House of Commons - Annual accountability hearing with Monitor

Annual accountability hearing with Monitor - Health Committee Contents

3 Foundation Trusts—Monitor's continuing duties

Assessing and authorising remaining NHS Trusts

11. Monitor is currently responsible for authorising NHS trusts applying for foundation trust status. Applicant trusts are assessed to ensure that they are legally constituted, financially sound and effectively governed.[14] The Health and Social Care Bill would require all NHS trusts to now seek foundation trust status. In the form it was first presented to Parliament, the Bill required all remaining NHS trusts to become foundation trusts by April 2014, after which point the legal basis for NHS trusts would cease to exist. Following concerns raised by the Future Forum,[15] among others, that the deadline was unrealistic, the Government has brought forward amendments relaxing its conditions: the majority of NHS trusts would now be expected to become foundation trusts by April 2014, and all would be expected to do so 'as soon as clinically feasible'.[16] An agreed deadline would be set for each trust.[17]

12. Monitor will be responsible for authorising and assessing this significant new wave of applicants. Even the new timetable remains challenging, not least because of the sheer number of trusts involved. As of 1 August 2011, 138 foundation trusts had been authorised. Monitor told us that this left approximately[18] 95 NHS acute and non acute trusts, 9 ambulance trusts, and 16 community trusts, all still seeking foundation trust status.[19] In short, almost as many trusts remain to be authorised in the next three years as have already attained foundation trust status in the last seven years. Monitor notes that in order to process applications for all remaining trusts it will need to assess up to five trusts a month.[20] When this is coupled with the fact that Monitor's assessment of even 'straightforward' applications takes between three and four months,[21] the timetable appears even more challenging.

13. Monitor faces a significant challenge in assessing and authorising for foundation trust status the remaining NHS trusts. We welcome the Government's decision to change April 2014 from a legal deadline for the completion of this process to a less rigid target, albeit one the Government expects to be met. Nevertheless, sheer numbers alone make the assessment task formidable, and the Government must be prepared to be even more flexible if circumstances demand it.

14. The pace of the application and authorisation process is determined by: the work undertaken by the trust itself; the management of the 'pipeline' of applicant trusts by the Department of Health; and finally the assessment by Monitor. In recent years the rate of referral to Monitor has been slow: seven trusts were referred to Monitor by the Department of Health in 2009-10, and eleven in 2010-11.[22] Even when trusts make it to the stage of being assessed by Monitor, a proportion are not authorised due to issues identified during the assessment process.[23] In 2010-11 only half of the trusts assessed by Monitor were authorised as foundation trusts.[24]

15. Dr David Bennett, Chair and acting Chief Executive of Monitor, told us that Monitor was particularly keen to ensure that applicants would be referred to Monitor by the Department of Health in a phased manner:

One of the things we are very concerned about is that they all finish up being back-loaded, which, apart from anything else, presents us with an almost impossible challenge. I have been very clear to the Department that [...] if you do that, we will not be able to do our bit.[25]

16. Monitor told us that it was taking what action it could to help prevent this scenario, working with the Department to 'help it ensure high-quality applicants were put forward', and with the Department of Health, the Foundation Trust Network, and strategic health authorities to 'share best practice in supporting the preparation and development of applicant trusts'.[26] In May Monitor agreed 'a range of mechanisms with the Department of Health to ensure our processes and approach were aligned'.[27]

17. Monitor needs to be in a position to respond to the demands of applicant trusts, rather than trusts' programmes being artificially accelerated or delayed in line with Monitor's capacity. Monitor will, however, only be able to function effectively if the flow of applications through the pipeline is phased and not back-loaded. The Department of Health therefore needs to manage the progress of applications as far as possible to ensure Monitor is able to work effectively. Where this is not possible, the Department must either provide Monitor with the necessary resources to temporarily increase its assessment capacity, or should relax deadlines for a particular trust to enable assessment to be undertaken with due care and consideration.

18. The Department must resist the temptation to artificially accelerate the process by referring trusts to Monitor before they have reached an appropriate level—to do so would only hinder Monitor's capacity to handle more realistic applications.

