Barts & East London Healthcare – Merger OBC Executive summary

Barts & East London HealthcareMerger Outline Business CaseCapital Investment Committee – 4th August, 2011

Barts & East London Healthcare – Merger OBCExecutive summary • The proposal to merge Barts & the London, Newham University Hospital Trust and Whipp’s Cross University Hospital Trust to form Barts and East London Healthcare has made steady progress since NHS London approved for the organisations to develop an outline business case in late February, 2011. The merger would create the largest Trust in England, running from six hospital sites, with 2,000 beds, employing over 15,000 staff with a turnover in excess of £1 billion. The target date for merging is 1st April, 2012. • Combining the organisation would put two Trusts, which are currently financially challenged and not able to make viable standalone Foundation Trust applications, in a better position to achieve authorisation as part of a larger entity. It would also provide the opportunity for significant rationalisation of corporate overheads, as well as streamlining of clinical support services. The opportunities of scale would provide clinical, operational and financial benefits to all three Trusts. • The merger is, though, premised on significant upfront funding being made available. The OBC argues that there will be a need for a £93.5 cash injection and £22.5m recurrent PFI support. At the moment, the sources of this funding are not fully identified or confirmed. • The outline business case, submitted and signed off by all three Trust board in June, satisfies, in the main, the requirements laid out by NHS London in its Approach to Transactions. There are a number of qualifications against a number of areas, however. In large measure these arise due to the very tight timescales for finalising the FBC and the target merger date of 1st April, 2012. • The vision for the new entity is clear with aspirations well articulated. The strategic direction and objectives for BELH are also clear. Other requirements for the OBC have also been met, including the need for stakeholder engagement and communication plans. The transaction team, established to guide the merger process and prepare the business case, have also laid out the market context for the merger although further analysis is needed on determining the impact on other providers and competition, which will be required for the different CCP reviews. Proposals for BELH governance arrangements as these relate to corporate-level structures, as specified by NHS London, also appear coherent. The Organisational Development plan is sufficiently developed for this stage of the merger and succeeds in co-ordinating a number of changes identified as necessary for the new entity, including leadership development, training, as well as core transactional requirements such as HR processes and Board and Executive-level appointments. Proposals for future management of operational risk appear credible. • Management of near-term risks up to the point of establishing the new entity, and as they relate to the merger process, appear controlled. There are a number of wider, longer-term risks, including on the integration challenge and external stakeholders that warrant attention. • A number of other areas specified for the OBC by NHS London are sufficiently developed for this stage in the process but in view of very tight timescales need to be developed rapidly. The OBC sets out a number of enablers for the new organisation to realise the vision and strategy, and necessary if BELH is to bring about the improvements and benefits identified. These include putting in place new Clinical Service Groups. These groups represent a key restructuring objective for the new Trust, through which it will ensure clinical governance and deliver needed operational and performance changes, as well as better financial performance. In turn, in order for these Clinical Service Groups to function a number of major changes are needed, including, for example, implementation of a new Performance Management Framework, financial reporting arrangements and supporting ICT systems. The scale of these changes, the viability of delivering them against the merger timescales, associated costs and resource needed have yet fully to be determined.

Barts & East London Healthcare – Merger OBCExecutive summary cont’d • There are, therefore, a number of major conditions that need to be met for the merger, including delivery of organisational restructuring, upgrading enabling back-office systems and processes and identifying sources of funding for the financial gap identified in the OBC. Additional dependencies include establishment of an integrated view on Estates. • In summary, based on assessments by NHS London’s M&A and Finance teams, which have considered the OBC and a variety of other supporting materials, including information relayed during regular discussions with the BELH Transaction Director and Finance Director, and members of the BELH transition team, as well as its advisors, the recommendation is that the Trusts be allowed to continue to develop the merger proposals further into a full business case to be submitted later this year. Continuing co-operation between the merger team and NHS London and timely responses to queries raised and information requested remains key. • Finally, there remains a risk for NHS London on process. The OBC, in its current form, is agnostic on the question of the different solutions for the wider health economy in north east London. The starting point for the BELH proposal is the best interests of the three Trusts and the patients it currently serves. To date no full, independent options assessment has been undertaken by NHS London on the current three-way proposal against alternatives. There has also been no financially-based comparison of alternative proposals.

Barts & East London Healthcare – Merger OBCStructure of CMG paper Table of contents • This paper adopts the following structure. • Section 1, ‘Introduction’, sets out the main developments around the BELH proposal since February and NHS London’s approval that the merger passes to OBC stage. It also confirms the requirements for the OBC. • Section 2, ‘OBC Assessment’, contains NHS London’s Finance & M&A teams’ consideration of the OBC against these requirements. • Section 3 outlines the principal merger risks, dependencies and next steps to development of the full business case (FBC) subject to CMG/ CIC approval. • A summary is provided below.

