The effectiveness with which trusts plan for the future forms an important part of our assessment of their risk of breaching the terms of their authorisation. This annual review of foundation trusts’ three-year plans enables us to determine our regulatory approach towards each trust.
The annual plan review process also gives us a better understanding of the challenges and risks facing the foundation trust sector as a whole. This report is Monitor’s overall assessment of the risks in the sector and the emerging issues identified in the plans.
Each foundation trust assigns itself a governance and financial risk rating based on its annual plan. The 2012/13 annual plan risk ratings can be found here. We monitor foundation trusts against their annual plans throughout the year and we publish governance and financial risk ratings each quarter (and in 'real time' to reflect, for example, a decision to find a trust in significant breach of its terms of authorisation or the Care Quality Commission's regulatory activities) which indicate a foundation trust’s risk of a failure to comply with its terms of authorisation. We publish quarterly reports on foundation trust performance against their annual plans on our website.
All foundation trust 2012/13 three-year plans can be found here in the foundation trust directory. Each plan summarises the trust’s vision as well as its clinical, quality and financial strategy and membership plan over the next three years.
To view each section of the report use the drop-down arrow next to the section heading. To print the report, the relevant section(s) must be open to view or alternatively download a PDF of the review here.
Monitor has reviewed the 2012/13 three-year plans (written plans, financial returns and governance returns) of the 144 NHS foundation trusts authorised prior to and including 1 April 2012.
We are committed to learning from our experience as a regulator, particularly now as we progress towards taking on our future role as the sector regulator for health care during 2013. In reviewing this year's annual plans, we have particularly focused on sustainability, a direct lesson from Peterborough and Stamford Hospitals NHS Foundation Trust. We have also applied a more targeted approach and streamlined our information requirements to reduce the regulatory burden on foundation trusts (but not at the expense of our ability to identify risk). We have also segmented the sector to give some insight into common issues for similar types, sizes and locations of trusts.
Further review of plans
We commission more detailed reviews of specific issues where there are apparent weaknesses in planning processes, or where plans demonstrate significant risk of trusts' breaching their terms of authorisation. These reviews are an important regulatory tool for higher risk foundation trusts and aim to help reduce the likelihood of them getting into more serious difficulty by focusing their boards on rectifying the issues identified.
This year we have further developed this stage of the process, resulting in a more targeted and in-depth review with an emphasis on diagnosing underlying problems and recommending implementable actions to guide trusts. Thirteen trusts have been selected for the second stage review. Any additional key themes emerging from this work will be shared with the sector and aspirant foundation trusts later this year.
From our review of foundation trusts' plans, there are clear signs that the sector is facing increased financial pressure. A summary of some of the key issues emerging is given below.
Sustainability
Most of the sector looks likely to show resilience in the short-term and this year's level of planned Cost Improvement Plans (CIPs) appears sufficient to prevent serious financial deterioration. The sector's balance sheet should also remain in reasonable shape due to prudent liquidity planning and a large aggregate cash balance at the end of 2011/12. However, we expect the sector's finances to be weaker by the end of 2015.
Risk
All trusts face the challenge of improving the quality of care they provide and delivering significant savings year-on-year while meeting an increased demand for services and more stretching service targets. However, the financial challenges are far greater for some trusts than others. Consequently we expect the gap between those foundation trusts which are able to adapt to the continued pressures and those which are unable to adapt is therefore likely to continue to widen. Our analysis shows that small and medium-sized district general hospitals, trusts with significant PFIs and those located in challenged local health economies face the greatest financial risk. Despite the overall resilience of the sector, we therefore expect an increasing number of individual trusts to be placed in significant breach for financial reasons over the next three years.
Cost Improvement Plans (CIPs)
Over recent years the sector has substantially increased its delivery of CIPs. However, sustaining this level of CIP delivery, while maintaining and improving quality, will be challenging. If trusts successfully deliver the planned level of CIPs over the next three years, nearly 20% will have been removed from the sectors cost base over a five year period. Monitor will continue to focus on CIPs to ensure that quality and patient care are not compromised as costs are taken out. It appears unlikely that longer term financial sustainability can be achieved purely through delivery of CIPs and by the end of 2015 we expect that trusts will also need to be making significant changes in the way services are delivered, including through system reconfiguration and consolidation of suppliers.
