Review of NHS foundation trusts’ annual plans (2011/12)

Forward planning is a key part of making a devolved healthcare system work. Monitor does not set arbitrary levels of savings or performance-manage trusts. Instead we require them to produce realistic plans, based on discussions with their commissioners, which help them to ensure the local needs of patients and service users are met.

NHS foundation trusts are required each year to submit their three-year plans to Monitor. Our compliance teams review the plans in detail to identify the expected challenges over the next three years and each foundation trust assigns itself a governance and financial risk rating based on their plan. Our review of each individual annual plan is one factor that drives the intensity of our monitoring throughout the year. We monitor foundation trusts against their own risk ratings through the year and we update our own risk ratings each quarter and publish reports on foundation trust performance on our website.

Each plan contains a financial forecast and an assessment of governance risk, which includes the trust’s assessment of its ability to provide high quality patient care and meet service performance targets. This review is our overall assessment of the risks in the foundation trust sector and emerging issues that we have identified in the plans.

Each foundation trust’s 2011/12 annual plan can be found in the foundation trust directory. Each plan includes the foundation trust’s strategy document, a financial summary, headline cost improvement plans, service development contribution and the membership plan.

More detailed findings from the review can be found in the sections below. To view each section, use the drop down arrow next to the section heading.

To print, the relevant section(s) must be open to view or alternatively download a PDF of the review here.

  • Introduction

    Monitor has reviewed the annual plans of the 137 NHS foundation trusts eligible to submit a three year plan. The annual planning process encourages foundation trusts to plan and prepare for the challenges ahead. Over the last two years Monitor has enhanced the planning process to help trusts to identify at an earlier stage the future risks they are facing. This year we have focused particularly on the potential risks to quality associated with plans to reduce costs.

    Further review of plans
    In 2011/12 Monitor will continue its process of undertaking a second-stage, more detailed review of certain plans, the purpose of which is to better understand certain risks and how the trust board will mitigate them. This provides extra assurance that boards are fully aware of the potential risks they face, and this should in turn ensure that their planning improves and the risk of failure is reduced. Any additional key themes emerging from this secondary review stage will be shared with the foundation trust sector and with aspirant foundation trusts.

    Number of NHS foundation trusts participating in the 2011-12 Annual Plan Process

  • Overview of key issues

    Following our review of foundation trusts’ plans we believe there are significant signs of increased pressure across the sector. Particular challenges come from the need to deliver significant savings year-on-year while improving the quality of care, and the integration of large numbers of community services transactions. A summary of some of the key issues emerging from the plans is given below.

    Cost improvement plans (CIPs)
    In producing their annual plans NHS foundation trusts have identified their most challenging CIPs to date, planning to achieve a 4.4% reduction in operating costs. As in previous years CIPs will be a challenge and one Monitor will focus on throughout the year to ensure quality is not adversely impacted in the delivery of plans. The challenge to reduce costs must be met, but it is essential that good patient care is at the heart of this. This year Monitor has put extra focus on identifying the potential risks to quality that could result from each trust’s plan.

    Service performance
    The healthcare targets that foundation trusts forecast to be the most challenging are C.difficile, referral to treatment waiting times and A&E waiting times. We will continue to monitor compliance against targets throughout 2011/12. If we identify a pattern of failure that indicates weak governance, we will take action on behalf of patients to direct change and address failures.

    Diluted margins
    The significant number of Transforming Community Services (TCS) transactions taking place in 2010/11 has had an impact on both income and expenditure forecasts and staffing data. EBITDA (earnings before interest, taxes, depreciation and amortisation) margins have been diluted by the impact of TCS transactions, falling to a forecasted five year low of 1% in 2011/12. Over time it will be important that foundation trusts focus on efficiency gains to protect margins in order to maintain planned levels of investment in facilities and services.

    Demand management
    Our review of plans reveals that over the course of the next three years activity in the acute sector is forecast to remain broadly flat. Historical trends show overall acute activity has been rising each year. It will therefore be essential that foundation trusts work closely with their commissioners in order to manage demand effectively, and minimise the potential risk of contractual disputes at year end.

