Evidence submitted by Monitor (Def 46)
SUMMARY
1. NHS foundation trusts are delivering
a solid financial performance. Unaudited figures show that the
NHS foundation trusts achieved a net £8 million deficit for
2005-06, around 0.1% of turnover. This is the figure before exceptional
items which provides a better basis for comparison with the rest
of the NHS. This is based on information supplied to Monitor from
the 32 NHS foundation trusts which were in existence during 2005-06.
2. Monitor's rigorous assessment process
ensures that only organisations which are able to demonstrate
financial viability and strong management are authorised as NHS
foundation trusts.
3. The regulatory framework which is applied
to NHS foundation trusts builds on the rigour of the assessment
process. Where an organisation is performing well it is subject
to a proportionately low level of regulatory scrutiny, with the
foundation trust being relied upon to report openly and accurately
on its own performance.
4. Where an organisation is performing poorly,
the regulatory regime identifies this promptly and ensures that
the foundation trust responds appropriately. This may take place
by a collaborative approach between Monitor and the NHS foundation
trust or, as was the case with Bradford Teaching Hospitals in
2004, it may require use of Monitor's formal intervention powers.
5. The effectiveness of Monitor's regulatory
regime can be seen in the effective turnaround of the three NHS
foundation trusts which incurred the largest deficits in 2004-05.
Peterborough and Stamford, Royal Devon and Exeter, and Bradford
incurred an aggregate deficit of £23 million in 2004-05.
Following Monitor's involvement this has reduced to a net deficit
of £3 million for 2005-06 (based on unaudited figures).
6. Monitor is committed to maintaining the
high level of financial performance within the NHS foundation
trust sector. It has developed processes which will ensure that
the standards of assessment and regulation remain high, even as
the number of NHS foundation trusts increases steadily over the
coming three years.
OVERVIEW OF
MONITOR AND
NHS FOUNDATION TRUSTS
7. Monitor's statutory name is the Independent
Regulator of NHS Foundation Trusts. Monitor was established in
January 2004 under the Health and Social Care (Community Health
and Standards) Act 2003. Monitor's statutory responsibilities
include the authorisation and regulation of NHS foundation trusts.
Monitor is independent of the Department of Health. It is accountable
to Parliament.
8. NHS foundation trusts are autonomous
organisations. They are no longer subject to direction by the
Secretary of State for Health, although they must continue to
work within the framework of national targets and standards established
by the Secretary of State. Their primary purpose must remain
the provision of services to the NHS.
9. The Board of Directors of each NHS foundation
trust is responsible for strategy and performance. They are accountable
to local members through the Board of Governors, to their commissioners
(such as primary care trusts) through contracts and to Monitor,
through the Terms of Authorisation which are issued to each NHS
foundation trust.
10. The first 10 NHS foundation trusts were
authorised on 1 April 2004. There are now 40 NHS foundation trusts,
of which the most recent group was authorised on 1 June 2006.
A list of the NHS foundation trusts is included at Appendix A.
The forty NHS foundation trusts have annualised total income of
£8.2 billion (based on unaudited 2005-06 figures). £7.9
billion of this is from 37 acute trusts, representing around 22%
of acute trust activity in England. The remaining £300 million
is from the three mental health trusts which were authorised as
NHS foundation trusts on 1 May 2006.
11. The number of NHS foundation trusts
is expected to increase steadily over the next three years, given
the Government's wish to allow all NHS trusts the opportunity
to apply for foundation trust status. Monitor is currently anticipating
that there will be between 125 and 175 NHS foundation trusts by
April 2009.
12. The number of NHS foundation trusts,
and the fact that this number is set to increase steadily over
the next three years, means that an understanding of their financial
environment and performance is essential in order to assess the
current and future financial position of the NHS.
NHS FOUNDATION TRUSTS'
FINANCIAL PERFORMANCE
2005-06
13. Monitor has published unaudited financial
information for the financial performance of NHS foundation trusts
for 2005-06. This is based on information supplied to Monitor
as part of NHS foundation trusts quarterly returns. The audited
accounts of individual NHS foundation trusts for 2005-06 will
be laid before Parliament during July; Monitor prepares consolidated
accounts for NHS foundation trusts and these are expected to be
laid before Parliament in October.
