At the end of January, Dr Bill Moyes steps down as executive chair of Monitor, the independent regulator of foundation trusts (FTs).

In this interview, Moyes reviews the financial challenges of austerity and a marginal tariff, and appraises the successes and challenges of the FT sector within the healthcare economy of 2010.

Financial matters
Health Policy Insight: Late last year, you suggested that a number of foundation trusts (FTs) still had “an unrealistic view as to the extent of the risk and challenges they face”. Specifically, how do you expect FTs to manage in a cold or arctic financial future, where less acute activity may be commissioned, and with emergency activity over contract paid at 30% of tariff?

Bill Moyes: “There are two parts to this. Firstly, we asked FTs in the autumn of 2009 to redo their downside financial projections with tougher assumptions than at the annual planning round – primarily, to get them thinking what the future might be.

“As I said at the HFMA conference in December 2009, I was pretty disappointed that of 120-odd plans, only 15% had given serious thought about the future and reconsidered the income and costs of their trust.

“An awful lot of the revised plans actually viewed the future as likely to be better than the plans submitted in May. The economic slowdown seemed to be of no concern.

“So I worry a bit that they’re not seriously thinking how the economy will be over the next 2-3 years.

“I also worry a bit about both main political parties’ statements that NHS funding will be protected. While I'm sure these promises are genuine, I'm equally sure that economic circumstances could make it hard for those words to have much meaning. Even if there’s some real economic growth, it’ll be an awful lot less than has been ‘NHS normal’ over the last decade.

“I think the government is doing the right thing with the tariff, starting to use it to influence how commissioners and providers behave. I’ve no problem in principle in saying that the proposed 30% of tariff rate for emergency care is a conceptually sensible approach. (Whether the numbers behind the 30% figure are right, I'm not so sure).

“It sends interesting signals to providers about the government's view of demand management and of what activity it will fund. If provider FTs continue doing more emergency activity than is contracted, they will not make money - and indeed at 30%, they’ll lose money.

“I’d like to see parallel activity where government is working out what commissioners have to do. For more services to be provided in the community (as policy intends), PCTs will have to make investment in community facilities, so acute providers are not used. In recent years, we’ve seen hospitals introduce a ‘GP front door’ to A&E, but an unintended effect has been to encourage the public to think of acute care as the first point of call.

“So we need to take development of the tariff and capital investment by PCTs in primary care as complementary streams. It would be good to see them running parallel; but I’m not sure the 2010-11 Operating Framework (OF) makes those connections. However, the OF tariff changes showed the government making a serious start on influencing providers, and FTs should prepare for more of it in future”.

HPI: Have you seen sufficient ambition and innovation from the foundation trust sector, given its freedoms?

BM: No. That said, it’s probably hard for us in Monitor to judge what would have been a reasonable expectation. It's particularly hard for Monitor to judge professional and clinical innovation.

“There seem to be three types of innovation. First is innovation in treatment. I don’t know if FTs are doing all they can here, but they have incentives to innovate by efficiencies making care cheaper than tariff price: they can keep any savings as surplus. So I assume that provides the right incentives for clinicians and scientific staff to think about innovation. Academic Health Science Centres and Health Innovation and Education Clusters all reinforce those incentives, and I’d expect them to innovate in this area.

“Next is innovation in the way services are delivered. We’ve seen some of this (like the GP front door of A&E), but there could be more, as FTs work out how take responsibility for community care pathways for patients who are high-users of primary and secondary care services. FTs should work together with community services to develop more effective care pathways for areas like COPD and diabetes. And I think FTs could have done much more here. Their focus has tended to remain on their own institution.

“Lastly, there’s managerial innovation – how we run ourselves. Positives and negatives here: getting service line reporting (SLR) into acute trusts has been a big positive, so that clinicians start to understand the profitability and quality and safety of their services, and to consider patient experience. This has allowed clinicians to genuinely get into control, and start running their own services. SLR has been very innovative, and may be one of the most important things Monitor has stimulated.

