Takeover or oblivion are possibilities for some NHS organisations in the new order – so what are they doing to clutch victory from the jaws of defeat, asks Alison Moore.

The next two years will see the birth of many new health service organisations. But they could sound the death knell for others as focus on financial performance increases, potentially forcing underperforming trusts out of business.

That could be the bleak future for South London Healthcare Trust, with a deficit close to £70m this year. It will not be affected by the new foundation trust failure regime but, like all remaining non-foundation trusts, it needs to move swiftly to get authorisation – or face some form of takeover or disintegration.

Chief executive Chris Streather believes improving productivity could save half that amount: that involves reducing headcount by over 10 per cent, increasing efficiency in theatres, and cutting some wards. Other savings could come from estate rationalisation – although he is keen to retain the trust’s Sidcup site – and from the planned central support for the trust’s private finance initiative projects. Taken together, these could reduce the deficit to a more manageable £9m.

He sees part of the way ahead as collaboration with neighbouring trusts and potentially increasing the amount of elective surgery his organisation does for the Lambeth and Southwark areas.

But at the end of all this, he suggests, there may be a legitimate question about the structure of the organisation, about which he is “relatively agnostic.” Any solution has to involve a balanced health economy and meet the health needs of the three boroughs involved, he adds. “If it does those two then whose name is on the headed notepaper does not matter.”

But the next year or two may give him a chance to ensure that it is his name which remains at the top – and if he can pull off even half of the necessary savings it could be a remarkable turnaround for the trust, which is already performing well on many quality measures.

He is not alone in staring into an abyss. Barking, Havering and Redbridge University Hospitals Trust is heading for a £50m deficit, again partly related to PFI costs, while Imperial Healthcare Trust, also in London, expects to lose about £19m. Trusts in this level of financial difficulty will find it hard to move to foundation trust status and could face merger or takeover – or even a franchise arrangement such as at Hinchingbrooke Health Care Trust.

But the £56.3m deficit run up by one foundation trust – Peterborough and Stamford Hospitals – has focused attention on the new failure regime for foundations. From next year, they will face an unforgiving system which introduces transparency to their funding and could lead to them being dissolved and their services distributed to other providers.

Trusts running into financial trouble will be able to appeal for additional funding through enhancements to the tariff. But the bill for this will sit with their commissioners – who will receive no additional money to fund this. And some trusts may need more time (to reconfigure services or reduce costs) than commissioners or Monitor will want to give them.

If a trust is judged to be a failure it may be put in the hands of an administrator, appointed by Monitor. Commissioners will designate some services as essential – which means they must continue to be provided – but others could be closed. The trust could be acquired by one or more foundation trusts, or it could be dissolved.

It is a regime which is based around transparency – no hidden subsidies to keep trusts in the black, such as exist at the moment – and the threat of a harsh ending. NHS Confederation deputy chief executive David Stout argues it is substantially no different from the current regime; the question is whether it will be used more.

Significant deficit

But does the new system recognise the realities some trusts are working under?

Peter Reading, who has taken over as interim chief executive at Peterborough and Stamford Hospitals Foundation Trust, points out that who runs the trust or how it is structured makes little difference – an expensive PFI means there is a significant structural deficit for the foreseeable future. And with no other hospitals for 30 miles around, services have to be maintained.

Certainly, there is a need for managers to deliver on the elements of savings which are under their control. Dr Streather stresses the productivity savings which can be delivered and, he says, perhaps ought to have been delivered earlier in the three-year history of his trust. But even if he delivered the whole £35m of cost improvement plans in one year, it would only halve his deficit.

But Mr Reading argues that the investment in new PFI buildings, such as Peterborough City Hospital, has given the NHS some superb hospitals which will need to be at the centre of 21st century healthcare.

“You can talk about failure regimes, you can talk about all sorts of organisational tactics to deal with it but the NHS has 30-40 enormously expensive hospitals providing facilities we can only dream of.

“That is a strategic issue for the NHS to think about. Any reconfiguration… has to take these PFI hospitals as a starting point. We have to think about investment plans for neighbouring hospitals in that context,” he says.

Put bluntly this amounts to admitting the NHS cannot evade most of the cost of these hospitals – so it might as well make best use of them. Any failure regime needs to take account of this – and, to some extent, the government has done so in that a rescue package recognising the additional PFI costs of seven trusts is likely to be in place before the new failure regime.

