Financial Summary of the Barnet and Chase Farm Hospital merger with the Royal Free NHS Hospital Foundation Trust

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Susan Shanna Crawford
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1 Financial Summary of the Barnet and Chase Farm Hospital merger with the Royal Free NHS Hospital Foundation Trust 1. Context and Purpose The purpose of this paper is to provide an update on the financial aspects of the merger of Barnet and Chase Farm Hospitals NHS Trust (BCF) with the Royal Free NHS Hospital Trust (RF). This was previously discussed in Part II session at the Governing Body meeting held on 1 May A commitment was made at that meeting to bring the financials back and discuss in more detail when the Transaction Agreement was concluded and the figures were in the public domain. 2. What were the key issues driving the merger? 2.1 Barnet and Chase Farm Hospitals NHS Trust (BCF) is a challenged NHS Trust, providing services to around half a million people living in north London and parts of Hertfordshire. It has a financial turnover of approximately 329 million in the current year. During 2013/14, BCF was one of the poorer performing NHS Trusts in terms of A&E performance and referral to treatment time (RTT). 2.2 The Trust forecast a deficit of 16.4 million in 2013/14. The Trust delivered a financial surplus of 3.1m in 2010/11, a 1.7m surplus in 2011/12, and a small deficit in 2012/13. As part of the implementation of the Barnet, Enfield and Haringey clinical strategy (BEH), north-london commissioners provided BCF with 24.7m transitional costs in 2012/13. This was taken onto the Trust s balance sheet to fund the phasing of BCF costs related to BEH up to 2015/16. In earlier years the Trust made small surpluses. 2.3 Chase Farm is a district general hospital in north Enfield. The site is 21 hectares in total of which the Trust owns hectares. The rest of the site is owned by Barnet, Enfield and Haringey Mental Health NHS Trust. The age of the buildings on the Trustretained part of the estate dates from the 19th century up to The BEH strategy required that Chase Farm ceased to operate as a General Hospital as of November Emergency activity, paediatrics and maternity services were expanded at Barnet and North Middlesex Hospitals to accommodate patients who would otherwise have been treated at Chase Farm Hospital. Some investment was then proposed to improve the functionality of residual space at Chase Farm Hospital for its new role as a local (non-acute) hospital. A summary from the Full Business Case (FBC) of the additional hospital capacity built at each site is included as Table 1 below: 1

2 Table 1 - Summary of BEH additional capacity requirements Site of Investment No. of Acute & Maternity beds Description and Additional Accommodation North Middlesex Hospital 159 Barnet Hospital 50 Chase Farm Hospital -266 A new three-story building, refurbishment of the existing tower and additional supporting infrastructure A new two-storey building, with changes to internal lay-out to maximise functionality Service rationalisation with focus on Urgent Care and Outpatients 2.5 The key financial headlines from the BEH FBC of October 2012 were: The implementation of the BEH Clinical Strategy results in a 42.4m reduction in income in 2013/14 and 2014/15. There is a further 10m reduction in income in 2013/14 to reflect the NCL tenyear commissioner plan. In total then the Trust loses around 53m of income on a turnover of 329m equivalent to 18.1% of clinical income. The FBC assumed that to implement the BEH Clinical Strategy the Trust would reduce costs in direct proportion to the income reduction. However no further details are provided in the FBC to support this. CIPs deliver to the average Sustainable and Financially Effective (SaFE) level of 5.3% over the planning period. To manage the significant impact on the Trust s income and expenditure position, commissioners provided transitional funding of 23.5m over a threeyear period and additional estimated redundancy cost funding of 5.3m in 2012/ The FBC required the Trust to make 68.4m worth of cost improvement savings (CIPS) in the 5-year period 2012/13 to 2015/16, in order to manage the reduction in income of 52-55m over the same period. This equates to an average annual CIP achievement of 5.5% each year over 5 years a comparatively high target especially taking into account the estate characteristics of the Chase Farm site. 2.7 The original Business Case for the Barnet, Enfield and Haringey clinical strategy of November 2012 assumed that there would be activity outflows from the Chase Farm site to both the Barnet site and to North-Middlesex Hospital. The impact of the activity outflows on the BCF was modelled in the FBC as a series of forecast deficits as below: 2013/14 deficit of 8.2m. 2014/15 deficit of 14.8m. 2015/16 deficit of 12.3m. 2016/17 deficit of 11.4m. The financial deficit for the Trust in 2013/14 was 16.4m which is over double the figure assumed in the BEH FBC. This is a combination of additional non-beh related 2

