House of Commons - Health

Select Committee on Health Sixth Report

2 Impact of foundation status on foundation trusts

5. Foundation trusts (FTs) were established as part of the Government's 'earned autonomy' policy for the NHS, offering high-performing NHS trusts greater financial and management freedoms coupled with new, more locally accountable governance arrangements, with the aim of improving quality and financial performance. Annex A provides more information about the introduction of FTs, how they differ from traditional NHS trusts, and other relevant reforms that have occurred at the same time. In this chapter, we examine the impact of FT status on trusts' performance in a number of areas. These are:

finance;

quality;

innovation; and

governance and local accountability.

Finance

6. FTs have greater financial flexibility than other trusts and their finances are closely scrutinised by Monitor, their public regulator. The chief differences of the FT financial regime are:

a) An obligation on PCTs to pay FTs at tariff (payment by results) for the volume of services delivered. This obligation can be enforced at law.[3]

b) A rolling three year financial cycle which is carefully planned with any financial problems leading to swift intervention by Monitor. This regulatory system involves careful risk rating of the FTs performance with swift "traffic light" signalling and management scrutiny.

c) An expectation that annual trading will generate surpluses that can be carried forward to fund future investments.

d) Access to private capital markets to develop local services.

e) Capped private income.

7. Our written and oral evidence addressed the last three points, which are discussed below.

SURPLUSES

8. FTs have demonstrated good financial control with a few exceptions The recent Healthcare Commission and Audit Commission report Is the Treatment Working? suggests that FTs are providing more care than other NHS trusts, and are providing it more efficiently:

Both FTs and non-FTs have increased their overall activity levels between 2003/04 to 2006/07, although the increase was greater for FTs by almost 3 per cent. For FTs, this increase has been steady, although slightly higher in 2005/06, possibly as a reaction to PbR[4], which was introduced in 2004. FTs experienced activity growth for all types of care, with the exception of non-elective short-stay admissions. However, between 2004/05 and 2006/07, the increase in activity was greater in FTs for all types of care, including non-elective short-stay admissions. Therefore, second and third wave FTs have seen the highest level of activity growth of the three groups over this period, and this has been more noticeable since 2004/05.

Between 2003/04 and 2006/07, FTs have continued to be lower cost providers, and their relative cost position has been less subject to change than other trusts. However, FTs were authorised partly on the basis of their efficiency, and it should not be surprising that the majority are still relatively more efficient than the average NHS trust.[5]

9. Monitor argues that FT status and its rigorous regulatory system has enabled some trusts to deal more clearly and effectively with financial deficits when they arise.

10. FTs have generated significant cash surpluses, in the order of £1.7 billion, unequally distributed amongst FTs. Although this is a large nominal amount, it has been pointed out that in relation to their trading volumes, this sum is quite modest.[6]

FT cash surplus (2006/07)

Source: Audit Commission and Healthcare Commission (data from FT accounts)

11. The Healthcare Commission and Audit Commission provide more detail:

In the three years that FTs have been operational, their cash surplus has increased to £1.5 billion as at the end of the first six months of 2007/08 and is expected to continue to rise. This represents about 38 days of operating expenses, and is an increase of approximately £0.6 billion from the end of 2006/07. In addition, FTs have access to approximately £900 million of unused overdraft facilities. FTs are set up as independent bodies and are free to retain any surpluses they generate. FTs are also motivated to generate a reasonable surplus to achieve a low risk rating with Monitor and to be able to borrow monies for investment.

There is a clear link between income growth and FT status. This is unsurprising given that the FT application is built upon financial viability. The early FTs were, historically, low cost trusts, and stood to gain income under PbR through a higher national tariff than local prices. They also had a faster transition than other trusts to the new higher prices. However, increasing income is a contributing factor to both FT and non-FT surpluses. Of the 11 acute and specialist trusts that made over 45 per cent income gain between 2003/04 and 2006/07, just under half are FTs. One NHS trust, now an FT, made almost 60 per cent income gain over this period, and only one trust made a loss.

