Risk assessment framework update: summary of responses to Monitor’s consultation August 2015
Updated 5 August 2015
Applies to England
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1. Introduction
The NHS faces a continuing and significant challenge to simultaneously improve quality, meet access targets and drive up productivity. Meeting this challenge means there can be no let-up in the pace and scale of the change in provider organisations.
Last year was the first year that the foundation trust sector as a whole ended with an overall net deficit. Although this year’s plans are more realistic than last year’s they would result in a worse performance for the sector. Put simply this is unaffordable.
Given this challenging context we are proposing a number of measures to strengthen our regulatory regime so that we can help foundation trusts live within their means and support improvements in financial efficiency across the sector. These measures include changes to the risk assessment framework to enable us to take action earlier if a foundation trust is in deficit, failing to deliver its financial plan or not providing value for money. While these measures strengthen our regulatory regime with respect to financial efficiency and delivering value for money, continuing to deliver quality of care remains paramount.
In June 2015 we published a consultation on our proposed changes. It ran from 3 June 2015 to 1 July 2015 and involved a number of engagement activities including a session at the NHS Confederation and a webinar listened to by over 140 people. We received over 80 responses to the consultation, the majority from foundation trusts. Thank you to everyone who took the time to respond to our consultation.
2. Consultation proposals, responses and the approach we adopted
We have used the risk assessment framework to monitor NHS foundation trusts since 1 October 2013. It sets out how we monitor risks to financial sustainability and governance to ensure providers are meeting their requirements under the Continuity of Services (CoS) licence conditions and the foundation trust governance licence condition 4.
To strengthen our monitoring arrangements over the financial provisions in licence conditions FT4, the consultation proposed adding new metrics to encourage sound financial governance (decision-making, management and control) and value for money. Specifically:
- monitoring foundation trust in year financial performance and the accuracy of planning
- combining a trust’s rating on these 2 measures with the existing CoS risk rating to produce a new single financial sustainability risk rating
- including a value for money governance measure within the existing governance rating
We also consulted on changes to the accounting officer memorandum and the consultation set out that we were reviewing the appropriate monitoring requirements for foundation trusts with respect to financial information.
Below is a high level summary of the responses we received.
2.1 Introducing an income and expenditure margin measure
We proposed to introduce an income and expenditure (I&E) margin measure into the risk assessment framework with the I&E margin (%) calculated as: ‘surplus/(deficit)/total operating and non-operating income’. We proposed surplus/(deficit) should be calculated before impairments, transfers by absorption, gains/losses on asset disposal and restructuring costs to provide a reasonable approximation of underlying performance without being unduly influenced by one-off items or accounting adjustments. We also proposed the following thresholds for rating I&E margins:
| Rating | I&E margin threshold |
|---|---|
| 1 | Greater than and including (1%) |
| 2 | Between (1%) and up to 0% |
| 3 | Greater than or equal to 0% up to 1% |
| 4 | 1% or greater |
We consulted on whether an I&E margin should be introduced into the risk assessment framework, the proposed definition and the proposed thresholds.
A majority of respondents supported the inclusion of I&E margins. A number of respondents asked for clarifications on the exact definition of the measure, including which exclusions should and shouldn’t apply. A number of respondents noted a discrepancy between how I&E margin was defined in two sections of the consultation. This was due to Figure 1 containing an error that should have read ‘surplus/(deficit)/total operating and non- operating income’. On balance, we have decided to keep the definition as consulted on, and will not include any additional exclusions, as we consider the proposed definition with the current set of exclusions provides the most appropriate view of I&E performance. The definitions and calculations needed will be included in the reporting template.
Around half the respondents disagreed with the threshold levels; they suggested the levels were too narrow and would result in a large proportion of the sector meeting the thresholds for potential investigation and additional regulatory scrutiny in the risk assessment framework. However, the performance of the sector has been declining and it is important foundation trusts ensure that they are not operating with a sustained and continuous deficit and that we are able to help foundation trusts live within their means by identifying potential problems sooner.
Our analysis does not suggest a disproportionate number of trusts will meet the thresholds for potential investigation in the updated risk assessment framework. Although we acknowledge there may be more than under the current framework. However, given the significant challenges faced by the sector, these changes allow us to take action earlier where a trust has a deficit but does not have credible and robust plan to return to surplus. These additional triggers are to enable us to consider whether potential investigation is necessary, and does not lead automatically to licence breach.
Any investigation into a potential licence breach will depend on the individual trust’s circumstances, including an assessment of whether it has a robust plan and the ability to resolve the issues identified. Therefore we consider the thresholds proposed allow Monitor to identify trusts with deficits as a higher risk earlier and to provide the necessary support and, where required, regulatory intervention as appropriate on a case-by-case basis.
A small number of comments were raised over the timing of the changes, however given the exceptional challenges facing the sector this year we felt these measures were required quickly to help trusts’ financial situation improve as soon as possible.
