On 27 July 2009, the Department of Health (DH) launched a consultation on introducing new legislation allowing for the de-authorisation of a NHS Foundation Trust (FT).

This follows its proposals of last year on the same topic which are reflected in the Health Bill currently going through Parliament. If the new proposals are pursued following the consultation, the likelihood is that they too will be implemented in the Health Bill.

This would result in there being on the statute book three possible approaches for dealing with an under-performing or failing FT.

The existing provisions

All 112 current FTs were previously NHS Trusts.

As NHS Trusts, they were subject to the control of the Secretary of State for Health (the SofS). If they were seen to be failing - whether in financial, administrative or clinical terms - the SofS had available to him a range of interventions. Ultimately, where he decided that it was in the best interests of the health service, this included the right to dissolve the Trust.

Importantly, however, the SofS was also under a duty (now at section 70 of the NHS Act 2006) to stand behind the liabilities of the Trust. On dissolution, he was required to make sure that he met these liabilities himself or transferred them to another NHS body. Among other things, this provided comfort to those dealing with NHS Trusts that they would not be left financially exposed by any failure of a Trust.

One of the distinguishing features of an FT, of course, is its independence of direct control by the Secretary of State. Nonetheless, the enabling legislation (now sections 52 to 55 of the NHS Act 2006) still made provision for failure.

The larger part of this failure regime is controlled by the Independent Regulator of FTs (Monitor). Where a FT is significantly failing to comply with its obligations under statute or its authorisation, or where it has done so previously and is likely to do so again, Monitor is able to exercise one or more of its 'intervention' powers. These are:

  1. to require the FT to do or not do certain things specified in a notice,
  2. to remove any or all of the directors or members of the board of governors and appoint interim directors and members, and/or
  3. to require the directors to obtain a moratorium or to make a proposal for a voluntary arrangement (in both cases where the SofS has made an order that applies the Insolvency Act 1986 to FTs).

However, no order in relation to the Insolvency Act 1986 has been made, and therefore in practice the third intervention power is not available to Monitor.

Following an initial Monitor intervention, the SofS may then step in where:

  • a FT fails to comply with Monitor's intervention notice; and
  • Monitor considers that a further exercise of its intervention powers would be unlikely to secure the provision of the goods and services that the FT is required to provide under its authorisation.

In practice, the second of these criteria means that the SofS may act only where an FT's failure is so severe as to compromise its basic provision of mandatory services.

In these circumstances, the SofS may (but is not required to) dissolve the FT.

On dissolution the SofS may deal with the liabilities of the FT by transferring them to himself or another NHS body. But, unlike in the case of NHS Trusts, he is not required to do so.

The Health Bill Provisions The Health Bill - introduced in Parliament on 16 January 2009 - takes a different approach to the treatment of failing FTs.

It includes provisions which provide for the de-authorisation of a FT - in effect, for it to cease to be a FT and be returned to NHS Trust status.

As currently drafted (but subject of course to further changes during the Parliamentary process) the key provisions apply where Monitor has already exercised one of its powers of intervention, and they provide for:

  • Monitor to give notice to the SofS where it is satisfied that the FT is failing to comply with the intervention notice and that a further exercise of Monitor's powers would not be likely to secure the provision of goods and services the FT is required to provide under its authorisation,
  • Monitor to give its reasons for this conclusion,
  • the SofS, where he receives such a notice, to be under a duty to make an order for the FT to cease to be a FT and also to appoint a 'special administrator' in relation to the Trust,
  • under that order, the FT to cease to be a FT and a public benefit corporation and to become a NHS Trust.

We do not discuss here the various responsibilities of the special administrator but note that his/her key role is to exercise the functions of the chairman and directors of the Trust while preparing recommendations to the SofS on the future of the Trust within a strict timetable.

A consultation - new proposals The current consultation proposes a third approach. The underlying reason for this third approach is to deal with 'gaps' which are said to have been identified by the situation of the Mid-Staffordshire NHS Foundation Trust.

Under this third approach Monitor would be able, with the agreement of the SofS, to de-authorise a FT and return it to NHS Trust status.

The consultation does not specify the circumstances that will permit this de-authorisation. Therefore it is not immediately apparent whether the power could be exercised without Monitor previously having intervened in the running of a Trust. However, the strong implication is that this power will be available in cases where the other powers could not be used - i.e. in a case which falls short of the fundamental unsustainability of the FT.

A number of suggestions are made as to the circumstances in which the power could be exercised, including for example where:

  • the FT no longer meets the criteria on which its authorisation was granted or is failing to comply with the terms of its authorisation,
  • the FT has failed its patients and a 'significant loss of public confidence' has occurred,
  • the Care Quality Commission (with whom FTs will need to be registered from April 2010) intervenes due to breach of the registration requirements,
  • there is very significant local dissatisfaction, either among the general public or members of the FT, with the quality of services provided.

As with the existing Health Bill provisions, such de-authorisation would have the effect of the FT reverting back to an NHS Trust.

The consultation also discusses the option for the SofS to be responsible for triggering the de-authorisation, but discounts it on the basis that this would fundamentally challenge the principle of an independent regulator and thereby the independence of FTs.