Barts & East London Healthcare – Merger OBCList of acronyms • JSNCC – Joint Staff Negotiating and Consultative Committee • KPI – key performance indicator • LTFM – long term financial model • NUHT – Newham University Hospital Trust • OBC – outline business case • OD – organisational design • ONEL – outer north east London • PAS – patient administration systems • PFI – private finance initiative • SOC – strategic outline case • SRO senior responsible officer • T&Cs – terms and conditions • TFA – tri-partite formal agreement • PMIIP – post merger integration and implementation plan • WCUHT – Whipp’s Cross University Hospital Trust • AfC – Agenda for Change • BLT – Barts and the London NHS Trust • CCP – Co-operation and Competition Panel • CCG – clinical commissioning group • CIP – cost improvement programme • CSGs – Clinical Service Groups • CTB – Challenge Trust Board • DoH – Department of Health • FBC – full business case • FT – Foundation Trust • HfNEL – Health for north east London • HMT – Her Majesty’s Treasury • HR – human resources • IBP – integrated business plan • INEL – inner north east London

Barts & East London Healthcare – Merger OBCBasis of preparation for CMG paper • The OBC assessment is based on a review of the following document: BELH Outline Business Case, DRAFT version 5 dated 15th July, 2011. • Additional information has been requested and provided as part of regular discussion between NHS London Finance and M&A teams, the BELH transaction team, the Transaction Director and Finance Director, as well as Ernst & Young, which is advising on the transaction. Documents include: • BELH Transition Supervisory Board papers, March, 2011 • BELH Transition Supervisory Board papers, April, 2011 • BELH Transition Supervisory Board papers, May, 2011 • BELH Transition Supervisory Board papers, June, 2011 • Merger internal programme organisation structure, 1st July to 30th September, 2011 • Indicative outputs from the BELH FBC financial modelling, dated 28th June, 2011 • BELH back-office savings, dated June, 2011 • Estates & Facilities workstream plansDRAFT, dated 5th July, 2011 • Informatics workstream plansDRAFT, dated 5th July, 2011 • Organisational Development workstream plansDRAFT, dated 5th July, 2011 • Copies of the BELH OBC and all other materials and documentation are available to CIC members on request.

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OBC assessmentStatus of merger proposal Background • The strategic outline case (SOC) for the three-way merger of Barts and the London NHS Trust (BLT), Newham University Hospital NHS Trust (NUHT) and Whipp’s Cross University Hospital NHS Trust ( WCUHT) was finalised in January, 2011. • The SOC was then approved by BLT, NUHT and WCUHT Trust boards on the 26th, 20th and 14th January, 2011 respectively. • NHS London Capital Investment Committee (CIC) considered the SOC at its meeting of 22nd February, 2011 when it gave its approval to BLT, NUHT and WCUHT to commence development of an outline business case (OBC) for the three-way merger of the Trusts. Recent developments • Following approval of the SOC and agreement to proceed to OBC, a Supervisory Board was established to oversee creation of the business case and the merger. David Palmer was appointed as Independent Chair of this Board. Lucy Moore was seconded from her position as Chief Executive of Whipp’s Cross to the role of Integration Programme Director. Peter Morris, Chief Executive of BLT is to take the role of lead Chief Executive during the transition. The Supervisory Board has held meetings on 23rd March, 19th April, 25th May, 22nd June and, most recently, on the 19th July. • The BELH Transition Executive Board, in agreement with the three Trusts, has approved and passed the budget for the transaction to October, 2011.The cost of the transaction team, including advisors is approximately £4m to end of September. Funding is being provided by each of the three Trusts, proportionate to turnover, as well as from the ONEL and INEL clusters. • A number of advisers have been retained to support the Supervisory Board and transition team, including Ernst & Young, which is supporting development of the business case and integration plans, as well as Frontier Economics, which is supporting on the Co-operation and Competition Panel (CCP) submission. • Additionally, the first submission has been made to HM Treasury’s CCP on 8th April, 2011. CCP has since raised a number of questions for their Part 1 review, which began w/c 20th June. Final responses to these have been submitted week ending 22nd July. Additionally, the CCP has received a challenge to the merger proposal from City & Hackney East London Integrated Care, a consortium of GPs on 13th June. The basis of the challenge is over the clinical vision and impact on how services will be delivered locally and the extent to which wider impacts of the merger on the health economy have been considered. • The merger is being planned using a programme management approach with three main phases: Preparation (running to March, 2012); Integration (running to April, 2013) and Transformation (running to April, 2014). The Preparation phase is concentrating on developing materials for the independent approvals process, including the OBC and CCP submissions and, then, post FBC, on effecting the changes and organisational restructuring needed for the merger. • Further details on the key approval milestones are provided in Section 3 following. • NHS London’s Capital Management Group considered the OBC at its meeting on 19th July and agreed to recommend the merger proposal to CIC for its consideration.

