The High Court of Justice has ruled that Monitor’s interpretation of what constitutes private charges for the purposes of the private patient cap, as set out by Monitor in the NHS Foundation Trust Financial Reporting Manual 2009/10, is incorrect.


Section 44 of the NHS Act 2006 gives Monitor a general power to include restrictions on the provision by the FT of goods and services otherwise than for the purposes of the NHS in the authorisation of an NHS Foundation Trust (an FT).  However, section 44 then goes on to require Monitor to exercise this power with a view to securing that the proportion which the income of an FT derived from private charges in any financial year bears to the total income of the FT in that financial year must not be greater than that in the base financial year.

The base financial year is the 2002/3 financial year, unless the predecessor NHS Trust to the FT was established after then, in which case it is the first financial year in which it was first an NHS Trust.   Private charges are defined as “charges imposed in respect of goods and services provided to patients other than patients being provided with goods or services for the purposes of the [NHS]”.

The issues have turned on the question of what income should be regarded as derived from private charges (normally called private patient income).  On 1 February 2008, Unison commenced a judicial review challenge of Monitor’s then current interpretation, which is described as Option 1 below.  Following this, Monitor issued a consultation document on 18 June 2008 about modifying its approach.  The consultation considered three options for the interpretation of private charges and following the consultation Monitor adopted Option 2, described below.

The three options developed by Monitor are briefly summarised as follows:

  • Option 1: under this option the private patient income of an FT encompasses income directly earned from the provision of private healthcare by the FT plus the relevant proportion of income earned through joint arrangements and subsidiaries.  Income arising through associates and joint ventures and investments are excluded.  Also excluded is income derived from the provision of goods and services to third parties, which in turn provides private healthcare.
  • Option 2: this is the same as Option 1 except that the private patient income also includes the relevant proportion of income from associates and joint ventures.
  • Option 3:   this option includes any income of an FT which is connected with the provision of private healthcare whether this is provided by the NHS foundation trust or some other body in private patient income.  Thus, it includes income received from the provision of goods and services to third parties which provide healthcare, income from investments and charitable donations funded by the provision of private healthcare.

The correct meaning of “income derived from private charges”

In R (Unison) v Monitor [2009] EWHC 3221 (Admin), Mr Justice Cranston considered the history of the application of the private patient cap and relevant case law and decided:
What matters is that income should be received which is derived from [private charges].  So what does this concept of income derived from private charges entail?  The case law…. establishes that the concept demands an enquiry into the real, rather than the immediate source, of income.  That may not be the fund or place from which the income immediately flows.  Enquiry may need to go beyond that to the real source or origin of the income.

Following on from this, there is no basis for limiting income derived from private charges to income obtained directly from private patients in respect of the provision of goods and services to them as opposed to income derived from the provision of goods and services to a separate entity which usually itself provides these to private patients. When an FT provides goods and services to a private healthcare entity the reality of the matter may be that the income stream accruing to the FT is being derived from private charges.

Similarly, there is no justification for including or excluding an investment dependent upon the degree of control which the FT has over it.

The judge specifically addressed the issue of whether it may be difficult to identify whether income was indirectly derived from private charges, e.g. “the NHS foundation trust may sell a product to a wholesaler and not know who the end user will be or a trust may not sell the drug but licence the intellectual property to a pharmaceutical company in exchange for royalties”.  In response to this issue the judge stated, “Determining the reality of the matter is not a tracing exercise.  Unless at the time of the transaction the only genuine or real prospect is use by the purchaser of the medical product or intellectual property rights to generate private patient income, Monitor may well decide that income from the transaction is not derived from private charges.  Similarly Monitor may be justified in setting a de minimis threshold or permitting the use of high level approximations.

The judge’s decision on Monitor’s approach – what will Monitor need to do now?

The judge decided that Monitor, in reaching its conclusion that Option 2 was the correct approach to the private patient cap, had not given proper consideration to the statutory concept of income derived from private charges. Thus he declared that the adoption by Monitor of Option 2 on 26 November 2008 was unlawful.

However he noted that it did not seem sensible to unravel accounts for the year 2008/09 and thus it may be implied that the new approach to the private patient cap should be adopted for the 2009/10 financial year onwards.

The judge also stated that his conclusions did not lead to the judgement that Option 3, which was Unison’s preferred approach, was the correct interpretation.  It directed Monitor to consider whether that option accords with the correct meaning of the statutory concept of income derived from private patient charges.  He noted that there may be a workable intermediate option.

Monitor has now issued a press release confirming it will address and revise the definitions which apply to the cap as set out in the NHS Foundation Trust Financial Reporting Manual.

What should you do now if you are an acute FT?

  • The exact scope of Monitor’s revised approach to the interpretation of the private patient cap will not be known until Monitor has revised the NHS Foundation Trust Financial Reporting Manual.   We understand that submissions have also been made that any new rules should not be applied for the 2009/2010 year but only for the year 2010/2011 on the basis that it would be too complex to have to unravel arrangements for the present financial year.  Thus, we also await clarity on when the changes will take effect.

    The Department of Health is also currently carrying out a review of the private patient cap and has called for written evidence to inform its review by 31 December 2009.  This may result in recommendations for change to the cap but these will require primary legislation and it is uncertain whether these will be carried through in the present Parliamentary session.  Therefore it would be inadvisable to rely on any changes at the present stage. 

    We therefore advise that Acute FTs: 

  • review whether the approach by the court will affect your private patient income cap percentage in your base financial year.  In particular, is there likely to be a change to the amount of your private patient income in the base financial year?  Since it is not clear how Monitor will approach minimum thresholds, etc, you may wish to adopt a best case and worst case approach.  We also note that Monitor currently applies the test by comparing private patient income with total patient income rather than total patient and non patient income, but do not know if it will continue this in any revised approach.  You may therefore wish to consider what impact using the alternative approaches would have on your cap;
  • review the likely impact of the new approach to what constitutes private patient income in determining whether the Trust will be operating within its cap in the current year and future years. Once again, because the way in which Monitor will apply the judgement is not entirely clear, you may wish to develop a best case and worst case scenario. You may also want to consider the impact of the alternative approaches to total income discussed above;

In the event that it is likely the FT will exceed its cap, you will need to consider plans to modify your private patient income activity in order to comply with the cap. In particular, you will need to consider at what stage action should be taken pending Monitor’s statement of its revised approach and the outcome and implementation of the Department of Health review.  Any decision will need to take into account the risk that the FT may be given an adverse governance rating if it cannot comply with the new rules when they are announced.  We suggest that FTs engage closely with their Monitor client relationship manager if it seems that they are likely to exceed the cap.

What should you do now if you are a Mental Health FT?

Mental Health FTs are now in the fortunate position that Parliament has already amended the rules for them by the Health Act 2009, so that the proportion of private patient income compared to total income is limited to the higher of 1.5% or the cap determined under the rules above.  Since most Mental Health Trusts have a negligible cap under the above rules, for most Mental Health FTs the private patient cap percentage will be 1.5%.  The new cap rules are not yet in force but it is anticipated that the provisions will be brought into force early next year.  Thus, Mental Health FTs may wish to plan against a cap of 1.5% for the moment, pending the outcome of the Department of Health’s overall review of the cap.  In estimating its likely private patient income the FT should consider the principles set out by the Judge described above.

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