19. If the numbers alone appear daunting, the challenge is further complicated by the fact that the group of remaining NHS trusts is likely to have a high proportion of trusts with quality or financial issues. In recent years, foundation trust status applications were deferred by Monitor for a variety of reasons, including:

the lack of a robust process of board self-certification; a lack of evidence of sufficient board challenge in areas of key risk; mitigation strategies not robust enough; cost improvement plans needing more development in order to address quality concerns; a failure to address historical due diligence recommendations; and a failure to demonstrate credible plans to reduce private patient income below the private patient income cap once foundation trust status is achieved.[28]

20. Dr Bennett noted that some aspiring foundation trusts will face 'multiple challenges', including managerial shortcomings, issues with legacy debt or expensive PFI projects, and the need to make 'major productivity improvements'.[29] Sir David Nicholson, NHS Chief Executive, has estimated that about twenty foundation trusts will struggle to reach foundation trust status at all, and would need to be accounted for through other options such as takeovers and mergers.[30]

21. Trusts that have struggled to get over the bar up until this point may now find that the bar is moving even further out of reach. Monitor noted in its annual report that:

Since we first started authorising foundation trusts, the economic environment has tightened and there are more risks facing provider organisations. In light of this, and given that all trusts are facing increasing financial challenges, delivering an all foundation trust economy by April 2014, which is the Government's expectation, will be challenging.[31]

22. In April 2011, Monitor reviewed and revised the financial assumptions used in the assessment of applicant trusts in order to take account of the latest inflation forecasts issued by the Office of Budget Responsibility. As a result, applications for foundation trust status considered by Monitor's board after 1 June 2011 were tested against efficiency assumptions for 2011-12 that were more demanding than previously.[32] The letter to foundation trust applicants announcing this change noted:

We recognise the scale of the productivity challenge that the revised financial assumptions imply; however it is important that the assumptions reflect the economic outlook and current policy framework. The changes are consistent with maintaining the current "bar" for achieving foundation trust status.[33]

23. Monitor did state that trusts currently undergoing assessment would be given extra time to provide evidence that they met these revised assumptions.[34]

24. Both Monitor and the Government have stated firmly that authorisation standards will not be lowered in order to assist remaining NHS trusts.[35] Monitor has, however, said that it will 'review our approach to assessment to ensure we make the best use of our limited resources—without lowering the bar'.[36]

25. The Committee strongly supports the view that the standards for authorising foundation trusts must not fall as a result of the Government's desire to see all remaining NHS trusts become foundation trusts. We welcome the assurances on this point from both Monitor and the Government. We note that Monitor intends to review its approach to assessment in order to accommodate the extra demands on its capacity. It is imperative that any change in process does not alter the standards expected of aspiring foundation trusts, either directly or as a result of the space created by a less comprehensive process.

Foundation trust performance and compliance

26. Monitor regulates foundation trust performance and operations to ensure they comply with the terms of their authorisation. In summer 2011 Monitor published its review of foundation trust performance for 2011-12.[37] The report shows that although most foundation trusts are performing well, a stubborn minority continue to have problems. Of the 136 foundation trusts in existence on 31 March 2011, 12 were rated 'red' for governance (the worst rating), and 24 were rated 'amber-red' (compared to 83 rated 'green' and 17 rated 'amber-green'). In terms of financial risk, 10 foundation trusts were rated at '2' or '1' (highest risk), compared to 13 rated at '5' (lowest risk).[38] Monitor has stated that a new foundation trust would not usually be authorised unless it had a rating of '3' or above,[39] demonstrating that some existing foundation trusts are falling below the standards expected of new entrants.

27. Monitor's assessments of Foundation Trust performance show that although many foundation trusts are performing well, a significant proportion are still struggling to meet financial and governance standards.

