Contracts with NHS trusts, a risk or an opportunity?

Is it the case that the United Kingdom’s National Health Service (NHS), with an annual budget of £114.7 billion (revenue), £3.6 billion (capital) and the 4th largest workforce in the world, is too big to fail? The answer to this question holds the key to the “risk rating” of doing business with NHS Trusts.

This article looks at contracts between private sector parties and NHS Trusts, and considers what is likely to happen if an NHS Trust gets into financial difficulty. Unless expressly stated otherwise references to “NHS Trust” means both NHS Trust and NHS Foundation Trust.

NHS Trusts – current position

“NHS trusts are forecasting an end-of-year net deficit of around £2.3 billion. The estimate, based on survey responses from 83 trusts, comes as NHS national bodies are imposing stringent financial controls in an effort to reduce the deficit to £1.8 billion by the end of the financial year. This underlines the risk that the Department of Health will breach parliamentary protocol by overspending its budget.”¹

The above extract from a recent King’s Fund Report also identifies that:

• more than two-thirds of trusts (67 per cent) and 9 out of 10 (89 per cent) acute hospitals are forecasting a deficit at the end of 2015/16;² 
• more than half of trusts (53 per cent) are concerned that they will not be able to meet nationally-imposed caps on their agency staff spending, while a fifth (22 per cent) say the caps may have an impact on their ability to recruit the staff they need to provide safe care;
• nearly two-thirds (64 per cent) of trusts are reliant on extra financial support from the Department of Health or drawing down their reserves;
• more than half of trust finance directors (53 per cent) are concerned about meeting productivity targets – the highest level of concern at this stage of the year since the King’s Fund survey began; and
• Clinical Commissioning Groups are in a better financial position, although nearly one-fifth (18 per cent) are forecasting a deficit and nearly a third (29 per cent) are concerned about meeting their productivity targets.

In reaction to this critical financial situation, the Department of Health has introduced a budget “re-set” for NHS Trusts, described below.

Impact of the NHS “re-set”

On 21 July 2016, NHS Improvement and NHS England announced a seven point set of actions to cut the annual NHS Trust deficit and to “sharpen the direct accountability” of NHS Trusts to live within the public resources made available by Parliament. The announcement has been followed by detailed Guidance.³ The proposals include:

• allocating £1.8 billion out of the Sustainability and Transformation Fund to reduce the deficit (see above) to £250 million;
• imposing “financial control totals” which NHS Trusts must deliver on;
• introducing a new intervention regime of “financial special measures”.⁴ These are in addition to the existing special administration regime set out in statute and described in more detail below.⁵
• imposing control caps on management costs; and
• announcing a two-year NHS planning and contracting round linked to the Sustainability and Transformation plans

It is recognised in the Guidance that NHS Improvement, as regulator, already has intervention powers under statute and is not seeking additional powers. The purpose of these new measures is to accelerate intervention and to set out the steps to be taken in more detail than is prescribed by statute. For example: the Department of Health will reserve the right to exchange surplus assets for cash where an NHS Trust needs an injection of funds. NHS Improvement can appoint an Improvement Director onto the NHS Trust’s board. While it is unlikely to benefit an NHS Trust to challenge the Guidance, it is possible that some of the steps described in the Guidance may be outside the regulator’s statutory powers.

At the same time, an NHS Trust could be put in “quality” special measures overseen by the Care Quality Commission. This is also covered by the new Guidance.

It is possible to exit the financial special measures regime by putting forward an approved robust recovery plan and showing significant “wins” in implementing it within two months.

Avoiding special measures – alternative options

Even before the introduction of the financial special measures described above, NHS Trusts in financial difficulty have been trying to find savings to reduce their deficit in order to ward off being put into the statutory special administration regime. These savings may be achieved by, for example:

• merger – two or more NHS Trusts or Foundation Trusts (FTs) can merge, e.g. Peterborough and Stamford with Hinchingbrooke;
• reducing or refinancing debt – Northumberland County Council effectively refinanced elements of the PFI contract entered into by Northumberland Healthcare NHS Foundation Trust to the tune of £100 million; or
• reducing operating costs – a number of NHS Trusts and FTs are reviewing their contracts with the private sector, particularly facilities management contracts, reviewing lifecycle costs, insurance premium risk-sharing and potential debt refinancing to establish whether savings can be found.⁶

First signs of trouble

Is the NHS Trust delaying payment of a monthly service fee beyond the contractually agreed payment period or has it stopped paying altogether? This could be a sign of financial difficulty and presents the other contracting party⁷ with a choice: it could terminate the contract or keep the contract going and allow the debt to accrue interest and/or sue under an indemnity for losses

Most contracts with the NHS are under the NHS Standard Contract. The references in this article are to the General Conditions (“GC”) of the 2015/2016 edition. The NHS Trust would be in default if:

• the amount owed exceeds either 25 per cent of the expected annual contract value, or if no expected annual contract value, then the equivalent of three times the average monthly income to the other contracting party, and in each case, payment is not made by the NHS Trust within 20 operational days of notice;⁸ or
• it is in persistent material breach of its obligations.⁹

There is no compensation regime if an NHS Trust is in default. Therefore the other contracting party will have to sue for the debt due (together with interest payable). Interest accrues at a rate of two per cent over LIBOR. In this context, we consider below the statutory remedies that may be taken by the regulator where an NHS Trust or an FT is in financial difficulty.

