News / Productive talks

Foundation trusts’ financial risk ratings will not be relaxed to take account of the current economic downturn and anticipated reduction in public sector growth.

Bill Moyes, chairman of foundation trust regulator Monitor, addressed the HFMA’s FT Finance group’s first finance director forum of the year in January with a stark message on efficiency and productivity. He said that productivity, based on analysis by Frontier Economics, would have to improve by up to 3.5%  a year in the years to 2013/14 to make up a £13bn gap between the 4.9% annual growth identified as necessary by the Wanless review and more modest growth set out for the whole public sector in the Pre-Budget Report.

He stressed that this productivity would have to be achieved while delivering and demonstrating quality improvements. At the same time the financial position will have to be maintained and the NHS will not have recourse to the traditional safety valve of increasing waiting times and waiting lists.

But Mr Moyes ruled out changes to the financial risk rating to reflect the current economic difficulties. ‘I don’t anticipate any changes other than to accommodate international financial reporting standards (IFRS),’ he told the 80 finance directors at the forum in central London.

In particular he said that the EBITDA (earnings before interest, taxation, depreciation and amortisation) and surplus levels linked to higher risk rating scores would not be reduced. He added that the wider economic position would not ‘affect the detail of our system’, although he accepted that the tightening financial position could lead to lower overall risk ratings as surpluses reduced.

Speaking to Healthcare Finance after the event, Mr Moyes said there was a misinterpretation that the regulator wanted all foundation trusts to be a five on the risk rating. ‘We don’t set profit targets, he said, ‘we don’t think in those terms.’

Local context and plans would dictate the appropriate risk rating suited to a foundation trust. For instance, an FT with a major buildings programme may need a level five rating to enable it to secure sufficient borrowing. But for other organisations a level three, with a green rating on governance, might be perfectly acceptable.

However, finance directors privately raised concerns that falls in risk ratings could lead to greater levels of intervention and more hands-on regulation. They said there was a tendency for the risk ratings, which are also used in the Healthcare Commission’s annual health check to assess use of resources, to be used as a league table of financial performance.

Finance directors also raised concerns about the use of a crude cost improvement target, incorporated into the tariff uplift, suggesting that the one size fits all approach took no account of existing levels of efficiency or former achievement of cost improvement programmes.

However, Mr Moyes rejected a proposal of differential cost improvement targets for different types of provider or organisations with different levels of existing efficiency. He said this was ‘difficult to see’. But he believed it was possible at some point in the future that the tariff would set a range of prices rather than a single national price.

One finance director questioned whether the productivity and cost control being identified as necessary was achievable when national pay awards meant foundation trusts did not have full control of their most significant costs. But Mr Moyes rejected the suggestion that pay had to remain outside of local control. ‘There is nothing stopping you from taking charge of your local pay costs,’ he said.

He expressed ‘frustration’ that foundation trusts had not looked at securing a greater hold over this key area of expenditure. However, while he stressed there was nothing formally barring FTs from moving towards more local pay, he said there were practical considerations and constraints. ‘FTs do have to think about how they do this and think about their human resources capability,’ he said.

Finally, Mr Moyes addressed the issues of mergers and acquisitions. Some commentators suggest that between 10 and 20 NHS trusts will not be able to make the leap to FT status and there is an expectation that successful FTs will acquire these organisations.

He acknowledged that management problems could be overcome. But he said there were some organisations with systemic problems, where fixed costs were simply too high.

Mr Moyes questioned whether it was realistic to expect successful FTs to take on organisations that were intrinsically failing. ‘We need greater clarity on this issue,’ he said.