On 26 July 2001, the Department of Health (DH) published a consultation paper entitled "Liberating the NHS: Regulating healthcare providers", which deals with its proposals to establish Monitor (currently the Independent Regulator of NHS Foundation Trusts) as an economic regulator for all NHS health care providers in England. Monitor would continue to work in tandem with the Care Quality Commission as the standards regulator.

It is proposed that Monitor will also have a statutory duty to promote competition in the wider health and social care economy where appropriate (see our earlier analysis for further information on the proposals relating to competition).

As a corollary of the above, this analysis will also consider the impact of the proposals to lift some of the statutory restrictions on NHS Foundation Trusts (FTs).

1. The making of Monitor

Monitor's current role  

Monitor was established in January 2004 to authorise and regulate FTs. The regulator acts independently of central government.

In particular, Monitor assesses whether NHS Trusts meet the criteria to be authorised to become an FT, and then regulates the compliance of FTs with the conditions of their authorisations. Where an FT significantly fails to comply with those conditions, Monitor has powers to intervene in the way the FT is run. Monitor also helps FTs to make the most of their greater independence from direction by the Department of Health.

Monitor's proposed role

The Coalition government proposes significantly to expand Monitor's role to allocate to it a series of new powers, subject to certain constraints.

New powers

  • Monitor will have a duty to develop a set of general licence conditions for providers of NHS services, including a condition that each of them is registered by the Care Quality Commission. This will subsume the regulator's current role of authorising FTs, and replace many of the standard conditions of their authorisations. Monitor will also be able to issue special licence conditions for individual providers to promote patient choice or protect continuity of particular services important to the local community.
  • Monitor will be responsible for devising a pricing methodology - setting efficient caps on prices paid for NHS-funded services - in order to promote fair competition and drive productivity. Monitor and the NHS Commissioning Board will together decide which services should be subject to regulated national tariffs. In certain cases, Monitor may have the power to modify the national tariffs as they apply to individual providers.
  • Monitor will gain a power to fine licensed providers, with a complementary power to suspend and revoke licences for failures to comply with licence conditions.
  • Monitor will be able to assess which healthcare services are essential to local communities and increase protections by using special licence conditions to restrict particular FTs from withdrawing or altering those 'additionally regulated' services without prior consent. This will supplement Monitor's current power to specify those 'mandatory services' which FTs cannot withdraw without permission.
  • Monitor currently has a never-exercised power to raise funds from the organisations it regulates by charging licence fees to cover its regulatory activities. The consultation paper proposes that this power should be used in future.

Curbs on powers

  • While Monitor's powers to apply competition law will extend to both publicly and privately funded health and social care, its powers to regulate prices and to license providers will only cover publicly funded NHS services. Greater competition already exists in respect of privately funded health services and social care, so regulation is said to be unnecessary.
  • As in other regulated sectors, an NHS provider will have the right to require Monitor to refer proposed changes to special licence conditions to the Competition Commission. A reference could also be required in relation to general licence conditions where a 'significant proportion' of relevant providers collectively oppose the proposed changes.
  • Monitor's freedom to act will also continue to be subject to a duty to consult with NHS providers and the NHS Commissioning Board before implementing new regulations or pricing structures. Providers and the NHS Commissioning Board will also be able to oppose Monitor's pricing methodologies.
  • Monitor will continue to have the status of a non-departmental public body. The Secretary of State will have no power to direct Monitor's operations. However, as is the case currently, Monitor will have to account to the government for its use of resources and publish annual accounts. The Secretary of State will also continue to appoint the Chair, approve the appointment of the CEO and have the power to remove both if mismanagement has occurred. This is consistent with the position for many other sectoral regulators.

Our comment

Price regulation

Given the need for NHS efficiency savings, it makes perfect sense to establish Monitor as a properly constituted economic regulator with price regulation powers, drawing on the valuable knowledge and experience of economic regulation elsewhere.

Both before and since the privatisation of the utility industries during the 1980s, a large body of academic and practical expertise has developed in relation to price regulation. It has been highly effective in driving efficiencies in the privatised companies. While the very different context of healthcare regulation must be recognised, it is high time that the disciplines that have been developed elsewhere were brought to bear on the NHS.

This is the case in particular given the experience of the last decade, in which increasing amounts of public money made available to the NHS have been accompanied by reducing levels of efficiency. This was attracting adverse comment even before the current fiscal crisis, and is even more problematic now. With the Coalition having promised to protect the NHS budget in real terms, all efficiency savings should in principle be recycled for patient care. Efficiency must therefore be a - perhaps the - key strategic driver for the NHS going forward.

