Small is beautiful? Not if you want a new GP surgery
It is reasonable to assume that just about all small to medium sized GP practices will be only too aware of the operational and financial challenges of operating within the primary care environment in the current climate. As a result of these challenges, we have witnessed a significant number of practice mergers, the creation of many GP federations as well as the introduction of third party providers to the primary care environment.
And yet there remains a significant number of small and medium-sized GP practices across the country who remain an important part of primary care today.
The need for new practice premises
The need for funding to replace obsolete, outdated surgery premises is widely accepted and is at least as significant for smaller practices as it is for the many larger practices. Whilst it is fair to say that all practices face significant difficulties in securing funding for new GP premises (even in the light of the Transformation Fund), there are additional issues that smaller GP practices face which can cause real difficulties when they seek to address their need for new surgery premises. These issues mirror some of the widespread difficulties that GP practices have experienced over the past five years relating to partner retention and recruitment. They are felt most acutely in smaller practices as a result of some of the commercial commitments required by GP partners when procuring a new surgery premises.
These can be summarised as follows:
1. 3PD schemes
Where a practice is seeking to procure a new surgery via a third party development, the developer landlord will almost always require a minimum of two GP partners at signatories to the occupational lease. In a larger practice, it is usually relatively straight forward to comply with this requirement but where there are a smaller number of GPs, this can be problematic. A typical example would be in a three or four GP practice; if one or two of those GPs are salaried and one of the GP partners due for retirement in the next three or four years, it is easy to understand the difficulty in persuading sufficient GP partners to sign up to a lease commitment of 20 or 25 years.
This same issue can also create difficulties where small practices are considering entering into sale and lease back arrangements although at least in this situation the existing GP partners are likely to be comforted by the payment relating to the disposal of their equity interest in their surgery.
2. Practice led schemes
One of the alternatives to working with a third party developer to procure a new surgery is for the GP practice to undertake their own development and retain ownership of the surgery. Historically, this alternative has been preferred by many smaller practices. Whilst this form of procurement does not require GP partners to enter into a long-term occupational lease, the partners will typically need to raise funding for such a scheme. This will usually require GP partners to take on significant debt finance over the long term. As construction costs and property values have risen over time, GP partners have become understandably reluctant to take on the increasingly significant levels of debt associated with this form of procurement. The experience of smaller GP practices is that in this situation there is often a relatively higher burden on individual partners within their practices when compared to their colleagues within larger practices.
It is also difficult to achieve financial viability for this form of procurement because it is challenging for GP partnerships to reclaim VAT on construction costs in the way that a developer can. The effect of this is that the costs for such a scheme are invariably higher; This creates problems in terms of scheme viability as the rent reimbursement is a value based assessment and will not vary to reflect the increased development costs referred to above.
Irrespective of the form of procurement adopted, it is undeniably more difficult to achieve financial viability on smaller schemes. One of the reasons for this is that smaller schemes will not benefit from the economies of scale associated with the larger schemes which results in relatively higher build costs on smaller schemes. As referred to above, there is little flexibility within the reimbursement model to reflect higher construction costs even when they are generally accepted as being reasonable.
The difficulties facing smaller GP practices described above are likely remain an issue in the coming years.
One significant hope is that the increasing influence of local CCG’s in the funding decision making process will help to redress some of the inequities of the existing system of financial sign off on new primary care premises schemes described above; CCG’s are well placed to understand the needs of their locality and do have the flexibility to reflect local needs in the allocation funding available for new primary care premises where this is justified. It is too soon to know exactly how beneficial the increasing involvement of CCG’s will be. It is hoped that they will be well positioned and motivated to introduce a degree of flexibility that will be beneficial to GP practices of all shapes and sizes as they seek to deliver services to the local community.
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Wootten Dean is an established property consultancy led by Bryan Wootten who has over 15 years of experience as a valuer and general practice surveyor. Bryan is an RICS Registered Valuer who deals with a range of property types and has a special interest and focus on the NHS primary care environment.