Health Select Committee inquiry into foundation hospitals
Memorandum by the British Medical Association
January 2003
Introduction
The establishment of foundation trusts, together with the recently announced reform of financial flows, has been regarded by some as marking a return to the internal market of the early 1990s. The BMA did not support the introduction of the internal market in the 1990s because of fears that it would lead to the development of a two-tier service in the NHS, and our position is essentially unchanged. We are concerned that these proposals will create unfairness and inequality, with some hospitals able to improve their services at the expense of other hospitals and other NHS services, for example, by drawing valuable NHS staff away from less favoured areas.
The Department has been keen to promote foundation trusts as a new form of local public ownership but, like the internal market, they are based on an assumption that the provision of public services can be improved by exposure to the freedoms and disciplines of the market. A recent paper by the World Bank has identified five factors involved in the ‘marketisation’ of public services [1], of which the first four are recognisable features of the Department’s proposals:
- Decision rights – in traditional public sector organisations, control rests in a vertical hierarchy, whilst marketisation implies increasing management autonomy;
- Residual claimant – managers and staff will have more incentive to economise if they benefit from making efficiency gains than if savings are absorbed back into a global budget;
- Market exposure – if revenue is earned as a direct result of providing services rather than allocated as a budget, managers have more incentive to focus on financial viability;
- Accountability – rules, regulations, contracts and market pressures provide accountability mechanisms to replace that of hierarchical control;
- Social functions – “as the hospital is motivated to focus more on financial viability … the financial bottom line undermines the ability to cross-subsidize certain services internally” – mechanisms such as explicit funding, demand-side subsidies and insurance regulation are needed to ensure that non-profitable services continue to be delivered.
Reforms of this type have an internal logic in which the financial strength of the individual organisation is pursued at the expense of other concerns and of competitors within the sector, and which is inevitably in tension with public sector values and concerns. The Department has acknowledged this to some extent by introducing a range of constraints on trusts’ financial and other freedoms (for example a cap on their level of income from private patients) [2] and these requirements would need to be rigorously enforced and monitored.
Financial implications
The financial freedoms granted to foundation trusts will cover three key areas:
- Retention of proceeds from asset disposals;
This could provide an incentive for trusts to undergo an ‘asset-stripping’ exercise which could sacrifice long term needs in return for short term financial gains, fundamentally distorting the local pattern of service provision. Trusts will need to demonstrate that the proceeds will be used to further their public interest mandate, and this constraint may be sufficient to ensure that the freedom is not abused for commercial gain or short term political targets. However, we believe the use of assets and resources needs to be planned across the local health economy as a whole – the proposals do not provide a mechanism to facilitate this.
- Retention of operating surpluses;
Under the new commissioning system outlined in Reforming NHS financial flows, “funding will flow to the providers of patients’ choices”. It is not yet clear exactly how the new regime of patient choice will apply in practice, but it seems likely that patients will perceive foundation trust hospitals to be better than their neighbours and will prefer to be treated in them (and that less assertive, less informed patients will be correspondingly disadvantaged). A system of winners and losers seems inevitable, in which funding flows away from unpopular providers, possibly trapping them in a cycle of decline in which they have a higher proportion of the more complex and “unprofitable” cases but fewer staff.
- With funding for selected activities based on fixed price tariffs, foundation trusts will have an incentive to cut their unit costs in these areas to generate operating surpluses. It is possible that this will lead to innovative and more efficient forms of service delivery, but is it equally possible that it will result in a deterioration in the quality of patient care and increased pressure across the system. For example foundation trusts could reduce their unit costs by discharging patients earlier, thereby increasing demand for community care and the risk of emergency readmission to neighbouring hospitals. It will be particularly important therefore to ensure that primary and community care services have the workforce and financial provision to take over care of the patient – mechanisms to ensure this are currently extremely weak. At the same time, the provision of services which are not currently subject to fixed price tariffs could be devalued and marginalised as they could be perceived as not having the potential to generate operating surpluses.
- Access to capital based on financial performance and ability to meet any liabilities incurred as a result of borrowing.
For both winners and losers, Reforming financial flows introduces relative uncertainty compared to the existing block agreements. For foundation trusts, the ability to demonstrate guaranteed long term revenue streams will be a crucial factor deciding the ease with which they are able to borrow in private markets and the cost of doing so. The Department anticipates that PCTs will enter into 3-year service level agreements with foundation trusts. However, recent reports that the Secretary of State was planning to guarantee their income for up to seven years, which led to claims of ‘hypocrisy’ by the opposition [3], have not been refuted by the Department.
In either case, the concept of guaranteed income streams is essentially incompatible with that of exposure to market forces (including patient choice). It is not clear therefore how this requirement can be reconciled with the maxim that funding must follow patients.
A foundation trust will be able “to access borrowing subject only to its ability to service the debt incurred” [4] but this borrowing will contribute to departmental expenditure limits, thereby reducing the amount of funding available to other bodies in the NHS and consequently their ability to maintain and improve their own performance. The potential impact on the financial position of other NHS bodies is a serious concern to which the Department appears to have given no consideration.