Tariff setting already takes place in the NHS, but does not benefit from the disciplines or techniques of independent economic regulation. A fully empowered Monitor should be able to make significant improvements to the current arrangements.

However, we question the government's assumption that national tariffs should continue to form the basic unit of price regulation, subject only to some limited ability to adjust them in exceptional cases. National tariffs may over-reward some providers and unfairly squeeze others, and do not take proper account of regional differences in cost. A more subtle approach is likely to be required, at least in the period in which remains scope for major efficiency gains. It is important that the legislation brought forward by the government allows adequate room for flexibility as to the basic mechanics of price setting and does not tie Monitor into a system that may be sub-optimal.

Fines  

Given that Monitor's proposed powers to license providers will only relate to the NHS, it is questionable whether the ability to fine licence holders will be very useful in practice. Compared with a commercial regulatory environment, in which the effect of a fine can be assumed in most cases to fall on shareholders, money taken from an NHS provider has the capacity to penalise patients by reducing the funds available to that provider while (since the money funding the payment is ultimately public money) generating no new revenue for the NHS.

However, there needs to be mechanisms for ensuring that providers do not benefit from failures to comply with their legal obligations. It is important in a properly functioning market that no provider is put in a worse competitive position by having committed the resources necessary to ensure compliance with the law. This means that those who seek to such avoid compliance costs must be penalised in order to ensure a level playing field in the market.

Fees

The power for Monitor to cover its own costs by levying a licence fee reflects the funding arrangement of many other regulators. However, given that Monitor will only be able to license NHS providers, a replacement of public funding made directly to Monitor by the use of a power to levy licence fees appears to be little more than an accounting measure.

2. Flexible FTs

How FTs currently operate

As public benefit corporations which are part of the NHS, FTs have greater freedoms than NHS [Acute] Trusts, since they are not subject to the same power of direction held by the Secretary of State. Under their constitutions, local communities have a greater opportunity to decide how FTs are run. Local residents, employees and service users can become a member of the FT, contributing to the election of the Board of Governors which in turn appoints the Chair and Non-Executive Directors of the FT and approves the CEO.

Changes to operation of FTs

The regulation of FTs is intended to be closer to that of other regulated providers in the private and voluntary sectors. It is argued that a freeing of constraints will allow FTs to innovate in the way they care for patients.

The key proposals

  • Removal of statutory borrowing limits

Statutory controls giving Monitor the power to limit the amount FTs can borrow from private sector lenders on commercial terms may be removed. Monitor's power to set tariffs and to penalise breaches of licence condition and any failure of financial discipline have been said to render these controls superfluous.

  • Private income

There will be a repeal of the controversial private charges cap, which limited FTs' private income to an arbitrary percentage of their income before conversion to FT status. (See our earlier analysis of this issue.)

  • Freedom to change constitution and governance arrangements

The requirement to seek Monitor's prior approval for changes to the constitution of an FT may be lifted. However, this greater freedom may be reserved for 'mature' FTs of some three years standing or more. They would in any event still need to notify Monitor of changes to their constitutions and gain the prior approval of their board of governors and directors.

The consultation recognises that the three tier governance arrangement described above may be less appropriate for some FTs, citing the case of a small community services FT. It envisages that mature FTs of certain types could be given flexibility to adapt their governance model - perhaps to be purely run by staff where there are few capital assets paid for by the taxpayer.

  • Demergers

There are current freedoms (subject to relevant approvals) for an FT to merge with another FT or an NHS Trust in order to absorb other services where it would benefit the NHS. The consultation proposes that the reverse should also be made possible.

Our comment

Each of the above changes can only be welcomed by FTs.

New freedoms, new regulation

Private sector funders have been rightly concerned about the validity and enforceability of loans which exceed an FT's Prudential Borrowing Limit. Removing the limit could stimulate greater private sector investment in the NHS and hopefully greater innovation by FTs in receipt of such resources.

Teamed with the lifting of the arbitrary and increasingly absurd private charges cap, FTs are also likely to gain greater opportunities to generate additional revenue. This change, which was perhaps the most predictable of all the government's proposals, will especially benefit those whose private charges cap was set at a level which precluded them from carrying out any private patient work at all.

Or is this too much freedom in one fell swoop? The limits were in place, after all, to achieve certain objectives; in particular to ensure that FTs did not risk taking on too many liabilities, and were not too distracted from their core NHS functions.

It is a paradox that with new freedoms comes an increased need for regulation, so that the freedom is not abused. The greater the flexibility given to FTs, the greater the need for Monitor to engage in active regulation to ensure that there is no substantial increase in the risk of failing FTs.

