Editor’s blog Wednesday 11 August 2010: Monitor's review of FTs' Annual Plans

Editor's note - Monitor haven't put this online yet, so I am doing so very quickly. No time to make the tables readable, but there is some interesting text here. National 18 week waiting time target cancelled - except where specified in the contracts sticks out.

Review of NHS foundation trust annual plans 2010/11

Overview
Monitor has reviewed the Annual Plans of the 129 NHS foundation trusts authorised at 31 March 2010. This year, we increased the rigour of the annual planning process to encourage foundation trusts to plan and prepare more robustly for the financial challenges ahead. Monitor’s Annual Plan Review is designed to identify the future challenges and significant risks emerging in the foundation trust sector in the next three years.

Based on our review of the plans we believe there is an increase in the level of financial risk across the whole foundation trust sector. This was anticipated given the tougher economic conditions foundation trusts will be operating in, and as a result we expect to see an increase in regulatory action based on financial concerns.

Monitor had urged foundation trusts to be more realistic in projecting their future income than in previous years’ plans. This is the first time we have seen foundation trusts forecasting a decline in their income, reflecting their assessment of the impact of changes to the economic environment.

In producing their plans foundation trusts have identified challenging Cost Improvement Plans (CIPs) that they will need to deliver. Historically, trusts have struggled to achieve their plans to reduce costs, and these plans are more demanding than in previous years. We are being clear with foundation trusts that, having identified the cost reductions they need to make, high quality planning is essential to ensure they can deliver them. If planned properly, it should be possible to achieve cost reductions and deliver continuous improvements in quality.

On governance risk the majority of foundation trusts (74%) are forecasting a Green rating for 2010/11. For those that have declared a risk to their Governance rating, the cancer service performance targets present the biggest challenge. The 62 day cancer target is the target most at risk of breach for acute and specialist (e.g. children’s hospitals; women’s hospitals; cancer hospitals) foundation trusts.

Some of the key points identified in this year’s plans include:
 39 (30%) foundation trusts have forecast a decline in their Financial Risk Rating in 2010/11;
 income growth of 1.7% is forecast in 2010/11. However, over the three years of the plan, income is expected to decline by 0.8%;
 average Cost Improvement Plans (CIPs) of 4.4% in 2010/11 are higher than foundation trusts have achieved before (3% in 2009/10);
 95 foundation trusts (74%) forecast a Green rating for governance in 2010/11; 25 (19%) declared themselves as Amber Green for 2010/11; 6 were Amber Red; and, three trusts forecast a Red rating.

 53 (41%) foundation trusts have highlighted potential acquisitions in their plans. These are primarily driven by Primary Care Trusts disposing of their provider functions; and
 foundation trust membership grew by 7.4% in 2009/10. It is forecast to grow by 6.6% in 2010/11 with the total number of members expected to reach 1.8 million.
Finance
Income and expenditure

This is the first time we have seen foundation trusts forecasting a decline in their income, reflecting their assessment of the impact of changes to the economic environment.

Although a 1.7% increase in income is forecast for 2010/11 - the majority of which is contracted and has minimal risk - over the three year plan the sector is forecasting an income reduction of 0.8%. One of the main risks to future income is that foundation trusts will not be paid for over performance. Changes in the tariff for emergency admissions will restrict income and commissioners will withhold payment for activity above contracted levels. The delivery of many acute foundation trusts’ plans are therefore heavily dependent on the effectiveness of demand management schemes operated by Primary Care Trusts.

A deficit of £108 million is forecast in 2010/11 due to impairments from the opening of large Private Finance Initiative (PFI) hospitals in year; this had a significant impact on the end of year position (after impairments) of foundation trusts in 2009/10 [insert link to Consolidated Accounts]. However, foundation trusts are forecasting surplus income (after impairments) of £276 million in 2011/12 and £353 million in 2012/13, reflecting the impact of increased EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) and decline in impairments.