“And FT boards think about their role in quality, we’ve done a lot of work with the boards of big acute teaching FTs on what part they play in improving the quality of clinical teams’ delivery.

“I think we’ve also seen lots of innovation in FTs’ quality reports. These have been good reports, with interesting indicators. They also made promises on quality improvement in 2009-10, and when we see their follow-up reports this May-June, we’ll see what boards and clinicians have been doing to improve quality.

“But in broader innovation, I’m disappointed that FTs have not started to get into workforce issues much. Workforce is 70% of acute trusts’ cost, but FTs still rely on national negotiations, contracts and terms and conditions. I’d like to think FTs could have used their freedoms more in this area - not necessarily to the detriment of the deal for staff. I think it would be good if your employer negotiated your terms and conditions with you directly, rather than some remote body”.

HPI: Earlier this year, Audit Commission head of health Andy McKeon wrote in The Times, “the foundation trust finance regime will be stress tested, possibly to the limit”. Will the changes to tariff create a significant challenge to the financial viability of some FTs?

BM: “I don’t know. Andy’s right in that the marginal cost of added activity has got to be 70% as that’s the cost represented by labour, so 30% payment versus a marginal 70% cost ought to apply considerable restraint.

“But I’d also expect FTs to plan for that, and ask themselves as they come to contracting, ‘what activity do we really expect to do?’ That means having serious discussions with their PCTs; and if PCTs say we’ll only commission 100, then (even if FTs think they’ll actually do 110) I’d expect that FTs to get close to 100 - and to have monitoring in place, to see they don’t get any nasty shocks six months into the financial year.

“I’d also expect strategic health authorities (SHAs) to oversee PCTs in creating community facilities to divert patients from hospital. If we see no change and all carries on as it’s done in the past, Andy will be right.

“But the tariff is the signal for a change in providers’ behavior. It’s a very positive sign from the government, rightly acting as the headquarters of commissioning. The tariff is a powerful lever, giving the signals of behaviours that the government, as commissioner-in-chief, wants to see in the market. The best mechanism for this is the tariff. And we’ll see more and more providers respond positively.

“But for the first six months of the first year, some FTs may think this does not apply to them. And they’ll get a nasty shock”.

HPI: You've previously expressed concern about the accumulation of FT surpluses. What level of turnover would be a smart surplus in forthcoming trading conditions?

BM: “Obviously, we don’t set profit targets, but we do point out that in the US not-for profit sector, which must fund its own capital at commercial rates, the margins for earnings before interest, taxes, depreciation and amortisation (EBITDA) are of 10-15%. We say to FTs that a valid NHS comparator operating margin should be about half of that – say 5-8% kind of level, as there is no need to make a profit to fund full commercial capital costs. But we use these numbers indicatively to make FT managers think; not as any kind of target.

“It’s very important for FTs to continue to make surpluses to invest in service developments. It’s inevitable in the case of changing community services: to change delivery, you’ll have to get different equipment, facilities, and maybe a different staff team. Some commissioners may want to contribute to these costs, but acute providers can only invest in this 're-tooling' if they're making profits. To me, that surplus generation seems an essential part of the system: one that government would be foolish to get rid of.

HPI: How does the private patient income cap ruling change the game for the FT sector?

BM: “I don't know if it changes the game that much – for many, private patient income (PPI) is not a big part of overall income. Lots of FTs have not seen PPI as a big source of future revenue. Mental health foundation trusts have been quite right to press government to allow them to earn some PPI (as in the 2002-3 baseline year, they had none): in the last 4-5 years, there’s been a greater focus on talking therapies, and to tell mental health FTs they can’t earn private income wouldn’t be sensible. Also, patients wanting to go private (which isn’t prohibitively expensive in talking therapies) locally, wouldn’t be able to without bypassing the NHS. It’s good that mental health FTs are allowed to earn 1.5% private income.

“For the broader acute sector, the ruling on PPI will be a problem for some particular trusts who’ve historically done a fair amount of private work. And some patients may find services they’re used to disrupted or withdrawn, which is a pity.

