NHS foundation trusts: review of three months to 30 June 2010

Monitor requires each NHS foundation trust board to submit a quarterly report. Performance is monitored against these reports to identify where potential and actual problems might arise.

Based on these reports, Monitor assigns each NHS foundation trust with financial and governance risk ratings. These risk ratings are designed to indicate the risk of a failure to comply with the foundation trust’s terms of authorisation.

This is the first quarterly report of 2010-11 and is based on data submitted by the 130 NHS foundation trusts authorised at 30 June 2010.

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  • Sector overview at quarter 1


  • Quarter Highlights

    Governance performance
    Financial performance

    The NHS foundation trust sector as a whole is in relatively good health at the end of the first quarter of 2010-11. However, our analysis of the returns submitted by the trusts has identified some emerging issues, below, that could become significant risks for some trusts later in the year. Some of these were identified as potential challenges during our review of their annual plans for 2010-11. At the end of the first quarter, we have reviewed those challenges against the current performance of foundation trusts - in particular, their progress against delivery of challenging cost improvement plans and the potential impact on income of emergency activity above planned levels - as described below.

    Governance performance
    The majority (62%) of foundation trusts are rated ‘green’ for governance risk at quarter one. However, as indicated in their annual plans, the targets causing the most immediate challenges for acute and specialist foundation trusts are the 62-day cancer target and the target to reduce rates of C.difficile. Ten mental health foundation trusts reported a breach of the target on the enhanced care programme approach in the first quarter.

    Financial performance
    Aggregate EBITDA (earnings before interest, tax, depreciation and amortisation) is marginally ahead of plan, and the average financial risk rating (FRR) for the foundation trust sector was in line with plan. As forecast in foundation trusts’ annual plans, fewer trusts have the lowest risk FRR (4 or 5) while more have an FRR of 3 (an FRR of 1 represents the highest risk).

    Income was marginally (1%) above plan due to additional emergency and non-elective activity. However, costs were also above plan, primarily due to premium costs incurred delivering this additional activity. Eighty-one foundation trusts (62%) are behind plan in delivery of their cost improvement plans (CIPs). Although there is often some slippage on CIPs in the first quarter of the year, this has been identified as an issue for 2010-11 as trusts are unlikely to be able to rely on payment for over-activity to mitigate shortfalls.

    Capital expenditure is 12% below plan. However, this represents a change from 2009-10, when capital expenditure was 22% behind plan at quarter one.


  • Emerging issues and challenges

    Contract issues
    Emergency activity
    Cost improvement plan achievement

    Contract issues
    A number of NHS foundation trusts have identified potential issues regarding contracts with their commissioners that could affect their financial position in 2010-11 if unresolved.

    Sixteen NHS foundation trusts are identified as having a likely dispute in relation to their 2010-11 contracts, often related to primary care trusts challenging over-performance.

    There are 27 NHS foundation trusts which have not yet signed one or more of their 2010-11 contracts. However, all of these are expected to be resolved shortly, as are the cases of nine foundation trusts with outstanding disputes in respect to last year’s contracts.

    Emergency activity
    In 2010-11 NHS foundation trusts will only be paid at 30% of the full tariff for emergency activity above a baseline set by 2008-09 emergency activity levels. At quarter one, the aggregate performance of acute and specialist foundation trusts is above plan by 1.2% in non-elective care and 2.2% above plan in A&E activity. Monitor does not track activity that will be included in the marginal tariff. However, as an indicator of financial risk it is possible that trusts will not receive the full tariff rate for some non-elective and A&E activity that is above plan. Eleven foundation trusts reported non-elective and accident and emergency income that is 5% or more above plan at quarter one.

    None of these 11 trusts are reporting adverse EBITDA (earnings before interest, tax, depreciation and amortisation) performance at quarter one as a result, but if this trend continues we would expect a number of trusts to experience financial pressures related to the marginal tariff during the year.

    Cost improvement plan achievement
    Failure to deliver cost improvement plans (CIPs) at a time when the NHS is facing severe financial pressures is likely to have an adverse effect on the financial viability of foundation trusts later in the year. NHS foundation trusts have delivered £203 million of CIPs at quarter one, but this is £41 million below plan, with 81 foundation trusts (62%) behind plan in delivery of their CIPs. Failure to deliver CIPs relating to staff costs is the primary driver (£24 million below plan).

    This is a familiar challenge and NHS foundation trusts have often struggled to deliver their CIPs in full. There has been a tendency for foundation trusts to back load delivery of CIPs towards the end of the year. However, as we identified when we reviewed annual plans, conditions have changed. The level of CIPs identified by NHS foundation trusts for 2010-11 is more challenging than in any previous year, and the old solutions that enabled some trusts to deliver their CIPs later in the year (such as over-performance and income growth) may not be options which are now available.  Therefore, it is essential that boards have comprehensive, long-term plans in place to deliver savings without relying on short term and non recurrent measures.


