A private healthcare company headed by one of Tony Blair's closest allies is making millions of pounds from acute NHS staff shortages, The Observer has discovered.

Reed Health Group, chaired by the former Labour Party general-secretary Lord Sawyer, expects to make more than £5 million profit this year from charging hospitals more than £40m to supply nurses, physiotherapists, radiographers and other critical medical staff.

One company insider told The Observer: 'The worse the staff crisis in the NHS, the more money his company will make.'

The revelation that one of the key architects of New Labour is now running a firm that is specifically geared to make millions from staff shortages in hospitals has infuriated Labour backbenchers, who have become increasingly worried about the Government's desire to involve private companies in running public services.

Sawyer sat close to Blair at this year's Labour Party conference and also sat beside Health Secretary Alan Milburn while chairing the con ference debate on public sector reforms. Much of this debate focused on ways to involve the private sector more closely with the NHS.

The peer - who, as Tom Sawyer, the former public sector union chief, was crucial to Blair's modernisation of the Labour Party - became chairman of the newly created company earlier this year. According a financial report prepared by the company's own stockbrokers, Reed Health aims to profit from the 'structural deficiencies with the NHS [and] the continuing shortage of nurses and specialist healthcare staff, and an ageing population'.

Since being floated on the stock market in July, Reed's share price has soared 40 per cent against a sagging stock market.

Financial documents obtained by The Observer show that while hospitals struggle to keep wards open and fully staffed, Reed Health will make a profit of up to £25 for every £100 they charge these overstretched centres.

If a hospital calls up Reed Health in desperate need of nurses for an intensive care unit, the company will charge 25 per cent more than the hospital would normally pay for a nurse. The company adds an even higher mark-up for supplying physiotherapists, radiographers and specialist assistants to work in operating theatres, making profits of about £100,000 a week.

Earlier this year the Audit Commission produced a damning report on agencies, like Reed Health, which supply nurses to hospitals, stating that their high charges cost the NHS more than £300m a year. The Commission accused the agencies of holding the NHS to ransom and criticised the standard of nursing staff some of them supplied.

The situation was 'nothing short of a scandal,' said Karen Jennings, head of Unison, the main hospital union. 'The more desperate the hospital is, the more these firms charge. They are ripping off the NHS.'

The Liberal Democrats' health spokesman Dr Evan Harris said: 'I have lost count of the number of so-called progressive Labour politicians who leave their principles behind them in order to make money from the private sector. Yet again, a private company is hiring someone with access to senior Ministers.'

Sawyer did not return calls from The Observer yesterday and a spokesman for Reed Health refused to reveal how much Sawyer earned as non-executive chairman, the size of his personal shareholding in the company, or what bonus he can expect if profits continue to soar.

The majority of the shares in the company are still owned by Reed Executive, the recruitment group run by Alec Reed, a major donor to the Labour Party.

However, Alan Howard, divisional manager at Reed Health, defended the company: 'We are providing an important service for both hospitals who want temporary staff cover and medical professionals who are looking for flexible employment.'

The Department of Health recently acknowledged the problem it faces over the supply of temporary staff. It has set up a non-profit body, NHS Professionals, to cut the £800m it spends on temporary staff.

However, Reed's stockbrokers, Granville Baird, believe this could actually lead to an increase in the company's profits - because the impact of NHS Professionals could be to squeeze out its smaller rivals.

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