Service performance
Service performance indicators suggest the sector as a whole is performing adequately. There is positive progress against a number of the cancer targets. Performance on infection control has improved over time, although trusts are declaring a slight increase in risk of failure in 2012/13 as targets become even more stretching. Performance on Referral to Treatment (RTT) and A&E targets may come under increasing pressure. We recognise that service performance is difficult for trusts to forecast and historically they have under-declared the risk of target failure in their annual plans. However forecasts appear to be improving year-on-year, with the gap between the number of predicted and actual target failures narrowing in 2011/12, compared with 2009/10 and 2010/11 plans.
Margins continue to be under pressure
Margins have declined consistently over recent years and trusts are forecasting a further decline in 2012/13, largely due to increased pay and drug costs. Trusts are projecting that margins will recover in the latter two years of the plan. This has been the prediction in the last three years but, in the event, margins have continued to decline. We believe that a similar outcome is likely this year for a number of reasons. Most significantly, the level of planned CIPs (4.1%-4.3%), while higher than in previous years, is still below the estimated efficiency requirement (4.5%-5%).
Demand management
The Health and Social Care Act 2012 means that foundation trusts will need to adapt to working with Clinical Commissioning Groups (CCGs). Our review of plans suggests that trusts believe CCGs will have a large one-off impact in reducing acute activity in 2013/14. This contrasts with patterns of growth in acute activity seen in recent years (4.5% per annum) and suggests foundation trusts believe CCGs will be more effective in delivering demand management initiatives and moving activity out of the hospital setting. We believe it is questionable whether CCGs will be able to improve demand management significantly within their first year of operation. Our experience of reviewing trusts' plans tells us that when they are faced with demand substantially above planned levels they have been unable to deliver the additional work profitably.
Some key points identified in this year's plans include:
Operating income is planned to rise by £315 million (1%) in 2012/13, and then to decline by 1% in years 2013/14 and 2014/15. The planned increase in revenue in 2012/13 is driven by growth (planned service developments, transactions and revenue generation schemes) exceeding the impact of tariff cuts. The projected revenue falls in years two and three is driven by a combination of continued tariff cuts, reduced overall volume growth (including activity, developments and transactions) and planned reductions in other operating income.
Acute activity is forecast to remain broadly flat over the three year period, with an aggregate increase of 4% in 2012/13 followed by a reduction of 5% in 2013/14, and then a rise of 1% in 2014/15. The significant planned reduction in both non-elective and elective inpatient and day case activity suggests that the sector expects a large one-off impact on demand through changes in commissioning arrangements in 2013/14. This contrasts with patterns of growth seen in recent years (4.5% per annum) and suggests foundation trusts believe Clinical Commissioning Groups (CCGs) will be more effective in delivering demand management initiatives and moving activity out of the hospital setting.
Our review shows a decline in earnings before interest, taxes, depreciation and amortisation (EBITDA) margins from 6.1% to 5.9% in 2012/13. However, trusts are forecasting margins will rebound to 6.5% and 6.8% in years two and three respectively. This looks unlikely for a number of reasons:
Our view is that it is more likely that margins will exhibit a relatively flat profile in years two and three of the plan period. It will be important for foundation trusts to plan realistically to protect their margins.
All NHS foundation trusts are required to make savings as part of the Government's efficiency challenge, but not at the expense of patient care or service quality. Over the past three years a step change in CIPs has been seen (2.0% in 2009/10 rising to 3.9% in 2011/12). CIPs are forecast to remain at greater than 4.1% of operating costs each year from 2012/13 onwards (peaking at 4.3% in 2013/14).
While the sector's encouraging performance on CIP delivery is expected to continue with the highest level of planned efficiency in the past three years, it is still below Monitor's assessor case efficiency requirements (4.5% in 2012/13 and 5% in 2013/14 and 2014/15). It is possible this gap may be closed via other margin enhancing initiatives (additional planned revenue generating CIPs account for a further 14% of total CIP plans in 2012/13) and release of unutilised contingencies.