2.2 Introducing variance from plan measures
We proposed to monitor NHS foundation trusts’ variance from plan in:
- I&E margin
- capital expenditure
The proposed rating thresholds were:
| Rating | Threshold – I&E margin | Threshold – capital expenditure |
|---|---|---|
| 1 | Greater than and including (2%) | +25% or higher |
| 2 | Between (2%) up to and including (1%) | +20% and up to +25% |
| 3 | Greater than (1%) up to 0% | Greater than +10% up to +20% |
| 4 | 0% or higher | +10% or lower |
Responses were mixed, with concerns raised about the inclusion of capital expenditure variance due to its volatility. On balance, we have therefore reconsidered the inclusion of capital expenditure variance and have decided not to include it as a specific measure.
The inclusion of a I&E margin - variance from plan measure had more support. We will therefore include it in the RAF. A number of respondents asked for clarification about whether the thresholds represented both under and over performance (ie if a trusts variance from plan was 20% worse than expected or 20% better than expected this would be treated the same). For I&E margin variance, only underperformance will be considered (ie the thresholds are based on the degree to which the trusts I&E margin is worse than planned).
2.3 Combining new and existing measures into a single financial sustainability risk rating
We proposed combining the existing CoS risk rating with the additional metrics highlighted above to produce a single financial sustainability risk rating. An override mechanism would apply if performance against one of the measures were rated ‘1’.
Over half of the respondents supported a single risk rating in principle. Comments were raised about the weightings and thresholds. As we are not including capital expenditure variance we have decided to implement the variance from plan aspect of the rating as 25% but will calculate it using the I&E variance alone. We consider it important to retain a variance from plan element within the single financial sustainability risk rating because accurate planning and managing of variance are essential for ensuring financial sustainability. As highlighted above, a combined rating of 1 or 2 is a trigger for considering investigation. Any investigation into a potential licence breach will depend on the individual trust’s circumstances, including an assessment of whether it has a robust plan and the ability to resolve the issues identified.
A small number of trusts suggested we should retain a 2* rating. We consider it would be sensible to retain discretion to apply a 2* rating where structural financial factors lead to overall rating of 2 but where we do not anticipate further deterioration of a trust’s financial position. As before, we anticipate this is likely to apply to a small number of trusts. In addition, clarity was sought on whether the calculation would be rounded up like the CoS risk rating. However, given this is a more complex composite measure, compared to the CoS risk rating which only contained two metrics, we consider it more appropriate to round to the nearest number instead.
2.4 Including a value for money measure within existing governance rating
We proposed that demonstrable inefficient/uneconomical spend (actual or likely) when compared against published benchmarks should be a trigger to consider an investigation. We consulted on whether this value for money measure should be included as an additional measure within a trust’s governance rating.
More than half of the respondents agreed in principle with its inclusion although a number of respondents felt there was insufficient detail to enable them to comment specifically on the proposal.
We think it is important to include a value for money measure within governance ratings to reflect the challenging circumstances faced by the sector and to reiterate the importance of delivering value for money. Performance will be assessed on a qualitative basis and will feed into the overall governance rating.
Appropriate national benchmarks are not yet available. Once appropriate benchmarks are available we intend to notify the sector of our intention to use them and how they will be used. In the meantime we may consider investigating a trust if there is other material evidence to suggest a trust is delivering poor value for money. Where this is the case we will discuss the evidence with the NHS foundation trusts in question to help us understand the individual circumstances.
2.5 Updates to the accounting officer memorandum
We proposed to change the accounting officer memorandum to strengthen the requirement to consider value for money:
Update paragraph 7 to set out that the accounting officer must ensure:
- the foundation trust delivers efficient and economical conduct of its business and safeguards financial propriety and regularity throughout the organisation
- financial considerations are fully taken into account in decisions by the NHS foundation trust.
Update paragraph 8 to reference the accounting officer’s duty to deliver prudent and economical administration in line with the principles set out in ‘Managing public money’.
A small number of respondents made comments about the changes; some were in favour, a few disagreed. We do not consider the responses reflected substantive objections that would prevent these amendments being made.
We will make the changes and publish at the same time as we publish the updated risk assessment framework.
3. Other changes
There are some additional changes to the risk assessment framework that we intend to make at the same time as the changes we consulted on.
3.1 Removal of referral to treatment admitted and non-admitted targets
As outlined in a recent letter to the sector, we have committed to taking no further regulatory action on the grounds of failure of admitted and non-admitted referral to treatment targets from 24 June 2015. We have therefore removed both measures from the risk assessment framework in the August 2015 update. The ‘referral to treatment wait time – patients on an incomplete pathway’ standard remains. Where a trust is under investigation or in breach of their licence for failure to meet these targets, we are reviewing them on a case by case to determine our approach for the future. Relationship teams will contact the trusts affected by this in the coming weeks.
3.2 Frequency of monitoring
We explained in the consultation that we would review the reporting requirements for trusts. In the Foundation Trust Bulletin published on 29 July 2015 we notified trusts that from month 4 (July 2015/16), we will be collecting monthly financial data from all NHS foundation trusts. This will not supersede the quarterly reporting process; this will remain a comprehensive review of both financial and governance positions and ratings will continue to be published on a quarterly basis. The monthly data collection will require selected information in the same template return as the quarterly collection. We have updated the risk assessment framework to reflect this.
4. Next steps
We published the updated risk assessment framework on 4 August 2015. The changes will take effect from publication. We will issue updated reporting templates to the sector shortly. We have also published changes to the NHS foundation trust accounting officer memorandum.