14. The unaudited figures show that before
exceptional items the 32 NHS foundation trusts recorded an aggregate
deficit of £8 million for 2005-06. This represents around
0.1% of their £6.8 billion total income. The deficit before
exceptional items provides the best basis for comparison with
other NHS organisations (see Appendix B for an explanation of
exceptional items).
After exceptional items the NHS foundation trust
sector incurred a deficit of £24 million for 2005-06, marginally
behind the £20 million full-year deficit forecast in Annual
Plans prepared at the beginning of the financial year.
NHS foundation trusts have reported £28
million of provisions against potential bad debts with primary
care trusts (PCTs). While these figures are subject to audit,
it suggests that nine NHS foundation trusts have significant concerns
about whether their commissioning PCTs will make payment for work
which has been carried out. PCTs commission services from NHS
foundation trusts on the basis of legally-binding contracts.
University College London Hospitals NHS Foundation
Trust (UCLH) incurred a deficit of £36m. Excluding the performance
of UCLH, the remaining 31 NHS foundation trusts generated a £12m
surplus (see paragraph 17 ) .
Further information can be found in Monitor's
preliminary report on 2005-06. *
* Not printed here.
TURNAROUND—CREATING
FINANCIALLY ROBUST
ORGANISATIONS
15. In 2004-05 the three NHS foundation
trusts with the greatest deficits were Bradford (£7.9 million),
Peterborough and Stamford (£7.7 million), and Royal Devon
and Exeter (£7.3 million). In each case concerted action
was taken to address the deficit leading to a marked improvement
in performance during 2005-06. The unaudited figures for 2005-06
show that Bradford had a deficit of £2.8 million, Peterborough
and Stamford a deficit of £1.0 million and Royal Devon and
Exeter a surplus of £0.6 million.
16. These effective turnarounds shared a
number of common factors:
Early identification of issues—Monitor's
light touch but risk focussed compliance framework gives early
indication of financial underperformance. This facilitates prompt
diagnosis of the size and nature of the problems and promotes
rapid remedial action.
Transparency—there is greater transparency
in NHS foundation trust financial statements; in particular their
accounts are free from the distorting impact of financial support
and prior year deficit adjustments. Enhanced transparency, allows
for improved financial planning, control and turnaround.
Commercial discipline—NHS foundation trusts
have greater independence. This brings greater responsibility
and accountability. This accountability and associated sanctions
for failure inject commercial disciplines into culture of NHS
foundation trusts which again helps to ensure strong financial
management and successful turnaround of deficits.
Intelligent use of professional advisors—early
detection of issues and greater commercial discipline promote
the optimal use of professional advisors to assist in the identification
and implementation of turnaround plans.
Independence from political process—The
culture of NHS foundation trusts is generally one of non reliance
on direct subsidies and non interference by Government bodies,
which expediates successful turnaround because it reduces influencing
activities.
Independent regulator—Monitor's blend of
role and powers means that it is viewed as an "honest broker",
facilitating a trust's successful recovery with Monitor's own
focused team.
Focusing on clinical efficiency—in developing
a response, it is essential to focus on the organisation's core
costs and the processes which determine those costs; particularly
under the payment by results system financial performance is dependent
on an organisation developing effective programmes to improve
clinical efficiency and increase productivity
17. The approach which Monitor adopted successfully
with the three worst-performing FTs in 2004-05 is also being applied
to UCLH. The Trust began to suffer adverse performance in the
first quarter of 2005-06. The significant underperformance in
2005-06 has been due to activity levels which were significantly
below plan, higher than anticipated facilities management costs
arising from the move to the new PFI-funded hospital and underachievement
of cost improvement plans. The Trust has been subject to monthly
monitoring during the year as it develops a recovery plan. The
plan has now been agreed and provides for UCLH to return to financial
break-even in 2007-08. It will remain subject to close scrutiny
by Monitor and remains under consideration for formal intervention
if necessary.
DEVELOPING FINANCIALLY
STRONG NHS FOUNDATION
TRUST APPLICANTS
18. The positive effects of NHS foundation
trust status have been observed by Monitor not just in improved
performance by existing NHS foundation trusts but also in greater
rigour from organisations applying for NHS foundation trust status.