Staffing implications
Employment practice is an issue on which the Department remains deliberately ambiguous. Although the proposals stipulate that staff currently working in a trust which gains foundation status will retain their terms and conditions and continuity of service, the trusts will also be able to offer performance-related bonuses to individuals and teams. This could further strengthen their ability to out-perform other trusts and lead to divisiveness and loss of morale. Foundation trusts will “be able to continue to benefit from wider agreements negotiated by or on behalf of NHS employers collectively” [5] which sounds reassuring but provides no guarantee that they will be bound by national terms and conditions of service. In particular, whilst foundation trusts will be amongst the early implementers of Agenda for change, their establishment threatens to undermine this agenda by giving credence to the view that individual trusts should have control over staff pay and conditions, and press reports [6] that this control will be “absolute” will do nothing to dispel the distrust and hostility of health unions.
We are disappointed to hear that foundation trusts may be involved in attempting piecemeal implementation of the rejected new consultant contract framework [7]. National terms and conditions of service, for doctors as for other staff, are one of the main building blocks of a truly national health service and destroying this unity would undermine the founding principles of the NHS itself. Encouraging local negotiations would not only be extremely time-consuming and expensive but would also make NHS workforce planning and resource allocation enormously complex. The suggestion that funding set aside for implementation of the new contract will be used in local productivity deals to achieve target waiting times is particularly disturbing. This represents a shortsighted use of funding for political ends that is unlikely to secure lasting improvements in the health service.
The flexibilities offered to foundation hospitals are likely to leave other trusts with worsening recruitment difficulties, especially in recruiting the most experienced and most sought-after staff, an effect which will be particularly marked on neighbouring trusts. The Department has recently announced that measures will be introduced to stop foundation hospitals from poaching staff [8], but is silent on how this immensely difficult objective will be achieved.
We would expect foundation trusts to follow good employment practice by implementing the Improving Working Lives agenda, the provisions of the New Deal for junior doctors and the Working Time Regulations, and by introducing family friendly policies. It is disappointing to note that these developments are not mentioned in the Department’s proposals.
Governance and accountability
In principle, we welcome the devolution of power and responsibility which these proposals symbolise. However, the extent to which foundation trusts will be genuinely free from centrally imposed targets remains unclear. As indicated in our comments on staffing implications above, it appears that their agenda will be largely focused on achieving the Department’s waiting time targets.
Links with local communities and responsiveness to the priorities and concerns of PCTs remain issues of concern. Although trusts will be “expected to demonstrate innovative approaches to ensuring genuine community membership” [9], there is no guarantee that these approaches will be successful – it is entirely possible that less organised and less vocal groups in the community, including ethnic minorities who may have specific health needs, will be under-represented. Similarly, although commissioning PCTs will be guaranteed places on the trust’s board of governors, this may not be sufficient to ensure that the priorities of the trust are consistent with those of the wider local health economy.
Impact on quality of management and quality of patient care
By introducing the National Institute for Clinical Excellence (NICE), the Commission for Healthcare Audit and Inspection (CHAI), clinical governance and National Service Frameworks (NSFs), the Department has provided the basic building blocks required to ensure high and consistent standards of patient care. These have enabled it to take various steps in diversifying service provision whilst providing reassurances on quality. The BMA is broadly in favour of these developments, although it is too early to say whether they will provide sufficiently robust as a quality framework. As mentioned above, there is a danger that quality of care may be compromised in the search for financial viability.
Impact on the wider NHS
The establishment of foundation trusts as independent decision-making bodies has fundamental implications for the strategic coherence of the wider local health economy. PCTs have responsibility for determining local strategic priorities and the decision-making role of foundation trusts must be structured so as to support PCTs in this role. It is not clear how this will be achieved and there is a likelihood of foundation trusts deciding on and pursuing priorities which conflict with those of the PCT.
Much current thinking about the development of the health service emphasises designing services around patient care pathways and a greater emphasis on primary and community-based care. The introduction of foundation trusts could detract from these aims by consolidating the power of major providers and reinforcing barriers between different sectors [10].
As mentioned above, helping under-performing trusts to improve should have higher priority, and they would be better able to do so if they had greater freedom to innovate. The Department is pressing ahead with plans to franchise out the management of failing trusts. Foundation trusts and other three-star performers can tender for franchises, and this may prove beneficial to both sides. However, tenders will also be accepted from a selection of private sector bodies, which will expect to make a profit from the exercise.
Furthermore PCTs, many of which are still at an early stage in developing commissioning and managerial expertise, will face additional legal complications in commissioning from foundation trusts.
Notes
1 Harding A & Preker A S. Understanding organizational reforms : the corporatization of hospitals.
The World Bank (HNP discussion paper). September 2000.
2 Department of Health. A guide to NHS foundation trusts. December 2002.
3 Milburn to underwrite foundation hospitals. The Times 11.11.02
4 Department of Health. A guide to NHS foundation trusts. December 2002.
5 Department of Health. A guide to NHS foundation trusts. December 2002.
6 Milburn to underwrite foundation hospitals. The Times 11.11.02
7 NHS perks may lure consultants to break ranks. The Times 28.12.02
8 Department of Health. A guide to NHS foundation trusts. December 2002.
9 Department of Health. A guide to NHS foundation trusts. December 2002.
10 Harrison A. How not to design the health care system of the future. The Kings Fund 13.11.02.
http://www.kingsfund.org.uk/eKingsfund/html/op0211141.html