Monitor unveils shake-up of financial risk ratings
Monitor will no longer use foundation trusts’ operating profitability or surpluses as measures of the financial risk they are carrying, under proposals unveiled by the regulator.
Each foundation trust currently receives a “financial risk rating” from Monitor based on five metrics. These include its surplus margin, margin on earnings before interest, tax, depreciation and amortisation (EBITDA margin), actual EBITDA margin compared to plan, net return on capital, and liquidity.
FTs with the worst risk ratings face closer oversight by the regulator, and possible regulatory intervention.
However, under the Health Act 2012, Monitor is required to assess the financial risk to continued delivery of NHS services whether they are provided by FTs or private sector providers.
In a consultation on a new risk assessment framework published last week, Monitor has proposed to replace the financial risk rating with a “continuity of services risk rating”, which would apply to all providers of services that commissioners have designated for protection.
The new rating would be based on just two metrics: an organisation’s ability to service its debts, or “capital servicing capacity”; and its “liquidity days”, or the number of days for which its liquid assets could cover its cash obligations.
The consultation states that whereas the current financial risk rating reflects “the broad financial situation of a foundation trust”, the new rating is intended to flag risks to a provider’s solvency “over a 12-18 month period”.
It also makes clear that most of the paid-for overdrafts – or “working capital facilities” – extended to foundation trusts by commercial lenders would no longer count as part of an FT’s liquid assets for the purposes of risk rating.
“In Monitor’s experience, default clauses in working capital facilities often mean these facilities become unavailable to trusts in financial difficulty,” the consultation states. Therefore, it proposes that only “unconditionally committed lines of credit” will be counted as part of an FT’s liquidity.
Monitor anticipates that this would exclude most existing working capital facilities, and therefore proposes to reduce the number of liquidity days a provider must record to achieve the best risk ratings.
Monitor proposes to calculate providers’ risk ratings four times a year, as it does currently for foundation trusts. However, the consultation lists a number of possible “material in-year events” that might trigger an “override”, in which the provider’s risk rating would be recalculated and a new rating published.
These include: Care Quality Commission warning notices that could require a provider to spend significantly more in order to meet quality or safety requirements; material transactions; financial performance that is materially worse than plan; and the loss of a major contract.