OBC assessmentOutline Business Case requirements Requirements for OBC • NHS London has developed the process for transactions covering community services and NHS Trusts during late 2009 and early 2010. Its recommendations are set out in the following document: NHS London’s Approach to Transactions, dated 17th February, 2010. This document specifies expectations on participant Trusts at each phase for all transaction types, e.g., acquisition, merger, de-merger or divestment. • The OBC is the document that combines materials generated as part of development of the merger proposal and planning for integration. It is also intended as a very early preparation for Trusts’ Foundation Trust application. • Requirements for the OBC include: • An integrated business plan (IBP) • The IBP should include a vision for the merged organisation, summary profile, market assessment, financial evaluation, stakeholder engagement, leadership and workforce and governance arrangements, and risk. • Note that the requirement for the OBC is that it incorporates less detail than the IBP needed for the Foundation Trust assessment process. • A draft Organisational Development Strategy • A Post Merger Integration Blueprint • Draft Heads of Terms • Scope of Due and Careful Enquiry • The OBC should provide the basis for an independent Due and Careful Enquiry that will inform the full business case (FBC). This process would commence after OBC approval. Status of the OBC • The OBC does not represent the point for approving the merger. It is intended as a review point in the merger process and development of plans to enable scrutiny of and assurance on: • whether the fundamentals of the business case are viable; • whether the organisations have articulated the intent and outlined the direction for the new entity; • whether there is clarity on how the new entity will operate and be governed; and • whether integration planning is sufficiently developed to meet the projected merger timeline and subsequent assessments for the FBC. • The FBC represents the point of final sign off and approval by NHS London. At that point, the proposals is passed for Department of Health Transaction Board approval. • The assessment of the OBC set out in this paper makes a number of specific recommendations for the FBC, as well as stipulates requirements for the BELH transaction team in respect of information and assessments in advance of the FBC submission deadline.

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OBC assessmentVision Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentVision cont’d Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentOverview of BELH Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentMarket assessment Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentFinancial case for merger Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentFinancial case for merger cont’d Summary shifts in savings requirements from merger • If these CIPs are achieved and the cash position is resolved then the business case model indicates the merged organisation will be able to make a viable FT application. • The merger savings come from a number of sources including back office (£7.1m, reduction 126 wte), consolidation of diagnostic services (£4.6m) surgical repatriation(£3.5m) and estates(£4m). Although it might be possible to achieve some of these without merger the argument is that it will be easier to deliver this under one management structure and the current systems would have done this if it were possible in current structures. • High level documents have been reviewed but with the exception of the back office (where new structures have been identified and costed) the work so far has concentrated on identifying the opportunities. • The position is similar in respect of productivity gains. The merger team reviewed the cost per HRG (based on reference costs) for each Trust and have calculated the saving if each Trust improved to the mean for the merged organisation. The productivity benchmarking pool is effectively “Barts Whipps and Newham”. The merger team have identified that the £39.1m can be delivered through improvements to length of stay (£5m), day case(£1m), DNA (£1.3m), cancellation rates (£6.6m) Diagnostic (£4.6m), surgical repatriation (£3.5m) and other (£17.1m). However implementation plans are not yet developed. • The basis of the savings is reference cost information and inconsistencies in approach and cost allocations make this a theoretical approach to efficiency and will make it difficult to achieve 100% of savings identified. • The PFI funding has not been confirmed. • The lack of detailed planning means there is a risk that CIPs in 2011-12 (current plan £85m (7.5%)) will reduce the opportunities for savings in future years.

OBC assessmentBELH structure & governance BELH Board & Committee structure FT Board & Committee structure Trust Board Council of Governors Audit Committee Integrated Quality/ Assurance Committee Finance & Investment Committee Renumeration Committee Membership Committee Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentBELH structure & governance cont’d Wider Executive Team + Clinical Service Group Leads 1. Management Board Tripartite Multi professional Directorate Leadership Team 2. Clinical Service Group Clinical Specialities 3. Service Lines 4. Service Delivery Point Ward / Primary care setting Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentBELH structure & governance cont’d Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentCorporate risk management Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentStakeholder management Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentOrganisational development strategy Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentOrganisational development strategy cont’d Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentIntegration blueprint Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentIntegration blueprint cont’d Key: OBC requirements met OBC requirements met with qualifications noted Insufficient detail provided in OBC

