The Shrewsbury and Telford Hospital Public Interest report

Introduction and background
1.1 Scope and purpose of this report
We present this report in the public interest on the financial standing of The Shrewsbury
and Telford Hospital NHS Trust (the Trust) under section 8 of the Audit Commission Act
1998. This section of the Act requires the external auditor to consider whether, in the
public interest, there should be a report on any significant matter coming to his or her
attention.

In preparing this report, we have discussed the financial position with directors of the
Trust and had regard to public and private board reports and related correspondence,
including financial monitoring returns issued to the Shropshire and Staffordshire Strategic
Health Authority (the SHA).

We highlighted issues relating to the financial standing of the Trust in our 2003/04 annual
audit letter and we completed a detailed review on the financial standing arrangements in
late 2004. Following the late emergence of additional financial issues in April 2005, at the
request of the Chairman and Acting Chief Executive, we completed two detailed reviews
on the Trust’s financial position, the findings of which inform this report.
We are also aware that the SHA has commissioned an independent inquiry into the
financial management and governance at the Trust.

This report addresses the financial position and reporting at the Trust (section 2) and
makes a number of recommendations for action (section 3).
1.2 Statutory financial duties

The Trust is required to meet four statutory financial targets as defined within Section 10
(1) of the NHS and Community Care Act 1990. These are:
• Break-even, over a rolling three year period;
• Meet its external financing limit, set by the SHA;
• Containing capital expenditure within the notified capital resource limit; and
• Generate a 3.5% return on relevant net assets.
The Board is accountable for financial control and for ensuring that the Trust meets it
statutory targets.
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NHS trusts should normally plan to meet this duty by achieving a balanced position on
their Income & Expenditure account each year. However, the break-even duty includes
the phrase "taking one financial year with another". Within the NHS, this interpretation
provides some flexibility and is generally taken to mean that a Trust should break-even
over three years. The SHA may grant an extension to five years.

1.3 Key findings
The Royal Shrewsbury Hospital and the Princess Royal Hospital NHS Trusts merged to
form the new Shrewsbury and Telford Hospital NHS Trust on 1 October 2003. Following
the merger, the Trust is in year 2 of its break-even period.
Historically, Princess Royal Hospital (PRH) and Royal Shrewsbury Hospital (RSH) had
significant deficits in three out of the previous six years prior to the merger. The
combined accumulated deficit for both Trusts from 1 April 1997 to 30 September 2003
was £4.767m.

The audited deficit for the first financial period (1 October 2003 to 31 March 2004) for
the merged Trust was £418,000. When combined with the financial outturn for PRH and
RSH for the first six months of the financial year, the combined financial outturn for
2003/04 was a deficit of £791,000. The full extent of the deficit in the period was offset
with financial support of £5.3m received from the SHA. Without this financial support,
the deficit in 2003/04 would have been of the order of £6m. In addition to the £5.3m
financial support received, the Trust agreed to defer the repayment of £1.2m financial
support received in prior periods that had originally been intended for repayment in
2003/04. More detailed analysis is set out in table one.

The Trust’s draft accounts for 2004/05 reported a deficit of £10.1m, with financial
support of £9.2m. Without the financial support, the Trust’s deficit would therefore be
£19.3m. However, the true extent of the 2004/05 deficit only emerged late in the
financial year. The Trust had consistently forecast a break-even position, both within its
public board reports and in its financial monitoring returns (FMRs) to the SHA. For
example, the February FMR predicted a break-even position for 2004/05 rising sharply in
the March FMR to a potential deficit of £2.995m. This was reported to the SHA and
Department of Health in April 2005.

As outlined in the Introduction, in late April, following the considerable movement in
forecast outturn the Chairman and Audit Committee Chairman asked us to complete a
further review of the 2004/05 financial position. This highlighted a number of
weaknesses in financial control arrangements and a series of technical accounting issues.
We also completed a detailed assessment of the robustness of the Trust finances for
2005/06. This indicated a planned deficit in the region of £10m based on the achievement
of £7m of deficit reducing assumptions including a cost improvement programme of
£2.5m. Our review highlighted that there was little evidence at this stage to support the
successful achievement of these savings.


