Feature / From FCT to FT

Ten of the 17 financially challenged trusts have agreed solutions to their problems. Seamus Ward speaks to three now former FCTs about how they did it and how they now aim to become foundation trusts

It might seem like a long road from financially challenged trust (FCT) to foundation trust status but the Royal Wolverhampton Hospitals NHS Trust is planning to complete this journey next year. The trust is the first of the FCTs to enter the foundation trust application process after a programme that has put it on a firm financial footing.

It has submitted its integrated business plan and long-term financial model to NHS West Midlands and is in the process of its historic due diligence as it works towards foundation status. It’s a far cry from the final quarter of 2006/07 when the withdrawal of resource accounting and budgeting and the brokerage system from NHS trusts, exposed cash shortfalls in many trusts.

The Department of Health replaced what it called ‘an informal and opaque’ system of cash brokerage between NHS organisations that had been used for many years to help organisations in deficit pay their staff and their bills.

A new loans system was introduced, which the Department believes is more transparent as the loans are visible in organisations’ accounts. It also stresses that the loans are cash only, and will not disguise deficits.

In March 2007, a total of £778m was loaned to 56 trusts, with interest and principal payments made every six months. The Department allows trusts to make extra repayments to reduce balances and so interest charges, but they cannot miss repayments. The interest rate is the relevant National Loans Fund rate for the day of the loan and varies with the term. Any NHS trust that defaults on a working capital loan repayment will be deemed financially challenged (see box p31).

However, the Department decided it could not make loans to 18 trusts (reduced to 17 after Good Hope merged with the Heart of England NHS Foundation Trust) because they could not afford to meet the repayments or a loan could only be repaid over a long period of time. These, including the Royal Wolverhampton, were dubbed financially challenged, though 18 months later 10 have lost this unwanted label.

Announcing that the 10 trusts had agreed solutions for the repayment of their debts, director general for NHS finance, performance and operations David Flory said: ‘ Each of these 10 organisations has worked extremely hard in conjunction with their SHAs and PCTs to improve their underlying financial performance. As a result, they are trading in balance and they have shown that they are able to produce sufficient surpluses going forward to operate as sustainable organisations, both financially and in the provision of healthcare. All 10 of these organisations will have repaid their debt within five years.’

Wolverhampton’s recovery

The Royal Wolverhampton (below) was initially given a temporary £21m cash loan while a solution was found. Peter Sawyer, the trust’s director of finance and information and deputy chief executive, says its financial problems had their roots in a failure to get the organisational basics right – long lengths of stay and low levels of day case surgery.

The situation came to a head in 2003/04 when the trust had a £7.6m deficit, which was to rise to £9m the following year. Virtually a new board was installed and, with Mr Sawyer in post, it agreed a recovery plan in early 2005. This planned deficits in 2005/06, 2006/07 and 2007/08, with breakeven from 2008/09.

‘We did better than that,’ Mr Sawyer says. ‘We broke even in 2006/07 and in 2007/08 we generated a surplus of £8.3m. It was largely achieved through improved clinical efficiency. Some of the biggest drivers were reducing lengths of stay and improving day case rates. Increasing day case rates tends to increase average length of stay but we managed to do both.’

Between 2005/06 and 2007/08 the trust shut 200 beds but experienced higher activity levels than ever. It also moved its previous ‘stand alone’ Eye Infirmary onto the main site at New Cross Hospital, which generated significant savings.

‘Service improvements drove the recovery rather than us dishing out cost improvement targets. We also made savings in procurement and undertook a complete nursing skill mix review, which took £2m recurrently out of the nursing budget,’ Mr Sawyer says.

Though it was never formally in turnaround, the trust was given financially challenged status due to its underlying problems – which it was tackling through its efficiency programme – and the cash brokerage it required to pay its bills.

‘We were on the list because at that point there was no arrangement on how to pay back that brokerage, which for us was £21m.’

Early this year this was resolved. Mr Sawyer explains: ‘The trust paid in £3.2m, which came from the sale of the Eye Infirmary site, and also agreed we would make a surplus in 2007/08 of no less than £6.2m. This would be made with the assistance of the local PCT and handed over as part of the deal to pay back the loan. Above that, the SHA agreed to contribute £6.1m, so in total we resolved £15.5m of the loan.’

The £5.5m balance will be repaid over five years at £1.1m a year. ‘We may be in a position to repay it earlier and I know the Department of Health would be happy with that,’ he adds.