OBC assessmentScope of due & careful enquiry/ Heads of Terms HoTs • A draft of the HoTs is currently being prepared following discussions between the transaction team and NHS London. • A number of provisions still need to be settled, in particular the status of any funding available to the three Trusts from CTB and NHS Bank (in respect of PFI support). There is also an open question over whether the current funding estimates should be specified in the HoTs. • Revised forms of the particular clauses are being finalised by NHS London’s legal advisors. The revised draft HoTs will then go to each of the three Trust boards for approval. • It is anticipated that, subject to agreement over the outstanding provisions, the HoTs will be concluded by the first week of August. Scope of due & careful enquiry • A pro forma scope of work is set out in NHS London’s Approach to Transactions. • As part of a separate process for the Challenged Trust Board (CTB) a process of due diligence and financial assessment is due to commence on WCUHT and NUHT. To avoid duplication and streamline the process, it’s been agreed to combine the due diligence activities. A supplier is being retained and a final scope of work that will meet the separate requirements of all parties is in the process of being finalised. • It is anticipated that a final agreed scope of work will be in place by the end of July with work starting in early August.

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Risks, dependencies and next stepsMerger risks BELH risk management • Risks to delivery of the merger are being managed and routinely considered at the Transition Supervisory board, which has delegated authority to take appropriate actions where necessary. Risks appear broadly well managed as part of the transaction programme. • Following is a summary the main risks associated with the merger over the next two quarters to FBC submission. • As part of its approach to risk management, the BELH transaction team is also anticipating post-merger risks. Details of these and the underlying approach will require scrutiny at FBC stage and the assessment of the full post-merger integration and implementation plan (PMIIP).

Risks, dependencies and next stepsMerger risks cont’d NHS London view on risks • For NHS London there are a number of risks given the status of the merger proposals. • Longer-term risks beyond the FBC stage later this calendar year are also registered as part of NHS London’s Provider Development monitoring of milestones as specified in Trusts’ tri-partite formal agreements (TFAs).

Risks, dependencies and next stepsMerger dependencies PFI/ productivity • The DoH-sponsored review currently underway around the financial challenges arising from Trust PFIs is due to complete in September with early results of the assessment out in late July. Very early conclusions suggest that there is likely to be a shortfall from the figure set out in the OBC to cover BLT’s PFI. This would have an impact on current targeted CIP levels at BLT. • At the point where conclusions are settled and the likelihood and levels of any support for BLT confirmed amendments will need to be made to the LTFM for the FBC, including reconciliation of changes from the financial case underpinning the OBC. • Additionally, the conclusions of NHS London’s SaFE project need to be reconciled with productivity assumptions in the BELH OBC, or variances agreed. This needs to happen as a priority and in advance of the FBC completing. Estates • The OBC acknowledges the potential for efficiencies across the different Trust sites, as well as for estate configuration. The opportunities presented by the merger for the BLT PFI are referenced. Additionally, the estates requirements at WCUHT are also noted, including the challenge of solving the significant maintenance backlog and continuing investment requirement, e.g., in Maternity. • The FBC will require full details of BELH’s Estate strategy, including disclosure of planning and financial assumptions on each of the current Trust sites, as well as the consolidated portfolio. • The Transaction team needs urgently to provide full details of the strategy, including identification of all site variables and dependencies, change requirements and associated costs, investment needed to deliver these, including an assessment of viability. Information should be provided before the target date for finalising the FBC. ICT and information/ clinical systems • The OBC similarly acknowledges both the critical dependency of changes to ICT and related systems for the integration and operational success of the new entity, as well as realisation of financial benefits identified. The aspiration for ICT are articulated clearly at a high level, including key objectives. • The Transaction team needs urgently to provide full details of the ICT strategy, change requirement and associated cost, investment needed to deliver these, including an assessment of viability. Information should be provided before the target date for finalising the FBC.

Risks, dependencies and next stepsNext steps Developing the FBC • Subject to approval of the OBC and satisfactory resolution of any issues and questions arising from CIC consideration, the BELH transition team will continue to develop the FBC. • Preparatory work on this has already commenced, in particular in relation to integration planning. Approvals • There are a number of major sign offs and approval points by different stakeholders. • Draft FBC completion – 19th August • Transition Supervisory Board – 21st September • BLT Board review of FBC – 28th September • WCUHT Board review of FBC – 30th September • NUHT Board sign off FBC – 2nd November, 2011 • NHS London CMG approval sought for FBC – 9th November • NHS London CIC approval sought for FBC – 17th November • Sign off of the FBC at BLT and WCUHT Boards is targeted for late October. • CCP approval is to follow in late November/ early December and is subject to confirmation. Discussions with CCP are continuing. Subject to the outcome of the CCP review it is possible that the FBC may need to be revised. • Finally, Secretary of State approval is set for March, 2011 at which point the three Trusts will be dissolved and BELH established. At the time of writing, the target date for this remains 1st April, 2012.

Barts & East London Healthcare – Merger OBC Executive summary