Income growth overall has been a significant contributor to the FT net surplus before exceptional items, which in 2006/07 amounted to £134.4 million, and their cash surplus, which amounted to £995 million. Efficiency gains have also contributed to their improved financial position.[7]

12. Witnesses from FTs were clear that the ability to retain surpluses was a crucial aspect of the attractiveness of FTs. When asked what difference FT status had made in practice to the trust he worked in, Keith Palmer, Chairman of Barts and the London NHS Trust, told us that "the fact that that foundation trusts are allowed to keep the surplus that they generate through efficiency improvements is a really important driver of behaviour within the hospital trust".[8]

13. Our evidence raised two main concerns about FTs generating and retaining surpluses. First, is this policy harmful to the rest of the NHS? This is discussed in the next chapter of this report. Secondly, has FT status itself helped trusts generate surpluses, or is this the result of long-term financial trends?

14. It is clear that FTs are demonstrating improved financial performance. However, it is not clear whether these improvements are directly attributable to FT status or whether, as Marini et al concluded, this should instead be attributed to long term trends—i.e. that these high performing trusts would have continued to demonstrate improved financial performance even without the supposed advantages of FT status. Using data on retained surpluses and the Reference Cost Index (an activity weighted average of a Trust's casemix costs[9] relative to the national average) Marini et al conclude that:

It is very common to read that FTs are "outperforming" non foundation trusts (NFTs) financially. However, this is usually based on very superficial comparisons. There is very little empirical evidence relating to the financial management and performance of FTs. Our own research is the first to shed light on the comparative performance of FTs and NFTs using robust methods.

The evidence on the extent to which the potential benefits of FTs have been achieved in practice is not, so far, particularly promising. Although of course, it is early days for FTs and we might expect such changes to take time to appear…. Evidence on the comparative financial management and efficiency of FTs has not previously been produced aside from superficial comparisons which lack robustness. Our research … suggests that, rather than the FT policy suddenly having brought about a change in behaviour, there seem to be longstanding differential trends between these different groups of Trusts. The FT policy per se has not made a significant difference to their financial management.[10]

15. Marini et al go on to question whether this level of financial performance will be sustainable in future as increasing numbers of NHS trusts gain FT status, and indeed whether this can continue to be achieved without detriment to quality:

Whether these long-standing trends are sustained as the policy is rolled out to additional hospitals, or whether improved financial performance is gained at the expense of quality, is a matter for future study.

16. We questioned Dr Bill Moyes, Executive Chairman of Monitor, about the research presented by Marini et al. He argued that FT status is now no longer limited to the best of the hospital sector, but now includes some hospitals that 'were definitely in the middle of the pack'. He told us that in his view, "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."[11]

BORROWING FROM PRIVATE CAPITAL MARKETS

17. In the view of Professor Alan Maynard, although access to private capital markets is one of the theoretical financial benefits for FTs, in practice accessing these markets remains a problem. He stated:

FTs generally cannot access NHS capital and the PFI programme of recent decades is fading into insignificance. In theory FTs should be able to borrow and finance repayment and interest out of trading surpluses. However hospital tariffs are in a continuous state of flux as DH seeks to fine-tune the policy and use tariff manipulation to induce cost savings and improved benefits for patients. The consequence of this hospital tariff policy is that FTs have very uncertain income flows and surpluses are either not spent or are used to fund one off small capital projects, e.g. improving car parking. FTs have as a result large unused licence capacity to borrow and there is great uncertainty about how FT capital development will be carried out to improve service quality.[12]

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 the 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[13]

18. Is the Treatment Working? also notes that FTs are not taking full advantage of their borrowing freedoms:

Monitor … has found that FTs are not taking full advantage of their borrowing freedoms and have accessed only £100 million out of £2.5 billion available, partly because many were already undertaking or had recently completed significant capital investments before becoming an FT.[14]

19. However, according to our witnesses from FTs, FTs do not currently need to access private capital as their current investment plans can be financed through their own surpluses and there is not a need for large scale investment. It also seems that FTs may be holding back from large scale investment programmes because of uncertainty about future funding streams, and uncertainty about what services commissioners want—this is discussed more fully in Chapter 3. Dr Moyes gave more detail on both of these points:

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.[15]

FUTURE CAPITAL REQUIREMENTS

20. It is clear from the analysis of Marini et al that most FTs had low reference costs[16] when foundation status was granted. However, analysis of reference cost trends since they achieved FT status has been poor. If their reference costs have gone up relative to the tariff since they became FTs, or if this happens in future it will lead to a reduction in the surpluses available to FTs. Equally, if the Department of Health readjusts the PbR tariff downwards to achieve greater cost efficiencies—as it is expected to do in 2010-11—this could also reduce or even eradicate FT surpluses. This raises important questions about where FTs would get their capital from, as they would not have surpluses to reinvest, and equally a lack of surplus would make banks less likely to lend to FTs.

