for 30 years but want a portfolio career. It is widely recognised that taking on a surgery loan does not become profitable until approximately the 15 year point. Surgery premises are a long-term commitment and therefore investment in them does not appeal to those who may wish to have a portfolio career.

Furthermore generation Y is saddled with significant student debt sometimes with sums approaching £100,000. Since the crash of 2009 banks have become much more cautious in their lending and many operate a rule of not lending more than £300,000 to any one person. This means that a young incoming partner may not be able to become a capital sharing partner because in addition to their student debt they are likely to have a domestic mortgage. Outgoing partners are unlikely to be willing and probably unable to wait any significant length of time for their capital payout and the whole process is leading to practice instability as older partners race to get out leaving the last person standing.

It is a combination in this second decade of the 21st century of uncertainty as to the future of general practice coupled with impossible workloads, falling incomes that recruitment to the training streams has dried up and the train GPs are emigrating changing specialty or leaving the profession altogether. When added to the de facto premises stand still for 20 years it is not difficult to see why practice premises are in a mess. Treasury has an aversion to long-term liabilities of any quantum and it was for that reason that modern commercial PFI systems blossomed but only at the cost of mortgaging our grandchildren on some very commercially unattractive deals for hospitals and schools. The 1966 cost rent system was the first and the most successful PFI of all time. It encouraged GPs to invest £4 billion in their own future without the state having to find the £4 billion and the reason it worked was GPs were prepared to take a modest profit and did not seek some of the extortionate provisions in commercial PFI schemes and could not because of the requiement to have the DV value the premises.

Since 1995 general practice premises funding has been a political football. Treasury doesn’t want long-term commitments, politicians need soundbite ribbon-cutting opportunities and, so what we have seen is a series of flagship schemes in discrete localities costing millions of pounds when what has been needed is a series of quarter to three-quarter million pound extensions on existing premises. Treasury has been willing to come up with capital sums but not revenue consequences and this presents a problem to GPs. Matters are being made worse by persistent political meddling with premises costs directions there were two sets of premises costs directions between 1966 and 2004 we are currently on our third set since 2004 and the fourth set has been five years in the generation and likely to run to 7.

One concept which the government have looked at is the simple question of a lump sum investment in discrete surgery premises and it is our understanding that there is one set of premises on Merseyside which cost £1 million and in return for taking on the responsibility of maintaining and providing those premises the GPs receive no cost rent or notional rent but actually now have a £1 million asset (or whatever value the building is placed at) to their name. This is a dangerous precedent. Firstly It lays open doctors to the charge that they are being bunged money by the Treasury, and secondly could be wide open to patronage.

Such schemes have not been thought through. If the practice were for example four young doctors all likely to undertake 25 years service then such a scheme might just be acceptable but that is not the reality of life. Partners come and go and if a practice is for the sake of argument given a £1 million asset but told it must maintain the asset then how do you value the shares in the practice building for the partners and how do you buy and sell the shares when you leave the building leave the practice and what are the tax implications thereof?

Throughout this essay let us assume the building is valued at £1 million. The partners have been given the title deeds to the building but told that they will have no entitlement to any premises support for the next 25 years. That position might seem fair but it is extremely dangerous as we have no certainty of

• The inflation rate
• the inflation rate on business rates
• the tax situation either now or on sale
• the future requirements of the practice itself.

For the purposes of argument let us assume that the practice has been given the deeds to the

£1 million surgery building and there are four partners. In 12 months time partner a decides he wants to retire. Is Dr A entitled to £250,000? Even if Dr a is entitled to £250,000 how are doctors BC and D going to fund this? They would each have to take out a personal loan of over £83,000 which they would ultimately have to repay to the bank with interest and the interest will come from their take-home pay. You cannot presume that any replacement for Dr A (Dr E) Will want to be in a position to buy in a £250,000 share. Under a conventional cost rent or notional rent system there is a sporting chance that Dr E will be able to buy in because the bank will see an income stream from either cost rent or notional rent to manage the costs of the loan to Dr E. But in this case the deal was the practice has been given the premises in return for 25 years of no premises support. It is unlikely that Dr E will have access to quarter of a million in capital even if Dr E was prepared to take the costs of servicing that loan on the chin.