However, it does propose a new statutory power enabling the SofS to give formal notice to Monitor requesting that it intervene in a particular case. The ultimate decision as to whether to intervene in the manner requested by the SofS would rest with Monitor, but where it decided not to do so it would be required to publish its reasons and its proposals for an alternative approach.

Again there is no clear explanation of the circumstances that would need to exist in order for the SofS to give such a notice but the examples suggested include cases where -

  • a significant failure has occurred at the FT and public confidence in its delivery of services has been seriously damaged,
  • there is demonstrable poor quality, demonstrable poor governance or a failure in leadership at the FT,
  • the SofS considers Monitor has failed to act appropriately.

The consultation on these additional measures closes on 18 September 2009 - a relatively short consultation period given its significance and that most of it falls during the summer holidays. This is explained by the desire of the DH to use the earliest available legislative vehicle - in this case the Health Bill while it is still before Parliament - to introduce these new provisions.

Commentary If clarity and certainty are measures of the quality of any regulatory system, the proposed approach towards failing FTs leaves a lot to be desired.

The effect of the current proposals is that there will be three potential responses to a FT in difficulty.

The existing provisions The first of these arises when Monitor has already exercised its powers of intervention but without success - in practice, where the FT is unsustainable in its current form. Here, the SofS has the power to dissolve the Trust, may (but does not have to) take on its liabilities, and may (but does not have to) put in place an Insolvency Act regime for it.

It is notable that, while Government willingly accrues new powers, it only reluctantly gives up old ones. With the likely introduction of two new methods of dealing with a failing FT - and surely these are now the favoured approaches - it might be thought that the DH would take the chance to repeal the existing provisions. But apparently not. This means that FTs are not entirely de-risked, i.e. their creditors will know that they could still be dissolved without the allocation of liabilities elsewhere (a risk factor that will ultimately increase the costs to FTs themselves). But nor are they to be treated (at least for the time being) on an equal footing with private sector competitors in the health economy by being subjected to a normal corporate failure regime. Are these provisions still necessary?

The Health Bill Provisions The second potential response to a failing FT arises in the same circumstances as the first - an initial unsuccessful intervention by Monitor, leading to the conclusion that the Trust is unsustainable. In this case Monitor can require the SofS to make an order de-authorising the FT and returning it to NHS Trust status.

NHS Trusts who became FTs probably thought that they were acquiring a one-way ticket. These provisions convert it into an open return. There is in fact of a lot of sense in this approach - as NHS Trusts, the former FTs will become subject again to SofS control and powers of intervention. And if they are ultimately dissolved the SofS will be under a duty to deal with their liabilities. But the burdens of the return journey will be significant - all of the appendages of being a FT (constituencies of members, the body of governors and so on) will also be lost in transition. In addition, this approach reduces NHS Trust status to a kind of sin bin for recalcitrant Trusts. In principle, a Trust may both find its way into and back out of NHS Trust status on more than one occasion.

The new proposal The third potential response to failure by a FT arises in a set of what are currently rather ill-defined circumstances based on such concepts as 'loss of public confidence'. These are almost certainly cases in which intervention powers would otherwise not be available, but where the DH is nonetheless eager to step in. The criteria for intervention are therefore very different from those in the first two cases, but the effect is the same as in the second case - the de-authorisation of the FT and its return to NHS Trust status.

In the previous case, the order is formally made by the SofS, but the real power lies with Monitor, which can in effect direct him to make it. Here, that situation is reversed. The order is made by Monitor, which therefore appears to hold the power. But since it cannot be made unless the SofS agrees (i.e. he has an effective veto) Monitor is unable to act alone. In addition, Monitor can formally be requested by the SofS to de-authorise a FT, and while the consultation paper stresses that it can decline the request, it would be an unusually bold regulator which did so. For all the window dressing to preserve the formal integrity of the 'Independent Regulator', this is a major statutory breach in Monitor's independence, and a reminder that healthcare is provided in a political world in which no regulatory system can be truly free of intervention by politicians.

Conclusion There is a lot to be said for dealing with failing FTs by removing their independence and taking them back into the main body of the NHS, ultimately subject to central control. This recognises that, like many other institutions - obvious recent examples include banks and train operating companies - FTs are too important to be allowed to fail, and in the real world it is almost inevitable that Government will need to stand behind them and take over if necessary.

But do we really need on the statute book three - confusingly overlapping but also very different - methods for dealing with a failing FT? The most recent proposal looks like a hurried Ministerial reaction to the political embarrassment caused by Mid-Staffordshire, and historically the precedents for such legislative reactions are not encouraging.

At the very least, we might hope that the consultation period produces some much greater clarity and limitation around the circumstances in which the new, third power for dealing with a failing FT can be exercised. If a FT is to be de-authorised, and particularly if it is to be done in circumstances where Monitor's hand is publicly forced by Government, it should occur only in highly unusual circumstances. Bad headlines should not be sufficient.

As noted above, the consultation on the new proposals remains open until 18 September.