The key question to ask about insolvency is the political ownership of hospital closures, says Noel Plumridge.

What if the Department of Health were to deny financial help to an insolvent NHS provider? NHS London is seeking tenders for modelling work on the various options for struggling trusts. And beyond various permutations of management reconfiguration, from regime change to franchising, lurks a dark question: could an NHS body actually be allowed to go bankrupt?

In the commercial world, insolvency is a sad fact of life. Companies that cannot pay their bills, or their staff, face a rigorous legal process. If there is a prospect of salvaging something, the company directors hand control to an administrator, whose role is to maintain the business as a “going concern” while trying to find a buyer. It is painful but less painful than receivership, which involves selling the assets, paying whatever is realised to the creditors, and winding up the company.

Take the example of clothing retailer Peacocks - hit badly by the recession and unable to restructure £240m of debt, it went into administration in January. KPMG were appointed as administrators. A buyer was found: Edinburgh Woollen Mill. Of Peacocks’ 611 stores and 49 concessions, the Scottish chain has acquired 388.

Many jobs have been lost, but thousands have been saved. Analysts now consider Peacocks to have been essentially sound, but with too many stores located in the wrong places.

It’s an analysis which resonates in the hospital sector, and especially in London, where many general hospitals are struggling to remain viable. Major acute trust mergers have happened in south-east London – creating the South London Healthcare Trust, currently predicting a £70m deficit in 2011-12 - and are taking shape in the north-east, where Barts and the London, Newham and Whipps Cross are pursuing an elaborate courtship. In south-west London, plans for St Helier Hospital to join St George’s Hospital broke down in January, and the future is once again uncertain.

But merger is one thing; material downsizing is quite another. South London Healthcare manages three major hospitals, and with the Woolwich and Bromley budgets tied into long-term PFI commitments, the vultures have been circling over Queen Mary’s Sidcup for years. However, closing any hospital is a political and managerial nightmare, yet savings expectations stretch inexorably into the future.

Hence perhaps a tempting thought. What if the tough new insolvency regime, set out in section 113 of the Health and Social Care Bill, were allowed to run its course in London? What if a new “buyer” were able to ditch assets considered commercially unviable?

The principle of section 113 is that failing NHS and private providers should be treated identically. So the Insolvency Act 1986 is to apply to foundation trusts. For providers of (undefined) “designated services”, Monitor can appoint an administrator to effect “rescue as a going concern” and transfer services to other licence-holders. For other failing providers, however, the outlook will be as bleak as that faced by Peacocks.

Strictly, the bill’s provisions do not apply to NHS trusts, but one can understand the desire to treat them similarly. So could we see a “for sale” board outside a London NHS hospital?

Technically, a winding-up order will be possible. Insolvency law requires the sale of any remaining assets to meet creditors’ demands. However, it is likely that the largest creditor will be the Department of Health. And the Secretary of State will continue to guarantee the PFI schemes that lie beneath many trusts’ financial difficulties.

So the problem doesn’t go away. Even if a new “buyer” can be found, the politics of hospital closure bounce straight back to Richmond House.

The collateral damage, meanwhile, may be significant. Loans underwritten by government are safer than other loans (even in Greece!) and interest rates reflect that low risk. Any dilution of government guarantees will lead to higher borrowing costs - a hard lesson learned by Liverpool City Council in the 1980s. 

So borrowing costs will rise. The price of a regime that mirrors the commercial world will be paid to the banks in hard cash - not just by struggling trusts, but by all NHS bodies.

There are also profound cultural implications: boards may become less malleable once directors, under insolvency law, incur personal liability – for instance, for wrongful trading. If there is no real prospect of achieving those cost improvements, and no practical hope of financial assistance, signing up to a “challenging” target may carry a high personal cost.

The key question, however, remains political ownership of hospital closures. For although losing 270 Peacocks outlets is sad, clothing is still available elsewhere. Threaten to close a hospital, however “insolvent”, and there will be a very public fight - irrespective of bankruptcy law.