28. In addition to these ratings, Monitor also has the option to declare foundation trusts to be in 'significant breach' of the terms of their authorisation, described by Dr Bennett as 'a very, very clear signal to the trust that they have problems the board must really sort out'.[40] At the end of 2010-11 nine foundation trusts were in significant breach compared to 13 at the end of 2009-10. Three new trusts were found to be in significant breach during 2010-11, compared to 14 during 2009-10. Although Dr Bennett stated that this reduction was partly because 'there has been improvement and learning overall',[41] Monitor also attributes this reduction to two other factors. First, fewer foundation trusts were triggering governance indicators based on healthcare-acquired infection rates. Second, Monitor's governance triggers had been amended to reflect the removal by the Government of the 18 week referral-to-treatment target and the reduction of the A&E four hour waiting time target.[42] Dr Bennett stated that it was important for Monitor's triggers to adapt to reflect the Government's own expectations of performance, giving the example: 'if the trusts are required by commissioners to meet a 95% target then, unless there is an extraordinarily good reason, we are not going to have a 98% percent target'.[43]

29. It is clear that some of the improvement in the numbers of foundation trusts in significant breach is accounted for by changes in targets which have been introduced by the Government. We agree that Monitor's compliance criteria should reflect the performance measurements used by NHS Commissioners, the CQC and the Government.

30. Monitor has also stated that the number of foundation trusts in significant breach has reduced in part because 'the CQC has introduced its own compliance regime against registration standards and we are now reflecting their judgements in our own governance triggers'.[44] Monitor told us that the annual review of its compliance framework would revise how CQC judgements arising from the CQC registration process are incorporated into Monitor's governance risk ratings. Our report into the CQC highlighted our concerns regarding the rigour of some CQC assessments and, in particular, the information that feeds into them.[45]

31. The Committee believes that the parallel existence of Monitor and the CQC creates a significant risk of cost and process duplication between the two bodies. It is essential that the scope and function of each body is clearly defined and that both bodies observe the limits of their responsibilities, while retaining a holistic view of the regulated organisations.

32. Monitor has certain powers to intervene in the event that foundation trusts are found to be failing, including closing a specific service or requiring a board to take a specific action.[46] These powers were used on seven occasions in 2009-10, but not at all in 2010-11. Monitor stated that it did not resort to using its powers because the three trusts newly found to be in significant breach in the course of 2010-11 were so-classified for 'mainly financial' reasons, 'and at the time of each breach there was sufficient evidence of action being taken to ensure that Monitor did not need to use its statutory powers'.[47] Dr Bennett also told us:

I imagine part of the reason is that, having used the powers [on previous occasions], and trusts having seen that we will use the powers where necessary, they have understood they might as well follow our advice anyway.[48]

33. Monitor has said that it would consider using its statutory powers in the future if the trusts in significant breach were found to be making insufficient progress.[49] It is right that Monitor adapts its regulatory approach and its use of formal intervention powers to reflect the circumstances of individual cases and we accept Monitor's reasons for not using its formal powers in 2010-11. Nevertheless, we encourage Monitor not to be reticent to use its formal powers when necessary, and to regularly review the progress of trusts in significant breach.

34. The current changes and financial pressures in the NHS are only going to make Monitor's compliance role more important, as Monitor itself has acknowledged:

As the number and range of NHS foundation trusts increase, the scale, importance and profile of our compliance role also grows. There may also be an increase in those facing financial difficulties. For current foundation trusts, pressure continues to mount on both management capacity and financial viability as expectations and demand continue to rise and finances become more constrained.[50]

35. In the area of financial risk, Monitor has taken steps to reflect this climate. The same raised financial assumptions that were discussed in paragraph 22, relating to the authorisation of applicant trusts, are also being applied to the risk-rating of investments and transactions undertaken by foundation trusts.[51] In addition, Monitor's 2011-12 compliance framework changed the threshold of financial risk rating for escalation (the stage of the compliance process that prompts Monitor to consider placing the trust in serious breach and, consequently, potentially using its statutory powers of intervention) to include trusts rated at a financial risk of '2', rather than just '1'.[52]

36. Over the next year, Monitor's foundation trust compliance role will become harder and more important. It must be prepared and resourced to meet this challenge. There will be more foundation trusts, many of them newly authorised, struggling to make demanding efficiency gains and to manage upheaval in the health landscape. Existing foundation trusts will also be affected. In this light, we welcome the fact that Monitor is increasing its monitoring of financial risk. We encourage Monitor to remain vigilant for further areas where closer scrutiny is needed.

