Examination of Witnesses (Question Numbers
61-79)
MR RICHARD
GREGORY, MR
STEPHEN FIRN
AND DR
BILL MOYES
3 JULY 2008
Q61 Chairman: Gentlemen, could I welcome
you to the second half of our evidence session in relation to
Foundation Trusts and Monitor. Could you introduce yourselves
and the position you currently hold?
Mr Firn: My name is Stephen Firn;
I am Chief Executive of Oxleas NHS Foundation Trust. For those
who might not know, we are a mental health and learning disability
trust in southeast London so we cover the boroughs of Bexley,
Bromley, Greenwich, Lewisham and also into Belmarsh Prison. I
have been Chief Executive for six years; we were one of the first
mental health FTs and that occurred about two years ago.
Dr Moyes: Good morning. I am Bill
Moyes; I am the Executive Chairman of Monitor.
Mr Gregory: Good morning. I am
Richard Gregory, Chairman at Chesterfield Royal; I have been Chairman
there since March 2006.
Q62 Chairman: I know Richard very
well although I have never met him in his capacity as Chairman
of Chesterfield Royal Foundation Trust; I have met him on many
other occasions with difference hats on. My first question really
is to all of you. The Healthcare Commission and the Audit Commission
have recently recommended that Foundation Trusts should not retain
large cash balances over prolonged periods and should set out
clearly how they intend to use these balances. Do you agree? If
you do, what do you intend to do about it?
Dr Moyes: I entirely agree that
we expect Foundation Trusts to use the cash they build up to develop
services for patients and that undoubtedly is what we expect to
see happen. I think the Committee has to recognise that Foundation
Trusts need their commissioners to be clear about what investment
they want to see made: investment in buildings, investment in
equipment, investing in some new staff to deliver new services.
As commissioning becomes a stronger function with a greater degree
of clarity about what they want to seeLord Darzi's report
obviously them a platform to do thatthen we will see Foundation
Trusts respond to that. My sense of Foundation Trusts is that
they are anxious to make investments; they recognise the issue
that you are putting to me and they are anxious to respond. However,
what they do not want to do is to make investments that do not
meet the needs of their commissioners. That would be my response
to it.
Mr Gregory: We have submitted
evidence that shows that we have nearly tripled out capital expenditure
since being a Foundation Trust. To be able to plan for that and
prioritise for that you need to build up surpluses. We use the
phrase to explain this to our local community that it is surplus
with a purpose; it is not surplus just to put into a cash account
and carry interest forward and not to be used. It is all going
to be used on improving patient services. It is a question of
timing, it is a question of planning and it is a question of prioritisation.
The wonderful thing about Foundation Trusts is that in principle
they are enabled by their very status to be able to plan and prioritise
and actually shape their own future, their own destiny. You need
to create surpluses to do that and you need to hold cash balances
to do that. By simply holding a cash balance it does not mean
that it is not prioritised. Virtually all our cash is actually
committed on a three year capital investment strategy that has
been agreed with our governors, agreed with our board and prioritised.
That may be re-prioritised according to the demands upon the service;
we have flexibility. The surplus and the cash balance give us
flexibility to be able to react, whether it is a short term issue
or a long term issue. For me it absolutely underpins the principle
of Foundation Trusts.
Mr Firn: To answer your question
straight away, yes I do agree with that premise and to some extent
we have been doing that. Each of the two years we have been a
Foundation Trust we have made a surplus which we have carried
over of around a couple of million each year. We have invested
that both in new services which have been agreed with governors
and with commissioners and in improving quality simply focussed
around certain things around the patient survey and setting up
an opportunity fund. We have £1 million which clinicians
can bid towards to set up new services or new innovations and
get access to within a month. I could give examples of those sorts
of things if it would help. We do have cash balances of about
£25 million which is a significant amount of money, but to
put that in context if our commissioners decided to stop paying
us for whatever reason we would run out of money within two months;
it is less than two months' operating money so it is not a huge
amount in that sense. However, we also realise that it is NHS
money and it should be used for the benefit of the patients and
carers. We do not have any major estate and capital issues ourselves;
we have been through all that so there is nothing obvious we could
and should be doing with it. There are new buildings that I would
like to build and new services I would like to set up. For example,
I was in Belmarsh Prison on Tuesday and there were ten prisoners
there waiting transfers to the NHS. We know the policy is that
they should be transferred within 14 days; some of them had been
waiting months. We have a medium secure unit about five miles
away with planning permission already secure; we could build a
unit there. The problem in mental health is that money does not
follow the patient so we could build a new service that is semi-psychological
therapyI could open a new for thatbut without a
tariff, without money following the patient, we would not have
the revenue streams to be able to fund that. As Bill says, there
is an uncertainty about how best to use it and clearly we are
also holding back to see the outcome of polyclinics in London
because we would be very keen to invest and be involved in those.