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Given the current projections for the 2005/06 year, it is unlikely that the Trust will
recover the accumulated deficit of £10.9m by 31 March 2006. This means that the Trust
will breach its break-even duty.

1.4 The way forward
There are two streams of work required to address the financial position at the Trust:
• The agreement of the recovery strategy including short-term borrowing requirements
of the Trust with the local PCTs and the SHA; and
• The delivery of the financial recovery process.
The delivery of the Trust’s financial recovery process will require the Trust to:
• Ensure that the financial reporting system improves in order to avoid a recurrence of
the sudden deterioration in the financial position; and
• Identify and cost all risks to its forecast position for 2005/06 and report progress
monthly to the Financial Recovery Board and inform the Trust Board promptly if
further issues emerge.
We have made a series of more detailed recommendations within section three of the
report and the Trust should develop an action plan, which addresses both the
recommendations contained within this report, and any further recommendations made
following the outcome of the Independent Inquiry. The implementation of the action plan
should be closely tracked by the Audit Committee and independently assessed through
the Internal Audit plan.
We have sent a copy of this report to the Audit Commission and the Shropshire and
Staffordshire Strategic Health Authority
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2 Detailed findings
This section of the report sets out the financial context within which the Trust operates
(section 2.1) and summarises the financial position that the Trust inherited upon
formation on 1 October 2003 (section 2.2).
We set out the emergence of the deficit as reported in the draft accounts for 2004/05
(section 2.3) and outline the issues relating to the financial reporting for 2004/05 (section
2.4). We set out the emerging picture for 2005/06 (section 2.5) and comment upon some
other implications of the growing financial problems (section 2.6).
Finally, we set out our detailed recommendations for action (section 3).
2.1 Financial context for Shropshire
The Trust provides acute services across the two Shropshire health economies as well as
services along Welsh borders. The Shropshire County PCT and Telford and Wrekin PCT
health economies faced a considerable challenge in delivering financial balance in
2004/05. Overall, the health bodies within Shropshire identified a potential shortfall of
£20m. This consisted of £10.5m historical deficit and £9.5m in-year recurring pressures.
Both the Trust and Robert Jones and Agnes Hunt Orthopaedic and District Hospital NHS
Trust sought financial support from the SHA in order to help them meet their
commitments for the 2004/05 year.

In response to the national requirements associated with the NHS Plan and local service
requirements and financial pressures, a Health Economy Programme Board (the
Programme Board) was established in June 2004 comprising:
• Shropshire and Staffordshire SHA;
• Shropshire County PCT;
• Telford and Wrekin PCT;
• The Shrewsbury and Telford Hospital NHS Trust; and
• Robert Jones and Agnes Hunt Orthopaedic and District Hospital NHS Trust.
The Programme Board’s long-term aim is to balance the available resources whilst
modernising services. In February 2005, the Programme Board published a report
outlining its main conclusions and future programme of work. Further work is on-going,
but we understand that it is unlikely that this will result in substantial service changes or
cost savings in 2005/06.

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2.2 Financial background of the Trust
Historically, Princess Royal Hospital NHS Trust and Royal Shrewsbury Hospital NHS
Trust had significant deficits in three out of the previous six years prior to the merger.
The combined accumulated deficit from 1 April 1997 to 30 September 2003 was
£4.767m.

In addition to the deficit, the Trusts received monies from the SHA totalling £6.366m to
support their financial position. Without this funding, the deficit would have been
considerably larger.

