In December 2009, the High Court ruled that Monitor’s interpretation of what constitutes private charges for the purposes of the PPI Cap, as set out by Monitor in the NHS Foundation Trust Financial Reporting Manual 2009/10, was incorrect.
The case turned on the interpretation of what income should be regarded as “derived from private charges” (normally called private patient income). For further information on the issues which arose in the case and the consultation by Monitor which followed, please refer to our previous update published on 16 December 2009 “Judicial Review on the Private Patient Income Cap".
Monitor has not sought to challenge the High Court judgment, and has now revised the NHS Foundation Trust Financial Reporting Manual and issued Guidance to FTs on how to calculate the level of their private patient income.
In his judgment, Mr Justice Cranston considered that it did not seem sensible to unravel accounts for the year 2008/09. Monitor has decided that changing the calculation rules for 2009/10 would also not leave sufficient time for Foundation Trusts to gather the appropriate information and make any necessary changes for planning and reporting. Monitor has therefore decided to apply the new approach to the PPI Cap for the 2010/11 financial year onwards.
The correct meaning of “income derived from private charges”.
Mr Justice Cranston’s judgment has made it clear that private patient income received from indirect sources should count towards the PPI Cap. The FT’s accounting treatment of private patient income should not therefore determine whether that income falls within the definition of private charges. The Guidance reiterates this point, stating that it is the ‘real’ nature, derivation or origin of the source of income which is the critical factor in determining whether it should be classified as private for these purposes.
The Guidance reiterates two principles which were confirmed by the judgment:
- It is still the case that “private” income which must count towards an FT’s PPI Cap can only be derived from charges for goods or services (either directly or indirectly received by an FT) which have been provided to patients. Income from charges for the provision of goods and services that are not provided either directly or indirectly to patients does not therefore count towards the PPI Cap.
- It is also still the case that income derived from the provision of goods and services to NHS patients should not count towards the PPI Cap. Charges levied on NHS patients for car parking, bedside telephones and private room accommodation will not therefore be considered private income, and will not count towards the PPI Cap. Likewise, top-up payments which NHS patients have agreed to make to supplement NHS care would also not be considered private patient income for these purposes.
It is possible for an FT to receive income from a variety of sources and through a number of business structures. However, the Guidance states that the manner in which income is received cannot dictate whether the income should count towards the PPI Cap. The legal and corporate structure of an FT’s business, or the accounting conventions which it applies to its income, should not therefore cause income obtained from private patients to be excluded from the FT’s PPI Cap.
By way of illustration, the Guidance states that the criteria used by FTs to determine the degree of control they have over a particular entity or investment (such as a joint venture company or subsidiary) for accounting purposes are not necessarily the same criteria that should determine whether income should be counted towards the PPI Cap. If, for example, one FT has a 60% investment in a subsidiary and another has six investments of 10% each in identical private patient businesses, both FTs should treat their income from each investment in the same manner, i.e. as obtained from private patients.
Appendix 3 to the Guidance gives illustrations of what does and does not count as private patient income for the purposes of the PPI Cap. An example of an indirect source of private patient income is rental income from an independent private patient unit operated by a private patient provider
FTs should be aware that both the Guidance and the revised NHS Foundation Trust Financial Reporting Manual should be considered not only when calculating the FT’s private patient income, but also for the purpose of re-calculating the amount of private patient income received by the FT in its “base financial year”.
As a general principle, the NHS Foundation Trust Financial Reporting Manual requires FTs to have in place procedures to be able to calculate accurately private patient income throughout the year, including at year-end. If accurate and reliable information is not available at year-end, Monitor nonetheless requires FTs to use all reasonable endeavours to include these amounts in the PPI Cap where appropriate, using estimates where necessary.
As a consequence, the Guidance states that FTs shall be allowed to apply “reasonable estimation techniques” in order to reach a best estimate of their private patient income from a particular source. This is particularly useful where the income stream is identifiable, but where the actual amount of income received is not yet available. An example would be where an FT receives income from a joint venture company. Where that company had not yet finalised its annual or audited accounts, an estimate based on accurate current management accounts would be acceptable.
FTs should note that any “reasonable estimation techniques” employed must be fully documented, as they will be subject to scrutiny by external auditors and possibly Monitor.
De minimis provisions
The Guidance states that Monitor does not wish to impose an unnecessarily heavy administrative burden on FTs in calculating their private patient income. Monitor therefore proposes to permit FTs to apply a de minimis level where the cost of obtaining information could outweigh the amount of private patient income the FT believes it has received.
The following criteria apply to the de minimis allowance:
- It can only be used for income where the amount of the income cannot be calculated or estimated without incurring costs which are disproportionately high when compared with the estimated amount of income;
- The estimated total amount of excluded income for any income stream in any year must be less than £25,000; and
- The de minimis level can only be applied to a maximum of 5 income streams.
Whilst the de minimis level is intended to avoid the administrative burden of identifying types and sources of small amounts of private patient income, FTs should note that they are nevertheless required to use reasonable endeavours to calculate this income. The FT’s board of directors must therefore be able to confirm to its auditors that its approach to and application of the de minimis rules is reasonable.
Anti Avoidance Principles
Monitor also requires FTs to continue to provide goods and services for the purpose of the health service, rather than applying their resources to PPI Cap avoidance activities. The directors of FTs are therefore responsible for their respective FT’s approach to the identification and treatment of private patient income, and must as an overriding objective comply with the FT’s Authorisation and all relevant legislation and guidance.
Appendix 4 of the Guidance sets out some general principles which FTs should follow in a reasonable and considered fashion in their approach to the PPI Cap. If these are not fairly applied, FTs are at significantly greater risk of additional external scrutiny and, in due course, the potential for specific regulatory action by Monitor.
It is clear that many arrangements which FTs currently have in place will be affected by the changes, and that FTs may not be able to alter these arrangements before 1 April 2010 without affecting adversely both patients and the FT’s obligations under any contracts it has entered.
In order to prevent the private patient income received by these FTs from exceeding their PPI Cap, and the FTs consequently breaching their Authorisation, the Guidance therefore states that FTs should by 1 April 2010:
- recalculate their PPI Cap base financial year;
- discuss with their auditors any estimations or de minimis provisions relied upon; and
- take all reasonable steps to comply with the PPI Cap and their Authorisation.
If any FT considers it will not be able to comply with its PPI Cap obligations on time, it should notify Monitor at the earliest opportunity, providing information on:
- the reason for delay in calculation of the PPI Cap base financial year;
- the reasons the FT risks breaching the PPI Cap, and the likely extent of any such breach; and
- the action which the FT proposes to take to rectify the position, including any likely financial costs, clinical implications and timescales.
Formal intervention by Monitor is not initially likely, but in the event the FT is not able to satisfy Monitor that it is able to rectify its position, Monitor may take action to intervene.
Will there be any further changes?
In October 2009, the Government began a review of its policy on the PPI Cap. As part of this review, it requested the NHS and other key stakeholders to submit evidence. The deadline for submissions was 31 December 2009 and the Government has yet to announce its conclusions and any consequential proposals. Monitor’s guidance is therefore based on the current legislation, and it is likely there will be further changes in the foreseeable future.
How Bevan Brittan can help you?
Bevan Brittan is able to assist you with:
- The process of assessing your current position in relation to the PPI Cap;
- Where you are at risk of breaching the PPI Cap, steps that you can take to bring yourself back into the cap whilst maximising profit from private patient income. These will depend on your circumstances but may include restructuring or terminating existing arrangements, business disposals or joint venture arrangements;
- Commencing any discussion or notification process with Monitor which is required.