Finance and failure

In relation to financing, the consultation paper indicates that economic regulation and the risk of failure will instil the necessary financial discipline. But will a cap on prices prevent FTs from seeking private loans? It is hard to see how they are logically connected. And will the potential for a special administration regime deter FTs from entering into loans they cannot repay? Again, probably not, as essential services will, according to the paper, be protected in any event and a failed FTs' liabilities will be the burden of either the lender or the Department of Health.

Under the last government it was generally acknowledged that the Department would not allow a hospital to become insolvent. The current government, however, has indicated that FTs will be allowed to fail, albeit with core services protected in the interests of patients. And indeed, in a fully functioning market it must be possible for poor performers to pay the ultimate price and be removed from the game.

Therefore, in the end, the practical success of these proposals will depend on the response of the private sector investment market, the quality of Monitor regulation, and the willingness of government to tolerate the occasional failed Trust. It is of course very easy for the government to say now that failures must be allowed to happen, but much more difficult to maintain the same position when the bad headlines hit the media.

3 No more NHS Trusts? Dealing with failing FTs

The consultation paper indicates that the government will repeal the NHS Trust legislative model by 2013 and encourages NHS Trusts to achieve FT status in the next three years.

The consultation touches on special administration arrangements, which are to be managed by Monitor and aim to ensure the continued availability of mandatory and additionally regulated (taken together, 'essential') services where an FT becomes insolvent. The consultation paper proposes an adapted version of the regime governing unsustainable providers in the Health Act 2009 to deal with exceptional cases where a hospital becomes insolvent. It suggests that some of the bureaucracy and capacity for political interference inherent in this system will be scaled down.

Monitor will be responsible for arranging finance for the continued provision of services, whether through their rescue or transfer. This special administration regime would seek to avert the instigation of 'other insolvency proceedings'.

The finance behind this is proposed to come from a 'funding risk pool' contributed to by levies on providers. The amount of the levy is suggested to relate to each provider's size and Monitor's assessment of its level of risk.

Our comment

The possibility of the failure of secondary care providers presents a number of problems that government policy published to date does not appear to address sufficiently.

First, there is little information on what will happen to those NHS Trusts that simply cannot meet the requisite standards to convert to FT status and that no FT wishes to acquire. It seems that they will still come under the supervision of Monitor with effect from 2013, but on what basis?

Secondly, there are some apparent contradictions in the reliance on the Health Act 2009, which provides for failing FTs to be de-authorised and returned to NHS Trust status. If the NHS Trust model does not continue, what will be the effect of de-authorisation?

It follows that the consultation reintroduces ambiguity concerning what will happen if an FT fails financially, while being too superficial in its treatment of the issue to provide any guidance as to how the government plans to deal with the problem.

At the heart of the issue there is a tension between the government's aim to develop a competitive market where healthcare providers are capable of failing, and its ultimate need to protect services to patients. The paper states that the government hopes to reduce the risk of assuming FTs' liabilities by giving FTs the freedom to "succeed or fail according to the quality of care they give patients and the value they offer to the taxpayer". Such competition is intended to drive efficiency and improve quality. However, it is clear that it is not possible to allow a local community to be deprived of healthcare services merely because its hospital has been badly managed.

The National Health Service Act 2006 does not adequately address this issue. It permits the discretionary application (and adaptation) by the Secretary of State of company law insolvency procedures; but that power has never been exercised. Even without a clear legal answer it was always understood that the government would not let a hospital fail; the application of a company style winding up procedure would simply not work; NHS assets had to stay within the NHS, and patient services had to continue.

The more recent Health Act 2009 did provide one clear legal framework for FT failure, in which the Department would intervene and the NHS would stand behind the liabilities of failed FTs. This did not resolve the ongoing tension, since it would have a detrimental impact on the wider health economy - FTs essentially had the potential for protection not available to their private sector competitors - but it at least established a clear approach. Unfortunately, however, the government did not commit to using it in all cases, leaving it as just one possible option.

There is no perfect answer to these problems, since any solution must ultimately sit in the tension between conflicting forces that cannot be resolved. But if nothing else there is a premium on clarity so that everyone knows where the risks fall and can therefore get a sense of how they might be valued. It has to be hoped that, whatever arrangements the government ultimately chooses to introduce, it will understand the need for a measure of certainty.

Conclusion

The consultation does not provide the level of detail that is needed to understand fully the government's intended approach. Clearly there is a great deal of intensive planning and discussion yet to take place before the introduction into Parliament of the Health Bill. However, the consultation remains open and is one way in which interested parties might still hope to shape the government's thinking before it is in final form.

The consultation closes for responses on Monday 11 October 2010.