Foundation Trusts, established under the Health And Social Care (Community Health And Standards) Act 2003, are perhaps the most controversial of the U.K. government's recent reforms to the NHS. Their increased operational independence gives them more flexibility to respond to local needs, but critics fear that this will lead to diversity and therefore inequality in the provision health care. The governors of Foundation Trusts are drawn from their respective local communities and other stakeholders, so as to increase local accountability and self-governing capabilities. Another feature that differentiates them from NHS Trusts is their independent legal status as public benefit corporations. They also have capacity to retain financial surpluses, and to borrow within borrowing limits determined by cash flow projections and ratio tests set by their regulator, Monitor.

Monitor is a non-departmental public body independent of the DoH, established by the U.K. Parliament for this purpose. Monitor is still in the process of finalizing a regulatory system that will incorporate a risk-based approach.
The extent and frequency of regulatory oversight will depend on an individual Foundation Trust's performance. As a relatively new body, Monitor's effectiveness has yet to be fully tested, but based on its performance so far, we expect that its regulatory approach is likely to improve the general level of financial management, particularly in respect of the Trusts' commitment to cost control.

The first wave of top-performing NHS Trusts became Foundation Trusts in April 2004, and the government aims that all NHS Trusts should follow by 2008, although this timetable look set to be extended. At present there are 32 Foundation Trusts, with combined revenues of some £5 billion, which is about 20% of total revenues for all NHS and Foundation Trusts combined in England.

NHS and Foundation Trusts operate in an environment with severe financial pressures. These pressures have been exacerbated by (i) the introduction of the European working time directive, which has significantly reduced the working hours (but so far not the remuneration) of junior doctors; and (ii) the consultant contract, which has also increased staff expenditures. At the same time, the government is requiring increased clinical activity so as to reduce waiting times. Additional cost pressure comes from the Trusts' need to keep up to date with new health technologies, particularly drugs. These factors are contributing to an aggregate forecast deficit for all Trusts of £650 million in financial 2005/2006 (source Standard and Poor's). Although this deficit has received much publicity, it is relatively small at less than 1% of the total NHS budget.

From April 2005, NHS Trusts became subject to the new PbR funding system. (The first wave of Foundation Trusts were introduced to the system a year earlier). PbR compensates Trusts based on the volume of their activity and mix of health care provision, according to a national tariff system. For a gradually increasing share of their activities, it will gradually replaces the old block grant system that was based on historical revenues. PbR potentially gives Trusts greater revenue flexibility, enabling them to be paid more for additional activity. Conversely, it could also penalize the Trusts with higher costs than can be remunerated under the national tariff. (The national tariff, which has been calculated by the DoH for these purposes, does allow for minor regional variations and additional compensation for specialist care providers.)

Another reform, designed to introduce more market pressure into the system, has been the introduction of "Patient Choice," which gives patients the freedom to chose between up to five alternate providers. As health care providers increasingly compete for patients, Trusts are learning to strengthen their competitive position, not only through clinical excellence but also through marketing. These reforms expose Trusts to the variability of demand, making it much more difficult than previously to accurately forecast revenues and expenditure.

In this context, Trusts may find their PFI obligations more onerous, since they represent fixed expenditures. Even a Trust facing a deficit has no flexibility to cut back its contractual PFI unitary payment. Government concern about the affordability of often long-term (25-35 year) PFI liabilities has led to a review of major PFI projects in the pipeline, including the biggest ever private finance scheme undertaken by the NHS: the £1.2 billion project to rebuild and refurbish the St. Bartholomew's and Royal London NHS Trust hospitals. Department of Health guidance published in January 2006 instructs Trusts to review any planned major capital developments so as to take account of the ongoing reforms and new financial regime.

It is expected that this will significantly reduce the size and number of planned PFI projects, although the same guidance states that PFI transactions will remain the major vehicle for financing capital expenditure on NHS acute services.
Although many NHS PFI projects are currently being reconsidered, the chief means of financing capital expenditure on acute services is likely to continue to be through PFI transactions.
For information purposes, in a PFI, a Foundation Trust undertakes to pay an annual unitary payment to a private-sector company, generally in exchange for the building, maintenance, and servicing of clinical or other facilities. If, for example, the services are not provided to the specified level, the unitary charge may be reduced. At the end of the concession term--often in excess of 35 years--the relevant PFI asset transfers to the Trust at no cost and to an agreed standard.

Despite widespread criticism, there is a consensus between insiders that financing healthcare projects through the PFI scheme still has prosperous days ahead.