A private health firm has lost one of the biggest and longest-running contracts to treat NHS patients, in a significant blow to the creeping privatisation of care.

Circle is losing the contract it has held for 11 years to run the Nottingham NHS Treatment Centre, which provides 240,000 operations and checkups a year. Nottingham University Hospitals NHS trust (NUH) has been handed a £320m contract to run the centre for the next five years after a bitter legal battle between Circle and the NHS.

Circle has run the centre since it opened in 2008 as one of the independent treatment centres (ISTCs) that the last Labour government set up to reduce the number of NHS patients waiting for non-urgent treatment.

Labour was accused of privatising part of the NHS because Circle was among a number of private companies that were put in charge of ISTCs and allowed to make a profit from them. Other firms, notably Care UK and Ramsay Health Care, still run centres elsewhere in England.

Rushcliffe NHS clinical commissioning group, the NHS body that awarded the contract on behalf of a group of CCGs, decided to give it to NUH despite legal threats by Circle. It said bringing the service into the NHS would “significantly benefit patients”.

However, there are concerns that thousands of people who are waiting to be seen at the Nottingham centre, including cancer patients, will face delays once NUH takes over the contract on 29 July because it will not be in a position to provide the full range of services immediately.

The transition was originally intended to take seven months, but is now being compressed into eight weeks amid acrimony, claims and counter-claims and legal action by Circle against Rushcliffe.

In a court hearing in April to decide who got the contract, the CCG’s chief officer, Amanda Sullivan, made clear that it preferred a “hiatus” of at least a month affecting the services that the centre offered after NUH took control to the option of extending Circle’s contract.

In 2012 Circle became the first profit-driven health firm to be put in charge of an NHS hospital when it took over the running of Hinchingbrooke hospital in Cambridgeshire. It handed the contract back to the NHS in 2015 after the hospital experienced financial problems and could not keep up with rising demand. The Care Quality Commission rated the hospital’s care as inadequate.

Circle has lost the Nottingham contract despite the CQC rating services there as good. It had high patient satisfaction rates and, unlike many NHS hospitals, was hitting the target of treating 92% of patients waiting for planned care within 18 weeks.

The shadow health secretary, Jonathan Ashworth, said he was pleased Circle had lost the contract and criticised the firm for using solicitors to try to thwart the contract decision, which was first reported by the Health Service Journal. “It’s hugely welcome this service is returning to our public NHS and out of the hands of Circle. Patients well remember Circle’s chaotic handling of the Hitchingbrooke hospital contract and their failures over dermatology at Queen’s Medical Centre [in Nottingham].

“It’s shocking Circle fought this move tooth and nail in the courts, exposing everything that’s wrong with the expensive, wasteful process of competitive tendering and privatisation.”

Circle has argued that financial problems at NUH, which overspent its budget by £31.8m in 2018/19, meant the trust should not be allowed to run the centre, whose services include cancer care, gynaecology, orthopaedics and pain management.

A spokesman for the firm confirmed it was challenging the CCG’s decision in court. “Circle believes the commissioners [CCG] ran a flawed procurement which does not adequately safeguard the sustainability of the services currently provided. We believe we put in the most credible bid, which would have continued the first-rate patient care and brought new investment and innovation, along with additional savings, to the local healthcare system,” he said.

“Circle is disappointed in the local Nottingham decision given the benefits that have been delivered over the last 11 years and the sustainable and innovative bid that we submitted. We believe passionately that the award of contracts needs to ensure long-term sustainability.”

• This article was amended on 10 June 2019 to include a credit to the Health Service Journal.