There are also other things like community services provider arms
which we would be very interested in running ourselves as well.
That cash, therefore, is ready and waiting for use when safe and
secure investments can be identified.
Q63 Chairman: The Healthcare Commission
and the Audit Commission have said that Monitor should have a
role in making sure that a proper balance is kept in relation
to that. Is that how you see it? Do you think it is the role of
Monitor?
Dr Moyes: I would be apprehensive.
I would not necessarily rule it out completely but I think the
first instance we are looking to commissioners to be clear about
what they need to see by way of investment by Foundation Trusts.
My hope and my expectation is that when the operating framework
is published in the autumn, after Lord Darzi, we will start to
see in that a clearer description of what the Department of Health
is looking to commissioners to create and that will flow into
their own local commissioning plans. If, in a few years' timeI
think it would be within that timescalewe were to conclude
that even given greater clarity of commissioning intentions and
the Foundation Trusts were building up greater surpluses than
they needed for their own investment purposes, that does raise
a question then about the tariff. I think that is where I would
go next before I tried to position Monitor as the owner, if you
like, of Foundation Trusts, requiring them to invest or to give
up cash. I am quite apprehensive about doing that.
Q64 Chairman: You would use a tariff
on a particular Foundation Trust to take money off them. Is that
what you are saying?
Dr Moyes: No, I am not saying
that. What I am saying is that if the suppliers are building up
a lot of cash, despite investing at the level that is needed,
then that does raise questions about whether the commissioners
are paying too much for the services.
Mr Gregory: I think one of the
problems with the NHS from my perspectivealthough I am
a relative newcomer reallyis the lack of being able to
plan the refurbishment and the re-building of large hospitals
in particular. You cannot wait for a hospital to fall over after
25 or 30 years and then have a problem. If you do that then it
is bad public sector planning. Chesterfield is 25 years oldit
is not a very old hospitalbut it actually does need re-building
so we are going through all the wards, we are refurbishing all
the wards, we are building a new children's department, we are
putting in great new equipment in technology. If all these things
did not happen under our stewardship they would have to be bid
into central pots whether they are held by Primary Care Trusts,
the Strategic Health Authority or the Department of Health. Being
able to own that opportunity to actually keep your hospital absolutely
up to scratch, then the interesting and exciting agenda is where
you go forwardI hope we can assess that post-Darziand
that is really the financial strength that Foundation Trusts have
been given.
Q65 Chairman: How can policy incentivise
greater efficiency in Foundation Trusts once they have achieved
a surplus? Are cost improvement targets sufficiently ambitious?
Dr Moyes: What we have seen in
every year since Foundation Trusts came into existence is that
their cost improvements are greater than the assumptions in the
tariff about the level of cost improvements. In 2005/06 the tariff
issue was something like 1¾% and Foundation Trusts delivered
a bit more than 2%. The same pattern was true in the two subsequent
years. I think again the answer to the question is that Foundation
Trusts do feel under pressureand our compliance regime
contributes to thisto make sure that their finances are
very strong. However, if that alone was not delivering a high
enough level of efficiency then again it comes back to the tariff.
The Government can use the tariff to signal a level of efficiency
it wants the suppliers to generate and at the moment the figure
they are using is 2½ to 3%. It is up to the Government, I
think, to take a view on whether that is the right figure or not.
Q66 Chairman: Do either of you have
anything to add about that?
Mr Firn: No.
Q67 Dr Stoate: Starting with you,
Bill, about the surpluses, obviously I appreciate that you have
to have surpluses, just as the others have said, in order to make
sure that these trusts are viable, but £1.7 billion of surpluses
is enough to put everybody in the country on statins and still
leave money for a fish supper on the way home. It is a lot of
money. Do you think that is a reasonable amount to have locked
up effectively in Foundation Trust surpluses?
