(Corrects name of company in reference to 800 million poundcontract)
* Government sees private sector as key to healthcareprovision
* NHS spent 10 bln stg on service providers in 2014-15
* Mitie eyes up to 10 pct healthcare revenue growth
* Outsourcing of critical services remains contentious issue
* Potentially lucrative for companies, but risks attached
By Li-mei Hoang
LONDON, Feb 19 (Reuters) - Sitting on a plush sofa in acheery room in a modern apartment block set in the leafysurroundings of a former British military academy, 72-year-oldGloria Lafferty is looking forward to a traditional British mealof fish and chips with her family.
The scene is far removed from the care home horror storiesthat have played out in the British media over recent years, forColebrook House is an assisted-living scheme that its operatorholds up as an example of what the private sector can contributeto a national health service creaking under the strain of anageing population and limited funds.
"It's different here, lots of smashing carers," Laffertysaid of the scheme that support services company Mears Group runs on behalf of local government and a housingassociation.
The provision of care for those who can no longer look afterthemselves but do not need hospital treatment is one of thebiggest problems facing Britain's state-funded National HealthService (NHS).
But the involvement of the private sector in criticalservices remains a contentious issue after botched high-profilecontracts, such as G4S and Serco's overchargingfor the electronic tagging of criminals.
The mishandling of health services can prove even more toxicfor government, while unexpected developments such as risingpatient numbers or more complex treatment can destroy companies'financial forecasts.
Circle Holdings, for example, walked away fromrunning Hinchingbrooke hospital in eastern England last month,saying the contract was not sustainable.
UNDETERRED
But for all the dangers, groups such as Mears, Mitie and Interserve remain undeterred, each buying into thehealthcare market to gain a foothold in what they see as sectorwith potential for high growth and high profit.
Britain provides home care to patients through its localauthorities and the NHS, which employ thousands of contractorsranging from outsourcers to healthcare businesses and individualprofessionals.
"It's an extraordinarily fragmented market ... that createsa big cost for local authorities because they have to manage andmonitor all those contracts," Liberum analyst Will Shirley said."That's a massive burden that will need to come down over time."
Mitie entered the healthcare market three years ago with itsacquisition of Enara, Britain's fourth-largest home-careprovider.
"Healthcare in the long term is a great growth opportunityfor the private sector, especially in areas like domiciliarycare," Mitie CEO Ruby McGregor-Smith told Reuters.
"In terms of (revenue) growth, I think you would say it cangrow 5-10 percent over the next two to three years."
Mitie's healthcare division accounts for about 10 percent ofgroup revenue and grew 7.3 percent to 48.2 million pounds ($74.4million) in the six months to Sept. 30.
The outsourcing of government contracts began in the early1980s under Prime Minister Margaret Thatcher, who privatisedlarge chunks of industry in a bid to make them more efficient.
Since then, both Labour and Conservative governments havecontinued the process. In 2013-14 the NHS spent 10 billionpounds on private service providers out of total expenditure of119.5 billion pounds, the National Audit Office said.
BIG CONTRACTS
The biggest deal so far has been an 800 million poundcontract for a partnership including Mitie, awarded by an NHSTrust last year.
It is these types of deals that mid-sized outsourcers suchas Interserve are hoping to target.
"We are now looking selectively at contract opportunitiesthat come up from the NHS ... Our ambition is, within the next12 to 18 months, to be successful at winning one of those largerNHS contracts," said Patrick Carter, Interserve's head ofhealthcare.
But as the experience of Circle Holdings shows, significantrisks remain.
As well as providing basic standards of care set out byregulators, the companies must meet specific objectives set outby local authorities or NHS commissioners -- such as customersatisfaction levels or time-keeping -- which can affect how muchthey are paid.
Serco, one of Britain's largest outsourcers, is now focusingon non-clinical services such as cleaning and switchboardoperations after its community care contract reported a 12million pound loss.
The government is also looking to improve care standards byadopting outcome-driven payment systems.
Though that would hit returns for providers that fail todeliver the required results, Mears is confident of hiscompany's ability to capitalise on such measures.
"The way many of the these services are commissioned isoutmoded," Executive Director Alan Long said.
"They desperately need to change to a payment system thatisn't based simply on the time you spend ... but is one that islinked to the quality of outcomes you are able to deliver."($1 = 0.6483 pounds) (Editing by David Goodman)
