Action plan to bail out debt-ridden NHS trusts

London health bosses are planning the biggest ever cash bailout of the NHS, the Standard can reveal today.

Debt worth millions would be wiped off the balance sheets of failing hospitals under a radical proposal drawn up by all 31 London primary care trusts.

NHS chiefs say the bailout will ensure all patients across the capital benefit from much-needed service reforms. But critics warn it will be seen as a "reward" for bad management and that cash for improvements will be diverted away from patients in a bid to balance the books.

Health chiefs are expected to finalise the plan by the end of this month - after their boards have given the go-ahead. The financial health of the NHS in London has improved dramatically during the past few years with most trusts now in the black. But six hospital trusts are still defined as "financially challenged" with another four - and one PCT - unlikely to be debt-free by 2011. Figures reveal the capital's health debt will reach £579million unless urgent action is taken.

Under the joint action plan, PCT chiefs will invest a proportion of their own existing cash resources in a collective fund during the next two years. Only the five trusts still repaying debts will be exempt. Each will be levied at a rate of 1.3 per cent which means trusts with the healthiest finances will pay more than others.

Controversially, the "pot" will also contain £304million of surplus funding currently held by NHS London. This would normally have been returned to PCTs to spend on patient care, but now this money and the levy will be used to clear the debts of ailing trusts.

NHS London said PCTs should be "congratulated" for drawing up the debt clearing plan. Finance director Paul Baumann added: "PCTs should be congratulated for taking this bold and decisive action. Failure to deliver this proposal would mean a number of organisations would be unable to deliver the improvements promised in Healthcare for London and healthcare across London would remain patchy. By taking this action PCTs will have much greater leverage to demand better performance from their providers."

But research think-tank The King's Fund warned it had to work. Its chief economist John Appleby said: "This is a once-in-a-lifetime opportunity for the NHS in London. It's vital that health services in the capital are redesigned and reconfigured to make sure we never find ourselves in this position again.

"However, to ensure this measure won't be seen as rewarding poor financial management, NHS London must be satisfied that the root cause of the financial problems facing the handful of trusts receiving the bailout won't return in a few years' time due to persistent problems that haven't been resolved."