Dr Moyes: That is not actually
the surpluses they are making. They are making surpluses of about
£500 million before exceptional items. What you are describing
is the cash they have on the balance sheet. Some of that cash
is a one-off effect. Sometimes they get public dividend capital
before they actually spend it on capital expenditure so some of
that will be drawn down. One of the things that happens when trusts
become Foundation Trusts is that they become much more focussed
on cash; they manage their cash better. They are much more careful
about when they pay bills and when they get paid and that alone
is probably creating £100 million of cash that we did not
expect to see on the balance sheet because we did not realise
that this is what would happen. Again that will be spent on time
on service development and capital expenditure when we are clearer
about what the commissioners need. I do not think you should regard
£1.7 billion as the profits, if you like, or the surpluses;
that is the cash on the balance sheet. The figure of surplus is
£500 million.
Q68 Dr Stoate: Certainly the assertions
you have made do seem reasonable, but our evidence is that they
are very lacking in evidence. Research, for example, at the University
of York has pointed out that actually the Foundation Trust policy
has not made a significant difference to financial management.
We are very lacking in evidence; we have a lot of anecdotes and
lots of feel good factors but not much hard evidence.
Dr Moyes: I am a little inhibited
in talking about the University of York's research with Professor
Maynard listening in; I hope you will forgive me if I make one
or two comments on it. As I recall that research focussed purely
on 2004-05 which was the first year we had Foundation Trusts.
That was the year when we had two or three financial problems
beginning to emerge; Bradford was beginning to emerge and UCLH
was beginning to emerge. I am pretty confident that we can give
you very good evidence that financial management is much sharper
in Foundation Trusts than in non-Foundation Trusts.
Q69 Dr Stoate: If you have any actual
evidence we would love to see it because one of the whole problems
with this inquiry is that we are very long on anecdotes and very
short on hard facts. If you have any actual evidence we would
very much like to see it.
Dr Moyes: I can quote UCLH, for
example, where financial problems were turned around. A financial
deficit of £36 million which, at its worse, became £50
million, was turned into a surplus in two years while at the same
time the trust delivered the targets and standards required of
it. We can give you a number of other examples; there are some
in our annual report. I am happy to provide the Committee with
a note on this if it would be useful.
Q70 Dr Stoate: That would be useful.
What we have is that the Foundation Trusts were picked as being
the very best of the best before they were allowed to be Foundation
Trusts anyway and it is often said that these were long term trends
that would have happened anyway, and it is not specifically due
to Foundation Trust status that these trusts which were already
exceptionally have got simply better. What we are looking for
is evidence that the actual Foundation Trust status itself has
made the difference or would they simply have done what they were
doing anyway?
Dr Moyes: One might say that about
the early applicants, but we now have 100 Foundation Trusts which
is about half the hospital system. A third of applicants do not
get authorised at first attempt and yet the only things we look
for are strong finances and good governance. I slightly resist
the proposition that we are dealing with just the best of the
hospital sector. We have some very good hospitals but we also
have some hospitals that were definitely in the middle of the
pack. I think that there is good evidence that the responsibility
and the accountability for the finances that rests at board level,
the financial regime within which they operate and the ability
to see a purpose in managing the finances well to build up surplus
and then invest, those things taken together I think are producing
much sharper financial management and I genuinely do not believe
that this would have happened if there had been no change in the
status.
Q71 Dr Taylor: Turning to borrowing,
Bill, how much can Foundation Trusts borrow collectively?
Dr Moyes: Collectively they can
borrow today about £3.2 billion.
Q72 Dr Taylor: How has that figure
been fixed?
Dr Moyes: The legislation provides
for Monitor to control the borrowing of Foundation Trusts. We
published about three years ago a prudential borrowing code where
the level of borrowing permitted is determined by a number of
tests including the financial strength of the Foundation Trust,
so the higher your financial risk rating the more you can borrow.
Again, if you want an explanation, we can provide that to you
quite easily.
Q73 Dr Taylor: We have been told
by the Audit Commission's report that when the limit was £2.5
billion only about £100 million of that was actually accessed.
Dr Moyes: Yes, that is correct.
Q74 Dr Taylor: Why was that?
