The recent merger of two acute trusts hints at things to come as struggling organisations are forced to re-examine their options. Chris Ham surveys the new structural landscape of the health service

The recent merger of two acute trusts hints at things to come as struggling organisations are forced to re-examine their options. Chris Ham surveys the new structural landscape of the health service

Health reform in England has focused on extra spending linked to targets and performance management to bring about improvement. The government is now seeking to drive change from the bottom up, through the actions of patients and providers, rather than top-down through directives from Whitehall.

Choice and competition are being given greater emphasis, supported by payment by results and practice-based commissioning.

As a result of choice and competition, some providers are likely to attract additional patients and income, while others may face a drop in demand. This challenge is compounded by changes to the financial regime that have brought about greater transparency and removed the scope for using brokerage to obscure the true funding position of these organisations.

The Department of Health has made use of turnaround teams to offer support to the NHS organisations with the biggest deficits. These teams have worked with the organisations to plan and implement actions for reducing deficits. In parallel, foundation trust regulator Monitor has helped organisations in financial difficulty.

Monitor has adopted a graded response in dealing with difficulties in foundation trusts. In the first stage, the aim is to understand the causes of difficulty. In the second, it works with the trust board to develop and implement a recovery plan. In the third stage, it intervenes to bring about improvement.

The causes of financial failure fall into three main categories: structural issues such as having too many sites, operational inefficiency, and poor management. Monitor seeks to identify problems early and ensure they are addressed rapidly.

Monitor has helped turn around three foundation trusts - Bradford Teaching Hospitals, Peterborough and Stamford Hospitals and the Royal Devon and Exeter - in a year of problems being detected. In all three cases, serious deficits have been turned into sustainable surpluses, with loss of posts.

Based on its experience, Monitor has developed an action matrix identifying how costs can be reduced. Areas of high impact in the short term include:

  • decreasing pay costs by improving vacancy control, cutting management posts and reducing agency usage
  • decreasing non-pay costs by improving office supply purchasing, reducing furniture costs, rationalising estate costs and improving IT effectiveness.

In the long term, a focused approach to increasing efficiency is needed to achieve substantial and sustained cost reductions.

The merger effect

While turnaround will enable many NHS organisations to achieve financial stability, more radical options are sometimes needed. Merging struggling organisations with trusts that have a record of good performance is one such option. An example of this involved Heart of England foundation trust and Good Hope Hospital trust in Birmingham.

Heart of England was awarded a management contract to run Good Hope Hospital in 2005. Over 18 months, a turnaround from a loss of£6m to a surplus of£1.7m was achieved. Behind the success were increased efficiency, closure of a ward and theatre, income growth through better financial procedures and some gains from tariff.

There was no blueprint to guide the partnership and the eventual acquisition of Good Hope by Heart of England in April 2007. Heart of England created the process along the way. One of the lessons was the need for a strong and sympathetic board. Another was the importance of Heart of England having a strong team of managers able to lead change across both organisations.

The Heart of England board was clear that the acquisition should not weaken its strong financial position, for example through the use of its surplus to buy out the deficit at Good Hope. An alternative had to be found.

The DoH, strategic health authority and Monitor worked together to agree a package of measures to support the acquisition. The package included£18m of public dividend capital to finance Good Hope's debt, rather than covering the debt with a loan.

Although public dividend capital attracts a dividend and is owed to the secretary of state, it does not have a fixed repayment period.

Determining the accounting arrangements was complex, as Monitor, the DoH and the SHA had different views on the accounting rules. The experience underlined the lack of understanding in SHAs of foundation trusts as businesses, and that risk transfer costs money. Under the final agreement, the SHA was responsible for paying interest on the additional public dividend capital issued to cover the Good Hope debt.

The merger of Heartlands Hospital and Solihull Hospital in the 1990s generated important experience that helped in the partnership with Good Hope. Heart of England foundation trust is one hospital on two sites (Heartlands and Solihull); Good Hope is now the third site. A lot of work has gone into reviewing services and agreeing on the rationalisation of services between the three sites.

A major organisational development programme has been undertaken to reduce the risk of failure due to cultural differences in the two organisations. Good Hope has regained confidence as an organisation as its finances and performance have improved.

One of the questions arising from the merger of Heart of England and Good Hope is the impact this and future mergers may have on choice and competition. The benefits of creating a smaller number of NHS organisations able to achieve high levels of performance have to be weighed against the risk of creating a monopoly or near-monopoly.

Exit and insolvency

As yet, there is no explicit exit regime to deal with providers for which recovery or merger is not appropriate.

As the regime is developed, it will be necessary to agree on a definition of what insolvency means for foundation trusts and how this differs from 'financial difficulties' that can be addressed other than through the insolvency route, not least to reassure commercial lenders as to what will happen in the case of serious financial failure.

A related issue is how to deal with trusts whose deficits are so large that it is unlikely they can take the action necessary on their own to become foundations. The DoH is currently exploring this issue with SHAs.

For trusts with large deficits, it is unlikely that Monitor would support merger with a foundation trust. This is because merger would destabilise the foundation trust and make it difficult for the NHS trust to meet its financial obligations.

It is equally unlikely that loans would be appropriate because NHS trusts with serious problems would not have the ability to repay them. Especially in the case of trusts with major PFI developments, alternative solutions will be needed.

One of the challenges is to meet the government's objectives for health reform while ensuring NHS providers have the leadership and capabilities needed to succeed.

Specifically, the aim of getting most providers to become foundations next year has to be reconciled with the ability of boards to exercise effective oversight and stewardship in a more challenging economic context. There will also be challenges for Monitor in dealing with the workload in assessing applications and overseeing the performance of more foundations.

In the process, it will be important to ensure services provided by foundation trusts fit in with future service strategies. In some areas, hospital services will be reconfigured to better meet local needs. It may be more difficult to bring about service changes if foundation trusts have been created to protect and develop a particular set of services.

With arrangements for turnaround, recovery and merger now established, more work is needed to develop the exit and insolvency regime, and to agree the future of NHS trusts with large deficits. Clear competition rules are also needed to reconcile service reconfigurations and mergers with the choice requirement.

Chris Ham is professor of health policy and management at the Health Services Management Centre at Birmingham University. This article is based on a series of seminars organised by the Nuffield Trust, entitled Exit, Merger and Recovery.