3 income loss, cost pressures and failure to deliver CIP targets. The normalised deficit for 2013/14 is 10.8m reflecting the stripping out of non-recurrent income. The deficit increases to 30.6m in 2014/15 with an underlying run-rate of 37.8m deficit. The unwinding of the deficit across the next five years then drives the deficit cover funding requirement outlined further on in the paper. Table 2 below outlines the forecast deficits for the Trust in the no-merger option. The financial position worsens over the 5-year period to land at a 41.4m deficit by 2019/ BCF experiences a loss of around 52.4 million of income from recurrent baseline income of 2012/13. The main driver of this is the implementation of the BEH strategy but there is around 10 million of further commissioner QIPPS during that period. Most of that income is lost from the Chase Farm site. Starting in the latter part of 2013/14 this pitches Chase Farm Hospital into immediate and - under its current configuration - irretrievable financial deficit. Table 2 Forecast deficits for Barnet & Chase Farm NHS Trust. SOCI BARNET AND CHASE FARM (no Merger Synergies and CF) Nominal m FY14B FY15F FY16F FY17F FY18F FY19F FY20F Clinical Revenue Other Operating Revenue Total Revenue Operating Expenses (325.1) (318.7) (310.5) (310.7) (311.9) (313.7) (316.6) Surplus/(Deficit) from Op's 4.3 (14.7) (12.6) (14.8) (14.1) (12.8) (14.0) EBITDA 4.3 (14.7) (12.6) (14.8) (14.1) (12.8) (14.0) EBITDA margin 1% -5% -4% -5% -5% -4% -5% Non-Operating Revenue (13.9) 0.0 Non-Operating Expenses (20.6) (23.1) (23.0) (24.0) (25.0) (26.5) (27.3) Surplus/(Deficit) (16.4) (30.6) (35.7) (37.1) (39.2) (53.3) (41.4) Net margin -5% -10% -12% -13% -13% -18% -14% Non recurrent Revenue (9.2) (22.4) (5.4) (1.7) Non recurrent Expenditure Normalised (10.8) (37.8) (37.1) (38.8) (39.2) (39.4) (41.4) Net margin - normalised -3% -12% -12% -13% -13% -13% -14% Source Royal Free/BCF finance team analysis and Deloitte/TDA assurance. 2.9 The financial problem attributable to the Chase Farm site is a deficit of around 20 million by 2018/19 based on not reconfiguring the site. The decline in the normalised financial position accelerates due to: 2014/15 the full year impact of contribution loss from implementation of the Commissioners strategy. 2016/17 - the end of transitional double running income from commissioners, with the risk that the Chase Farm site will not be able to take out the recurrent cost to offset the lost contribution. Failure to deliver CIPs at the planned level of 5.3%. 3