Dr Moyes: As at the end of March
the borrowing capacity was £3.2 billion and the total actually
borrowed was £172 million. There are a number of reasons
for that. One is what we have been discussing. The trusts are
not clear where investment is needed. The second reason is that
a lot of them are now planning investment in a piecemeal fashion;
they are not looking to re-build the whole hospital but hospitals
like Bradford, for example, in the heart of England are publishing
ten year investment plans that can be done in chunks and they
can largely raise the finance to do that from their own resources,
from the surpluses they are generating. I think the need for borrowing
is less in the system at the moment than could be allowed.
Q75 Dr Taylor: How does somebody
like Richard cope, who has told us his hospital is 25 years old
and he is going to need a new one? PFIs have gone by the board,
so how are you going to do it? Are you going to save up surpluses
all the time? What collateral do you have to borrow on?
Mr Gregory: We do not need to
borrow; we are using our surplus generation in a staged way to
actually hit the capital investment needs that we can identify.
At the moment I am quite comfortable. The only problem we would
have would be if the nature of the tariff changed to disadvantage
district generals. If that happened and reduced our surplus then
it may not be completely affordable out of our service generation.
At the moment on our present timeline horizons I am pretty comfortable
that we do not need to borrow. In fact I would not want to go
anywhere near borrowing on the refurbishment of the estate. I
would be interested in using the borrowing facility if it was
an agreed new interesting initiative for the benefit of the local
health community with the Primary Care Trusts that we could actually
help finance. I would be interested in using our financial powers
that way but not actually in terms of going to borrow for the
estate.
Q76 Dr Taylor: To be absolutely clear,
out of your accumulated surpluses you are confident that you can
do all you need to do to keep your hospital.
Mr Gregory: At present, depending
upon the changes in the tariff later on this year.
Q77 Dr Taylor: Do you have anything
to add?
Mr Firn: I would give a similar
story that at the moment we do not feel the need to borrow because
we have the cash that I have already mentioned and because there
is still uncertainty about where that could be best invested in
the interests of the local health economy. It is not that we are
not doing anything around this. Howard knows the local health
economy around area very clearly and there are some very large
deficits in the local acute trusts and the local health economy.
We are meeting with the Acute Trust and the Family Care Trust
on a fortnightly basis, discussing with them what might be the
future of that acute hospital site, whether that would have new
services on there, whether there will be a polyclinic; there are
GP-led clinical round tables that our commissioners are sitting
on looking at improved pathways of care around things like strokes
and where we may go into that. We are absolutely clear that that
cash that we are holding and our potential borrowing limit could
be utilised if it is in the interests of the health economy but
also enables us to continue as a viable concern.
Dr Moyes: Dr Taylor, you referred
to PFI; that is the other thing that we should not forget. In
the last ten years a huge amount of capital investment has been
transferred into revenue so hospitals like Newcastle Sherwood
Forest Foundation Trust will not borrow because they are re-building
themselves but they are doing it through PFI.
Q78 Dr Taylor: Remembering the first
inquiry we did in 2002-03 into Foundation Trusts, I think I remember
that the ability to borrow was going to be one of the most important
features of Foundation Trusts and yet you are not using it much.
Dr Moyes: It is not being used
because it is not required. I think I would really caution the
Committee that we are at a very early stage in the development
of Foundation Trusts. If one looks to much longer term, having
the ability to borrow from the commercial markets and being exposed
to the discipline of the commercial market I think will be a good
thing for Foundation Trusts and I think it will happen.
Q79 Chairman: Bill, you said that
the Trusts were not sure where investment was needed. Could you
just explain that a bit further and tell me why?
Dr Moyes: It comes back to all
the work that has been done in the last 12 to 18 months or so
to try to clarify commissioning, the work that Lord Darzi led
initially in London and now nationally. Stephen mentioned earlier
on polyclinics; we had the concept of polyclinics advanced by
Lord Darzi but what we do not know today is exactly how many,
exactly where, what scale, what type of services and all those
types of things. Lord Darzi, in his London work, identified a
need to concentrate certain services, stroke and cardiac in particular.
Again, I think there is a lot of good work being done in London
and around the country to start to refine that and to start to
work out where we want stroke services to be, how do we resource
stroke services, what kind of scanning equipment, diagnostic equipment
and so on. I do not think many Foundation Trusts todayeven
those like University College Hospital London that does have surpluses
and is ready and keen to investcould say to you, "We
are absolutely confident that we can make an investment of this
nature and be absolutely sure that that this what our commissioner
would want". I think that is a key requirement, to get to
the stage now where commissioning can describe the pattern of
services that they think is required to deliver the services the
population needs.
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