The government is to underwrite hospital trusts' assets to prevent them going bust and ending up in court.

HSJ has learned that the Department of Health is to issue a consultation paper this month that rules out insolvency for trusts that are failing financially.

The proposal is part of a package of last resort measures that would be put in place if a foundation trust or an NHS acute trust was seriously financially underperforming or failing to meet minimum clinical or quality standards. The government intends to legislate on the changes in the NHS Reform Bill next year.

NHS chief executive David Nicholson will take control of organisations that fall foul of expectations. Once this regime is triggered there will be a legal obligation to ensure services are not disrupted while the trust is turned around.

This could mean some services will be provided at a loss. The government is keen to send a message that hospitals will not be closed as a result of going bankrupt. It will underwrite trusts' assets so that they will not be forced to declare themselves insolvent.

The move will answer the question of what would happen if foundation trusts, which have additional freedoms and are able to borrow money, ran into financial difficulties.

The regulator Monitor, which had been in favour of an insolvency regime for foundation trusts, is understood to be unhappy with this and other elements of the report.

The proposals would mean that for foundation trusts, Monitor would decide whether to trigger the failure regime. If it did, the trust would be deregistered as a foundation.

Previous versions of the strategy had the NHS chief executive making decisions about when foundations should be deregistered, a proposal that is understood to have particularly upset Monitor.

For non-foundation trusts, the NHS chief executive will decide whether to take control. In practice, strategic health authorities are expected to do most of the direct administration.

Later in the autumn, the DH is expected to publish a list of the trusts it believes are falling below minimum standards. This is expected to be fewer than the 22 trusts given a double weak rating in the last annual health check.

Labour hopes the policy will open a clear dividing line between these proposals and the Conservatives, who have pledged to lift the restrictions on foundation trusts to allow them to secure borrowing against their assets.

One government adviser said: "This regime will draw a sharp contrast between government plans to ensure continuity of service, and Tory plans to put services at risk whenever hospitals get into debt. I'm certain this will be a pretty major election issue."

Newcastle upon Tyne Hospitals foundation trust chief executive Sir Leonard Fenwick said: "This regime should be the last resort. Managers with pride and reputation would wish to avoid it.

"If it's common knowledge that there's a safe landing then the initiative of self-determination could be lost."

A DH spokeswoman said: "Developing the NHS Performance Regime set out the department's plans for tackling underperformance in the NHS. We are shortly due to publish a consultation which sets this out in more detail, while protecting services for patients."

Monitor declined to comment.

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