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Britain's outsourcers target healthcare in new growth push

(Corrects name of company in reference to 800 million pound contract)

* Government sees private sector as key to healthcare provision

* 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 a cheery room in a modern apartment block set in the leafy surroundings of a former British military academy, 72-year-old Gloria Lafferty is looking forward to a traditional British meal of fish and chips with her family.

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The scene is far removed from the care home horror stories that have played out in the British media over recent years, for Colebrook House is an assisted-living scheme that its operator holds up as an example of what the private sector can contribute to a national health service creaking under the strain of an ageing population and limited funds.

"It's different here, lots of smashing carers," Lafferty said of the scheme that support services company Mears Group (LSE: MER.L - news) runs on behalf of local government and a housing association.

The provision of care for those who can no longer look after themselves but do not need hospital treatment is one of the biggest problems facing Britain's state-funded National Health Service (NHS).

But the involvement of the private sector in critical services remains a contentious issue after botched high-profile contracts, such as G4S (LSE: GFS.L - news) and Serco's overcharging for the electronic tagging of criminals.

The mishandling of health services can prove even more toxic for government, while unexpected developments such as rising patient numbers or more complex treatment can destroy companies' financial forecasts.

Circle Holdings (LSE: CIRC.L - news) , for example, walked away from running 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 (LSE: IRV.L - news) remain undeterred, each buying into the healthcare market to gain a foothold in what they see as sector with potential for high growth and high profit.

Britain provides home care to patients through its local authorities and the NHS, which employ thousands of contractors ranging from outsourcers to healthcare businesses and individual professionals.

"It's an extraordinarily fragmented market ... that creates a big cost for local authorities because they have to manage and monitor 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 its acquisition of Enara, Britain's fourth-largest home-care provider.

"Healthcare in the long term is a great growth opportunity for the private sector, especially in areas like domiciliary care," Mitie CEO Ruby McGregor-Smith told Reuters.

"In terms of (revenue) growth, I think you would say it can grow 5-10 percent over the next two to three years."

Mitie's healthcare division accounts for about 10 percent of group revenue and grew 7.3 percent to 48.2 million pounds ($74.4 million) in the six months to Sept. 30.

The outsourcing of government contracts began in the early 1980s under Prime Minister Margaret Thatcher, who privatised large chunks of industry in a bid to make them more efficient.

Since then, both Labour and Conservative governments have continued the process. In 2013-14 the NHS spent 10 billion pounds on private service providers out of total expenditure of 119.5 billion pounds, the National Audit Office said.

BIG CONTRACTS

The biggest deal so far has been an 800 million pound contract for a partnership including Mitie, awarded by an NHS Trust last year.

It is these types of deals that mid-sized outsourcers such as Interserve are hoping to target.

"We are now looking selectively at contract opportunities that come up from the NHS ... Our ambition is, within the next 12 to 18 months, to be successful at winning one of those larger NHS contracts," said Patrick Carter, Interserve's head of healthcare.

But as the experience of Circle Holdings shows, significant risks remain.

As well as providing basic standards of care set out by regulators, the companies must meet specific objectives set out by local authorities or NHS commissioners -- such as customer satisfaction levels or time-keeping -- which can affect how much they are paid.

Serco, one of Britain's largest outsourcers, is now focusing on non-clinical services such as cleaning and switchboard operations after its community care contract reported a 12 million pound loss.

The government is also looking to improve care standards by adopting outcome-driven payment systems.

Though that would hit returns for providers that fail to deliver the required results, Mears is confident of his company's ability to capitalise on such measures.

"The way many of the these services are commissioned is outmoded," Executive Director Alan Long said.

"They desperately need to change to a payment system that isn't based simply on the time you spend ... but is one that is linked to the quality of outcomes you are able to deliver." ($1 = 0.6483 pounds) (Editing by David Goodman)