Health Secretary Andrew Lansley has drafted in a crisis team to deal with the dire financial situation at the South London Healthcare NHS Trust.
The government is shortly expected to appoint an administrator or turnaround expert as part of a radical restructuring programme for the trust, which is reportedly losing more than £1m a week.
Lansley wrote to the board of the trust warning them he intends to trigger an "unsustainable providers regime" led by a special administrator with wide-ranging powers to cut costs.
The administrator will look at a range of options to take the return the trust to a commercially viable situation, including splitting its services and merging elements with other trusts.
Lansley said: "A central objective for all providers is to ensure they deliver high quality services to patients that are clinically and financially sustainable for the long term.
"I appreciate that any decision to use these powers will be unsettling for staff, but I want to stress that the powers are being considered now so that patients in South-east London have hospital services that have a sustainable future."
Richard Fleming, UK head of restructuring at KPMG, said: “In the private sector, an administration is an important mechanism for making tough decisions to address a severely financially distressed company’s problems. We expect this to be true of health special administrations as well, where the regime seeks to safeguard patient care as a priority but also allows the special administrator to address the most difficult financial challenges.
It has been widely reported that debts at the South London trust rocketed due to two large PFI deals (Private Finance Initiative) that cost £61m in interest payments a year.
However Nick Prior, head of infrastructure and capital projects at Deloitte, told AccountingWEB that you can't blame the structure of PFI for this NHS Trust being overstretched financially.
“I expect there are a number of issues at play here but as ever it is the now soft target of PFI contracts that take the blame. There were clearly strategic errors that were made when the building of these hospitals were committed to a number of years ago," he said.
“All of these PFIs would have been signed off not just by the NHS Trusts but also the Department of Health and quite probably the Treasury itself, so in terms of understanding where fault lies, if fault is appropriate, with respect to the build programme that was undertaken, there were a number of bodies that were involved.”
The financial commitments agreed by the trust with Whitehall were greater than the revenues that those respective organisations had to cover them.
Going into more detail, Prior said the financial commitments were greater ultimately than the revenues that those respective organisations had to cover them. “Part of the technicality in this I suspect is that typically PFI contracts have an inflation linked payment which with inflation having increased significantly over the past two of three years has been well in excess of the GDP deflator funding structure for public sector bodies.
“So the funding of the NHS Trust has not kept pace with the financial commitment of the PFI contracts. Again that's not the fault of the PFI contacts, because there is flexibility as to how the payment structure for PFI contracts can be put together – its the fault of those who did not anticipate that there would at some point be this imbalance”
This is the first time a health minister has used powers to appoint a special administrator, but there are at least another 20 healthcare trusts in a similar critical condition that could require similar treatment, the Department of Health admitted.
Last September Lansley said the cost of paying for new hospitals under the PFI was bringing 22 NHS Trusts to the "brink of financial collapse" because some hospitals have been landed with PFI deals they cannot afford.
Matthew Custance, head of Healthcare PPP at KPMG, told AccountingWEB: “We think the issue is overstated… Sometimes organisations procure too big a hospital and end up with long-term problems. Of the 22 trusts that are struggling, the unitary charges usually represent more than 10-15% of their budgets, suggesting that the hospital was over-scoped for the size of the trust.”
South London Healthcare NHS Trust runs the Queen Mary Hospital in Sidcup, the Queen Elizabeth Hospital in Woolwich and the Princess Royal Hospital in Bromley.
Officials confirmed that the hospitals will continue to operate as normal while their finances are re-assessed.