News analysis Foundations accused of seeking to avoid income cap

16 Aug 07
NHS foundation trusts have been accused of circumventing the cap Parliament imposed on their private patient work by establishing arm's-length bodies whose income does not show up in their accounts.

17 August 2007

NHS foundation trusts have been accused of circumventing the cap Parliament imposed on their private patient work by establishing arm's-length bodies whose income does not show up in their accounts.

The cap was introduced as a key concession to quell Labour rebels' fears that foundation trusts would pursue more profitable private work at the expense of NHS activities. But accountancy rules mean that as long as trusts channel private income through 'quasi-subsidiary' charities or special purpose vehicles, it is not consolidated into the trust's own accounts and therefore does not count as private patient income.

Public Finance has learnt that at least four foundation or aspirant trusts are developing such quasi-subsidiaries, and has been told that as many as 20 others might be exploring similar options.

A spokesman for the foundation regulator Monitor said: 'Monitor is aware that FTs are looking at various structures which satisfy the [income cap] requirements. Monitor does not approve or otherwise any proposals and relies on boards and disclosure within accounts to confirm that they comply with the [regulations].'

Former health secretary Frank Dobson told PF: 'Parliament voted for foundation trusts on the undertaking that there was going to be a cap. So it seems to me that Monitor are in breach of their duty, just as the hospitals will be if they are deliberately breaching the cap by looking for some devious way of breaking the undertaking given to Parliament.'

Karen Jennings, head of health at Unison, told PF: 'There is nothing new about this approach in the business world but we don't expect that to happen in the public sector, where we expect openness and accountability.'

However, Sue Slipman, director of the Foundation Trust Network, said: 'There's nothing problematic about this. The accounts only have to be consolidated under accounting rules if you own or control a substantial percentage of the shares in the companies of whatever venture it is you set up, although it's debatable what “controlling” means.'

She added: 'The problem with the cap is that everyone understands the intention of it, but one of the difficulties is where services are being curtailed within the NHS, such as fertility services. There are plenty of people who would wish to become private patients if they are denied treatment under the NHS.'

Hospitals considering such structures include North Bristol NHS Trust, Chelsea & Westminster Foundation Trust and Great Ormond Street Hospital, which all have plans to establish independent charities through which private income will be channelled. Basildon & Thurrock Foundation Trust is negotiating with third-party investors to establish a special-purpose vehicle to expand its private patient income.

November 2006 documents from the North Bristol trust's board confirm that directors were concerned that a new £3.5m IVF and fertility unit – where eight out of ten patients would be private – would cause it to breach its private patient income cap when it becomes a foundation in the next 18 months.

So trust executives developed a scheme for the centre which would involve it being run by 'a charity independent of North Bristol'.

A November 30 board document states: 'The charity would be set up by a member or members of the NBT board, but in a personal capacity and not under the direction or instigation of the trust.

'The aim of the charity would be to raise funds for NBT… Staff [would] hold their contracts with NBT, but be seconded to work for the charity or charged to the charity.'

The centre is expected to bring in £3.85m a year and generate £500,000 profit.

NBT was asked to comment on its plans, but a spokeswoman said the lead official was unavailable.

Minutes of Chelsea & Westminster Foundation Trust board meetings show that it is close to its £7.1m cap, and plans to expand its private maternity wing from six to ten beds would almost certainly breach it.

The trust initially explored the idea of establishing a joint venture with a 'chamber' of obstetricians.

However, trust chief executive Heather Lawrence told PF that the board eventually decided to transfer private maternity patients to a charitable company as that would 'maximise the returns for the benefit of NHS patients, rather than a joint venture where we'd have to share a proportion of the profit with another partner'.

She added: 'We have taken professional accountancy and legal advice on what models are available.'

Similar moves are expected at Great Ormond Street Hospital, whose draft board minutes dated March 28 show that directors have discussed 'the possibility of founding a community interest company to run the international and private patients' business'.

Section 15 of the 2003 Health Act limits the percentage of income foundations may derive from private patients to the percentage the individual trust gained in 2002/03 as an NHS trust.

The 2002/03 baseline for Great Ormond Street is 9.5%, but since then the hospital has invested heavily in facilities for international private patients, who now account for 12% of its income. Without a way around the 9.5% cap, Great Ormond Street's annual income from private patients would be cut from £24m to £17m.

In May, the hospital directors explored possible solutions, and a board document stated: 'To avoid consolidation of international and private patients' revenues into trust accounts, so breaching the limits set by section 15, the IPP organisation will need to establish a separate organisational identity.'

Those proposals were discussed with Monitor, whose response was described in Great Ormond Street minutes as 'positive', and in July the board developed plans which would involve establishing a trading charity which would donate its surplus to the hospital each year via GiftAid. 'There is no legal limit to the level of funds the trust can receive in this way,' the board documents noted.

A hospital spokesman said it was unable to comment as the board had not finalised its plans.

Nigel Johnson, the head of health care audit at Deloitte – which has advised a number of NHS bodies on their private patient income structures – told PF that trusts must ensure that the management, control and trustees of the charity are clearly separate from the hospital trust.

'There are things that indicate that there is a separation, as opposed to being a sham arrangement to stay within the cap,' he said.

Guidance issued by Monitor states that private patient income from entities that accountancy rules would define as 'subsidiaries' must be consolidated in trust accounts. But the income of arrangements defined as merely 'associate relationships' or 'joint ventures' do not.

However, Trevor Blythe, a partner at lawyers Beachcroft – which also advises trusts – told PF that the Monitor guidance was 'open to legal challenge'.

Whereas section 15 of the 2003 Health Act could be seen as defining 'private charges' as any income received from private patients, Monitor's guidance had narrowed the definition to imply that only charges imposed by the foundation itself (rather than a third-party) counted as 'private income'. 'There's a lawyer's nightmare here,' he said.


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