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Foundation Trusts – provision of private patient care

Two recent developments threaten to derail the plans of several Foundation Trusts (FTs) to exploit a perceived loophole in the legislation which places a statutory cap on income from private work.

 

Background

The basic principle of the private patient income cap is that an FT is not allowed to increase the proportion of its income derived from private patient care beyond the baseline of the financial year ended 31 March 2003. So if a particular FT derived 5% of its income in the baseline year from private patient work then it is not allowed to exceed this proportion in any subsequent financial year once it achieves FT status. The cap was included in the legislation setting up Foundation Trusts in 2003 as a key concession to appease Labour backbenchers who were concerned that the FT initiative amounted to “privatisation by the back door.” Interestingly, the same restriction does not apply to NHS Trusts which are not FTs.

 

Many FTs would like to increase their income from private patients, and see this as an essential part of exercising the supposed greater autonomy and flexibility which FT status was supposed to confer on them. But the principle of the cap is enshrined in the legislation and is also set out within each FTs “Terms of Authorisation”, any changes to the level of the cap either for an individual FT or generally would require new legislation. Not even Monitor, the body responsible for regulating FTs and approving their terms of authorisation, has the power to alter the cap.

 

A loophole in the legislation?

Despite lobbying by the Foundation Trust Network, there are no signs at the moment that the Government is likely to introduce new legislation to allow greater flexibility for FTs to carry out private patient work – any such proposals would undoubtedly be extremely politically sensitive – and so several FTs have been looking at innovative ways to increase revenue from private care within the restrictions of the current legislation.

 

One such approach has been for the FT to set up a separate legal entity to carry out private patient work. Depending on the exact nature of the relationship between the FT and the separate entity, it has been widely believed until now that income from this private work can be passed to the FT without counting towards the private patient income cap. The details are complicated, but Monitor has issued guidance which states that:

 

“income from associate relationships, joint ventures and investments (as defined by UK GAAP) falls outside the scope of the definition of private patient income and patient related income” [1]

 

Salisbury, North Bristol, UCLH and Chelsea & Westminster FTs are all either planning or already using this method of enhancing their income from private work, relying on Monitor’s guidance as to the interpretation of the legislation, and it is likely that many more FTs will take advantage of this apparent “loophole” if these initial projects are successful. However, Monitor’s interpretation of the legislation is being challenged by Unison, the public sector trade union. The union is arguing that Monitor’s interpretation of the legislation is wrong, and that all of an FT’s income which derives from private patient care should count towards the cap, regardless of whether the work is carried out directly by the FT or by a separate entity. Monitor has agreed to formally review its approach to private patient income, and it is expected that Unison will seek a judicial review of the matter if Monitor refuses to amend its existing guidelines.

 

Charitable status

A second recent development has also threatened the viability of this method of getting around the private patient income cap. Salisbury NHS Foundation Trust established a separate company limited by guarantee, Odstock Private Care Limited (“OPCL”), which it funded by means of a loan, to carry out private patient work using Salisbury District Hospital’s facilities so as to take advantage of the loophole described above. Salisbury FT had hoped that OPCL would qualify for charitable status thereby benefiting from the tax advantages which apply to registered charities. However, the Charity Commission has decided that OPCL does not meet the necessary criteria to qualify for charitable status because it does not have objects which are “exclusively charitable for the public benefit.”[2]

 

The grounds for the Charity Commission’s decision are that the private health care services which were to be provided by OPCL are not available to the public at large but only to those with the ability to pay the fees. Salisbury FT advanced several arguments to support its application, such as the fact that profits from the private patient work would be used to enhance the services provided by the FT to NHS patients, that the fees charged for private care were lower (and therefore more affordable for the public generally) than other local private providers, and that OPCL would only use the hospital’s facilities in the evenings and at other times when they would otherwise be idle so as to have no adverse impact on NHS patients. However, the Commission nevertheless concluded that OPCL did not meet the necessary criteria for charitable status.

 

The Charity Commission’s decision has already provoked a great deal of comment from charity lawyers and may well end up being tested in the High Court as it will have potentially far reaching consequences for other charities which charge fees to the public for their services, including of course any other FTs who may have been considering following Salisbury FT’s proposed model for deriving income from private patient work.

 

Summary

The combination of the threatened judicial review of Monitor’s guidelines by Unison, and the possible High Court challenge to the decision of the Charity Commission on OPCL, has created a climate of great uncertainty. Any FT which is currently considering incurring substantial time, effort and expenditure in setting up a separate legal entity to provide private patient care may be well advised to delay its plans until these arguments have tested by the courts and the legal position has been clarified.

 

For more information or advice, please contact Oliver Pritchard.

 

[1] Para 3.64, NHS Foundation Trust Financial Reporting Manual (FT FReM) 2006/7, available at http://www.monitor-nhsft.gov.uk/.

[2] Charity Commission Review Decision made on the application for registration of Odstock Private Care Limted, published on http://www.charity-commission.gov.uk/ on 12.11.07.

 

 

The content of this bulletin is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.