With the early applicants Monitor identified a number of recurring
issues which gave rise to concern. These included cases where
financial plans were subject to frequent change; cost improvement
plans which were highly aspirational and lacked detail; and Boards
which lacked sufficient financial or commercial expertise within
the non-executive directors. The level of concern at these issues,
while not entirely eliminated, has been significantly reduced
as more recent applicants appear to have a better appreciation
of the demands of FT status.
19. A notable recent example of an organisation
which has demonstrated greater financial accountability through
the application process is East Somerset NHS Trust. It originally
applied for authorisation in Autumn 2004. At the time its programme
included a £30 million capital investment to replace a number
of existing buildings on the Trust's main site with a new single
building. Monitor questioned the affordability of the scheme and
the application was deferred while the Trust undertook further
review of its forward plans.
20. When the Trust reapplied to Monitor
in Spring 2006 it had considerably revised its plans. Following
the deferral of its application the Trust undertook a thorough
review of its planning assumptions and the scope for achieving
cost improvements. Working with external advisers it identified
considerable scope for efficiency within internal processes which
would allow length of stay to be reduced and achieve improvements
in operating theatre and bed use. When the Trust reapplied to
Monitor in Spring 2006, the proposed £30 million capital
investment had been dropped. The Trust outlined how it could achieve
its desired improvements in services through greater efficiency
and improve the existing buildings through more modest incremental
expenditure. The Trust and its main commissioner expect to be
one of the first health economies in the country to achieve the
18 week treatment target. It is significant that during the period
from Autumn 2004 to Spring 2006 the Board at the Trust was strengthened
with a number of new appointments with greater commercial experience.
The application was approved and the Trust was authorised as Yeovil
District Hospital NHS Foundation Trust from 1 June 2006.
21. Monitor has also gained valuable insights
into the financial challenges facing the NHS through its involvement
with the Department of Health and SHAs in the Whole Health Community
Diagnostic Programme. The programme provides individual trusts
with a clear indication of the issues they need to address to
be able to apply successfully for NHS foundation trust status.
A consistent theme is the need for trusts to understand the link
between their costs and activity so that they can operate successfully
under a tariff system. The actions identified also often include
ensuring that cost improvement plans are robust and appropriately
supported and undertaking actions to improve productivity and
efficiency. The diagnosis also identifies actions for SHAs, particularly
where service reconfiguration needs to be considered or where
there are strategic financial issues for commissioners as well
as providers.
22. Implementing the action plans for each
trust will take some time particularly where significant work
is required to achieve a financially robust position and to strengthen
appropriately their Board and organisational capacity and capability.
Monitor estimates that it will take more than two years for the
majority of the remaining acute NHS trusts to reach a position
where they could credibly apply for NHS foundation trust status.
It is important that "turnaround" work does not focus
on short term fixes to achieve financial balance at year end.
The Whole Health Community Diagnostic Programme provides a planned
basis for ensuring that all acute trusts are financially viable
within a time frame which reflects their local circumstances.
CONCLUSION
23. While a number of NHS foundation trusts
have generated surpluses in 2005-06, Monitor believes that it
is essential that the size of the surpluses, and the number of
NHS foundation trusts generating them, needs to increase. NHS
foundation trusts need to generate reasonable surpluses in order
to fund the renewal of their assets. While NHS foundation trusts
can borrow from commercial organisations in order to fund investment,
it is probable that it will be more efficient to fund small scale
investment programmes through funds which the organisation has
generated itself. In addition, a commercial lender is unlikely
to look favourably on a borrower who cannot demonstrate a track
record of strong cash flow and surpluses.
24. The accounting and regulatory framework
which applies to NHS foundation trusts promotes transparency and
encourages rigour. NHS foundation trusts are delivering a relatively
strong financial performance. Where problems are identified, the
regulatory framework ensures that they are addressed promptly
with appropriate and achievable plans. At the heart of the system
are the Boards of Directors of each NHS foundation trust. By making
them solely accountable for the performance of their organisation,
and giving them the freedoms to lead their organisations within
a clear framework of rules, they will be well placed to respond
to the financial pressures which the NHS will continue to face
in the future.
William Moyes
Executive Chairman, Monitor
6 June 2006
| 