In last year's annual plans, trusts planned significant reductions in clinical staff (c6%-8% in years two and three). This reduction does not appear in this year's trust plans. Instead, both mental health and acute trusts are forecasting only a small change in frontline staff (acute +1%; mental health -1%). However, over the plan period, acute trusts and mental health trusts are planning a 3% and 6% reduction respectively in clinical staff; both segments are forecasting a c5% reduction in beds over the same time span. Trusts plan to make savings through more efficient working on the front line and by reducing administrative or clerical costs. Trusts will need to ensure that quality is not compromised by savings.
CIPs relate predominantly to pay costs (increasing from 57% of the total in 2012/13 to 63% by 2014/15). Sustaining delivery of CIPs at these levels while maintaining and improving quality will continue to present a challenge to the sector as a whole and, traditionally, recurrent CIPs have under-delivered against plan by around 15%. However, 'slippage' has declined in recent years (5.6% in 2011/12 and 7.0% in 2010/11), which suggests trusts are planning for and delivering better CIPs. If trusts are successful in delivering the expected level of CIPs over the next three years, then nearly 20% will have been removed from the sector's cost base over a five year period.
Aggregate closing cash balances are planned to reduce by £802 million (20%) to £3.2 billion in 2012/13 and then by a further 9% to c£3.0 billion in 2013/14. However, foundation trusts have historically forecast cash to be much lower than actually reported at year end. The 2011/12 cash balance forecast in annual plans was £2.7 billion versus actual cash balance of £4.0 billion, a variance of c49%. This was because of favourable working capital movements and capital expenditure being lower than plan.
As in previous years, capital expenditure is forecast to reduce year-on-year over the three years of trusts' plans. The planned ratio of investment to depreciation in all years would indicate foundation trusts are more than maintaining existing assets. Long term borrowing over the three year period looks relatively stable, peaking at £5.8 billion in 2013/14 (versus £5.5 billion in 2011/12).
Sector liquidity is forecast to fall from 34.4 days currently to 30.4 days in 2014/15, reversing a recent improving trend in liquidity caused by the high level of capital expenditure. The main driver for the planned weakening in liquidity is planned capital expenditure significantly exceeding depreciation. Foundation trusts expect a subsequent reduction in capital expenditure year-on-year over the rest of the plan. The increase in capital expenditure levels in 2012/13 to £2.5 billion is potentially as a result of a catch up on slippage from planned capital expenditure levels in 2011/12. Investment in maintenance expenditure will be relatively steady, however investment in new property is expected to fall by 45% from 2012/13 to 2014/15.
Trusts are forecasting a more challenging 2012/13, with the aggregate Financial Risk Rating (FRR) declining from 3.4 to 3.2, reflecting increased risk and financial pressure across the sector.
Significantly, 43 trusts (30% of the sector) are forecasting a lower FRR in 2012/13 than they achieved in 2011/12 (28% of acute trusts; 29% of mental health trusts; and 44% of specialist trusts). Only ten trusts (7%) are forecasting a higher FRR in 2012/13 than 2011/12.
Annual plans indicate to Monitor that trusts expect the sector's FRR to improve to 3.3 and 3.4 in years two and three. We believe this may prove optimistic given the challenging financial climate.
Targets are an important tool for measuring improvement in the sector's performance and provide a proxy for Monitor to assess governance risk. Targets are also a useful reference for patients to help them understand the effectiveness of a particular service or hospital.
Our indicators suggest the sector as a whole is performing adequately. 77% of foundation trusts are forecasting a green/amber-green Governance Risk Rating (GRR) in 2012/13. This represents a small improvement against quarter 4 2011/12 ratings and indicates that the majority of foundation trusts expect to meet key service performance targets and safety standards. The number of trusts forecasting red or amber-red GRRs has reduced from 29% to 23%. However there is a level of uncertainty about such projections. Only 3% of foundation trusts forecasted a red GRR in 2011/12, compared to an actual figure of 13% at quarter 4 2011/12. As a result, we expect a minimum of 17 trusts to achieve a red GRR for 2012/13, and expect there may be more.