However, making best use of all PFI buildings requires someone to take a strategic view across a wide area. With strategic health authorities due to disappear, it is not certain which organisation will do this. Commissioners may be too small – and too close to the problem.

Nigel Edwards, senior fellow at the King’s Fund, says there is a similar problem with intervention at an early stage in a trust’s failure: who will mastermind assistance to them?

He is sceptical about what the regime will achieve in cases where the fundamental problem is lack of money in the local health system and deficits bounce between commissioners and providers. “When the music stops the person holding the deficit wins a new chief executive,” as he describes it.

“We have been very bad in the past about separating out systemic and managerial problems and separating out long-term cultural problems from management problems.”

And David Stout questions what the failure regime is for commissioners – who could end up holding the deficit? “Sorting out a provider may simply transfer the problems to the commissioner,” he says.

Anita Charlesworth, chief economist at the Nuffield Trust, says current opaqueness around financial support – which can include non-tariff deals – makes it hard to identify which trusts are in trouble, she says. “There needs to be a change in NHS culture to be clear and open about these things.”

The failure regime for foundation trusts envisages an administrator being put in. In reality, this is likely to be a team including an insolvency practitioner and some managers with health service experience – although who will take the lead is still under discussion. The availability of people with the right skills could become an issue if many trusts are in the failure regime at the same time, says Ms Charlesworth: they may also be very highly paid, which may be an issue if they are closing services.

Mr Stout points out they will have a relatively short period to find solutions to what may be deep-seated problems which have evaded resolution for some time.

Struggling trusts

What is an essential service is not defined but access is likely to be important. However, there is no national guidance on what is a reasonable travel time. Failing trusts in London – where patients have alternatives – may be at greater risk of closure than those elsewhere.

Many struggling trusts have already been through mergers. Graham Atkins, associate director in the public health practice at Hay Group, says these may have been forced and there may be a lack of shared vision.

He urges trusts undergoing further change to emphasise communications with staff, patients and other stakeholders. But he warns that being told they are failing and need to be acquired by another trust could “feel pretty difficult” for the staff and it will be important to set the right tone and to recognise talent in both trusts. Some very big organisations do manage to develop a shared vision and buy-in among their staff, he says.

Who might take over some of these struggling hospitals? The failure regime highlights foundation trusts and private providers. But taking over some of these trusts might be too much to swallow for even a large foundation trust.

South London Healthcare, for example, has a turnover of around £460m a year and a deficit close to £70m this year. It could be too big a risk for many organisations to take on and would dwarf some private providers. Where private provider solutions have been mooted it is often with much smaller trusts – the franchised Hinchingbrooke’s turnover is around £100m.

Epsom and St Helier University Hospitals Trust, with a turnover of over £300m, looked as if it would be split between two organisations until St George’s withdrew its bid for St Helier Hospital. This has created the spectre of an “orphan hospital” which no one wants to run.

Some of these takeovers would only look attractive if the risk could be reduced – for example, if there are substantial, obvious savings which could be delivered quickly.

Break-up may look a more likely option for some trusts – which, ironically, were often formed from mergers of several smaller organisations. Some elective services may look attractive: emergency ones may not.

How many trusts will enter the failure regime is uncertain; chief executives and boards, whose jobs will be on the line, will be anxious to avoid it. Financial pressures, however, may make it unavoidable – especially in cases where providers and commissioners cannot agree on the way ahead. David Stout thinks failures may not be rare: “It could quite plausibly be quite frequent.”

But is this regime partly a response to the failure of the NHS – and politicians – to drive through necessary reconfigurations? Some of the weakness of London trusts can be linked with over-provision of hospitals in the capital but pushing through change has been a slow process: Chris Streather feels the delays in implementing A Picture of Health: the reconfiguration for south east London, has contributed to the problems in South London Healthcare Trust, especially in slowing the elective/non-elective split.

Bringing in an administrator could mean painful decisions could be presented as entirely necessary and taken out of politicians’ hands.

Whether it will succeed in this depoliticising of difficult decisions will be another matter. Nigel Edwards thinks politicians will struggle to take a step back from the process. “It is likely to be less apolitical than the designers of the system intended,” he says.

And timing may be the curse of the new regime. If a trust runs into serious trouble in late 2013 or 2014, is the government really going to want to see it dissolved and services closed by a highly paid insolvency practitioner as an election looms?