Spire Healthcare Regulatory News (SPI)

Clinical care

The Group's future growth depends upon its ability to maintain its reputation for high-quality services by meeting its quality goals. Poor clinical outcomes, negative media comment or patient, GP and/or consultant dissatisfaction could reduce the quality ratings, which could lead to a loss of patient referrals and lost earnings.

Risk remained stable

Spire Healthcare continually monitors its clinical standards, policies and procedures through the Board's Clinical Governance and Safety Committee ('CGSC').

During 2017, regular management information and associated reporting has been provided to the Executive Committee. Management information is subject to continuous improvement to best leverage underlying clinical data.

There is a schedule of regular Clinical Reviews using the Care Quality Commission's ('CQC') key lines of enquiries. Each hospital is reviewed at least annually with an action plan for improvement as well as an overarching improving plan across the Group.

The Group reviews and maintains insurance to mitigate the possibility of a major loss. Adequacy of cover is reviewed annually with the Group's brokers.

'Project Outstanding' was launched in early 2018 with the overarching objective of achieving a rating of Outstanding across the Group by 2020.

Government policy

Change in the medium-term public funding of NHS services provision, and/or the prioritisation of this funding to particular service lines over time (elective healthcare, A&E, community care, etc.), could adversely reduce the flow of NHS patients to Spire Healthcare.

Changes in the service level requirements for providers of NHS services, and service level commitments to members of the public served by the NHS, could adversely impact the attractiveness of privately funded treatment.

Changes in fiscal policy could increase the burden of welfare resulting in a reduction of NHS-funded options.

A fundamental change in the tariff structure (pricing arrangements) associated with the provision of services to the NHS could result in reduced access to patients, reduced tariffs, or reduced prices leading to reduced revenues and/or margins.

Risk increased

The Group derives revenues from three primary payor groups (PMI, NHS and Self-pay) and this provides a natural 'hedge' against exposure to risks in each of these payors. The Group looks to optimise the mix of revenues across each of these payor groups dependent upon local market circumstances. For example, restricted access to NHS treatment can lead to increased numbers of patients electing to pay privately for their healthcare needs.

The Group's service levels are confirmed by regular surveys of patients, GPs and consultants, which provide ongoing feedback to ensure NHS requirements (whether as providers or as commitments to its patients) are met. In addition, the Board regularly reviews the competitiveness of its patient offering (both NHS and private patients).

The Board continually monitors Government policy, NHS requirements and associated tariff structures to consider the need for cost and/or investment reduction, whether in the short, medium or long term.

Compliance with laws, regulations and other applicable requirements

The Group operates in a highly regulated environment, including complying with the requirements of, for example, the CQC, NHS Improvement and the CMA.

Failure to comply with laws, regulations or regulatory standards may expose the Group to patient claims, fines, penalties, damage to reputation, suspension from the treatment of NHS patients, loss of hospital licence and loss of private patients, such that the Group may not be able to operate one or more of its hospitals, causing a significant reduction in profit.

The CQC has continued its inspection regime which assesses and rates hospitals and makes these results publicly available. If a hospital fared badly in one of these inspections, it could result in that hospital being assessed as 'Inadequate' which could have significant regulatory and reputational impacts. As at the end of 2017, no Spire Healthcare hospitals had received an 'Inadequate' rating.

The introduction of the General Data Protection Regulation ('GDPR') will bring tighter controls and responsibilities to how the Group controls and processes personal data.

The Group is aware that HMRC has indicated it will hold a public consultation on reforms to the IR35 Regulation. It will be important that the Group understands the impact that any changes would have.

In addition, the Group could fail to anticipate legal or regulatory changes leading to a significant financial or reputational impact.

Risk increased

The Group continues to strengthen its Group-wide risk management framework (and associated policies and procedures) to ensure that risks are mitigated as far as possible, the Executive Committee has appropriate visibility to ensure robust decision-making, and the Group has the ability to monitor and react to the changing regulatory framework of a listed company in the healthcare sector.

The Group has a significant centralised clinical services team which assists hospitals in establishing and maintaining a high level of clinical performance.

Emerging legal or regulatory changes are monitored by the Board, the Executive Committee, the Audit and Risk Committee and the CGSC, in addition to consultations with external advisers and industry briefings.

A GDPR implementation board is leading on preparation for GDPR. Progress has included a detailed gap analysis and the identification of associated risks and mitigations.

Insurance

Healthcare companies, including Spire Healthcare, are sometimes subject to actions alleging negligence, malpractice and other legal claims that may involve large potential damages and significant defence costs, whether or not the defendant is ultimately found liable.

The Group could be subject to litigation for actions by third parties or may be found liable for damages which may not be covered by its insurance policies, if the claims are in excess of cover or claims are not covered by the Group's insurance due to other policy limitations or exclusions or where it has failed to comply with the terms of the policy.

The Group's insurance premiums may increase and, if there is a significant deterioration in its claims experience, insurance may not be available on acceptable terms.

Risk remained stable

The Group holds third-party liability insurance to partially cover patient, third-party and employee personal injury claims, and is partially self-insured up to predetermined levels, above which its third-party liability insurance applies.

The Group reviews and maintains insurance adequacy of cover annually with the Group's broker.

Concentration of PMI market

The PMI market is concentrated, with the top four companies (Bupa, AXA, Aviva and VitalityHealth (formerly PruHealth)) having a market share estimated at over 85%.

Loss of an existing contractual relationship with any of the key insurers could significantly reduce revenue and profit.

Further consolidation of the PMI market could adversely impact Spire Healthcare's relative bargaining power in any ongoing commercial arrangements.

Risk remained stable

The Group works hard to maintain good relationships and a joint product/patient health offering with the PMI companies, which, in the opinion of the Directors, assists the healthcare sector as a whole in delivering high-quality patient care.