CAP ON PRIVATE SECTOR INCOME

21. Finally, Stephen Firn, Chief Executive of Oxleas Foundation Trust, informed us that the fact that the private sector cap has been set at zero for mental health trusts, was hampering their efforts to use their financial freedoms to improve services:

It is a specific problem for Mental Health Trusts because, I think I am right in saying, everyone who has been authorised so far has had the private patient cap set at zero because that was the position in 2002. It is something of an absurdity because if we were not a foundation trust we could set up services that have private patient income, but because we are a foundation trust we cannot. I have worked in the NHS for 27 years and I agree with all the principles about care being free at the point of delivery, but I know from all the work we have recently been doing with employers, that the support we could provide to employers about getting people back into work and retaining people in work and getting income from them would meet some of the Government's policies around keeping people in work and recovery, we cannot take forward because it would count as private income at the moment. There are other things around psychological therapies where we could set up units with free access for people on the NHS but we could part fund it by having private patients; we are not in a position to do that. I think it is actually inhibiting us from taking forward some key policies but also getting income to improve other NHS care.[17]

22. FTs have shown good financial performance; according to the Healthcare Commission and Audit Commission they are delivering more care and may be doing so more efficiently. FTs have generated cash surpluses to the order of £1.7 billion. It is not possible to conclude, however, whether this is largely attributable to the introduction of the FT system with its new flexibilities and rigorous financial monitoring, or whether it is simply the continuation of long-term trends amongst high-performing trusts in a Payment by Results system.

23. We were told that FTs are holding back both from investing their surpluses and from making full use of their borrowing powers because of a lack of direction from commissioners; this issue is discussed more fully in the following section.

24. A further difficulty is that the private sector cap for mental health FTs currently set at zero. We have not examined the relationship between NHS FTs and the private sector in depth in this inquiry. However, it seems inequitable that mental health trusts should not have the same freedoms as other trusts, and we recommend that the Government reconsider this policy.

Quality

25. 'Quality' is a term used within the NHS to cover many aspects of service provision, including waiting times for treatment, convenience and accessibility, cleanliness of facilities, and patient involvement, as well as the quality and effectiveness of clinical care. It is defined by Lord Darzi as care which is "clinically effective, personal and safe".[18] In measuring quality of services and care, ideally both process and outcome measures[19] should be used to ensure that adherence good processes (for example using NICE guidelines, or specifying a maximum waiting time for treatment) is actually leading to good outcomes (for example, reduced mortality rates, or patient reported outcome measures.

26. Looking at comparative data from the Healthcare Commission's Annual Healthcheck, it is clear that FTs outperform non-foundation trusts. Comparative performance tables are included as Annex D to this report. The Healthcare Commission and Audit Commission note these trends in their recent report, but sound a strong caveat that FTs were selected as high-performing organisations, and so, as we noted above, are starting from a position of advantage. Moreover, they conclude that 'there is no significant evidence yet that FTs are delivering higher quality care as a result of their status':

There is some evidence, through the annual health check, that FTs are becoming even stronger organisations when compared with other acute trusts. But it is important to note that they were deliberately selected for foundation status on the strength of their service delivery track record, financial standing and financial management arrangements

However, an important test is whether the autonomy that accompanies FT status results in higher quality services being provided. Although FTs tend to be higher performers in the quality of service ratings in the annual health check, there is no significant evidence yet that FTs are delivering higher quality of care as a result of their status. FTs generally started from a better financial position. The great majority of current FTs were also scoring highly on quality of service before the introduction of FT status. This changed with the new assessment system but the response does not appear to depend appreciably on when FT status was obtained. Analysis of the Healthcare Commission's annual health check quality of service scores found no clear indication that FTs improved their quality of service at the time they achieved their FT status. The changes in the scoring system in 2005/6 (the introduction of the annual health check to replace star ratings) meant that a large proportion of current FTs suffered a reduction in their score from the highest level, so it is difficult to disentangle any effect of FT status from the change in scores.