The table below illustrates the total deficit had the financial support not been received.
Table one: Financial outturn and received – 2002/03 and 2003/04
Year Deficit in year
per audited
accounts (£m)
Financial
support
(£m)
In year total
deficit (£m)
Princess Royal Hospital NHS Trust / Royal
Shrewsbury Hospital NHS Trust 2002/03
3.077 1.050 4.127
The Shrewsbury and Telford Hospital NHS
Trust 2003/04
0.791 5.316 6.107
Although at face value the level of the deficit reduced between 2002/03 and 2003/04, this
was due to a significant increase in the level of financial support provided from the SHA.
In addition to the £5.3m financial support received in 2003/04, the £1m support received
in 2002/03 was not repaid as originally planned.
2.3 Financial position in 2004/05

The Trust set a break-even budget for 2004/05. This initial break-even forecast presented
to the Board was heavily reliant on the achievement of a cost improvement program (CIP)
totalling £6.5m, 3.7% of the budgeted expenditure for the period.

In the 12 months following the merger, the Trust harmonised some procedures between
the two sites, although to date significant savings through service reconfiguration have
yet to be realised. Service reconfigurations were expected to generate saving of £0.8m
during 2004/05 but evidence of detailed plans and associated monitoring have not been
available to adequately assess achievement. There were also a number of issues relating
to contractual agreements which resulted in risks to the income forecasts which were not
resolved until late in the financial year.

In addition to the financial risks faced in 2004/05, the Trust has experienced a number of
senior management changes. The Chief Executive resigned suddenly in October 2004 and
the Trust expects a replacement to start in August 2005. Between October and August,
the Trust will have had one acting Chief Executive and one Interim Chief Executive. In
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addition, the Director of Finance was suspended in April 2005. The Trust has not been
successful in appointing an Acting Finance Director.
In particular, the gap at Finance Director level places an additional burden of
responsibility on the remaining staff within Finance, at a time when improved financial
management support, forecasting and reporting is required across the Trust. However,
the Interim Chief Executive, appointed on 31 May 2005, has given significant attention to
financial matters as otherwise there would have been an absence of strategic financial
leadership.

2.4 Financial reporting 2004/05
Throughout the year, the Trust reported a growing in-year deficit, but continued to
forecast break-even in both its public board meetings and its Financial Monitoring
Returns (FMRs) to the SHA. Although the Trust reported risks relating to break-even,
these were not always quantified and reporting was inconsistent.
We reviewed the financial position of the Trust as at November 2004 and raised
significant concerns with the Trust in December 2004/January 2005 regarding the
robustness, detail and achievability of the CIP. Specifically, at October 2004, the Trust
had devised plans that included £0.7m of income and £0.8m of service reconfiguration
savings which had yet to be identified.

At this point, the Trust had predicted break-even on the achievement of £1.7m of nonrecurrent
cost reductions, including additional capitalisation of revenue expenditure and
identifying additional stocks. We indicated that a review of suggestions for generating
additional savings in year would be required to ensure that they complied with relevant
accounting principles.
As part of our report, we recommended enhancements to the governance arrangements in
order to enable more appropriate Non Executive and Executive scrutiny and challenge of
the financial position, specifically through the formation of an internal financial cost
recovery group. A formal meeting was held on the 26 April 2005 but to date no formal
terms of reference have been adopted by the Board and detailed, risk assessed plans have
yet to be fully developed.
The February 2005 FMR and Board report predicted a break-even position for 2004/05
rising sharply in the following month to a potential deficit of £2.995m.
In late April, following the considerable movement in forecast outturn the Chairman and
Audit Committee Chair asked us to complete a further high level review of the 2004/05
financial position. In summary, we found that:
• Although Finance reports to the Board, and Financial Monitoring Returns (FMRs) to
the SHA, continued to forecast a break-even outturn up to February 2005, the year to
date figures indicated that a significant in year deficit was being incurred. The
financial ledger indicated an in-year deficit of £6m as at February 2005.
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• Actions presented to the Board and SHA to recover the deficit appear to have become