The Board believes continuing to invest in its well- placed portfolio of hospitals should provide a natural fit to the local requirements of all the PMI providers.

The Group continues to ensure we have long-term contracts in place with our PMI partners to avoid co-termination of contractual arrangements.

Availability of key medical staff

Growing demand for healthcare, changes to the working requirements and a limited supply of appropriately qualified key medical staff may lead to a shortage of medical staff. Profitable growth, in line with the Group's strategy, requires an expansion of clinical services in hospitals, particularly including more complex surgical procedures and ongoing treatment of higher-risk patients, which could be impacted by a shortage of key medical staff. In order to expand our directory of services at hospital level, in line with our strategy, it is vital to have access to appropriately qualified, clinical staff.

The market may see salary rates rise as competition for staff increases and, as a result, the Group's costs may increase and its profits may reduce.

There may be further complexity to recruitment post-Brexit.

Risk remained stable

The Board focuses on staff retention, with trends and changes in our staff survey informing our strategy for engagement with a focus on incentives, staff development and training.

Management deploys productivity tools and pursues opportunities to reduce clinical nursing time spent on non-clinical activities to optimise the effectiveness of its clinical staff base.

The Group has looked to ensure that all significant contracts run for a minimum of a year to avoid co-termination of contractual arrangements across its PMI base.

The Group believes consultants are attracted by its advanced facilities, technology and equipment, excellent brand and reputation, the availability of a broad range of treatments, skilled nursing staff and medical support staff, and the efficiency of administrative support. The Group undertakes continuous investment in its equipment, facilities and services to retain high-quality consultants and also provides theatre capacity to new consultants. This is confirmed by good consultant satisfaction levels, though these fell in 2017.

Macroeconomic conditions

Approximately 70% of the Group's revenue is dependent on private patients having PMI, paid by their employer or paid by the individual, or being able to afford its services (Self-pay).

In an economic downturn, the number of insured individuals falls with the level of employment and individuals have reduced real income to fund insurance or Self-pay for procedures.

This would have an adverse effect on the Group's business, the results of its operations and prospects.

Risk remained stable

The Board manages this risk by regularly reviewing market conditions and economic indicators to assess whether actions are required.

As successfully employed in the recent economic downturn, if the private market contracts, the Group can try to reduce costs and future investment to improve profit and cash flow, and may be able to offer the released capacity to the NHS at its lower tariff, reducing the impact on profit.

Macroeconomic conditions may put comparable finance strain on competitors, who may not be as well positioned to respond. Opportunities may arise from reduced competition or market consolidation.

Competitor challenge

Spire Healthcare operates in a highly competitive market. New or existing competitors may enter the market of one or more of our existing hospitals, or offer new services.

The potential impact would be the loss of market share due to a new competitor and reduced profitability and cash flow.

Risk remained stable

The Group maintains a watching brief on new and existing competitor activity and retains the ability to react quickly to changes inpatient and market demand.

The Group considers that a partial mitigation of the impact of competitor activity is ensured by providing patients with high-quality care and by maintaining good working relationships with GPs and consultants.

Cyber security

The Group's information technology platform supports, among other things, management control of patient administration, billing and financial information and reporting processes. In common with other corporate organisations, the Group faces the challenges of a continually evolving external cyber threat landscape, and could become vulnerable to computer viruses, break-ins and similar disruption from unauthorised tampering.

The Group's business could be disrupted if its information systems fail or if its databases are breached, destroyed or damaged. This could cause financial and reputational impacts.

The level of risk to Spire Healthcare's IT architecture and systems continues to grow as the volume of cyber security threats are increasing and becoming more sophisticated.

Risk remained stable

Spire Healthcare's technical IT teams continually monitor these developments as a business as usual activity. Working with a number of specialist and industry leading technical partners, Spire Healthcare has created multiple layers of business protection through the use of advanced intrusion detection and protection systems, web access firewalls and advanced content filtering to combat denial of service attacks.

Business processes are also kept under review and user education regularly carried out to minimise the possibility of ransomware incidents.

Regular third-party penetration testing is performed on Spire Healthcare's core IT systems. New IT system developments are subject to rigorous penetration testing prior to release.

This approach allows us to keep pace with the increasing risk profile, ensuring that the risk to Spire Healthcare has remain stable.

Investment plans and execution

The capital investment programme (which includes IT system developments) at any time consists of a number of individually significant projects simultaneously in progress.

With any major project there are risks, such as major cost overrun or substantial delay in delivery, or disruption to business activities during capital builds which could impact upon the expected returns, the Group's planned profit growth and future cash flow.

Risk remained stable

The Group conducts a financial and operational appraisal process to evaluate the expected returns on capital during the evaluation phase of the project.

Comprehensive project management is employed throughout the project, from the evaluation, to the bid process, agreement of contract terms and conditions, cost forecasting, as well as regular monitoring and management of progress.

Regular reporting of all significant projects to the executive sponsor and the Board is provided. Learnings from recent new builds will strengthen the process going forward.

Liquidity and covenant risk

The Group may not have sufficient liquid resources to meet its financial liabilities as they fall due, or breach financial covenants linked to its borrowings.

Failure to meet its obligations or covenants would have a substantial adverse effect on the Group's reputation and may lead to borrowings becoming repayable earlier than contracted for.

Risk remained stable

The Group actively monitors and manages its liquid asset position, its financial liabilities falling due and the cover against its loan covenants.

The Board has considered the risk in detail as part of its assessment of the viability of the Company.

(£ million)

2017

2016

Salaries and other short-term employee benefits

3.5

3.2

Post-employment benefits

0.4

0.4

Share based payments

0.9

0.3

4.8

3.9