In FTs, the DH has succeeded in creating more autonomous, locally accountable bodies. The FT concept has driven change more quickly in NHS organisations and improved financial control, including for those organisations that are still preparing for FT status. The freedom and flexibilities of FT status give frontline healthcare professionals and local managers the incentive to improve services and innovate in response to the needs of their patients and local populations. However, the changes resulting from this are not striking. We found no evidence of significant innovation in our research for this study or from the detailed service reviews undertaken by the Healthcare Commission. Annual health check data suggest that FTs are generally higher performers, but they started from a better position in terms of service delivery, efficiency and financial standing.[20]

27. Interestingly, comparative data from the Healthcare Commission (HCC) (see Annex D) suggests that some FTs' performance fell from 3 star to 2 star after they received authorisation[21], and a small number are amongst the worst performers in the NHS according to HCC ratings, although changes in the HCC's measuring systems make comparisons difficult. Although the proportion of poor performers amongst FTs is far lower than the proportion of NHS Trusts performing poorly, the fact that they exist at all is noteworthy given FTs' selection and reputation as an elite part of the NHS.

28. Mr Palmer, Chair of Barts and the London NHS Trust, agreed with the conclusions of the Healthcare Commission/ Audit Commission's recent report, telling us that in his view quality had not been sufficiently prioritised anywhere—but that this was not a problem unique to FTs:

This is nothing whatsoever to do with foundation trust status but the dynamics to improve quality of care have not been very strong and I welcome the very recent announcements by Darzi et al for a renewed focus on quality but if that is to be achieved we need instruments that will drive it better than we currently have. I think those instruments should apply to everybody, not just to foundation trusts.[22]

29. Dr Moyes told us about a scheme currently being piloted to reward trusts for delivery higher quality services:

Lord Darzi has recommended a system of paying for performance and a pilot scheme has been run in the North West using a model developed in America by Premier Healthcare to have a very small pot of money—it is not an enormous amount of money—and to use that small pot of money to reward trusts (not just foundation trusts, but all trusts) for delivering above and beyond the minimum contracted levels. I think the pilot in the North West has been held to be a successful pilot and Lord Darzi has recommended that it is adopted as a feature of the tariff going forward, which we would certainly support; we think it is a good idea.[23]

30. As well as rating financial risk, Monitor also rates 'governance' risk, which assesses the quality of services and management. Monitor considers seven elements when assessing the governance risk that an NHS FT may face over the coming year, including service performance, clinical quality and membership and board structures. Governance risk is rated using a traffic-light system, where green indicates low risk and red indicates high risk:

Green - NHS FT's governance complies with terms of authorisation
Amber - Concerns about one or more aspects of governance
Red - Concern that issue(s) significantly breach(es) Terms of Authorisation

31. At the time of our inquiry, the most recent report (see Annex E) suggested that five trusts had improved their governance risk rating in the last quarter, but that the governance risk rating of 8 trusts had got worse, and 30 trusts' ratings remained at amber or red. It was also apparent that a total of 25 trusts have remained on an amber or red risk rating for the whole of the past financial year.[24] Monitor told us that it would instigate proceedings, including meeting with the Board of the FT, and if necessary commission external advisers to work with the FT if a trust remained on a red rating for more than two quarters. [25]

32. FTs are generally high performers in routine NHS process quality measures. However, despite the fact that they are widely believed to be a high performing elite, the performance of some FTs has fallen, and a small number are amongst the worst performers for some measures. A significant minority also fall within the 'amber' or 'red' categories on Monitor's governance ratings, with some showing no improvement across a whole financial year. This suggests that FTs can afford no complacency about the quality of services.

33. We commend the Department of Health for piloting a scheme to reward trusts financially for delivering a quality of service beyond the minimum contracted levels. We recommend that such schemes should be extended and conversely schemes to punish low quality care as evidenced by unacceptable complaints from patients or their relatives should be considered.

