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BMJ. 2007 July 28; 335(7612): 170.
PMCID: PMC1934482

What to do with insolvent hospitals

Will politicians allow providers to fail?
Chris Ham, professor of health policy and management

The progress made by the NHS in England in converting a net deficit of £547m (€812m; $1121m) in 2005-6 into a net surplus of £510m in 2006-7 has given the government a breathing space. Yet behind the headline figures lies a picture that is more complex and promises to become more troubling as the programme of health reform gathers pace.

The net surplus in 2006-7 resulted from a gross deficit of £911m and a gross surplus of £1421m.1 Moreover, the gross deficit was concentrated in a small number of organisations, some of which face financial difficulties that cannot be easily resolved. To address these difficulties the Department of Health is working with strategic health authorities to identify long term solutions, focusing on 17 NHS trusts with the greatest challenges.

The experience of converting deficits into surpluses has shown that there are three main approaches to dealing with NHS providers in difficulty.2 The first is to develop recovery plans tailored to the circumstances of providers, often linked to the provision of loans.

In many cases, these recovery plans focus on reducing pay costs by cutting the use of agency staff, eliminating unnecessary management posts, and improving the control of staff vacancies. Recovery plans have also found savings in non-pay costs, such as improving office supply purchasing, reducing furniture costs, rationalising estate costs, and improving the effectiveness of information technology.

The second approach is to merge providers with neighbouring providers that have a record of sound financial performance. The first example of this was the merger of the Heart of England NHS Foundation Trust with Good Hope Hospital NHS Trust in April 2007.

In this case merger was preceded by a partnership between the two organisations in which the Heart of England trust lent its management expertise to Good Hope Hospital to convert a loss of £6m to a surplus of £1.7m. The path to a full merger was cleared by dealing with Good Hope Hospital's historic debt through the issue of £18m of public dividend capital, with the interest on the capital being paid by the strategic health authority. Freed of the need to pay back the debt, the Heart of England trust could then take over Good Hope Hospital.

The third approach is to recognise that providers may have to “exit” the emerging healthcare market. This is an option being considered for NHS trusts with the biggest deficits and also for NHS foundation trusts that find themselves in serious financial difficulty. Financial failure on this scale is likely to be unusual, but the architects of the reforms argue that the threat needs to be real enough to create incentives for providers to continuously improve their performance.3

If a hospital or other provider is to close arrangements will have to be made for the continued provision of essential NHS services to the populations served by that provider. The government's consultation document on regulation made it clear that this was the responsibility of commissioners, but this is a new role for commissioners and it is not clear that they have the ability to deal with the consequences of large scale financial failure. The consultation document also announced that proposals were being prepared to establish an insolvency regime for foundation trusts, and the time it is taking to develop such a regime is a sign of the complexity of deciding how insolvency should be handled.4 Foundation trusts, unlike others, are free to borrow money from commercial lenders, but the lack of an insolvency regime means that commercial lenders are uncertain about the protections available to creditors in the case of a trust failing financially.

To invoke the language of insolvency, exit, and merger is to signify the transformation that is taking place in the NHS in England as the current round of health reforms are implemented. The conundrum for the government is how to reconcile the development of a more transparent and businesslike way of dealing with financial difficulties and ultimately failure with the public's expectation that services will continue to be available in each locality.

Also, when the consequences of competition collide with the reality of politics, will ministers follow the logic of the reforms and allow unsuccessful providers to fail, or will they intervene in the market to preserve access to services?5 The last time this question arose, under the Conservative government's internal market reforms in the 1990s, politicians lost the courage of their convictions and acted to blunt the impact of competition. Government intervention was most evident in London, where additional funds were given to help hospitals in financial difficulty and commissioners were told not to move their contracts in order to prevent instability among providers. Subsequently the Tomlinson inquiry was set up to prepare a plan for the future of health services in London as politicians acknowledged that the internal market might result in unacceptable consequences for hospitals.6

An early challenge for Gordon Brown as the new prime minister will be whether to do the same or to keep faith with the policies of his predecessor and accept the pain that will undoubtedly accompany the reconfiguration of services in areas where NHS providers fail financially. The way in which he responds to this challenge will provide important clues to the direction of the NHS under his stewardship.

Notes

Competing interest: CJH is a member of the board of governors of the Heart of England NHS Foundation Trust.

Peer review and provenance: Not commissioned; not externally peer reviewed.

References

1. Department of Health. NHS Financial Performance Quarter Four 2006-07 London: Department of Health, 2007
2. Ham C. Exit, merger and recovery London: Nuffield Trust, 2007.
3. Timmins N. Hewitt warns that failing hospitals will be closed. Financial Times 2005;14 May:p5.
4. Department of Health. The future regulation of health and adult social care in England. London: Department of Health, 2006
5. Ham C. When politics and markets collide: reforming the English national health service Birmingham: Health Services Management Centre, 2007.
6. Ham C. Health policy in Britain Basingstoke: Macmillan, 1999:43.

Articles from The BMJ are provided here courtesy of BMJ Publishing Group