With its foundation trust application in the works, the future looks brighter. He says that throughout the process he never believed the trust was unsustainable in the long term and as soon as the board understood the problems it became more and more confident that it could be turned around relatively quickly.

‘The trust had a good clinical reputation,’ says Mr Sawyer. ‘It was just a question of getting hold of the services and giving them a tweak. At one point we would have been worried about the levels of redundancy because taking 200 beds out is a lot of nursing posts. But with careful manpower planning and vacancy management we were able to implement all the savings mostly through natural wastage. We only had 14 redundancies in two years.’

‘Our long-term financial model indicates we will not just be in financial balance but planning to make a surplus. We have stopped using the language of financial recovery and regard ourselves as facing issues no different from those any acute trust has to face.

‘We are particularly proud we have achieved financial turnaround but not compromised on any service performance or quality. If you look at our record we achieved the 18 weeks target nine months ahead of the national deadline and we are amongst the best on our figures for healthcare acquired infections. Finance is no longer top of the agenda.’

Coventry’s cash issue

About 25 miles south of Wolverhampton, the University Hospitals Coventry and Warwickshire NHS Trust was also given FCT status in 2007. However, Andy Hardy, the trust’s deputy chief executive and chief finance officer, explains this was not due to an I&E deficit.

‘We were unique among the financially challenged trusts in that we had never had a brought-forward I&E deficit,’ he says. ‘Historically we had a cash shortfall in the trust – there was an imbalance in the balance sheet right from the start when the trust was set up.’

The trust historically required around £30m in cash brokerage a year but in addition in 2006/07 it required £27m in non-recurrent support to achieve break even linked to the opening of its new private finance initiative hospital. In 2007/08 the trust calculated that even after its £15m savings plan it would require a further £15m in non-recurrent support to break even before covering the cost of the PFI hospital from its own resources from 2008/09.

However, with the change in the rules and the end of brokerage this was not an option. The trust could not rely on non-recurrent support to achieve balance and so had to submit a deficit plan, and would need a cash loan to cover its historic cash shortfall and the cash consequences of its planned in-year deficit. However, even this avenue closed.

‘With the size of the loan we would have needed it was deemed, rightly so, that we were in no position to pay it back over a reasonable timescale of five years,’ Mr Hardy says.

The trust was labelled financially challenged. It was allowed to retain the temporary cash brokerage at the end of 2006/07 while a long-term solution was agreed. In the meantime it sorted out its I&E issue. During 2007/08 the trust found £30m in efficiency savings to make up for the shortfall between its estimated income and forecast operating costs following the opening of its new hospital.

During 2007 KPMG worked with the trust to examine the levels of cash needed to make the trust sustainable and liquid. The resulting solution – agreed by the Department of Health, the trust, NHS West Midlands and both local PCTs – will see £20m of brokerage converted into permanent public dividend capital. There is also a working capital loan of £16m, repayable over five years.

While interest on the loan will be paid from I&E, the principal will come from cash predominantly via asset sales. The additional PDC will also attract PDC dividend. The trust (right) is looking to release funds through asset sales and it will also have to generate a surplus each year. A repayment profile has been agreed over five years, with a payment being made every six months.

The trust is working or has worked with a number of consultants, including GE Healthcare on a LEAN project. This year it has set itself an efficiency target over and above the 3% set by the Department at 3.8% of forecast turnover and intends to do so again next year.

‘The work we are doing now includes looking at the whole culture throughout the trust as part of an organisational development programme. We are reassessing our strategy, mission, vision and each year we will be making sure the systems we have are as efficient as they can be.’

The trust has very little spending on

agency nursing as its in-house bank covers

the majority of the spare shifts, but Mr Hardy says there may be savings to be made in other areas, such as agency medics. ‘We will look

at each of these as any good organisation should, and when vacancies come up we will ask do we need to replace like for like or can

we do things differently,’ he adds.

He says the solution has no bearing on the trust’s duty to break even taking one year with another as it has never recorded a deficit. ‘We do have an interest charge to bear and we will include that in our financial plans year on year.’

FCT status created communications problems within the organisation. Staff wanted to know why the trust was in this position given that it did not have an I&E deficit, and a lot of time was spent explaining the situation to them.