  • Regulatory action

    In July, Monitor’s Board found Poole Hospital NHS Foundation Trust in significant breach of the terms of its authorisation.

    The decision was based on concerns around the trust’s governance arising from its performance in 2009-10. The trust reported a deficit of £4.5 million (before impairments) against a planned surplus of £2.1 million and there was a lack of robustness in its plan to recover from this position.

    Having considered the available evidence, we decided not to use our formal intervention powers at this stage. However, the trust’s performance will be reviewed against specific milestones; if it fails to demonstrate timely progress towards full compliance with its terms of authorisation, we are likely to consider further regulatory action.

    University Hospital of South Manchester NHS Foundation Trust was removed from significant breach during quarter one. This was as a result of the progress the trust had made in addressing governance concerns and improving its focus on healthcare standards.


  • Governance risk ratings

    We use the term governance to describe the effectiveness of an NHS foundation trust's leadership.  We use performance measures including whether foundation trusts are meeting national targets and standards, such as a reduction in infection rates, as an indication of effective governance, together with a range of other governance measures.

    In the 2010-11 Compliance Framework, we separated our previous amber governance risk rating into amber-green and amber-red to ensure we could more accurately reflect governance risk in NHS foundation trusts. We also included mandatory services risk in our governance risk rating.  The latest risk ratings for all foundation trusts can be found here.

    • The majority (62%) of foundation trusts are rated ‘green’ for governance risk at quarter one.
    • All 13 red-rated foundation trusts are acute or specialist trusts, representing 14% of these trusts. Twelve of the red-rated trusts are in significant breach of their authorisation.
    • Peterborough and Stamford NHS Foundation Trust has been red-rated due to consecutive breaches of the 62-day cancer target in 2009-10.

    The diagram below provides a breakdown of the governance ratings.

    Governance Risk Ratings Q1 2010-11


  • Healthcare targets

    The most frequently failed healthcare targets among acute and specialist foundation trusts were the 62-day cancer target and the target to reduce C.difficile.

    Although target breaches by mental health foundation trusts have been rare, ten trusts reported a breach of the target on enhanced care programme approach in the first quarter. We will be monitoring performance of this target closely in future quarters.

    As a result of the changes to the NHS Operating Framework and the 2010-11 Compliance Framework, the accident and emergency target threshold has been lowered from 98% to 95%. There were no breaches of the 95% target in the first quarter of 2010-11 compared to 17 foundation trusts breaching the 98% target in quarter four 2009-10.


  • Self-certification

    Of the 95 foundation trusts that did not identify any risks of non-compliance in their annual plan self-certification, 42 have breached one or more targets at the end of the first quarter. Of these, 13 foundation trusts (all acute/specialist trusts) have breached one or more of their priority 1 targets. If non-compliance continues in quarter two we may consider the need for these trusts to commission an independent review of self-certification, as set out in the Compliance Framework.


  • Care Quality Commission registration (as at 31 August 2010)

    We work closely with the Care Quality Commission (CQC) to enhance our understanding of trusts’ clinical performance and inform our judgements on their clinical governance. From April 2010 all health and adult social care providers were required to be registered with the CQC. For some providers registration was conditional on further action being taken to address concerns about the safety and quality of care.

    Twelve NHS foundation trusts were registered with conditions by the CQC on 1 April 2010. During quarter 1, three of these foundation trusts (Luton and Dunstable Hospital; Northern Lincolnshire and Goole Hospitals; and Tameside Hospital) have had all their conditions lifted.  Surrey and Borders Partnership had its conditions lifted in September 2010.

    Of the eight foundation trusts still registered with conditions:

    • Five are red-rated for governance: Basildon and Thurrock University Hospital; Heatherwood & Wexham Park Hospitals; Milton Keynes Hospital; Peterborough and Stamford Hospitals; and Mid Staffordshire; and
    • Three are rated amber-green due to an automatic override we apply as a result of the CQC conditions: Heart of England; Medway; and Sherwood Forest Hospitals.

  • Financial risk ratings

    Financial risk ratings are allocated using a scorecard which comprises key financial metrics calculated consistently across all NHS foundation trusts. The rating is designed to reflect the likelihood of a financial breach of an NHS foundation trust’s terms of authorisation. A rating of 5 reflects the lowest risk and a rating of 1 the highest.