“We at Monitor focus on working with the government as they carry out their current review of the PPI regime to ensure that the future regime is workable, clear, unambiguous, and ideally, has a long life. The present system, based on trusts’ percentage of private income in 2002-3 becomes very out-of-date.

“The new regime is properly a matter for government; not for us – we're very clear on that. We want unambiguous rules that Monitor can operate effectively, and that all FTs can understand. We want the output of the government review to be workable”.

HPI: Andrew Lansley told a recent Economist conference that a Conservative administration will abolish the private income cap for FTs. Is this a good idea?

BM: “Based on our experience to date, we’d have no tremendous worries. because we’ve not seen FTs go hell-for-leather for PPI income. Some acute trusts have traditionally had significant PPI due to their kinds of services (like the Royal Marsden), and I don’t think would materially affect what they do.

“Some FTs have tried to enable people to buy private care when it’s not free under the NHS, but I think market is quite limited. I myself don’t find it a matter for particular concern, but any government going forwards will want to ensure that ultimately, hospitals funded almost entirely by the taxpayer focus on meeting taxpayer need, whether by the PPI cap, or however”.

HPI: You said in our 2006 British Journal of Healthcare Management interview that "trusts have to assume that the Government will continue to drive efficiency at national level through the tariff" - did this message really get through in the growth era? And did government really drive efficiency through the tariff (until the current OF)?

BM: “Government could have operated the tariff to deliver the message more strongly over recent years. They tended to make assumptions on efficiency driving this, but not till this year did they try to signal the service behavior they wanted via tariff.

“So people on FT boards or FT senior managers may have come to assume government wouldn’t do that.

“And quite a lot of people assume that the main purpose of the Department of Health (DH) is to support the NHS hospital sector. I think the DH should be the patients’ friend, ensuring that they get the best care clinically and financially, wherever it may be delivered. So the DH should look after the interests of patients, rather than those of acute trusts. The two are not always the same.

“Government should use the tariff more to drive change, but ensure that the information it’s based on is good; ensure that acute providers have thought the implications through; and stop assuming it’s the DH’s job to keep hospital trusts in existence

HPI: You also suggested in that interview that the NHS needs an economic regulator. Why do you think this never arrived?

BM: “I think the last three secretaries of state for health have been anxious about ‘losing control’, as they saw it. Alan Milburn invented a clear policy framework for FTs: the health secretary focuses on patients and commissioners; and the management of provision is a matter for boards and independent regulators, and not health secretaries. Which I think is the right thing to do.

“However, some of Mr Milburn’s successors regarded that as a bit risky. To some extent, because of their hesitancy about (as they see it) ‘letting go’, we ended up with three economic regulators – us, Monitor, on market entry and failure; the Competition and Co-operation Panel (CCP) on competition; and the DH on pricing. And you don’t get a terribly coherent system out of that

“I continue to think that the right thing is for the DH to focus on commissioning care, patient needs and wants and quality standards. After that, and within a particular public expenditure envelope (which must be government-defined if raised by tax, there should be one regulator for quality, one for economics and one body reswponsible for commissioning, and that tripartite structure is the right way to end up”.

HPI: Is the FT sector capable of managing a transition from financially expansionary times to contractionary ones? And is the NHS as a whole?

BM: “FTs are, I think. That’s not to say there won’t be problems; there almost certainly will - but not insuperable ones. You need good boards for good strategy and to oversee performance effectively, and we’re seeing that in FTs. You also need good managers and systems of control and reporting - and ideally, strong ways for clinicians to be involved in working out how to deliver services more cost-effectively (and I think the FT financial regime with service-line reporting and quality reports has provided that basis. It may need development here and there, but the main bits are in place.

“The unmet need remains for strong commissioning, to give providers a strong sense of priorities and to channel patient demands in the right way. I think we’ve made a start, but government needs to invest more time and energy getting commissioning right. Give those three, there should be no reason FTs can’t cope with considerable financial pressures.