Innovation

34. One of the chief attractions of FT status was that the freedoms afforded to FTs would enable them to innovate more effectively than normal trusts could. According to the Department of Health:

NHS foundation trusts will be at the cutting edge of the Government's commitment to devolution and decentralisation in the public services. They will not be subject to direction from Whitehall. Local managers and staff working with local people—rather than remote civil servants—will have the freedom to innovate and develop services tailored to the particular needs of their local communities.[26]

35. The Foundation Trust Network, the membership group of all FTs, cites several examples of what it views to be innovative practice:

Gloucestershire Hospitals NHS Foundation trust has pulled off a national first in a partnership deal with a local charity, Hope for Tomorrow, to provide a mobile chemotherapy team across three counties where many residents live in isolated communities. The foundation trust was free to make the decision when the charity approached it—proving that good ideas can happen quickly in an FT. In Gloucestershire chemotherapy was provided in a secondary setting, and the FT wanted to push out the service so that a safe, quality assured infection free service could get to where the patients were. The FT wanted to cover all three counties—not just their own. This innovation was about looking at the way the FT provided services from the standpoint of the patient and then finding ways to do things differently. And the FT had the financial freedom to deliver part of the cost without referral to other bodies.

Salisbury NHS Foundation trust 'spin off' company - Odstock Medical Limited makes and market electronic devices that help disabled patients to walk by stimulating paralysed muscles. OML is the first 'spin off' company to be created and owned by the NHS. Salisbury NHS FT has taken the innovative route of creating their own company so that the income generated by the device can be used to further research and create new developments to help NHS patients. Salisbury maintains majority ownership of the company—68%—with the hospital charity owning 18%. The only other shareholders are staff and Bournemouth University. As the FT has the majority share it can ensure that the philosophy of the company remains dedicated to putting patient care first. Salisbury has used the financial flexibility afforded by FT status to grow the company and has renovated the hospital's old burns unit to house it. Its medical physics department has been developing and producing the devices for 20 years. However until now operating constraints within the NHS severely limited their availability to patients outside the Salisbury area.

South Essex Partnership Trust is reinvesting surplus funds into the building of a brand new mental health hospital at Rochford (pictured) and a six bed psychology unit for young people. The hospital will benefit the local community by providing state of the art accommodation for people experiencing mental health problems.

Other FTs are investing surplus from their budgets and using their borrowing freedoms to enhance services to patients or to speed up existing plans, as these examples demonstrate:

Stockport has opened a £25 million cardiology and surgery unit, invested in a £3 million scheme to upgrade all wards and opened a £5 million car park.
UCLH has sold its Middlesex Hospital site for £175 million to invest in a new cardiac centre
Moorfields Eye Hospital is launching a new specialist drugs manufacturing unit.
Queen Victoria Hospital, East Grinstead, is planning to accumulate £12 million to redevelop the hospital and has already opened a new £1m critical care unit and a day surgery unit
Liverpool Women's hospital has gone into partnership with a private company to start new IVF service for NHS and private patients.
Homerton University Hospital has borrowed £2 million to add to a £1 million gift to build a new teaching centre.
Doncaster and Bassetlaw has opened a new dialysis unit.[27]

36. However, it is difficult to disentangle which of these are examples of innovative practice that have occurred as a direct result of FT status, and which are examples of good practice that might be expected from any high-performing trust. The Healthcare Commission and Audit Commission report is clear that innovative models of patient care have not yet emerged from FTs:

On a national level, despite the improved quality of services, FT status does not yet seem to be empowering organisations to deliver innovative models of patient care.[28]

37. This view was endorsed by Dr Mark Exworthy, who is leading the NHS Service Delivery and Organisation Programme research into the impact of system reform in four health communities:

Sandra Gidley: Are there any practical examples or independent evidence that foundation trusts are actually delivering care more innovatively or efficiently?