4 2018/ /20 the worsening impact of negative cash, causing high interest charges: and Higher depreciation from the capital/backlog spend. 3. Royal Free London NHS Foundation Trust 3.1 The Royal Free Trust is a major acute hospital (630 beds) located in Hampstead in north London with a network of services provided from other sites across north London and Hertfordshire. It is a teaching hospital hosting a major campus of University College London (UCL) Medical School. The Royal Free is a founder member of the UCL Partners academic health science network, collaborating with UCL, Queen Mary s and four other NHS Trusts in north and east London. The Royal Free has been a successful Foundation Trust since April Its Standardised Hospital Mortality Index (SHMI) - a key indicator of quality outcomes - is one of the best in England 3.2 The Trust currently has a very good Continuity of Service Risk Rating (CSRR) of 4 based on a turnover of approximately 580m (2012/13). It achieved a surplus of 12 million in 2012/13 and had an 8 million planned surplus in 2013/ The Royal Free s Integrated Business Plan (IBP) for the acquisition of BCF sets out a transformation agenda, positioning the Royal Free at the centre of a managed care network. This will involve the Royal Free reaching agreements with its commissioners to, for example, invest in a programme of service redesign with its clinical commissioning groups (CCGs); implement GP referral protocols, reducing demand on hospital-based care; manage a range of community hospital services complementary to its referral base; invest in the redevelopment of Chase Farm Hospital site as a high quality outpatient and elective hospital with an urgent care centre. 4. North Middlesex University Hospital NHS Trust 4.1 The North Middlesex University Hospital (NMUH) is a small to medium district acute general hospital serving the communities of the London Boroughs of Enfield and Haringey, and surrounding areas. It is located in Edmonton, on the border of the London Boroughs of Enfield and Haringey. It serves a diverse population of approximately a quarter of a million people. Turnover for 2012/13 was approximately 180 million. 4.2 The Trust made relatively small surpluses of 0.5 million and 1.8 million in 2011/12 and 2012/ A feasibility study by NHS London in December 2011 indicated that the Trust had a high risk of financial non-viability and that its plans for stand-alone Foundation Trust (FT) status were not credible. This coincided with the development of the BEH clinical strategy. A subsequent financial viability study came to the conclusion that the Trust s financial model was robust, post-implementation of the BEH strategy, and that additional activity flows into the Trust from the BEH strategy would allow it to prepare a viable FT application. The Trust entered the Foundation Trust pipeline process in November 2012 and aims to have Foundation Trust status from August

5 4.4 In 2013/14 year the Trust was forecast to achieve a 10.6 million surplus, consistent with plan. NMUH currently achieves an overall financial risk rating (FRR) of 4 out of 5 based on a turnover of approximately 180 million (2012/13) Additional capacity of 159 acute and maternity beds is required at NMUHT to accommodate BEH activity flows. This has allowed the Trust to generate additional income. It is clear that the impact of BEH has significantly benefited NMUH in activity and financial terms. 5. Summary of the Headline Merger Financial Position and Costs 5.1 The merger business case showed that the merged Trust returns to financial surplus in year 6 with a financial package of support over the prior 5 years totalling million. The NHS TDA and Royal Free have now concluded discussions with the Department of Health (DH) / Her Majesty s Treasury (HMT) in order to confirm that the required cost support of 262.8m over five years is available in a form that will allow the Royal Free to achieve an acceptable risk rating with Monitor. Approximately 87% of the funding is to be provided via DH. DH has also confirmed that the value for money (VFM) assessment is robust and based upon a satisfactory risk rating by Monitor. 5.2 A summary of the overall merger funding is shown in Table 3 below. Table 3 Summary of the Merger Funding Proposal Revenue Support Funding Funding Source 2013/ / / / / /19 Total m m m m m m m Integration costs NHSE/CCGs Transaction costs NTDA Deficit cover DoH CSRR DoH Total Revenue Capital (net of disposals) Depreciation Net Capital DoH Integration capital Total Capital Liquidity Support DoH PDC Revenue Total Financial Support

6 The funding components of this are: Revenue transaction costs of 5.2 million in 2013/14. These have been agreed as funded by the TDA. Integration Costs of 33.5 million over 4 years to 2016/17. In line with previous mergers this funding is shown as coming from commissioners i.e. both CCGs and NHS England. Revenue deficit support of million over 5-years. This is currently assumed as being provided in the form of cash/pdc support by the DoH. The nature of the deficit support provided, and the acceptance of this by the Royal Free, needs to be confirmed in order to progress to a Transaction Agreement. Continuity of service risk rating (CSRR) funding of 16.9 million to be provided by the DoH. This is also currently assumed as being cash support alongside the deficit cover. Capital expenditure of ca 104 million with a net capital requirement of 42.5 million. This is funded by the DoH. Capital Integration Costs of 15.2 million over 4 years to 2016/17 funded by the DoH. Liquidity funding of million in year one provided as cash support from the DoH and relating to the opening BCF deficit taken onto the balance sheet of the merged organisation. Key to transaction funding terms. Cost Support Funded via Funder m Integration costs Transaction Costs Cash support for revenue deficit These are the costs of implementing the integration of the two organisations and achieving a common platform for equipment and for adopting consistent systems and processes. These will be time limited and will be funded by NHS England and CCGs. These are the costs associated with achieving a contractual close on the transaction. It is expected that these costs will be funded by the TDA as vendor in the transaction, with the DH to stand behind the TDA to the extent that its budgets are exceeded. Support for a deficit and its impact on the CSRR in the combined organisation, but limited to the extent that this is attributable to the acquired trust, will be provided by the DH for a time-limited period on the basis that a financially sustainable solution could be achieved. As it currently stands, Commissioners including NHS England/CCGs NHS TDA/ Department of Health Department of Health