Even worse Dr B decides to emigrate so that could actually leave Dr C and D needing to find

£250,000 each to buy out doctors A and B. Dr C goes off sick with worry and resigns leaving Dr D standing and needing to find three quarters of a million from the bank something which is totally unsustainable because he has no income stream to buy out his former partners. Now it could be argued that the doctors put nothing into the building and therefore should expect to take nothing out uncertainly that is an argument which is worthy of discussion in the early years but at year 23 for example when you have been maintaining and repairing a building for almost ¼ of a century you would expect to have some return for your effort responsibility and contribution.

Whilst noting that at present the Treasury’s preferred method of funding capital schemes is by one-off payments the profession does not believe that this is an appropriate way of doing things and that there should be a properly structured consistent and long-term approach and policy towards premises and their capital funding however it is recognised that government thinking on general practice is currently rather reflex than considered. If the Treasury’s long-

term aim is to only provide single aliquot funding then we believe that there should only be two routes for these funds.

Route 1 A community interest landlord system

this needs to be a community interest company with locals as the stakeholder aiming for a not-for-profit operation which accepts the money, owns the building and, acts as landlord on behalf of the community with responsibility for external repairs leaving the practice responsible for internal repairs and decoration. There is no way a GP is going to take on a full repairing lease.

Route 2 - a managed equity transfer system

Under a managed equity transfer system the million pounds is paid to the building contractor to deliver the building. The title of the building will be put into escrow between the partners and either the Treasury or a third party acting as the Treasury’s representative. The aim is that over 25 years the title to the building will move over in managed aliquots of 4% per annum on the anniversary of the handover the building to the practice from the Treasury or their representative to the practice. During the 25 year period the practice can only receive an abated notional rent but will receive business rate reimbursement on the same terms as any other practice. The practice is responsible for ALL maintenance and repairs. Should the building be sold then profits and losses are in proportion to the equity held.

There are many benefits to managed equity transfer. Firstly the comings and goings of partners can be more easily managed in that at for example year seven the practice will own 24% of the building and therefore the buyout figure will be 6% or £60,000 which is a much more manageable sum but what is more 24% of the notional rent coming into the practice will provide the income stream to fund the interest on the loan. Secondly the NHS has for too long avoided paying for premises and society has to recognise that a legitimate component of healthcare costs are the premises from which to deliver healthcare. On the managed equity scheme it means that the NHS will be paying some notional rent from anniversary 1 and that as the scheme matures CCG annual budgets will find the liability more easy to accommodate the notional rent as it accretes slowly rather than in one hit.

It is open to debate as to where the abated rent is held. Some CCGs would argue that as they are ultimately going to have to fund the whole notional rent that they should retain the monies. We would not favour this option because CCG predecessors have a track record of diverting GP premises monies into non-GP related expenditure with the result that GP premises are always the back of the queue for resource.

One idea could be to allow the unpaid abated notional rent to go into a sinking fund to fund future projects or even to consider a mark 2 general practice finance corporation. More fundamentally the government needs to consider whether or not GPs actually owning premises in the long term is a sustainable option both the GPs and for the flexible development of the future health service and we should be considering whether or not in fact there needs to be a managed equity transfer scheme B whereby over a period of time GPs transfer their equity to a public corporation or community interest company with a staged payout over a number of years.

Again, if the building were to be sold then excess profit should be shared in accordance with the equity shares and notional rent will be diverted in proportion to the shares held but the community interest company should be a sleeping partner in the premises. The advantages of this scheme are it will allow for the increasing trend toward portfolio careers and eventually allow GPs who wish to cease ownership of their premises over a period of years to do so. It could also underwrite the last man standing scenario.

The last person standing scenario can be avoided if confidence is built into the system and confidence need not cost money provided people are assured that there is a real last person standing “insurance”. It is on the same basis that the Bank of England promises to pay the bearer on demand it is the promise which makes the economy work not the fact of the bank having the gold in its vaults.

June 2022