FTs with heavy PFI burdens could face ratings downgrade

The regulator may also include “overrides” in the rating system to allow downgrades in response to care failures that are likely to damage a provider’s finances.

Under the government’s health reforms, Monitor must track the financial risk of all providers of essential NHS services. FTs will be first to become subject to this regime when they are licenced from April 2013, but it will later apply to private or third sector providers whose services are singled out for “commissioner requested” protection.

Monitor has dropped a plan to use credit rating agencies to track providers’ financial risk, and will perform the task itself using an adapted version of the “risk assessment framework” it uses to regulate FTs.

The rating framework will determine when and how the regulator can intervene in the affairs of a struggling provider, and when a provider should be placed in administration.

A document published by Monitor last week – as an annexe to its licencing consultation – gives an early indication of how the framework might look.

Providers would be ranked on a 10-point scale, with 1-5 marked ‘normal’, 6-7 ‘concern’, 8-9 in ‘distress’, and 10 ‘failure’. The core of the risk assessment would be the financial metrics familiar to FTs, but the regulator expects to add a measure of ‘interest cover’ – an indicator of an organisation’s ability to meet interest payments on its debts.

Monitor is also considering providing itself with a number of “overrides”, allowing  it to downgrade or upgrade a provider’s rating where the core metrics fail to “capture other important factors and therefore over or understate the financial position”.

The ‘quantitative’ reasons it is considering for overrides include a provider’s external credit rating, its reliance on block contracts, the number of commissioners upon which it relies for income, and “significant levels of indebtedness and PFI”. Of the latter, the annexe says the “Department of Health has recommended that PFI payments should not exceed 10 per cent of income”.

The regulator is also considering overrides for clinical or governance problems. These would have to be events which had “likely financial consequences in the short to medium term”.

The annexe gives the example of a provider receiving a notice of “major concern” from the Care Quality Commission over its staffing levels. “Monitor will consider what costs the licensee is likely to incur to rectify this situation and what the likely impact would be on the organisation’s risk rating,” the annexe states. “If the impact would be large enough to move the licensee down at least one point on the scale, Monitor will consider an override of the licensee’s rating.”

The document adds: “Our current thinking is that overrides would only be able to move a provider’s risk rating plus or minus one point on the scale, other than in exceptional circumstances where the evidence indicates a high likelihood of a rapid and drastic deterioration in the licensee’s future financial position.”

Monitor will publish and formally consult upon its risk assessment framework later this year.