Good progress is being made against cancer targets (see our quarter 4 2011/12 report); and only 8% of the sector forecasts it will breach these targets in 2012/13. Performance against infection control targets continues to improve over time. However trusts project a slight increase in breaches in 2012/13 as targets are made even more challenging. Performance on Referral to Treatment (RTT) and A&E targets looks set to come under increasing pressure.
Acute foundation trusts have the highest level of governance risk (17 out of 19 red-rated foundation trusts in quarter 4 2011/12 were acute). The acute foundation trust sector is forecasting a marginal improvement in GRR in 2012/13 with 15 foundation trusts red-rated. The targets trusts are forecasting they will most likely breach in 2012/13 are:
| Target |
2012/13 projection | % of sector | 2011/12 projection |
| C. difficile | 25 | 17% | (16) |
| Referral-to-treatment pathways admitted patients | 22 | 15% | (16) |
| Referral-to-treatment (incomplete) | 10 | 7% | - |
| A&E waiting time | 15 | 10% | (14) |
| 62-day cancer wait | 12 | 8% | (11) |
There is an increase in trusts declaring a risk of non-compliance against RTT waiting times targets. 22 foundation trusts have declared a risk of not achieving the target for admitted patients, with ten trusts declaring a risk for non-admitted patients. The sector is forecasting 15 failures against the A&E target, which is generally in line with 2011/12.
Mental health trusts are declaring risks of failing community care indicators (4), RTT (2) and Care Programme Approach review (2) targets. The governance risk rating profile for mental health foundation trusts has declined slightly in the 2012/13 annual plans with three fewer green-rated, two more amber-green rated and one more amber-red rated foundation trust than in quarter 4 2011/12. The two mental health foundation trusts projecting a red rating are the same as those at quarter 4 2011/12.
Following our review of previous years' plans, we are aware that foundation trusts' forecasts of service performance can be optimistic. However forecasts appear to be improving year-on-year, with the gap between the number of predicted target failures and actual target failures narrowing in 2011/12 compared with 2009/10 and 2010/11 plans. We continue to work with foundation trusts to better understand reasons for discrepancies to help improve planning.
The achievement of targets is important for patients, and we expect foundation trusts to meet them. Where we identify a pattern of failure that indicates weak governance, we take action on behalf of patients to direct change.
| Income and expenditure all figures in (£m) |
2011/12 Full-year Actuals |
2012/13 Full-year Plan |
2011/12 Actuals and 2012/13 Plan |
2013/14 Full-year Plan |
2014/15 Full-year Plan |
FY1 - FY3 Variance |
| Total operating income | 37,697 | 38,013 | 315 | 37,486 | 37,289 | (724) |
| Employee benefits expenses | (23,663) | (23,993) | (331) | (23,513) | (23,274) | 720 |
| Drug costs | (2,605) | (2,654) | (49) | (2,692) | (2,748) | (94) |
| PFI operating expenses | (343) | (359) | (16) | (369) | (381) | (22) |
| Other operating costs | (8,686) | (8,630) | 57 | (8,384) | (8,265) | 364 |
| EBITDA* | 2,287 | 2,252 |
(35) |
2,431 | 2,526 | 274 |
| Non-operating income, Total | 62 | 62 | (0) | 30 | 45 | (17) |
| Total Depreciation | (1,071) | (1,125) | (54) | (1,185) | (1,226) | (101) |
| Total interest expense | (312) | (325) | (12) | (332) | (336) | (11) |
| PDC dividend | (467) | (497) | (30) | (521) | (537) | (40) |
| Other non-operating costs | (53) | (109) | (56) | (66) | (68) | 40 |
| Net surplus before impairments and tax |
560 | 384 | (176) | 454 | 499 | 116 |
| Impairments and restructuring costs | (438) | (208) | 229 | (97) | (80) | 128 |
| Taxation payable | (0) | (0) | (0) | (0) | (0) | (0) |
| Surplus/(deficit) after tax | 122 |
175 | 53 | 357 | 419 | 243 |
| EBITDA% | 6.1% | 5.9% | -0.1% | 6.5% |
6.8% | 0.9% |
* EBITDA = Earnings before interest, tax, depreciation and amortisation. EBITDA margin variance in 2012/13 is 0.1% due to the impact of rounding on FY Actuals 2011/12 and FY Plan 2012/13.