7 this is likely to be in the form of liquidity support. Liquidity This is funding to cover the Department of 34.4 forecast net current liabilities position in the closing Balance Sheet of BCF at the point of acquisition. Health Capital Both for integration and long term Department of investment on the site to maintain the estate and achieve an efficient operating model. These funds will be provided by the DH Health Depreciation (61.4) TOTAL The Department of Health s Value for Money test has been completed. The Department of Health is satisfied that the transaction offers good value for money for the tax payer and that the assessment meets HMT guidance for public sector bodies on how to appraise proposals before committing funds. 5.4 Table 4 below compares the net present value and the equivalent annual cost of the no merger and merger options. The current and projected Trust deficit has been used as a proxy for the cost to the tax payer of the do-minimum option under consideration, and is the starting point for the comparison. Under a scenario where a Trust continues to operate at a loss, the taxpayer would, in theory, have to contribute additional resources to fund that gap. The merger option shows significant benefit compared to the no-merger option. 5.5 The VfM analysis assumes that the BEH services configuration will be maintained and split, as now, between the two main hospital sites. It is likely that over the next 5 years commissioners will want to change this in some way. The do minimum does not preempt any such future decision-making. Similarly it is assumed that current quality standards will be maintained, not improved or degraded. It is assumed that levels of performance can be delivered to national standards. The capital cost of the no merger scenario assumes that the Chase Farm site can be run on the current infrastructure, with minimal capital being expended to maintain that infrastructure, and make necessary improvements to maintain minimum acceptable clinical standards. 5.6 Investment agreed as part of the BEH strategy goes ahead as planned. Land sales as set out in the BEH strategy also proceed as planned. It has been assumed that BEH transitional funding will be received as set out in the approved BEH FBC. 5.7 The deficit support modelled is based on the deficit forecast by the Trust for the five years until financial year 2018/19, with the final deficit amount extrapolated over the remaining 25-year period. 7

Table 4 VfM Comparator for Merger and non-merger Options 5.8 The March NHSE FIC (Finance and Investment Committee) agreed to provide 12m out of the total 33.5m, in 2014/15. The residual 21.

8 Table 4 VfM Comparator for Merger and non-merger Options 5.8 The March NHSE FIC (Finance and Investment Committee) agreed to provide 12m out of the total 33.5m, in 2014/15. The residual 21.46m costs have been agreed to be shared according to the commissioner splits and phasing in table 5 below. The splits are based on SLA shares of each commissioner of Barnet & Chase Farm Trust and North Middx NHS Trust income, normalised back to the overall Commissioner quantum. The rationale is that the commissioners of NMUH and BCF benefit from this transaction i.e. the financial turnarounds of both Trusts, whilst the Commissioners of the Royal Free do not. Table 5 Summary of Commissioner merger costs Commissioner FY15 FY16 FY17 Total m m m m NHSE - National NHSE - London Barnet CCG Enfeld CCG East & North Herts CCG Herts Valley CCG Islington CCG Haringey CCG Camden CCG Total Recommendations The CCG Governing Body is asked to: Note the report 8

DATE: 14 th October 2016 Primary Care Co-Commissioning Due Diligence LEAD COMMITTEE MEMBER: Ahmet Koray, Chief Finance Officer (Islington CCG)

DATE: 14 th October 2016 Primary Care Co-Commissioning Due Diligence LEAD COMMITTEE MEMBER: Ahmet Koray, Chief Finance Officer (Islington CCG) APPENDIX B OUTLINE DUE DILIGENCE INFORMATION DATE: 14 th October 2016 TITLE: Primary Care Co-Commissioning Due Diligence LEAD COMMITTEE MEMBER: Ahmet Koray, Chief Finance Officer (Islington ) AUTHOR: Daniel