Hospitals move prompts warning of two-tier NHS

The top performing hospitals in the NHS are to be removed from Whitehall control with the aim of making them more responsive to their local communities under government plans to modernise the NHS.

But the Health and Social Care Bill, which will establish foundation hospitals, is certain to prove controversial. The first candidates will be selected from among the three-star NHS trusts, which will be given the right to borrow money from the private sector and will have the freedom to invest in and develop their services in ways not available to other hospitals.

The hospitals will be set up as non-profit, public-interest companies controlled by a "stakeholder council" including local patients, residents and NHS staff rather than by distant bureaucrats in Whitehall. The hospitals will manage their own assets, retain surpluses and set their own pay and conditions. This has drawn accusations, notably from the former health secretary Frank Dobson, that it will lead to a two-tier NHS.

Mr Dobson said on BBC Radio 4 yesterday: "Apart from one or two cabinet ministers, I have yet to meet a single MP who is in support of foundation hospitals."

The plans have also sparked a clash between the Secretary of State for Health, Alan Milburn, and the Chancellor, Gordon Brown, over how much financial freedom foundation hospitals will have. A compromise was agreed last month under which the hospitals will be permitted to borrow up to a "prudential limit" set by an independent regulator who will judge their ability to repay the loan.

The Treasury feared excessive borrowing could lead a hospital into bankruptcy with the state left to pick up the tab. It also insisted that the borrowing should appear on the Government's balance sheet – against Mr Milburn's original wishes. On this point the Treasury has prevailed: any borrowing will come off expenditure limits already set for the Department of Health.

But it remains unclear whether this agreement only holds for the current spending round to 2005-06 or beyond. Mr Milburn's advisers want future borrowing to be determined by foundation hospital's spending decisions and not by Whitehall diktat, and that it should eventually move off the Government's balance sheet.

Ministers defend their plans in terms of "shifting power to the front line" and remedying the "democratic deficit" in public services by making them more accountable to their local communities. Although they tacitly acknowledge that foundation hospitals will have advantages, introducing an element of a two-tier service, the intention is to roll out the scheme with a programme of financial and operational deregulation covering all hospitals. "If it's good for one, it's good for all," one source said.

The first foundation hospitals, numbering up to a dozen drawn from among the best- performing trusts, are likely to be set up as shadow trusts in July next year and to begin operating from April 2004.

The Bill will also create a "super-inspectorate" for the health service by merging the Commission for Health Improvement, the government watchdog on NHS performance, with part of the Audit Commission to create the Commission for Healthcare Audit and Inspection, which will cover both the NHS and the private sector. It will be the first time the private sector has been subject to regulation.

Another Bill, which is expected to be published today, seeks to end "bed-blocking" by elderly people awaiting discharge from hospital with the introduction of a system of fines for local authorities that fail to provide necessary support in the community or places in residential care. The Community Care (Delayed Discharges etc) Bill is aimed at reducing the backlog of up to 5,000 patients who are kept in hospital beds each year because they have nowhere else to go, preventing other patients from being admitted.

Medical and nursing organisations gave a cautious welcome yesterday to the greater freedom promised to foundation hospitals and the opportunities that would provide for innovation. But they warned about the danger of creating a two-tier health service. Ian Bogle, chairman of the British Medical Association, said: "Our prime concern must be to avoid creating a service in which patients who live near to foundation hospitals, or are vocal and assertive in pressing to be referred to them, receive better services than those who are treated in other hospitals."

The Royal College of Nursing warned of "geographical disparities in both hospital resources and nurse recruitment" and the NHS Confederation, representing managers, said foundation hospitals "must not distract from the more far-reaching government commitment to a wide ranging programme of deregulation for all hospitals, not just the top 10."

The confederation added that plans to tackle bed-blocking by fining local authorities could backfire if it reduced resources available for the care of elderly people. It said the scheme could undermine partnerships between local health and social services departments by creating financial barriers between them.