    The 130 NHS foundation trusts had an average financial risk rating (FRR) of 3.4. This is in line with plan, but marginally below the average from quarter four 2009-10 (3.5). The average FRR for mental health foundation trusts has improved to 3.8 from 3.7 (at quarter four 2009-10); the average for acute and specialist foundation trusts declined from 3.4 to 3.2 during the same period.

    Fewer trusts now have the lowest risk FRR (4 or 5) while there has been an increase in those with an FRR of 3.

    • 58 NHS foundation trusts (45%) have an FRR of 4 or 5 (63% at quarter four 2009-10);
    • 63 NHS foundation trusts (48%) have an FRR of 3 (32% at quarter four 2009-10);
    • six NHS foundation trusts (all acute trusts) have an FRR of 2: Blackpool Fylde and Wyre Hospitals; Medway; Northern Lincolnshire and Goole Hospitals; Poole Hospital; Royal National Hospital for Rheumatic Diseases; Royal Brompton & Harefield (five at quarter four 2009-10); and
    • three NHS foundation trusts (all acute trusts) have an FRR of 1: Mid Staffordshire; Heatherwood & Wexham Park Hospitals; and Dorset County Hospitals (two at quarter four 2009-10).

    NHS foundation trusts Financial risk ratings


  • Income and expenditure

    Income and expenditure
    all figures in £m    		 2010-11
    Pro Rata**
    Q1 Actual
    		 2010-11
    Pro Rata**
    Q1 Plan    		 Variance
    Total operating income  7,453 7,381 71
    Employee benefits expense  (4,739) (4,719) (20)
    Drug costs  (505) (487) (18)
    PFI operating expenses  (73) (73) (0)
    Other operating costs (1,636) (1,620) (16)
    EBITDA* 499 480 19
    Non-operating income 5  6 (1)
    Total Income 7,458 7,387 71
    Depreciation  (225) (230) 5
    Net interest  (66) (66) 0
    PDC dividend  (116) (116) 0
    Other non-operating costs (8) (8) 0
    Net surplus before impairments and tax 90 66 24
    Impairments and restructuring costs (214) (214) 0
    Taxation payable  0 0 0
    Net surplus/(deficit) after tax  (124) (146) 22
    EBITDA% 6.7% 6.5%  

    *EBITDA = earnings before interest, tax, depreciation and amortisation     
    **Results are shown on a pro rata basis for those NHS foundation trusts authorised during the period

    NHS foundation trusts reported aggregate income of £7.5 billion in the first quarter. This is £71 million (1%) above plan driven by over performance in non-elective care, accident and emergency activity, outpatients activity and other non-tariff income. Over performance in these areas was offset slightly by under-performance in elective activity.

    Operating costs were also (0.8%) above plan at £7 billion, with an over-spend in the acute sector (£63 million) offset by an under-spend in the mental health sector (-£13 million). Staff costs of £4.7 billion are marginally (0.4%) above plan. These costs are largely attributed to the premium costs incurred delivering acute activity and a shortfall in delivery of cost improvement plans (CIPs) linked to pay. NHS foundation trusts have delivered £203 million CIPs at quarter one, but this is £41 million below plan. Failure to deliver CIPs relating to staff costs is the primary driver (£24 million below plan).

    Aggregate EBITDA of £499 million is £19 million ahead of plan with a margin of 6.7%, against a planned margin of 6.5%. However, analysis of the EBITDA margins reveals that acute foundation trusts have not translated additional activity into increased margins, with an EBITDA of 6.4% being slightly lower than plan (6.5%). However, mental health foundation trusts have reported improved margins of 7.3% against plan (6.3%) and specialist trusts reported 7.4% against plan (6.6%).

    The aggregate pre-impairment surplus of £90 million is £24 million ahead of plan. Impairment costs of £214 million, primarily due to a new PFI hospital becoming operational with an impairment of £197 million, result in a post-impairment deficit of £124 million.


  • Cashflow and funding

    The aggregate cash balance of NHS foundation trusts at quarter one is £2.7 billion, representing 36 days working capital. Adverse working capital movements (£81 million) were offset by slippage in capital expenditure (£54 million) leaving the cash balance £26 million below plan.

    Capital expenditure of £403 million is (12%) below plan; this represents a change from 2009-10 when capital expenditure was 21% behind plan at quarter one.  However, we are requiring 67 foundation trusts - 18 above plan, 49 below plan - to submit a reforecast of their expenditure for the year due to significant capital expenditure variance against plan at quarter one.

    Total long-term borrowings of £4.3 billion (PFI liability £3.7 billion; loans £0.6 billion) are in line with plan and represent 50% of the foundation trust sector’s long-term borrowing limit (£8.6 billion).


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