Nursing agencies in emergency ward

Nestor Healthcare ousts chief executive after profits warning as NHS gets tough

The National Health Service's efforts to freeze out private sector agencies offering expensive temporary staff claimed another corporate casualty yesterday, as Nestor Healthcare issued a devastating profit warning and parted company with its chief executive.

The National Health Service's efforts to freeze out private sector agencies offering expensive temporary staff claimed another corporate casualty yesterday, as Nestor Healthcare issued a devastating profit warning and parted company with its chief executive.

Justin Jewitt, the head of Nestor since 1998, had bet his company's millions on hopes that the private sector would be called in to offer out-of-hours cover for general practitioners, but NHS trusts are instead organising rotas of willing doctors.

Two giant call centres built by Nestor to co-ordinate its network of private GPs are likely to stand virtually idle as a result of the misjudgment.

The disaster - which knocked 36 per cent from the company's value and sent its shares to 134p, the lowest since Mr Jewitt took over - is the latest profit warning to come out of the healthcare staffing sector. Reed Health Group, another listed company that specialises in providing agency staff for the NHS, has seen its shares fall from 113p to 68.5p in less than six months.

The previously free-spending NHS has launched a blizzard of national and local initiatives aimed at cutting its bills for agency staff, which rose to £1.68bn in 2003 from £1.28bn the year before.

Decisions by primary healthcare trusts, which are taking over the responsibility for out-of-hours cover this year, were showing a clear trend towards the provision of services in-house, Nestor warned yesterday. Not only does this mean no new work is being sent the private sector's way, but the company's existing work for GPs unwilling to cover out of hours is also being taken away.

John Rennocks, Nestor's chairman, said: "It has become clear over the last couple of weeks that a high majority of PCTs are going down a DIY route, linking up doctors and emergency centres under their own controls."

The future of 600 staff at the two new call centres in Birmingham and Sheffield has been put under review, along with those at five other call centres. "The structure of the business needs to be reviewed in the light of the changes to revenue expectations," Mr Rennocks said.

Investors were most disappointed to learn that the uncertainty has led Nestor to call off acquisitions it had been planning in the home care division, which supplies home help on behalf of local authorities and which had been expected to be the main driver of growth in the short term. Analysts at Nomura questioned whether the high overheads associated with the new call centres, and Nestor's debt burden of £90m, would lead the company into trouble with its banks. Nestor said its overdraft facility was £110m and denied a cash crunch was likely.

The out-of-hours GP services arm was the mainstay of the Healthcall business which Nestor acquired for £110m in 2001, and whose trading name has subsequently been changed to Primecare. The deal was accompanied by a £38m equity fundraising at 475p a share. The disastrous outcome of the acquisition made Mr Jewitt's position untenable.

It has become clear that few PCTs plan to use private sector providers such as Nestor's Primecare, even though the company had hoped it would be best able to guarantee the necessary response times and record keeping.

Mr Rennocks said: "I am not convinced that the PCTs will be able to deliver the standards that are required in the guidelines that have been set down, at least not initially, not without some time and a lot of investment."

Hector Forsythe, an analyst at Evolution Beeson Gregory, said the debacle left Nestor's strategy in tatters and revealed a "predisposition" in the PCTs to use local co-operative services. "They don't know if they can do it cheaper, but they are going to have a go," he said.

This mirrors the experience of the private sector across the NHS. Nestor is also one of the largest providers of agency nurses to the NHS, and issued a profit warning from its personnel division last December. There was further bad news from the division yesterday. It said initiatives such as NHS Professionals - the service's in-house staffing agency - were cutting revenues and profitability for the private agencies and Nestor had failed to find enough replacement business in other markets.

NHS Professionals was established a little over two years ago to be one-stop national shop for temporary nurses and other staff within the service, cutting out the cost of commissions paid to the private agencies. It attracted significant criticism in its early days for shambolic organisation and failure to pay nurses on time, but has since settled down.

In February, Reed Health warned of disappointing profits because of the NHS initiatives.

Reed complained that new rules requiring private sector agency nurses to have strict documentation and up-to-date training certificates was making it less attractive for people to work with the private sector, pushing them instead into NHS Professionals and local "banks" of temporary nursing staff. At one point over Christmas Reed was offering nurses free turkeys in a desperate bid to get them to sign back on to its books.

David Fennell, Reed's chief executive, said: "There is a list of conditions that our nurses have to satisfy that NHS Professionals and NHS trusts do not have to work to. We in the private sector are calling for a level playing field." He said Reed was adapting by seeking "sole provider" agreements with PCTs, to act as their first choice private sector staffing partner, but said these deals were driving down margins.

Mr Forsythe worried that the experience of the staffing agencies would be mirrored by other companies piling into the health arena in the anticipation that Government moves to involve the private sector in the NHS would prove lucrative. The service, he says, is likely to want to claw back any perceived profits.

Investors have recently chased shares in companies which will operate new "treatment centres" carrying out set numbers of surgical procedures for the NHS. Mr Forsythe said: "There is a natural question mark. There is a concern over what will happen once these businesses are up and running; over what happens when the first contract renewals come up in five years; over what happens to prices if these centres turn out to be profitable or even extremely profitable."

Case Study: Lewisham cashes in on its own bank of staff

University Hospital, Lewisham, in south-east London, used to pay up to 33 per cent commission to a private agency that provided the specially trained and highly sought-after nurses required to cover shifts at its intensive care units. That happens rarely now.

The hospital's "bank" of nurses willing to work shifts is typical of the local initiatives that are springing up across the NHS to stop money leaking unnecessarily into private sector profits.

Carole Ambrose, head of critical care nursing at the hospital, said she is now forced to resort to a private agency less than once a month. The bank has attracted about 30 nurses, often those who have left full-time jobs for family reasons, while staff wanting additional shifts are also more readily available.

"The vast majority of the gaps in the rota we can cover ourselves," she said. "Intensive care-trained nurses are like gold dust. Two years ago we made a conscious effort to build up the bank, paying rates that are comparable to the private sector but not having to pay the phenomenal commissions on top."

Because the nurses work regularly for the hospital, Lewisham can also put an input into their training,