“But they have to be given space, which is why I’m so keen they take control of the whole operation and government should not be involved in workforce planning, employment contracts and pay settlements: ail these, in my view, must be delegated locally in the long run”.

HPI: Is the FT sector - and the NHS as a whole – ready for what Sir David Nicholson calls “the productivity challenge”?

BM:”Service line reporting (SLR) is the most powerful tool for the NHS to use to raise productivity: it helps managers understand clinical aspects; helps clinicians to see managerial ones (economics, quality, safety).

“There are great examples of how much clinicians in FTs can do with information to make service run better; to release money to invest in other developments.

“Part of improving productivity, ironically, is to let go. The NHS will struggle to try raising productivity with tight control from the centre, assuming there’s only a small pool of people with good ideas … if we give information to the highly-trained intelligent NHS workforce, we could do great things.

“This is an industry where people thrive on data and use it very intelligently. Give them the data to describe cost, benchmarks and opportunities to drive change, and freedom to get on and do it, and we’ll be surprised what they can do – and it’s not salami slicing. Sometimes, it’s radical reshaping of services.

“The other thing we must recognize is that productivity improvement is not just a matter for providers. Sometimes it’s a matter for strategic thinking. And commissioners have a role. In some situations, commissioners may say they want certain volumes and / or geographical distributions of services that will just not be cost-effective (such as small maternity units). In those circumstances, there has to be a dialogue on trade-offs between ease of access and cost. All of us could put more effort into this: it's too easy to see productivity as just being the provider's job”.

HPI: Should FTs be free to cut staff wages or working time to preserve jobs, as private sector companies have done in the recession?

BM:”Yes. I think we should give FTs more freedom to operate in whatever ways they think best to meet financial disciplines and the requirements of commissioners. If too much is decided at national level, we undermine and inhibit local management from change and innovation. Nationally-made decisions may not be very appropriate to many local providers - or indeed sometimes, to none.

“I think we should recognise that there's much to be gained and little to be lost by setting FTs free to negotiate locally with staff, to appoint a workforce that meets the needs of local clinicians. That could get FTs operating really effectively and efficiently”.

Organisational matters
HPI: Of the significant minority of NHS provider trusts remaining un-authorised (which your 2009 Annual Report called “a great concern”), what proportion require remedial support to reach the mark (and who should provide this)? What proportion won't reach the mark in any circumstance, and what is their future?

BM: "If we’re saying a provider can’t become an FT, that’s because it can’t demonstrate that it’s financially viable and well-governed. As a society, we should have real concern if more than a very small number of providers are really unviable and not well-governed.

“Fixing governance is quite straightforward: you get the right people on board, who put in the systems and processes to offer the right challenges to clinicians and managers. This stuff can be put right quite simply.

“Financial viability is simple: income must be more than cost. So if a trust's cost base will always exceed its income, intrinsically, then we have to decide on such trusts' long-term futures - perhaps with some kind of special subsidy.

“But if trusts have relatively small activity levels (driving cost bases above income), you'll also probably have poor quality.

“So our position is that the idea that a significant number of trusts can’t become FTs poses significant problems. If such trust's finances are always poor, then quality will be questionable and good governance will not be there.

“I think it’s more a question of propriety, and of insisting that acute trusts accept the challenge of becoming FTs. I think some boards prefer the 'benign' SHA regime, as opposed to Monitor's robust regime of regulation. But those boards shouldn’t be allowed to persist in that comfort zone. If they will not take the challenge of going for FT status, then we should find another board who will.

“Ultimately, it comes down to the strategic health authorities (SHAs): it’s their job to prepare applicants. Monitor's criteria have not significantly changed in the past six years. There’s a serious question whether SHAs have given local providers’ FT applications the policy priority it deserves. I’d like to see SHAs put their backs into this.

“Or maybe a national unit, funded by the DH, to prepare applicants for FT status. Every SHA has several people involved in this process, and so does the DH: many people distributed around the system are involved in developing applicants to the FT sector, but is having them spread over 10 SHAs and the DH the most effective approach? I’m not sure it is”.