INCREASED INDEPENDENCE FOR FOUNDATION TRUST GOVERNORS

37. The Health and Social Care Bill changes Monitor into a regulator for the sector as a whole and proposes to remove Monitor's specific compliance powers over foundation trusts. The Bill makes provision to strengthen the powers of foundation trust governors and 'place genuine responsibility for performance on the organisations themselves rather than over-reliance on the regulator'.[53] The Bill makes explicit the duty of governors to hold their boards to account, and also gives governors powers to approve mergers, acquisitions, separations and other significant transactions.

38. The fact that this devolution of accountability coincides with substantial challenges to foundation trust performance, as noted in the previous section, has been a cause of concern for Monitor. Monitor told us:

The proposed new responsibilities for governors do mean that a step-change would be needed in the capability of governors in order to ensure effective governance without the safety net which Monitor currently provides.[54]

39. Monitor also had concerns about the associated ability of directors to perform under the new regime and in the challenging financial context:

Without the necessary skills, some NHS foundation trust boards of directors will find it difficult to deliver trust performance. Some boards may struggle with the extent of the challenge to plan and deliver simultaneous improvements in both cost and quality.[55]

40. In March 2011 Monitor published a report on lessons from foundation trusts that had gone into significant breach in the course of 2010. The report listed three main areas where trusts were experiencing problems, all of which highlighted issues at board level:

formulating effective strategy for the organisation;
ensuring effective performance—appropriate skills, effective information flows to the board, and board-level dynamics; and
ensuring accountability through trust boards holding the organisation to account for the delivery of the strategy and seeking assurance that systems of control are robust and reliable.[56]

41. We are concerned about the proposals in the Health and Social Care Bill to reduce the financial oversight role of Monitor and increase the responsibilities of foundation trust governors in this area. We draw the attention of the House to the fact that Monitor reported in March 2011 that failures of governance within existing foundation trusts were a significant contributory cause to cases of significant breach during 2010 and we see little or no evidence that this position has changed sufficiently to justify the additional responsibility being placed on foundation trust governors.

42. Monitor told us that providing foundation trust governors with the necessary skills would be:

[...] a major development challenge where an early start is needed if it is to be effectively addressed over the next three years. In particular, governors will need good induction and ongoing training to ensure that they fully understand their statutory responsibilities and have confidence to take action.

43. Monitor does have a track record of supporting development for boards and governors,[57] and they told us that they would 'consider new models of delivery to support governor development', including 'supporting governors to undertake their roles and responsibilities effectively'[58] under the new regime. It is not yet clear, however, exactly what form Monitor expects this training and support to take. Dr Bennett told us that it was too soon to have developed a specific plan, 'because this is a very recent change', but that Monitor would work jointly with the Department and foundation trusts themselves.[59]

44. We do, however, have concerns over Monitor's capacity to provide this developmental support on the level required, given that its 2010-11 annual report shows that restrictions on Monitor's spending limited its ability to deliver in its strategy area of 'promoting the development of well-led NHS foundation trusts'.[60] Although Monitor was able to complete several objectives relating to development, several (including running projects to help boards improve their effectiveness in leading quality improvement; and developing a communications plan to help governors to understand their role and how to exercise their statutory responsibilities) were only partially completed, while others (including developing a programme to support medical directors in their role on the board of directors; and exploring opportunities to promote productivity improvement) were not completed. In each case Monitor cited that spending controls across all arm's-length bodies had prevented it from carrying out the work.[61]

45. Development will be necessary if foundation trust governors are to have the skills required to successfully take on their new responsibilities and operate effectively in the new landscape. We note that Monitor's ability to provide development at the required level may be limited by spending controls on arm's-length bodies. When we next meet with Monitor, we expect to see clear evidence of their programme to support development for foundation trust governors. In the meantime the Government should provide additional resources to Monitor if required, or consider delaying the devolution of responsibilities until there is evidence that the effectiveness of foundation trust governors has been enhanced.

