by Alan Maynard, professor of health economics, University of York

Ninety-nine NHS organisations now have Foundation Trust (FT) status. Most of them are acute trusts, but an increasing number are in mental health and related services. The objective of the FT initiative was to achieve greater efficiency by giving greater autonomy to hospitals within a rigorous framework of financial regulation in particular.

Has this objective been achieved?

Payment by results (PbR), better known as payment for activity, has been developed alongside Foundation Trusts. If hospitals had cost below PbR tariffs, they make surpluses. FTs are allowed to retain these surpluses for service development.

Currently, FTs have surpluses of £1.7 billion. This is relatively small in relation to their turnover, but it is de facto NHS funding that is 'parked' and not being used to provide care for patients. Some of these funds are being used for one-off capital projects, with no or minimal revenue consequences.

The more ambitious notion was that FTs would use their surpluses to fund substantive capital developments. These were to be funded by borrowing on the private capital market.

However, Government has manipulated PbR to generate cost savings, and these fluctuations in tariffs mean that the income streams of FT are uncertain and offer poor collateral to private lenders wanting certainty about an FT’s capacity to repay its borrowings.

The situation now is that FTs have in their licenses to operate issued by Monitor, the FT regulator, billions of unused borrowing capacity. The nice issue is, how in the medium term will FTs maintain and improve their capital stock?

One way to do this is to enter into public-private partnerships. During the legislative process, opponents of FTs obliged the government to adopt rules which capped private sector income. Some FTs have set up joint and independent companies to trade with private sector partners.

Recent political pressure from trade unions fearful of the “privatisation” of the NHS is leading to more vigorous restriction of such arrangements.

In the absence of “imaginative” public-private links, capital constraints remain a problem for FTs. However, this debate masks another fundamental issue: how, once FTs have comfortable surpluses, can they be incentivised to be more efficient in their delivery of patient care?

These first 99 FTs are of course the cream of the English hospitals - having survived rigorous scrutiny by Monitor. There is the risk that with their comparative strength they will “tread water”, rather than further improve their performance.

A related issue is how PCTs can extract better value out of FTs. With tariffs fixed by PbR and PCTs obliged to pay for activity, commissioners have limited leverage to produce efficiency gains.

Consequently, PCTs will be looking to outcome measures with which to bargain with FTs - and if quality is poor, paying them less than tariff where quality is inadequate. Thus proposals to fine trusts for infection failures can be seen as the thin end of a wedge where patient reported outcome measures (PROMs) and team mortality data may be used by commissioners to leverage change in providers.

Another area of ambiguous success is the system of local members of the public who join FTs and elect governors to work with the Board of the hospitals. Governors elect the Chair of the FT, and appoint non-executive board members. They can also, with a 75% majority, sack the Chief Executive.

Inducting, training and communication with governors can be resource-intensive, and is very variable. In addition to holding the Board to account, the Governors may articulate local priorities.However if these priorities are not also national targets, the FTs capacity to meet them is constrained by resourcing.

An editorial in the Health Service Journal recently questioned this system of local public governance, and asked whether it was more than a fig leaf.

Monitor has groomed the best NHS provider organisations in England to be able to operate in a rigorous system of financial and governance regulation. However, it is unclear whether this has produced efficiency gains - and it is equally unclear how future gains will be maximised.

Capital financing of FTs remains uncertain at best, and a worrying black hole at worst. FT status and PbR have left PCTs with limited leverage as commissioners to improve efficiency. The fascinating aspect of this policy is how little substantive debate there is about these fundamental issues associated resulting from the Blair-Brown NHS reforms.