HPI: In our 2006 interview, you said that "when the Bank of England supervised the UK banking system, the Governor’s stated policy was to maintain confidence in that banking system, so the Bank of England would go to extraordinary lengths to ensure that solutions were always in place by the time problems (like Barings) reached the public domain - if they did. I’m sure there will have been lots of little problems that never came out that were just sorted, so that savers and overseas investors could have total confidence in the integrity of British banking. We should take the same approach in the NHS: I think it’s quite important that we maintain public confidence in the quality of health care, while not allowing that to dictate sub-optimal management".

In the light of Mid-Staffs (especially the recent revelation of a damning Royal College of Surgeons report), Bristol and Basildon, do you still think that?

B: “Yes, I think it’s important that the public is confident that where problems arise, effective arrangements mean that they will be detected and fixed. I think in the last six years, as independent regulation and inspection have grown, so has the focus on quality and performance. Inevitably, there’s now much more information on mixed performance.

“Yet until quite recently, under all governments (Labour and Tory), the public have been led to believe that NHS providers are all good and none are bad. That suggests there was no light and shade. Unsurprisingly, we’re finding quite a lot of light and shade. Many hospitals have some services that are well-performing and some that are poor-performing. Most places have some terrific services and some non-terrific services.

“Information that proves this is gradually becoming available. So it’s no good for government or politicians to go 'shock-horror' about the smallest blip. It is always a matter of concern where problems arise (especially for patients receiving not-good services), but we have good systems in place to detect and fix them. Commissioning is getting more effective. Monitor and the CQC are working well together. Boards are getting more effective.

“Mid-Staffs was very bad. The quality of care declined well below a level the public’s entitled to expect. Now it’s not a typical example, and we shouldn’t see it as the norm. Take Basildon: there were problems, and so there was intervention by Monitor and CQC and now the board’s action is tackling the problems very effectively.

“My view remains that it would be good if nationally, we can acknowledge that in a large, complex system like the NHS, there will be problems; they will come to light and be fixed; and politicians should not treat each one as requiring them to make a statement in Parliament. Sorting out problems is part of the system, which overall is working pretty effectively. MRSA has been tacked very effectively, as has C Diff.

“Even the Dr Foster data, taken overall, shows that unnecessary deaths reduced by 7% nationally. In Dr Foster’s methodology of ranking, Basildon were at the bottom (as someone must be when you list a ranking). They were presented as bad by the media, but the national context was of significant improvement in the reduction in unnecessary deaths.

“Heathcare is a complex industry, and explaining these issues to the public is not always easy. But that is not to say that we shouldn't try to do so”.

HPI: Proposals by politicians for saving about 30% on NHS management costs strongly imply post-election mergers and acquisitions (M&A). In the private sector, M&A doesn't have a great record, and are often strongly correlated with the destruction of value. Do you accept this assumption, and how could M&A pitfalls be avoided?

BM: I question whether management costs are a problem in the NHS. I’d argue that for a system of this scale, healthcare in the UK is often quite under-managed.

“For example, I often come across FTs with problems and find they have a part-time medical director and little else trying to manage their whole medical workforce. In my view, that’s a mistake. Trusts need effective planning and control systems and ways of managing doctors and nurses, and that can’t be done on the cheap. Are those management costs necessarily a bad thing?

“I suspect that there are ways NHS overhead costs could be reduced. But would it make a big difference to NHS performance? I don't know.

“I also think we should first look at inappropriate and ineffectual treatments; at the productivity of staff in community services. I’d much rather focus on the productivity of NHS staff generally, not just managers.

“I think it's a mistake for politicians to whip up a sense that the NHS is burdened down by a bloated bureaucracy and that this can be eliminated by mergers. In reality, the potential saving from mergers is modest and the cost often substantial - as is the diversion of managers' and senior clinicians' time.

