A group of foundation trusts that received £188m in Department of Health bailouts this year has been told the funding will now be switched to loans, as part of a push for financially distressed organisations to ‘manage their finances better’, HSJ has learned.

Monitor last week wrote to the 11 FTs saying that the DH had decided to move from making “interim support” payments in the form of public dividend capital to loans, in a “departure from current practice”.

The letter, from the regulator’s finance and risk director Jason Dorsett, said the terms of these loans were not yet finalised, but it would share them with the trusts this week. The terms will not be negotiable.

Richard Murray

If lots of organisations do default, the DH will have to retrospectively convert the funding to public dividend capital, Richard Murray said

Interim support is paid out to providers in financial difficulty to allow them to continue delivering services. Public dividend capital is treated as a kind of equity investment in a trust, and – unlike a loan – is not expected to be paid back.

Mr Dorsett’s letter, seen by HSJ, said loans would now replace both interim support funding paid out in “future years” and any support paid out in the form of a “temporary borrowing limit” during 2014-15.

A Monitor spokesman said there were currently 11 FTs that “have been granted interim support funding on a temporary basis that will need to be converted into loans”. This funding was worth around £188m and was a mixture of capital and revenue.

He added: “Last year the Department of Health changed the rules on providing short term financing for a minority of NHS providers that have mismanaged their finances, and would be insolvent without interim support to meet the gap between their obligations and cash flow.

“The change means that any future interim support to foundation trusts will be in the form of loans that will have to be repaid, rather than a direct subsidy through public dividend capital. The government believes that tightening the terms of interim support will be an incentive for trusts to manage their finances better.”

A DH spokeswoman said: “By restricting access to public dividend capital, we are incentivising trusts to develop and implement strong recovery plans when they go into deficit.”

However, one FT finance director told HSJ the decision to include some 2014-15 support in the policy shift created an “issue of assurance and governance” for trusts that had already taken support they would now have to reflect as debt.

King’s Fund policy director Richard Murray, a former senior analyst and economist for the DH, said switching bailout funding to loans only gave trusts more incentive to manage their finances “if they’ve got a credible chance of paying the interest and paying back the principal”.

He added: “Up until now the DH has used [public dividend capital]; by implication it has not thought that organisations could indeed pay back loans.

“It isn’t easy to see what’s going to change this year or next that will mean organisations cannot only remove their recurrent deficits, but can also start paying back interest and principal on a loan. In that case, although it might appear that you set up a better system of incentives in the short run, if you get a lot of organisations defaulting over the months and years to come then you really don’t.”

Mr Murray said that if large numbers of organisations did default, the DH would be forced to retrospectively convert the funding to public dividend capital, unless it was “willing to take incredibly difficult decisions about bringing down provider costs and their staffing”.

The £188m that will be converted to loans in 2014-15 represents a small proportion of the DH interim support expected to be paid out in this financial year. In 2013-14 the DH paid out £605m in interim support, plus a further £182m to support trusts that had been dissolved or merged with other providers.

An HSJ investigation last month found that the DH had made around £840m such payments in the first nine months of 2014-15.