Dr Exworthy: I think you are right to point out that there is relatively little evidence of this so a lot of it does rely on the sort of reports that you have mentioned which clearly have a "vested interest" in some of these issues so independent research or independent evaluations tend to be rather scarce … Probably there are two points to make, one is that these were high performing, largely innovative, dynamic organisations so, as it were, much of that has continued in the direction that you would expect it to, so what difference would foundation trust status over and above that bring? Some of the evidence seems to be a little bit weak in that regard.[29]

38. According to John Carrier, Chairman of Camden PCT which has had a close commissioning relationship with one of the first and largest FTs, UCLH, since its establishment four years ago, it is perhaps too soon to be expecting FTs to deliver innovative practice:

One of the issues that was always raised was the accounts, the finance. Innovation, I think, would have been pushing it for the first couple of years. They were the first wave.[30]

39. Mr Palmer agreed. He noted that FTs have to work with other health organisations which are still subject to the traditional NHS performance management regime and have less freedom to innovate themselves:

You can only change models of care by interacting across the whole network. You have to deal with organisations which are not foundation trusts and who are subject to direction by the SHA. I think it has been slow but my observation would be that there is a degree of freedom now and the fact that Guys and St Thomas's plan to use those surpluses is really quite interesting. It would be a shame, I think, to stop the experiment now, but if you do not see some action over the next couple of years then you should be asking the question why.[31]

40. Dr Exworthy told us that FTs' slowness to innovate may be because they are still adapting to the freedom from central control that they now have. He also suggested that the public discipline of FTs' new financial regime may make them more cautious about spending on innovative service models:

Their willingness in a way is being compromised not so much in the sense that they are being told what to do but there is a cultural change that is involved. In some ways many of these foundation trust organisations have grown up in an NHS that has traditionally been centralised so to some extent they have always been looking up, hence David Nicholson's advice to look outwards and not upwards, but clearly those traditional patterns still persist. Also I think the rules of the game are still a little unclear for foundation trusts in the sense that this is such a new departure and represents such a significant change in health policy that their willingness to extend into new areas—innovations, service developments, capital spending et cetera—exposes them in a much more visible way financially and publicly which you could say is a good thing but clearly, as you are exposed a little more, your willingness to do so leads to a certain caution or a certain carefulness which again might be a good thing but perhaps it starts to explain why, although they are very able and capable, they have not always been willing to exert that.[32]

41. FTs themselves told us that innovation was being constrained because they were not getting a steer from PCTs and local health communities about what new services are needed:

Mr Gregory: At the moment our innovative capability and capacity from where I sit is constrained by the quality of the contract and by the quality of the dialogue between the commissioner and the provider. That needs to be opened up and one of my personal concerns and priorities is that we need to escape our organisational barriers here and engage intelligently over and above the contract negotiation in terms of delivering change to the benefit of the patient ….I have not seen much evidence of an enabling framework for us to be able to do that from my perspective.

Sandra Gidley: So this sentence in your submission when it says that this is what you have achieved, "an all terrain vehicle model, goes everywhere, does everything, unrestricted by the usual boundaries" is not true because you have just mentioned boundaries that are in place.

Mr Gregory: I think there is a boundary. Yes, it is an exaggeration if you take that literally. I think that we have got the ability to deliver that; I think we have got the ability to be very flexible and innovative in the future, but we do need the right conditions. It is not simply about the contract, it is about the key individuals, it is the relationships.[33]

42. Monitor does not believe that it is its role to identify innovation and spread best practice. It argues that the Healthcare Commission and its successor the Care Quality Commission are the bodies that ought to monitor innovations in how clinical care is delivered. However they do not appear to do this regularly at present.

43. Freedom for the NHS to develop innovative models of care unencumbered by bureaucracy was widely seen to be one of the chief attractions of FT status; however while we have seen some examples of innovative practice, there seems to be little robust evidence to suggest FTs are using their new status to innovate in a significant way. Some witnesses thought it was too soon for FTs to be expected to be generating major innovations when they were still concentrating on achieving and maintaining financial stability; others considered that FTs' ability to innovate was being constrained by commissioners.

44. We were surprised and concerned that no organisation seems to have a clear remit to assess objectively whether or not FTs are becoming more innovative, which makes it difficult to evaluate whether or not there are sufficient incentives for FTs to innovate. Given that innovation is meant to be an important part of the 'value added' by FT status, and given the potential benefits to the rest of the NHS from sharing best practice, the Government should commission objective evaluation in this area.

