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Room for more trust, by Gary Lawson

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01 April 2005

NHS foundation trusts have been stuck in the middle of the government split between 'modernisers' and 'consolidators', unable to achieve true financial independence. So reform is urgently needed

Do you want a new maternity unit in your local hospital? Would you like to develop a regional centre of excellence for orthopaedic surgery?

Many trusts have seen foundation trust status as one way to achieve such aims. But beware — 'all that glisters is not gold' — the flexibility to borrow and invest to achieve is not all it seems.

Developing acute areas of expertise could lead to a healthy, strong and locally orientated NHS secondary sector. The 2003 Health and Social Care Act, the primary legislation that created foundation trusts, contains the potential for locally defined capital investment.

But foundation trusts form a key part of the conflict between the Gordon Brown 'consolidators' and the Tony Blair/Alan Milburn 'modernisers'. The result of this clash is stalemate. Its impact — no real local decision-making flexibility. This conflict has left the foundation trust initiative tainted with the atmosphere of 'false localism'. It has only served to hold up true devolution of financial management.

It was only just before Easter that Monitor, the regulator of foundation trusts, finally released details of the prudential borrowing limits for foundation trust hospitals. This simply confirms the festering tensions.

The chancellor was surely caught out by the unintended consequences of the legislation that created the trusts. Realising that their ability to invest or borrow externally could affect the Treasury's ability to effectively manage money supply growth resulted in an attempt to restrict borrowing flexibility through the regulatory regime.

For example, the Prudential Code's gearing ratio for foundation trusts is too restrictive. Hence, borrowing limits have simply been set too low. As they stand, they will serve only to prohibit local capital investment schemes of any magnitude. This is particularly the case for larger NHS trusts that have developed as a result of Private Finance Initiative schemes and, as a consequence, have small asset bases.

Monitor's currently defined role has therefore made it just another of the footballs being kicked back and forth in the government spat. A combination of the deficit in specialist financial experience and the impact of foundation trusts' borrowing on the UK money supply has given the chancellor the upper hand.

Despite the good intentions, Monitor has become just another 'quango' of central government control. It needs to truly demonstrate its independence and act more as a regulator of standards and practices.

One such standard is the increased challenge of financial management that comes with foundation trust status. Executives must assume the responsibility of managing financial surpluses or deficits. Within the NHS, apart from a brief focus on this area in the early 1990s, there has been no imperative to develop the skills related to banking, financial products and treasury management.

'Cash is king' is an aphorism foundation trusts must learn to live by. Managing surpluses and deficits requires hospitals to invest and borrow effectively and their staff to manage the associated liquidity and credit risks prudently. Actively managing the potential impact of interest income and expense goes beyond basic cash-flow forecasting, something local authorities have known for many years.

Standards are undoubtedly being addressed by CIPFA, the Healthcare Financial Management Association and the NHS Appointments Commission, which have risen to the challenge of improving both practitioner skills and the quality of corporate governance. And perhaps this points the way forward to a more effective regulatory model: Monitor as more a definer and regulator of minimum standards and less an issuer of proscriptive instructions. If Monitor had adopted this approach, it might have enabled the well-publicised problems at the Bradford foundation trust to be avoided.

A true commitment to delegated management autonomy will give locally orientated foundation trusts the genuine flexibility they wish for and need. Consequently, the trusts need three urgent developments to achieve their strategic goals: swiftly revised prudential borrowing guidelines with higher and more flexible limits; issuance by Monitor of the still-awaited prudential investment guidelines; and a government commitment to reform Monitor's regulatory mandate further.

Post-election, the opportunity exists to create a true regulator of foundation trust health care and financial management standards rather than another agent of central control. Reform could be stand-alone or part of a wider initiative to consolidate the crowded field that is the current health care regulatory regime. Whatever form it takes, further reform is undoubtedly and urgently needed.

True political leadership can enable foundation trusts to achieve their objectives, but it still requires a commitment to develop further a framework that liberates the trusts and unlocks the potential for localised clinical, financial and health care autonomy within the NHS.

Gary Lawson is a director of Sector Healthcare, a division of Sector Treasury Services

PFapr2005

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