NHS foundation trusts: review of nine months to 31 December 2011

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

Based on these reports, we assign each foundation trust financial and governance risk ratings. These risk ratings are designed to indicate the risk of a failure by a foundation trust to comply with its terms of authorisation.

This is the third quarterly report for 2011/12 and covers the 141 foundation trusts authorised up to 31 December 2011.

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; alternatively, you can download a PDF version of this report.

  • Sector overview at quarter three

    There has been an improved performance against key healthcare targets, most notably cancer targets, which is good news for patients. However A&E performance has declined, which is likely to reflect trusts dealing with greater demand and addressing referral-to-treatment time backlog issues.

    The number of foundation trusts rated green for governance risk has increased from 56 (41%) at quarter two to 63 (45%) this quarter.

    Although more trusts are rated red or amber-red for governance this quarter (42% compared to 35% at quarter two), one of the main reasons for this is an increase in the number of Care Quality Commission (CQC) inspections being carried out. This is something patients should be reassured by as it means regulation is working: problems are being picked up and foundation trusts are being held to account for fixing them.

    The foundation trust sector as a whole is coping well in the face of the financial challenges. Performance is slightly better than planned, partly as a result of improved delivery of cost improvement plans. However, the downward trend in margins of the last four years continues and conditions will challenge trusts in the coming months.

    Sector performance Q3 2011/12


  • Update on issues and challenges

    In August 2011 we published our review of NHS foundation trusts’ annual plans for 2011/12. This review identified areas of pressure and potential risk for performance across the foundation trust sector in the year ahead.

    Delivery of cost improvement plans

    Historically, cost improvement plans (CIPs) have proved challenging for all trusts to deliver. This year is no different with the sector planning to achieve its most challenging CIPs to date - a 4.4% reduction in operating costs (3.9% delivered in 2010/11).

    At quarter three, CIPs are 7.5% behind plan; we believe that the principal cause for slippage is pay costs linked to a rise in acute sector activity. However, this is an improvement on quarter two (9% behind plan) and quarter one (11% behind plan) and last year’s quarter three performance (9% behind plan).

    CIPs are an essential part of meeting the financial challenge faced by the NHS - to keep pace with the rising costs of higher demand on NHS services and an ageing population. To meet delivery challenges it is vital that the health service modernises and uses its resources more efficiently. However, Monitor has always been very clear that foundation trusts must not take out costs at the expense of quality.

    EBITDA margins

    Aggregate EBITDA is £53 million ahead of plan, with a margin of 6.1%. There are variances across the sector with acute trusts underperforming against plan, specialist trusts performing ahead of plan and mental health trusts managing to outperform plan despite the impact of community services transactions activity.

    However there is a significant downward trend in EBITDA over the last four years (margins slipping from 7.5% in 2008/09) and conditions will remain challenging for trusts due to increased demand and rising cost pressures.

    Service performance

    NHS foundation trusts reported in their annual plans for 2011/12 that C.difficile, referral-to- treatment waiting times and A&E waiting times targets were going to prove the most challenging.

    Overall, the number of C.difficile cases has continued on a downward trend, reducing by 24% compared to quarter three 2010/11. However, the targets set for this year are more challenging. At quarter three 2011/12, 31 trusts declared a risk of breaching the full year target, compared to 35 trusts at quarter two. Of these 31, five trusts have breached their full year target in quarter three. In their annual plans, 16 foundation trusts anticipated declaring a risk of breaching this target at this point.

    There has been a decline in performance against A&E targets. At quarter three, 14 foundation trusts breached the target, compared with six in the same quarter of 2010/11.

    Referral-to-treatment waiting times targets saw an improved performance across the sector in quarter three, with the number of trusts breaching the targets down to 12 at quarter three (from 13 at quarter two and 19 at quarter one).


  • Regulatory action

    Since the publication of the 2011/12 quarter two report, three trusts have been found in significant breach of their terms of authorisation, one has been removed from significant breach and we have used our formal powers of intervention at one trust.

    In December 2011:

    • Southend University Hospital was found in significant breach of its terms of authorisation, specifically its governance duty and healthcare and other standards duty.

    In January 2012:

    • The Queen Elizabeth Hospital King’s Lynn was found in significant breach of its terms of authorisation, specifically its governance duty and its general duty to exercise its functions effectively, efficiently and economically; and
    • Derby Hospitals was found in significant breach of its terms of authorisation, specifically its governance duty and its general duty to exercise its functions effectively, efficiently and economically.

    In February 2012, we used our formal powers of intervention for the second time at University Hospitals of Morecambe Bay. Monitor’s Board decided to intervene to strengthen the leadership at the trust to enable it to be in a position to quickly fix the problems identified, for the benefit of patients. The trust has been in significant breach since October 2011.