Governance and local accountability

45. The governance arrangements for FTs have three main elements:

a membership community comprising local people, patients and staff, including patients and carers living outside the area if the Trust chooses to make them eligible for membership

a board of governors made up of members elected from the membership community as well as people appointed by primary care trusts and local authorities. Foundation trusts with a medical or dental school are also required to have at least one university governor. There may also be other partnership governors to represent local partner organisations. Governors elected by public and patient constituencies must be in a majority

a board of directors made up of a Chair and non-executive directors appointed by the governors, a chief executive appointed by the non-executive directors with the approval of the governors, and executive directors appointed by the chief executive and non-executive directors.

46. The Chair of the board of directors also serves as the Chair of the board of governors. The Deputy Chair of the board of directors is also a governor.

47. The governors' powers are limited:

They appoint the Chair of the FT (the Chair of the FT chairs both the board of governors and the board of directors of the FT)
They appoint non-executive directors to the board
They can dismiss the Chief Executive (with a 75% vote) (The other Executive members of the Board are appointed by the non-executive directors with professional support from the Chief Executive and an independent external assessor).

48. Within this framework, each FT is able to determine its own governance arrangements, and the detail of these arrangements varies.

49. The Health Committee's inquiry into FTs in 2003, before their inception, noted 'considerable confusion' surrounding arrangements for local accountability and governance. Many witnesses expressed concern that FTs would end up merely 'going through the motions'.[34]

50. A recent Health Service Journal editorial reported that "there are huge obstacles to making foundation trust membership anything other than a fig leaf of accountability".[35] Marini et al agree that:

greater local accountability has not, as yet, been adequately demonstrated. Public and patient membership of boards is low and even where it exists, does not seem to be "active" in terms of producing high turn-outs for board elections"

51. However, they noted that

there are signs of improvement in terms of the numbers of people becoming members of FTs, although the degree to which they are representative of the community is not known.[36]

52. The Healthcare Commission and Audit Commission found that:

FTs were also positive about their governance arrangements and the greater connection with the local community, through the governors and the membership. They reported that clinical services are now starting to be planned in discussion with the membership, rather than in isolation. FT governors reported that they felt engaged, had assisted with recent board appointments and had sat on working groups in the FT. However, the extent to which they were informing local priorities was not clear. It was apparent that there can be frustration on both sides where governors seek to get involved in operational issues, which is outside their remit. Our qualitative research did not find significant evidence that FT governors were having a clear and identifiable impact on FT development. Indeed, we identified some instance of confusion of roles between the governors and board of FTs.[37]

53. Research carried out for the Department of Health by Chris Ham and Peter Hunt of Mutuo is more positive:

The evidence we have gathered suggests that the unusual hybrid governance model adopted for NHS foundation trusts is working increasingly effectively. There is greater clarity than in the initial stages about the role of the board of governors and how the knowledge and skills of governors can be used to best advantage. The statutory powers of governors have helped to ensure that they are taken seriously and are not treated as rubber stamps.

There is less clarity on the role of the membership community and the most effective way of governors relating to members. Foundation trusts are communicating with members in various ways but recognise that more needs to be done to become membership organisations. The experience of the mutual sector needs to be drawn on to enable foundation trusts to make further progress in this area.[38]

54. Our witnesses from FTs provided us with some examples of good practice where the involvement of governors and members had had a positive impact, and generally believed that the approximate £200,000 annual cost to their organisations of running the new governance structures was good value for money:

We appointed onto the Council of Governors people from partner organisations who had not really been involved with us before, so representatives say from JobCentre Plus, from the Chamber of Commerce and through those new links we have been able to do things like set up employment schemes where we have been able to get our service users into jobs and supported, we have a lot of events with local employers showing how we can support them to employ our staff, and we have set up a partnership with Charlton Athletic where they have had us on the pitch giving messages about mental health. I could go on, but I think those are the two big things: the flexibility around the money and being able to invest it locally, and the work with the Council of Governors.[39]

Our cleaning regime has changed; we are spending more on it. We are doing things in a different way; we have brought housekeepers back onto the wards, we have re-introduced matrons; we are looking at bringing our food sourcing into the locality rather than importing it from South Wales.[40]

55. However, Mark Exworthy argued that there was certainly room for further improvement with regard to the performance of governors:

I think there is some evidence that the governors have failed to identify their role in a sufficiently well-defined sense. In a way that was my implication about this further development in that area. I think also there are areas to test between the board of governors and the executive team in the sense of on what occasions has that role been exercised in audits, appointments et cetera. Maybe they have not entered into that territory yet.[41]

56. Surprisingly, Monitor has only recently issued guidance to governors, despite the fact that several reports over the last five years have identified the need for this, starting with the then Health Committee which recommended the establishment of a national training system for Governors in 2003.

