Circle Healthcare, a John Lewis-style partnership valued at around £120m, will manage the debt-laden Hinchingbrooke hospital in Huntingdon, Cambridgeshire, from February after the government signed off on a decade-long contract on Wednesday.
Although private sector firms already operate units within the NHS – such as hip replacement centres – Circle, one of Britain's most prominent healthcare providers, is the first to take over an entire hospital.
The takeover is not considered a full privatisation as the buildings will remain in public hands and the employees retain their pay and pension on existing terms.
However, Circle is viewed by ministers as a model "mutual" with 49% of its ownership in staff hands. It operates a scheme to allow more shares to be gained through a performance-related rewards system.
Significantly this allows doctors to take a slice of the profits – and this landmark deal, the government hopes, will lead to other cash-strapped NHS hospitals consider outsourcing their management to private companies.
Circle's chief executive, Ali Parsa, said: "At a time when some healthcare commentators say the solution for small district general hospitals is simply to merge or be shut down, we believe the NHS Midlands and East's courage and zeal for innovation will enable us to show how clinician and staff control can provide a more sustainable alternative."
Circle beat outsourcer Serco to clinch the deal a year ago. The company has ambitious plans to expand – in its share prospectus it said it had brought land in five city centres to expand its hospital services.
The market to run state-owned acute services is worth £8bn and with hospitals forced to find savings every year, experts warn that many will have to consider private help to meet efficiency targets.
Two NHS trusts are considering private sector management options — the Royal National Orthopaedic Hospital and the Whiston Hospital (St Helens).
The head of health at Unison, Christina McAnea, told the BBC a new management team could have been found without going private.
"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."
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