    All four trusts are subject to enhanced monitoring and are required to report to Monitor on a regular basis against the delivery of key milestones. You can read more detail about the issues facing these trusts here, alongside information on the other 11 trusts currently in significant breach.

    In January 2012, Monitor removed one trust, Poole Hospital, from significant breach following a steady improvement in its financial performance. Full details of those trusts no longer in significant breach can be found here.


  • Governance risk ratings

    The number of foundation trusts rated green for governance risk has increased from 56 (41%) at quarter two to 63 (45%) at quarter three.
    There has been an increase in the number of red-rated trusts (from 17 at quarter two to 19 at quarter three). Of these, 15 are in significant breach of their terms of authorisation – further information can be found here.

    Although more trusts are rated red or amber-red for governance this quarter (42% compared to 35% at quarter two), one of the main reasons for this is an increase in the number of CQC inspections being carried out. This is something patients should be reassured by as it means regulation is working: problems are being picked up and foundation trusts are being held to account for fixing them (see Care Quality Commission concerns for more information).

    The breakdown of governance risk ratings at quarter three is:

    • 63 foundation trusts (45%) rated green;
    • 19 foundation trusts (13%) rated amber-green;
    • 40 foundation trusts (28%) rated amber-red; and
    • 19 foundation trusts (14%) rated red.

    This table lists foundation trusts where governance risk ratings have changed since quarter two and explains the reasons for this.

    Q3 2011/12 Governance risk ratings

     


  • Performance against healthcare targets

    Healthcare targets are in place to improve services for patients. Foundation trusts have a duty to meet targets and standards as part of their terms of authorisation and we are committed to monitoring performance against targets during the year. If we observe a consistent failure to comply with targets we will change a trust’s governance risk rating accordingly. If a pattern of failure indicates weak governance, we will take action to ensure this is dealt with.

    We expect foundation trusts to take these targets seriously as they are in place to ensure improved services for patients. If foundation trusts are unable to deliver a solution that ensures patients are treated within the required time, we will consider using our regulatory powers to address the problem.

    Infection control

    MRSA
    Foundation trusts have showed an improved performance against MRSA targets. At quarter three, six trusts were breaching the target despite the target being more challenging (seven trusts were breaching the target at quarter three 2010/11).

    C.difficile
    Each foundation trust has a full-year target for rates of C.difficile. The anticipated performance required to achieve this target at year-end is spread evenly over each quarter to give each trust a planned trajectory.

    The overall number of C.difficile cases has declined considerably since quarter three 2010/11 (a 24% average decrease across all foundation trusts).  However, the targets are more challenging this year and, at quarter three, 31 foundation trusts are declaring a risk of breaching their full year C.difficile target. Of these 31, five trusts have breached their full-year target in quarter three.

    Cancer targets

    At quarter three, the number of foundation trusts breaching cancer targets has decreased, with 16 trusts failing one or more cancer targets (down from 23 at quarter two and 32 at quarter one). Although these targets remain a challenge, the improvement in performance is encouraging.

    Other performance targets

    A&E target performance has declined compared with quarter three 2010/11 (six breaches), with 14 foundation trusts breaching in quarter three 2011/12. It is likely that this has been influenced by trusts dealing with greater demand and addressing referral-to-treatment time backlog issues.

    Twelve foundation trusts have reported breaches of the 18-weeks referral to treatment waiting times target for admitted patients. This is an improvement from 13 at quarter two and 19 at quarter one.

    During quarter three, ambulance foundation trusts continued to remain fully compliant with all their service performance targets as in quarters one and two.


  • Care Quality Commission (CQC) concerns

    The CQC is the quality and safety regulator for all NHS organisations. Monitor and the CQC work closely to ensure NHS foundation trusts provide safe, high-quality care to patients. We take its judgments very seriously and expect all foundation trusts to deliver improvements required by the CQC within the specified timeframe.

    If the CQC has identified major or moderate concerns about a foundation trust's failure to meet an essential standard, we will reflect this within our risk ratings and expect the trust to take swift action to address the concerns.

    The CQC has been increasing the number of inspections it carries out since it completed the registration process in 2010. This has contributed to the increase in red and amber-red rated trusts this quarter. It is therefore picking up more problems, which foundation trusts are fixing - this is something that patients should be reassured by as it shows the system is working.

    However, it’s worth noting that the number of CQC enforcement actions (which reflect the most serious CQC concerns) relating to foundation trusts have reduced from six to two (as at 13 March 2012).

    The number of foundation trusts with CQC compliance concerns or actions was 34 (as at 31 January 2012), a decrease from 35 at the time of publishing the quarter two report for 2011/12. Of these, 17 are mental health trusts.


  • Financial risk ratings

    The average sector financial risk rating (FRR) in quarter three (3.4) is above plan (3.2) and better than quarter two (3.3).

    This is in part because trusts have planned effectively and delivered against their cost improvement plans (CIPs). Although CIPs are 7.5% below plan, these plans are more ambitious and trusts are performing better against them than in the last two years (when they were 9% behind plan at this stage).

