A National Audit Office report has concluded that while Hinchingbrooke Hospital - the first NHS hospital to be run by a private firm - has made early improvements in some clinical areas, it has so far failed to meet financial expectations.

The NAO's report to parliament today (Thursday) claims that the Trust’s performance against standards for cancer and A&E waiting times has indeed improved since Circle Healthcare began the landmark 10-year franchise in February this year.

However, the Trust has developed an in-year deficit of £4.1 million to September 2012, overshooting its target by £2.2 million.

The report also notes that while Circle plans to achieve £311 million in projected savings over the franchise period - an unprecedented figure as a percentage of annual turnover in the NHS - it is not committed to delivering the proposed savings initiatives submitted during bidding, such as reducing the lengths of hospital stays, which means cuts could stem from elsewhere.

Crucially, the NAO also said that the NHS East of England Strategic Health Authority failed to fully consider the relative risks of savings proposals offered up during the bidding period. "Assessing schemes in this way has the potential to encourage over-optimistic bids," it said. 

In addition, it noted that the Authority turned down the offer of a guaranteed payment towards reducing the Trust's deficit, in favour of "an ambitious bid that aimed to repay the debt in full".

"The final judgement on the value for money of the franchise will depend on how successfully Circle makes the projected savings and repays the cumulative deficit, while maintaining clinical quality," said NAO head Amyas Morse.

“This franchise agreement is the first of its kind in the NHS and it is important that lessons from this procurement process and early operational experience are used to improve future contracts.”

But David Worskett, director of the NHS Partners Network, said: "addressing Hinchingbrooke's financial difficulties and improving quality of care for the benefit of patients and the NHS was never going to be a short-term task and to try and draw conclusions about the approach Circle has taken at such an early stage is unrealistic".

He also urged caution over the idea of a standardised approach to this kind of franchising. "Every set of circumstances, and the reconfigurations needed, will be different," he said.

Deal history

Circle was given a 10-year franchise to run Hinchingbrooke hospital in November last year, becoming the first private group to take over the management of an entire NHS hospital earlier this year, and reportedly beating rival Serco to the post.

The company is a private partnership much like that of high-street giant John Lewis, with staff owning 49% of the business, meaning that doctors working at the hospital are entitled to a share of any profits.

The decision by the NHS East of England Strategic Health Authority to award the franchise was spurred by the extreme financial difficulties being experienced by the Trust, which had racked up a cumulative deficit of £39 million between 2004-5 and 2007-08, on annual income of around £73 million.