FCT status also attracted the attention of local and national media. ‘It caused a lot of consternation and we got a lot of bad press. They would say, “You are a financially-challenged trust so you must be about to make loads of job cuts.” We had to spend a lot of time explaining what it meant and how we were going to get out of it,’ he adds.

Even when the trust was first deemed to be an FCT, Mr Hardy says there was no question that it was viable. There was little chance a trust of its size (with a 2007/08 income of £380m and around 5,000 staff) would have been taken over. ‘It would have been interesting to see if anyone could have taken over a hospital of this size, but there is nobody in geographical proximity to us to do so. But [it’s a moot point anyway as] this hospital is viable.’

The trust has now set its sights on achieving foundation status in the first quarter of 2010.

‘We can now move forward towards foundation trust status, where liquidity is crucial. As a label, being a financially challenged trust was debilitating. Whatever developments we wanted to make, we were always challenged about being an FCT, that we must have an underlying problem on our balance sheet. That was true on the cash side but we’ve always broken even.

‘It is now sorted,’ he continues, ‘and we have got through the difficulties. The future is in our own hands and we are using it as a springboard to further success.’

Sussex turnaround

The Royal West Sussex NHS Trust has also now moved out of FCT status. Richard Hathaway, who joined the as finance director in 2006, says that in the previous two financial years the trust had recorded deficits of £13m and £15m. This had led to an accumulated deficit of £36m when smaller overspends in other years are taken into account.

Mr Hathaway was clear what had to be done. ‘A turnaround director had been appointed and was working up an action plan. When I joined my role was to take over the development and implementation of that action plan to get the show back on the road,’ he says.

That he did, with the trust starting to turn around its finances by the end of 2006/07 when it made a £1.9m surplus against a projected deficit of £3.1m.

Work streams have included LEAN, theatre optimisation, some organisational restructuring, land sales and new income sources, such as a bariatric surgery service, designed to tackle the underlying deficit.

As with many other trusts, brokerage had helped smooth out cash flow shortfalls in previous years but when this regime came to an end in 2007 the trust could not continue in the short term without support. It was given a working capital loan of £23m while a solution to its financial problems was sought.

‘The Department had to be satisfied that we could not only get back into I&E balance but also repay the loan,’ Mr Hathaway says.

In 2007/08 the trust was able to negotiate £9.8m of non-recurrent income after agreeing with its PCT (West Sussex) areas in which the trust had provided services over and above the service level agreement.

‘We had a very good year last year and produced an I&E surplus. It was down to the hard work within the organisation and good partnership working with commissioners and the SHA. This enabled us to make a significant repayment on the loan and reduce the I&E accumulated deficit. Having good working relationships within the health economy is an important part of getting out of financially challenged status.’

The accumulated deficit of £36m has now been cut to £2.6m. The additional income agreed together with proceeds of land sales were used to pay down its loan to £9.4m.

The trust has agreed a trajectory with the Department of Health detailing the amounts it will repay on the loan each year so that by 2012/13 it will have cleared the balance. ‘Each year our surplus should at least cover the repayment for that year and anything on top of that is a bonus,’ Mr Hathaway says.

‘We are still not in a cumulative breakeven position, although we have agreed the plan with the Department and should be there by the end of next year. The expectation, given that we are going into this financial year with a £2.6m deficit to clear, is to make a £1.7m surplus. We were on target at month six.’

The Department has received a section 19 letter from the trust’s external auditors to say the trust has not broken even over the last five years but Mr Hathaway is relaxed about this. ‘While we understand that this is a technical requirement for the auditors, we believe the agreement with the Department covers this.’

Aside from the fact that the Department is fully aware of the trust’s position, agreed its repayment plan and removed its FCT status, Mr Hathaway believes the redrawing of the Auditor’s Local Evaluation financial standing criteria for 2007/08 (so that failure to break even is not an automatic ‘weak’ rating) is a recognition of a change in emphasis. ‘We are now fair for use of resources rather than weak – another important milestone for the trust.’

As for the future, the trust has now agreed in principle to merge with neighbouring Worthing & Southlands Hospitals NHS Trust. It is consulting with staff, patients and other stakeholders and a decision on whether to proceed is to be made in December.

But Mr Hathaway insists the proposed merger has nothing to do with the fact that his trust was financially challenged. ‘The issue is about finding a better vehicle to get to foundation trust status and finding the best way to ensure the long term future of clinical services in West Sussex,’ he says.