    However there is a significant downward trend in EBITDA over the last four years (margins slipping from 7.5% in 2008/09) and conditions will remain challenging for trusts due to increased demand and rising cost pressures.

    Of the 15 foundation trusts in significant breach of their terms of authorisation (an increase from 13 in quarter 2) 11 of these have financial issues as one of the primary reasons for their breach. There is a small number of trusts with a significant deficit. Monitor is working closely with these trusts to ensure that they find ways to address the underlying causes of these problems.

    Foundation trusts’ annual plans for 2011/12 showed that the trusts with the most severe financial problems predicted longer recovery periods due to the complexity of some of the issues. It is important that trusts work closely with their commissioners to find a long-term solution so that patients continue to have access to high quality care.

    Q3 2011/12 Financial risk ratings


  • Income and expenditure

    Year-to-date operating income of £26.1 billion is £539 million (2.1%) above plan, primarily driven by greater than planned community block contract income (£143 million), higher than planned day case revenue (£74 million), other clinical revenue (£131 million) and other operating income (£191 million).

    Total operating costs of £24.5 billion are £437 million (1.8%) above plan.

    Staff costs of £16.6 billion are £209 million (1.3%) above plan, largely due to a shortfall in pay CIPs.

    Drug costs are 4.9% above plan (down from 4.2% at quarter two) due to increased activity levels and high drug costs.
     

    Income and expenditure
    all figures in (£m)
    Q3 2011/12 Pro Rata Actual
    Q3 2011/12 Pro Rata
    Plan
    Q3 2011/12
    Variance
    YTD
    Pro Rata Actual
    YTD
    Pro Rata Plan
    YTD Variance
    Total operating income 9,058 8,751 308 26,134 25,594 539
    Employee benefits expenses (5,684) (5,567) (117) (16,623) (16,414) (209)
    Drug costs  (608) (572) (36) (1,756) (1,674) (82)
    PFI operating expenses  (85) (85) 1 (256) (254) (2)
    Other operating costs (2,070) (1,970) (99) (5,849) (5,706) (143)
    EBITDA* 590 556
    33
    1,600 1,547 53
    Non-operating income 11 29 (19) 36 71 (35)
    Total Income 9,069 8,780 289
    26,170 25,665 504
    Total Depreciation  (254) (266) 12 (742) (766) 24
    Total interest expense (77) (79) 1 (229) (231) 2
    PDC dividend  (118) (117) (1) (350) (351) 2
    Other non-operating costs (13) (14) 2 (38) (43) 5
    Surplus pre-impairments 161
    109 52 326 225 101
    Impairments and restructuring costs (88) (41) (48) (171) (117) (54)
    Taxation payable  0 0 0 0 0 0
    Surplus/(deficit) after tax  73
    68 4 155 108 47
    EBITDA*% 6.5% 6.4%   6.1%
    6.0%  

    *EBITDA = earnings before interest, tax, depreciation and amortisation

    Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)

    Aggregate EBITDA of £1.6 billion is £53 million ahead of plan, with a margin of 6.1% compared with the 6.0% planned. This is primarily due to operating activity being above plan.

    • 60 foundation trusts (43%) delivered EBITDA more than 5% above plan, an increase from quarter two (38%); and
    • 55 foundation trusts (39%) delivered EBITDA performance below plan (down from 46% at quarter two).

    Foundation trusts delivered a net surplus (pre-exceptionals) of £326 million at quarter three, which is £101 million ahead of plan. This can be attributed to lower than planned depreciation and EBITDA over-performance.

    However, as noted earlier, there is a significant downward trend in EBITDA over the last four years (margins slipping from 7.5% in 2008/09) and conditions will remain challenging for trusts due to increased demand and rising cost pressures.

    Although the sector delivered a net surplus, there is a small number of trusts with a significant deficit. Monitor is working closely with these trusts to ensure that they find ways to address the underlying causes of these problems and return to financial stability.


  • Cash flow and funding

    The aggregate cash balance of 141 foundation trusts at quarter three is £3.4 billion, £489 million ahead of planned performance. This is mainly due to favourable working capital movements (£242 million) and capital expenditure underspend (£455 million).

    The 31% underspend against planned capital expenditure is slightly more than at quarter two (30%) and quarter one (19%) and is above the historical average underspend of 23%. Of the 124 foundation trusts reporting capital expenditure underspend (up from 115 at quarter two, 88 at quarter one and 105 at quarter three 2010/11), 27 are required to reforecast their capital expenditure plans in accordance with our Compliance Framework requirements.

    Long-term borrowing at £5.4 billion represents 47% of the Total Long Term Borrowing Limit (£11.5 billion) and is £670 million better than expected. Of this, £4.4 billion relates to private finance initiatives (PFI) and £1.0 billion to other loans and leases.


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