The Goldilocks Challenge: What is the right size of health trust?

Posted on July 3, 2013 · Posted in AB Public

The Mid Staffordshire Foundation Trust crisis has led to more questions than answers.  One of the inescapable anxieties is whether Mid Staffordshire was simply too small to be a viable and sustainable entity.

 

In 2011/12, Mid-Staffordshire’s income was £156m, making it one of the smaller trusts.  Robert Francis QC, who led the inquiry, indicated concerns about the negative results flowing from that size. 

 

One of the key causes of the crisis was the scale of savings that had to be achieved – which were presumably more difficult to achieve because of its size and restricted scope for cuts.  Francis also criticised weak governance, which was in part the result of having non-executive directors without relevant experience, which “may be inevitable in a relatively small trust”, suggested Francis. 

 

Monitor is clearly concerned at the issue of size and how that affects viability and sustainability – though the regulator declined to discuss this.  Instead it pointed to its newly updated guide on assessing applications for foundation status.  Rather than specifying an ideal trust size, the guide focuses on the need for strong financial planning.  Monitor requires applicants to provide a five year business plan, completed financial model template and a working capital report. 

 

Where a trust has a major PFI liability, Monitor requires that the financial projections have to extend over a ten year forward period.  Trusts are normally required to demonstrate to Monitor that they have a high likelihood of generating a sustainable net income surplus by year three of the business plan period.

 

One person who has discussed the issue with Monitor says the regulator is carefully considering the issue of optimum size.  There is, it seems, an emerging view amongst senior staff that trusts need to be of middling size – a Goldilocks preference of not too small and not too big, but just right.  Too small would be trusts of less than £200m to £250m income.  Trusts of over £500m might be regarded as too big to exercise adequate executive and board control – the governance issue.

 

This approach has its supporters.  Mark Millar is an ACCA Council member and former chair of ACCA’s health sector network.  He was until recently the chief executive at Milton Keynes Hospital, is a non-executive at Papworth Hospital in Cambridge and runs his own consultancy.  Millar believes that many hospitals and some trusts are too small to be viable and sustainable.

 

“There is a lot of reconfiguration taking place and there are challenges with achieving the QIPP savings,” says Millar.  “We still have district general hospitals for every large town and city and that is just not sustainable.  The question is whether it is best to achieve greater sustainability through a proactive process, or to just let it happen.  There is not a golden rule that can be used to provide a solution.

 

“A lot of work is going on around this, but it is very contentious.  The more that this debate surfaces, the better.  It is difficult.”

 

However, not everyone accepts that the key issue is about size.  “I very much doubt there is much or any evidence base to rules of thumb like this,” suggests Kieran Walshe, Professor of Health Policy and Management at Manchester Business School.  “If you looked internationally you would find lots of viable healthcare organisations smaller and larger than [the £250m to £500m income] range.”

 

Undoubtedly, one of the key issues for many trusts has been unsustainable PFI contracts.  This was the major problem for the South London NHS Trust, which, like Mid Staffordshire, has been placed in administration.  Unlike Mid Staffordshire, South London did have size and scale with an income of nearly £440m in 2011/12.

 

Millar agrees that the viability of PFI contracts taken on by smaller trusts is a related sustainability issue, but he says that the problem is more complex than just being about PFI.  In many cases, trusts entered into PFI contracts on an assumption of continuing income growth.  But trends in healthcare treatment have meant that more activity now takes place outside hospital, with a consequent challenge in maintaining income – whether or not a trust has a PFI contract.  “You don’t have to have a PFI contract to be in trouble,” he points out.

 

It is certainly interesting – and perhaps significant – that the majority of foundation trusts where Monitor has intervened over the years have tended to be on the small size, with only one (two, including South London, where the Department of Health intervened) where income in the 2011/12 exceeded £300m. (See box.)

 

However, as Millar suggests, the largest trusts are not necessarily the best.  Research published last year by the Nuffield Trust concluded that merging hospitals into bigger trusts does not always produce efficiency savings – these are only produced if the merger leads to reductions in beds and services.  Nuffield’s research also found that cost per case falls as a hospital increases up to 200 beds, then stabilises until about 600 beds, above which costs rise as diseconomies of scale are introduced.  This suggests, it concluded, that many proposed mergers would create trusts that are too large to operate at optimum levels.

 

Dr Richard Lewis, an Ernst & Young partner and senior associate at the Nuffield Trust, expressed concern at moves towards mergers to create ever larger trusts to achieve savings.  “recent review of evidence published by Monitor concluded that the evidence supporting this contention is relatively weak,” he wrote in a blog. “However, there was some consensus that economies of scale may exist at greater than 200 beds.”

 

What is more, suggested Lewis, while economies of scale should, logically, be produced through larger trusts, efficiency may suffer through the consequent loss of competition.   He speculated: “The merits or otherwise of mergers is therefore a complex topic, and one that is likely to occupy Monitor.”

 

Box

 

Monitor interventions in foundation trusts and incomes for 2011/12:

 

Mid Staffordshire, £156m;

Sherwood Forest Hospitals, £266m;

Bolton, £283m;

Gloucestershire Hospitals, £380m;

University Hospitals of Morecombe Bay, £252m;

Milton Keynes Hospital, £163m;

Colchester Hospital University, £244m;

Basildon and Thurrock University Hospital, £260m;

Dorset County Hospital, £148m;

Heatherwood and Wexham Park Hospitals, £222m;

Royal National Hospital for Rheumatic Diseases, £21m;

Bradford Teaching Hospitals, £343m.