The statutory special administration regime¹⁰

Does it make a difference if a trust in financial difficulty is an NHS Trust or an FT when contemplating whether to terminate a contract or keep it in place? Neither NHS Trusts nor FTs are subject to the general insolvency law applicable to companies under the Companies Acts. The special administration regime is similar for NHS Trusts and FTs but there are subtle differences. For ease of comparison these differences are set out in the table below.

Since 1 April 2016, the regulatory role of Monitor for FTs, and of the NHS Trust Development Agency (“TDA”) for NHS Trusts, has been subsumed within the new NHS Improvement agency. Monitor has oversight of an FT’s financial health as it awards and administers the licence to operate. NHS Trusts are currently exempt from needing a licence.¹¹ The TDA, as the regulator for NHS Trusts, oversees all aspects of performance and governance and ensures NHS Trusts comply with equivalent conditions to those imposed by a licence. This should give NHS Improvement early warning of an NHS Trust or FT in financial difficulty, and thus the special administration regime and other interventionary powers are steps of last resort.

In more detail

NHS Trusts

As referred to in the table below, the SoS may make an order (if he considers it appropriate in the interest of the health service) authorising the appointment of a TSA to exercise the functions of the chairman and directors of an NHS Trust. Within 45 working days of the appointment of the TSA, the TSA must consult certain parties and provide to the SoS and publish a draft report stating the action he recommends that the SoS should take. There then follows a consultation period (30 working days), during which the TSA must hold meetings with staff and other individuals who wish to attend.

Within 15 working days of the end of the consultation period, the TSA must provide the SoS with a final report stating the action that the TSA recommends that the SoS should take and within 20 working days of this the SoS must decide what action to take in relation to the NHS Trust. The guidance provided by the Department of Health sets out the type of recommendations one would expect to find in the report.

Summary of Regulator’s Statutory Powers where an NHS Trust or an FT is in financial difficulty

In the guidance, the possible recommendations by a TSA are stated as being the following:

• merger with another NHS body;

• transfer of staff and services to another NHS body;
• a rescue whereby the NHS Trust leaves administration to continue on its path to Foundation Trust status;
• acquisition by, or merger with, another NHS Trust or FT; or
• dissolution and the transfer of services and staff to another NHS Trust or FT.

NHS Foundation Trusts

The process outlined above applies similarly to FTs except that Monitor fulfils the role of the SoS. Monitor must decide within 20 working days of receiving the TSA’s final report whether it is satisfied that the actions recommended would achieve the objective set out in S65DA¹² and that the TSA has carried out his administration duties. Monitor must then supply a copy of the final report to the SoS who has a power of veto. The SoS can either approve the final report or reject it and send it back for amendment and so on until he is satisfied. Prior to the Health and Social Care Act 2012, the SoS had the power to “de-authorise” an FT, which would then become an NHS Trust. This power has been repealed as the intention is that all FTs should become NHS Trusts without any power to revert. Once Monitor has the SoS’s approval to proceed, it can implement the TSA’s recommendations or as it sees fit. The Guidance recommends that the period of special administration should not exceed 12 months. An NHS Trust or an FT can exit special administration if it satisfies the recommendations of the TSA.

And the outcome?

Where an NHS Trust or an FT is the subject of an order listed in the table above, the relevant regulator may provide for the transfer of property and liabilities to another NHS body or to the SoS. Where an NHS Trust or an FT is placed into special administration, the TSA may make recommendations with the same effect. Therefore, the private sector provider will have a choice where an NHS Trust or an FT gets into financial difficulty, and selecting that choice will depend in each case on the circumstances: to terminate and recover costs but lose the right to future profits and possibly to future contracts, or to continue the contract and rely on contractual remedies, such as interest, and ultimately to rely on the regulator exercising his discretion (he has no obligation to do so) to intervene and transfer the contract to another NHS body.

1. King’s Fund Report [18.2.2016] “How is the NHS Performing?” – Quarterly Monitoring Report.
2. Barts has the largest deficit of all NHS Trusts and Foundation Trusts at £134 million.
3. https://www.england.nhs.uk/2016/07/operational-performance/
4. The financial special measures are set out in Annex H of The Strengthening Financing Performance and Accountability 2016 – 2017 published by NHS Improvement on 21 July 2016.
5. The five NHS Trusts put on the new financial special measures regime are: Barts Health NHS Trust, Croydon Health Services NHS Trust, Maidstone & Tunbridge Wells NHS Trust, Norfolk & Norwich University Hospitals NHS Foundation Trust and North Bristol NHS Trust. There are a further 13 NHS Trusts on the “waiting list”.
6. London Procurement Partnerships, an NHS-backed procurement body is advising NHS Trusts on how to cut PFI operating costs by at least 5 per cent per year.
7. “the other contracting party” is assumed here to be the private sector and not another NHS body.
8. GC 17.9.1
9. GC 17.9.2
10. This article does not propose to examine the role of the Deed of Safeguard in relation to PFI contracts.
11. NHS (Licence Exemptions, etc.) Regulations 2013.
12. S65DA of the NHS Act 2006 provides that the objective of the TSA is to secure: (a) the continued provision of such of the services provided for the purposes of the NHS by the NHS foundation trust that is subject to an order under section 65D(2), at such level, as the commissioners of those services determine; (aa) that the services whose continuous provision is secured as mentioned in paragraph (a) are of sufficient safety and quality to be provided under this Act, and (b) that it becomes unnecessary for the order to remain in force for that purpose.