46. Under the original terms of the Health and Social Care Bill, after April 2012 Monitor would have retained its special powers to intervene in the event of a significant breach for only a defined subset of foundation trusts, until April 2014. Following concerns expressed by the Future Forum, among others, about the ability of governors to assume the reins so soon,[62] Monitor's transitional powers were greatly extended, with Monitor retaining powers over all foundation trusts for an additional two years, until April 2016, whereupon the powers would be reviewed.[63] The Government stated that this extension was necessary 'to enable time for foundation trusts' governors to build capability in holding their boards to account'.[64] It was welcomed by Dr Bennett as 'a very useful much longer period to prepare governors to take on the [new] role'.[65] We welcome the extension of Monitor's oversight powers for foundation trusts to 2016, and the fact that the powers will then be reviewed.

47. The Government's reforms and the financial context have placed Monitor in a position where its foundation trust duties have escalated, albeit on a temporary basis, and where its activities in both authorisation and compliance are likely to increase. Maintaining standards at this time will be vital. Monitor will need to adapt if it is to take on this additional workload without lowering its standards. The Government must ensure that Monitor has the resources necessary to maintain standards across foundation trusts while it retains responsibilities in this area. The next five years will be critical in ensuring that foundation trusts are in a fit state to survive and thrive in the new health landscape.

FAILURE REGIME

48. These many concerns make it especially important to have an appropriate failure regime in place for foundation trusts. A strong distress regime (a precursor to 'failure' status) is also important, and Dr Bennett agreed that the Monitor's transitional powers over foundation trusts could effectively be used in this way.[66] However, he noted:

The only difference is that our compliance regime applies to everything a foundation trust does. The proposal was that a failure regime would only apply to essential services. Therein lies a big question: how many of a foundation trust's services are to be regarded as essential?[67]

49. The failure regime proposed under the original form of the Health and Social Care Bill involved designating 'essential services' in advance. Following the Future Forum process, the Government stated that it had 'had concerns about the practicality of our current proposals for an up-front system of designating services for additional regulation, and we will be amending the bill accordingly'.[68] At the time of our evidence session, it was not yet clear exactly how the Government would structure its new regime, but Dr Bennett said he expected it to 'have the same basic design characteristics'.[69] Monitor told us that, whatever system was put in place, it would be important to have a failure regime that 'protects the services that patients need without propping up failing management teams if they are doing a bad job of running the service'.[70]

50. On 31 August the Government tabled amendments to the Bill, setting out the proposed new failure regime for foundation trusts. These amendments were tabled too late for us to consider them in full either in evidence or as part of this Report. We believe it is important for the new regime to dovetail with Monitor's compliance responsibilities and to have a thorough and effective distress regime. We look forward to hearing Monitor's view on whether the new regime meets these criteria and we will cover this issue in more depth next year.

14 Further detail on Monitor's current role in this respect can be found in Ev 21-22 Back

15 NHS Future Forum, Summary Report on proposed changes to the NHS, p31 Back

16 Ev 15 (Department of Health) Back

17 Ev 15 (Department of Health) Back

18 It is not possible to provide an exact number, because some trusts may consider merging with existing foundation trusts Back

19 Ev 52 (Monitor, supplementary written evidence) Back

20 Ev 31 (Monitor). In 2010-11, Monitor assessed an average of only one or two per month (Ev 31), although it should be noted that this pace was dictated by the slow rate of trusts being referred to Monitor by the Department of Health - see paragraph 14 Back

21 Monitor states that this average assessment time is necessary it light of its "enhanced approach to quality governance and the need for trusts to develop robust mitigation strategies to address the tighter financial environment". Monitor, Annual Report and Accounts 2010-11, 14 July 2011, HC 1217, p10. Back

22 Monitor, Annual Report and Accounts 2010-11, 14 July 2011, HC 1217, p10 Back

23 Applications may be 'postponed' at the trust's request, to allow issues to be resolved, or 'deferred' by Monitor to allow trusts time to resolve issues otherwise preventing authorisation. Back

24 Monitor, Annual Report and Accounts 2010-11, 14 July 2011, HC 1217, p10. Back

25 Q 21 Back