“That’s not saying there is no place for mergers and acquisitions, but they’d be better driven by quality considerations. Such as: are services being delivered on a sub-optimal scale; or located in the wrong place; or being delivered in physically clapped-out assets while there are other good ones nearby? Those should drive M&A. If our drive is to improve clinical quality, offer better access, use appropriate scale, real estate and kit more effectively, then simply trying to have one fewer chief executive and finance director means we might spend a lot to achieve little”.

HPI: The community foundation trust pilots seem to have been quietly euthanised. Why do you think that happened?

In some cases, the organisations themselves were probably too small, or possibly not inherently going to be viable free-standing organisations. I think there's been growing concern in the DH that community FTs could enshrine local monopolies: a concern with which I agree. I’d also be concerned that community FT inhibit acquisition of some services by FT.

“Monitor has always said, 'if you want us to assess and authorise community FTs if they meet the criteria, then we would do' but we've not been heavily lobbying for it.

“If the DH now wants to organise community services differently, then that's up to them, but it's very important that commissioners focus on commissioning. So we need to get PCTs out of managing local services, as with commissioning they’ve got a big part to play in ensuring that the healthcare system of future is one we can afford. That won’t be their main priority if they’re managing local services”.

HPI: Were Sir David Nicholson’s pre-Christmas comments about PCT provider arms retrograde or unclear?

BM: “No, it's not retrograde, but I think there's a desperate need for clarity from the DH on the future of community provision.

“I think that David Nicholson's view (as best I understand it) is that there is a lot of productivity to be gained by getting community services properly organised and managed, and I think he's right not to entrench community services in their current format: that would create no incentive to change the way they work.

“Limiting the number of community FTs and social enterprises is important, but we really need the next stage of policy: a picture of how community services are to be funded, managed, performance-managed and what they will be expected to deliver in productivity, quality and accessibility. Community services cost the NHS £10 billion a year; saving even 10% of that would be huge and could be significant. Getting the right policy on ground here is increasingly important”.

Philosophical matters
HPI: Are you comfortable with the NHS as "preferred provider"?

BM: I was talking to an MP today, who’s involved in an all-party medical group, who was saying that in the group’s view, the government shouldn’t set access targets for x hours but work much more on outcomes, survival, health improvement (like cancer five-year survival rates). I agree, that’s absolutely right, and was always the intention.

“Alan Milburn's waiting time targets were about responding to the public's desire back then for faster access times. If you asked the public today, I think they would say they want the best treatments, care, and chances of a good-quality, longer life afterwards. That’s certainly what government should get commissioners to purchase.

“But to do that, you have to look at all the providers and ask, 'can they really deliver what we want?' I think it’s a great pity that with this policy, the government is discouraging heavily new entrants. In some diseases, if we were focusing on outcomes, providers already in the market - maybe FTs, rather than the private sector - could come in and deliver a much better service than the local provider.

“Paul Corrigan wrote recently that the government is effectively saying by making the extant NHS service the preferred provider, ‘we’ll settle for good enough; not for best quality’. I think ministers should rethink this, and say to commissioners, ‘commission for quality and we'll let the tariff do price and efficiency’. And many patients would welcome that”.

HPI: The Healthcare Commission, and Ian Kennedy in particular, did some interesting 'blamestorming' towards Monitor over Mid-Staffs: "what cowboy's been doing the quality regulation here?". Given that they were the quality regulator, do you feel quite pissed off about that?

BM: I think the Healthcare Commission did us all a favour by investigating Mid-Staffs and exposing the failures of care and management. Credit to them for that

“It was a pity they didn't tell us that they were planning to investigate there, just as we authorised Mid-Staffs as an FT. That dislocation, as the thinking and processes evolved, wouldn’t happen again now. It was also a pity their investigation took so long: I tried to persuade Anna Walker that she had more than enough information for Monitor step in and intervene – but it's hard to intervene if such a report is ongoing and unproduced. I wish we'd been able to act faster.

“I still think it was a demonstration that the system can expose and tackle failings. I give them all credit for that. Mid Staffs was failing badly, and it’s being gradually fixed, but it will take a long time and it’s not simple. It would have been helpful if we'd been able to intervene six months earlier".