  • Highlights

    Some of the key points identified in this year’s plans include:

    • an increase in the number of foundation trusts forecasting the lowest financial risk ratings (FRR), with 11 forecasting an FRR of 1 or 2 at the year end. This compares with four in the 2010/11 annual plans;
    • foundation trusts are planning to deliver cost improvement plans of 4.4% in 2011/12 and similar levels during the following two years;
    • income growth of 7.5% is forecast in 2011/12 as a result of TCS transactions. However, from 2012 onwards income is forecast to decline by around 1% per year for the following two years;
    • of the ten foundation trusts currently in significant breach, three are forecasting a return to full compliance in 2011/12;
    • 57 foundation trusts forecast a governance risk rating of amber-red (27) or amber-green (30), this compares with 31 in the 2010/11 annual plans; and
    • following intensive TCS transactions activity across the foundation trust sector in 2010/11, 53 foundation trusts are integrating community services in 2011/12, with 31 significant  transactions and 22 smaller transactions. This could result in a potential increase in financial and governance risk as services are integrated.

  • Income and expenditure

    This is the most challenging time foundation trusts have faced, but despite the economic outlook, the results from the past year highlight the benefits of planning ahead.

    Operating income is forecast to increase in 2011/12 by 7.5% as a result of TCS transactions, with a subsequent year-on-year decline of around 1% per annum, with activity in the acute sector remaining broadly flat. Historically, data shows overall acute activity has been rising each year, so trusts will need to work closely with their commissioners in order to manage demand effectively.

    Whilst the sector is forecasting an increase in operating income in 2011/12, over the course of the three years activity in the acute sector remains broadly flat.

    EBITDA margin is set to fall by 0.5% to 6.1% in 2011/12. This is largely attributed to foundation trusts taking over very low margin contracts to provide community services, which has diluted overall margins, as well as operating expenses rising at a higher rate than operating income. Over time it will be important that foundation trusts protect their margin in order to generate enough funds to maintain planned levels of investment in their facilities and services.

    From 2012/13 onwards foundation trusts are forecasting that EBITDA margins are set to recover and will see a year-on-year improvement, despite planned reductions in operating income and lower CIPs.

  • Cost improvement plans (CIPs)

    All NHS foundation trusts are required to make savings over the next three years as part of the Government’s efficiency challenge. The level of savings identified in foundation trusts’ plans for 2011/12 is consistent with this challenge. Although it is higher than has been achieved over the last four years (which ranges from 2% to 3%), it should be seen in the context of the lower efficiency target during that period.

    In 2011/12 the foundation trust sector is planning to deliver CIP savings of 4.4%. This level is also forecast for 2012/13 and will only fall marginally to 4.2% in 2013/14. The data that trusts have provided indicates that they have clear plans in place to deliver the savings this year, but we believe that maintaining this for the following two years will be a significant challenge.

    Historically, foundation trusts have delivered challenging CIPs; at quarter four 2010/11 they were delivering CIPs of 3.9%, versus 3% achieved in 2009/10, although in both years actual CIPs were slightly behind those planned.

    Although 61% of planned savings in 2011/12 relate to staff costs this is slightly less than the proportion of a trust’s costs which relate to staffing (67%). The data also shows that overall acute activity levels are forecast to remain broadly flat and staff-to-bed ratios are expected to remain the same over three years. This suggests foundation trusts are not planning to make savings by treating fewer patients or reducing the level of care for patients. Instead they plan to make them through more efficient working on the front line and by reducing administrative or clerical costs. We are very clear with foundation trusts that savings cannot be made by compromising on quality.

    Maintaining and improving quality whilst delivering this level of savings represents a significant challenge and a potential risk for trusts. This year, Monitor has put extra focus on identifying the potential risks to quality that could result from trusts’ plans.  In addition to our usual process of reviewing the nature and scale of CIPs, we have analysed existing quality concerns and historical performance against our Compliance Framework; used input from the Care Quality Commission; held discussions with foundation trust medical directors; and reviewed quality accounts and other third party frameworks. We will also share the results of this process with the CQC to inform their work as well as feeding back to each foundation trust.

    The challenge to reduce costs must be met, but it is essential that good patient care is at the heart of this. Where foundation trusts have been unable to explain how they have accounted for quality in their plans we have asked for further detail of how they are assuring quality whilst removing cost.

  • Cash

    The aggregate cash balance of NHS foundation trusts is forecast to decline by £556 million (17%) to £2.7 billion in 2011/12. The main drivers behind this are a planned increase in capital expenditure and a significant decrease in working capital.

    Across the sector the average planned investment is lower in acute foundation trusts than in specialist and mental health foundation trusts over the course of the three year plans.

