Select Committee on Health Minutes of Evidence

Examination of Witnesses (Question Numbers 61-79)


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 see—Lord Darzi's report obviously them a platform to do that—then 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 therapy—I could open a new for that—but 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' time—I think it would be within that timescale—we 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 perspective—although I am a relative newcomer really—is 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 old—it is not a very old hospital—but 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 forward—I hope we can assess that post-Darzi—and 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 pressure—and our compliance regime contributes to this—to 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 today—even those like University College Hospital London that does have surpluses and is ready and keen to invest—could 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.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2008
Prepared 22 October 2008