2010/11
Income growth of 1.7% includes:
 3.3% growth forecast in specialist NHS foundation trusts – these are the only trusts that are forecasting growth in all three years of the plan;
 2.3% income growth in mental health foundation trusts, principally driven by acquisition of PCT provider arms; and
 1.4% income growth in acute foundation trusts.
The stable EBITDA margin across the sector is driven by acute foundation trusts, with EBITDA margins in the mental health and specialist trusts forecast to decline. This partly reflects the higher CIP targets (4.6%) forecast for acute trusts and the growth in high cost activity in the specialist trusts.

2011/12 and 2012/13
Overall income is forecast to decline by 0.8% between 2010/11 and 2012/13 driven by a 1.1% fall in income in acute trusts. Specialist foundation trusts are the only trusts forecasting income growth in the outer years.

EBITDA margins are forecast to grow in both 2011/12 (to 7.4%) and 2012/13 (to 7.7%) with acute trusts forecasting margins above the level achieved in 2009/10. This reflects the high levels of CIPs forecast for the period.

The decline in EBITDA margins in mental health and specialist foundation trusts in 2010/11 is expected to reverse in the 2011/12, driven by CIPs in mental health trusts and income growth in specialist trusts.

Cost Improvement Plans
Although they are expecting more difficult economic conditions than in previous years, foundation trusts are forecasting an increase in aggregate EBITDA in 2011/12 and 2012/13.

However, in order to deliver this, foundation trusts will have to achieve higher Cost Improvement Plans (CIPs) than have been achieved before, with CIPs of 4.4% forecast for 2010/11 (versus 3% achieved in 2009/10). In this context, Monitor believes the plans are challenging, but not unachievable, providing boards have planned properly and given full consideration to any potential impact of cost reductions on the quality of their services.

Monitor works closely with the Care Quality Commission and together we will be holding boards to account to ensure they continue to improve on quality and safety.

CIP % of Operating Cost  2010/11   2011/12 2012/13
Specialist                            3.3%          3.5%         3.1%
Acute                                  4.6%          4.8%         4.5%
Mental Health                    4.0%          4.3%        3.8%
All FTs                        4.4%          4.6%         4.3%

Key areas of risk to delivery of Cost Improvement Plans that Monitor has identified include:
 Quality: foundation trusts must continue to focus on improving the quality of the services they provide at the same time as delivering challenging CIPs;
 Capacity and skills to deliver transformation: foundation trusts must ensure they have the right capacity and skills required to deliver CIPs that involve service reconfiguration;
 Long term planning: very few foundation trusts have provided Monitor with detailed plans to support CIPs beyond 2010/11;
 Restructuring costs: some foundation trusts will have to ensure they have adequate funds where structural change is needed to drive plans; and
 Future risk: a number of trusts have forecast CIPs of less than 3% in 2010/11; for these FTs there is a risk as to whether this will cause financial problems in future years when they may be required to find significant savings.

Cash
The aggregate cash balance of foundation trusts is forecast to decline from £2.8 billion (2009/10) to £2.3 billion (2010/11) due to £2 billion forecast capital expenditure for 2010/11 (a 30% increase). However, in practice foundation trusts have tended to deliver less capital expenditure than planned (71% of plan in 2009/10). Cash is forecast to remain fairly stable in the outer years.

Average liquidity days across all foundation trusts is 31 days. However, there is wide variation within the sector. Nine trusts are forecasting fewer than 15 days of liquidity in 2010/11 and are therefore more exposed to financial risk.

Debt is forecast to increase significantly in 2010/11, reflecting increases of £1.3 billion in PFI leases and £0.2 billion in borrowings to fund capital expenditure.

2010-11 Annual Plan Review summary income and expenditure forecasts
No time to put in this table such that it could be vaguely readable

Risk ratings
The Financial Risk Ratings (FRR) highlight the increase in financial risk across the sector.
Monitor is anticipating an increase in regulatory action based on financial concerns. Of the 13 foundation trusts in significant breach at 1 April 2010, ten were due to governance failings in part triggered by service performance issues.

However, we anticipate that in 2010/11 the major trigger for significant breach decisions will be increased financial risk.

Mental Health Trusts may be exposed to increased risk from recently announced cuts to Local Authority budgets. Although unquantifiable at this stage, there is a risk that Mental Health Trusts, for the first time, will show a declining financial position. To date Monitor has never placed a mental health trust in significant breach for financial issues.