    Table 1: annual plan review summary income and expenditure forecasts

    Average liquidity days (liquidity expressed as days of operating expenses) across all foundation trusts is forecast to fall from 35.7 in 2010/11 to 31.7 in 2011/12. This is largely due to TCS transactions resulting in foundation trusts taking on additional operating expenses without a corresponding increase in cash.

  • Financial risk ratings

    The financial risk ratings assigned to foundation trusts illustrate the increased financial pressure across the sector.

    Our review of annual plans for 2011/12 has shown an increase in the number of trusts forecasting a financial risk rating (FRR) of 1 or 2. A total of 11 trusts are forecasting this at the year end, with an additional ten forecasting an FRR of 1 or 2 at points during the year. All of these 21 foundation trusts are acute or specialist trusts and this forecast is an increase from 13 in the 2010/11 annual plans. Eight of these 21 trusts are forecasting a continued FRR of 2 in 2012/13 with only one recovering to an FRR of 3 by the end of 2013/14. This indicates that the trusts with the most severe financial problems will take longer to recover. The complexity of some financial issues will require long-term solutions that take time to plan and implement.

    The number of foundation trusts forecasting an FRR of 4 or 5 has also declined in 2011/12 from 71 at quarter four 2010/11 to 39 at the year end. Year one of the plans, 2011/12, is forecast to be the most challenging financially with an overall improvement in trusts forecasting FRR 4 or above by 2013/14. The forecasting of FRR 4/5 is consistent with previous annual plan reviews, where forecasts have proved to be more prudent than actual in-year reporting.

    Over the course of the three year plans aggregate FRRs remain flat. In 2011/12 the average FRR across all types of trust, except ambulance trusts, is expected to reduce from those reported in-year through 2010/11 with the majority of acute trusts expecting to report an FRR of 3 or below.

  • Governance risk ratings

    The governance forecasts by NHS foundation trusts for 2011/12 show an increase in the number of amber-red and amber-green risk ratings. Where 95 foundation trusts declared risks resulting in green governance risk ratings in the 2010/11 annual plans, for 2011/12 this has reduced to 76. This shift is largely driven by Care Quality Commission (CQC) compliance issues and failure to meet healthcare targets.

    Historically, acute foundation trusts have the highest level of governance risk defined by service performance issues (ten of the 12 red-rated foundation trusts at quarter four 2010/11 were acute). For the acute foundation trusts the targets they are forecasting they will be most likely to breach in 2011/12 are:

    • C.difficile (16);
    • referral-to-treatment pathways admitted patients (16);
    • A&E waiting time (14); and
    • 62-day Cancer – one or both targets (11).

    In 2011/12 the number of foundation trusts (16) declaring a risk of breaching their full year C.difficile target is the highest for the last four years. However, this increase is partly driven by the fact that many trusts have lower targets compared to 2010/11 and are therefore less confident of meeting them.

    The reintroduction of referral to treatment waiting time targets has prompted several trusts to declare a risk of non-compliance. This target has changed and now focuses more on improving backlogs as well as improving waiting times. Sixteen foundation trusts have declared a risk of not achieving the target for admitted patients (specialist trusts declare risks of not achieving this target more than any other target), whilst four have declared a risk of not achieving the target for non-admitted patients.

    The sector is forecasting 14 failures against the A&E target. However, the pressure on foundation trusts, and indeed all trusts, especially in quarters three and four which have historically proved challenging due to higher admission levels in the winter months, could see an increase in breaches by the year end.

    Governance risks for mental health foundation trusts are forecast to stem from the increase in CQC inspections. Where a CQC inspection identifies non compliance with an essential feature or aspect of a foundation trust’s registration, this is reflected in a downgrade of that foundation trust’s governance risk rating.

    We are aware from reviewing previous annual plans that foundation trusts’ forecasts of service performance can be optimistic. In the 2010/11 annual plans only nine foundation trusts were forecasting a risk rating of amber-red or lower. However, the reality at quarter four 2010/11 showed 36 foundation trusts with these risk ratings. We therefore anticipate that the actual 2011/12 position is likely to be worse than forecast, especially with continuing CQC reviews which trusts will not have declared risks against.

    The achievement of targets is important for patients, and we expect foundation trusts to meet them. If we identify a pattern of failure that indicates weak governance, we will take action on behalf of patients to direct change and address failures.