57. The Involvement of members seems less well developed than that of governors. This may be caused by a number of factors, including duplication of public involvement in NHS services by other bodies, including patient and public involvement bodies and Overview and Scrutiny Committees.[42] Mark Exworthy summarised his observations on progress to date in this area:

I think that the focus—or priority if you like—has not been on [public membership and governance] so far, it has been about getting financial stability, robustness and making sure that their operation as a Trust (usually it is a hospital) is efficient and effective. There are signs that they are moving into developing better relationships with their memberships but I think there is a danger that initially at least these efforts have been focussed on people who might have been engaging with those Trusts anyway and extending it out to a broader membership is traditionally very difficult so foundation trusts would encounter similar problems.

58. Dr Exworthy did find cause for optimism that this could improve:

However, I think there are signs of much more outward focus; I mentioned that, rather than looking upwards, looking outwards. There are signs that they are taking that on board, entering into dialogue with all the various stakeholders that have been mentioned—local authorities, other NHS trusts, the public in all its dimensions.[43]

59. On the other hand, Dr Exworthy thought that new tensions may arise if, as suggested in the Darzi report, PCTs rename themselves to become, for example, 'NHS Derbyshire', in an attempt to better engage with their local populations, and find themselves vying with local FTs for the affiliation of the people they serve, when clearly there are not enough evenings in the week for people to attend all of these public meetings.[44]

60. While we saw some examples of good practice in FTs' new governance arrangements, in general they seem to be slow to deliver benefits and despite numerous small studies, there remains a lack of robust evidence of their effectiveness. The governance process currently costs circa £200,000 per trust, giving a total of around £20 million per annum. We recommend that the Department of Health make it a priority to evaluate rigorously the FT governance system and to give guidance on best practice so that public money as well as members' and governors' time can be used as effectively as possible to improve services.

61. We are also surprised and concerned that Monitor did not issue guidance to governors until shortly before our evidence session took place, despite several reports over the last five years having identified the need for this, starting with the Health Committee which recommended the establishment of a national training system for Governors as long ago as 2003.

Conclusions

62. In considering the impact of FT status on FTs themselves, a recurring theme has been a lack of firm evidence that FT status is yet conferring the benefits hoped for. While it is clear that the majority of FTs are high performers in terms of finance and quality as measured by Healthcare Commission ratings, these were high-performing organisations prior to becoming FTs, and so it is difficult to ascribe this high performance to FT status per se. Two other major aims were to give trusts the freedom to invest in innovation and to promote better local engagement with the public and other health providers through new governance systems. Evidence of benefit on both of these scores is also thin. Systematic and independent evaluation is needed. The Department of Health should make it a priority to commission research to measure FTs' progress objectively, and to disseminate their successes more widely.

3 As an incentive to reduce unnecessary secondary care treatment, any emergency care provided which is over and above the volume stipulated in contracts is only reimbursed at 50% of tariff. This applies to all NHS acute trusts. Back

4 Payment by Results (PbR) is a payment system introduced into the NHS in 2003-04, whereby providers are paid for the activity they undertake according to a tariff derived from national reference costs. Back

5 Healthcare Commission and Audit Commission, Is the Treatment Working?, May 2008 Back

6 The net surplus (before exceptional items) for 2007-8 for the 89 Foundation Trusts authorised as at 31 March 2008 was £514 million (after public dividend capital dividends of £352 million, but before exceptional charges of £120 million). This represents 3.1% of FTs' total revenue for the year (£16.3billion). Back

7 Healthcare Commission and Audit Commission, Is the Treatment Working?, May 2008 Back

8 Q8 Back

9 Casemix is the range and type of patients treated by a hospital or health service. Back

10 'Foundation Trusts in the NHS: does more freedom make a difference?' Marini et al, Health Policy, University of York, 2007 Back

11 Q70 Back

12 FTM 02, Alan Maynard Back