The majority of foundation trusts (54%) have been assigned a moderate risk rating of ‘3’ for finance (where ‘1’ reflects the highest risk, and ‘5’ the lowest), a shift from quarter four 2009/10 when the majority (58%) achieved a rating of ‘4’.

Within this group of ‘3’ rated trusts, we believe some plans are more exposed to future risk than others, and a slight decline in performance could quickly present a higher financial risk.
These trusts are at risk of moving to an FRR of ‘2’ during the year.

11 trusts have forecast an improvement in their FRR compared to quarter four 2009/10, but 39 are forecasting a decline.

Governance risk ratings
Foundation trusts’ governance forecasts for 2010/11, and the progress in meeting the requirements of the Care Quality Commission’s registration standards, suggest foundation trusts are expecting to meet key service performance targets and ensure their services meet required standards on safety.

We know from experience that some governance forecasts have proved to be optimistic in previous years. For example, 18% of foundation trusts that declared themselves Green or Amber in their Annual Plan for 2009/10 were in fact Red rated during the year. If this trend continues in 2010/11 then approximately 21 of the 120 trusts that declared Green or Amber Green in their plans may be at risk of being Red rated for governance during 2010/11.

However, one of the main service performance issues leading to governance concerns in 2009/10 was the A&E four hour waiting time target. The Government has reduced the threshold for this target from 98% to 95% and we have revised Monitor’s Compliance Framework to reflect this. In addition, the 18 weeks referral to treatment target has been removed. While this may indicate a reduced risk of failure to achieve targets for some foundation trusts, Monitor has reminded all trust boards that good governance remains of critical importance and we will continue to focus on this. Foundation trusts must still meet contractual requirements, including referral to treatment time targets.

We will be undertaking a fundamental review of our Compliance Framework for 2011/12 to reflect the move away from national targets and to strengthen further our triggers to assess governance.

Of the 13 foundation trusts in significant breach of their authorisation at quarter four in 2009/10, three declared themselves as Red or Amber Red rated in their plans for 2010/11:
 Dorset County Hospitals (Amber Red);
 Milton Keynes (Red); and
 Heatherwood and Wexham Park Hospitals (Red).

The remaining ten trusts declared themselves Green or Amber Green for 2010/11, indicating they believe they will rectify the underlying issues relating to their significant breach by the end of 2010/11.

Key service performance targets identified as a risk in 2010/11 plans include:
 23 foundation trusts declaring a risk to cancer targets;
 the 62 day cancer target is the target most at risk of breach for acute and specialist foundation; trusts – ten trusts declared it a risk in their plans;
 nine trusts declared a risk to the MRSA target;
 six trusts declared a risk against their C.Difficile targets; and
 three mental health foundation trusts identified a risk to the Care Programme Approach target.

Mergers, acquisitions, and investment activity
53 foundation trusts have highlighted potential acquisitions in their plans. This increase in planned transaction activity was expected as NHS Primary Care Trusts (PCTs) are required to divest their provider arms, presenting opportunities for NHS foundation trusts to acquire services.

However, only four foundation trusts have incorporated financial projections for the proposed acquisitions in their annual plans. This may be because discussions with PCTs are not yet sufficiently advanced to include projections in their plans. We will be posing tough questions to all foundation trusts with significant transactions planned to seek assurance that boards are fully aware of the potential risks involved.

Membership
Foundation trust membership grew by 7.3% in 2009/10 to reach 1.76 million. It is forecast to grow by 6.6% in 2010/11 with total number of members expected to reach 1.88 million by year end.

The majority of foundation trusts (85%) are assuming overall growth in their membership, with the remaining trusts either forecasting no movement (7%) or a decline (9%).

Further review of plans
We are undertaking more detailed reviews of plans we have identified as not being robust enough. The purpose is to raise our concerns with the trusts’ boards and ensure they are fully aware of the potential risks they face, so that they improve their planning and reduce their risk of failure. The additional review is not part of our regulatory regime, but where there are common themes emerging we will share these with the sector.