A groundbreaking £1bn, 10-year deal for a private firm to run a struggling NHS hospital has been confirmed.

Circle, which is part-listed on the London Stock Exchange, is to take over Hinchingbrooke hospital in Huntingdon, Cambridgeshire, from 1 February 2012.

The deal will see Circle assume the financial risks of making the hospital more efficient and paying off its debts but the hospital will stay in the NHS.

The company must maintain services but unions fear staff numbers could be cut.

Although private sector firms already operate units that treat NHS patients - such as hip replacement centres - the firm will become the first non-state provider to manage a full range of NHS district general hospital services.

Hinchingbrooke is carrying about £40m of debt and its financial status has been given a high-risk red rating by the NHS.

The franchise deal with Circle was developed after concerns that the hospital had become unviable, and a local campaign to maintain services.

Circle describes itself as a social enterprise because 49.9% is owned by a partnership of employees.

Others see it as a private business as the rest is owned by its parent company, Circle Holdings, which is listed on the stock market.

John Lewis model

Dr Stephen Dunn, from the NHS in the East of England, says the hospital will continue to be paid at NHS rates for its work while it is being run by Circle. The company was chosen after a competitive tendering process, and has to assume all the financial risk involved.

"It's a hugely original deal - we've managed to avoid the possibility of closing the hospital. We've got a solution to the debt - and have plans that allow us to meet the efficiency challenges the NHS faces."

Analysis

For the moment this deal is a one off, but other hospitals are struggling financially. About 20 in England have been named by ministers as being unviable in their current form.

It follows a review which all NHS organisations in England have had to undertake of whether they can meet the financial standards required to be given the status of a foundation trust.

Some may try to merge with more successful nearby NHS hospital trusts. Others will watch what happens in Hinchingbrooke with interest.

If Circle manages to maintain the range and standards of care at Hinchingbrooke, but cut costs, that in itself could put pressure on NHS managers at other hospitals to do the same.

And, as this deal has been subjected to very detailed scrutiny by the Treasury, it could also mean that other similar contracts could be agreed more quickly.

Any significant changes in services at the hospital will have to be agreed with the local NHS and the public will have to be consulted.

Circle chief executive Ali Parsa accepted the company was taking on a challenge. He said the strength of its approach was in increasing the involvement of doctors and nurses.

"We want to create a John Lewis-style model with everyone who works there in charge of the hospital, letting them own the problems and solve them. We will try everything we can to make this small hospital viable - if we can how fantastic would that be?"

The deal has taken almost a year from the plans being sent to the government for approval, to the contract being given the go ahead. The approval for the tendering process began under the last Labour government.

Circle, like other independent health providers, has experience of providing planned care but not of running a full range of services including emergency and maternity care.

Local GPs, now in a group getting ready to plan and buy services for the area, have been pressing for the deal to be signed off. They wrote to the prime minister to express concerns about the delay.

The deal is controversial and not all are convinced this is the only solution to keeping Hinchingbrooke open.

Public sector union Unison's head of health, Christina McAnea, said a new management team could have been found without putting a contract out to tender.

"We just don't accept there is no expertise within an organisation the size of the NHS, and to turn to the private sector which has a very patchy record in delivering these kind of services is an accident waiting to happen."