Loss-making NHS Trust could be the first to face "special administration" regime

South London Healthcare received the warning in the form of a letter from Health Secretary Andrew Lansley. A spokesman from the Department of Health told Out-Law.com that a brief consultation phase was underway, after which Lansley could decide to invoke the Trust Special Administration Procedure.

In a statement on its website, South London Healthcare reassured patients that its staff would "continue to provide services as normal".

"Our staff have worked hard for patients and in spite of significant financial issues, we are extremely proud that we now have among the lowest mortality and infection rates in the country," it said. "We expect these discussions to come to a conclusion in the second week in July when a decision will be taken by the Secretary of State."

The trust, which was formed in 2009 by the merger of the Princess Royal University Hospital, Orpington, Queen Mary's Hospital in Sidcup and Woolwich's Queen Elizabeth Hospital had a £69 million debt at the start of the financial year, according to the BBC. It inherited a large debt at the time of the merger, primarily due to the private finance initiative (PFI) used in the construction of the buildings at Orpington and Woolwich.

In his letter, published in part by the BBC, Lansley said that healthcare providers had to deliver high-quality services to patients that were "clinically and financially sustainable for the long term".

"I recognise that South London Healthcare NHS Trust faces deep and long-standing challenges, some of which are not of its own making," he wrote. "Nonetheless, there must be a point when these problems, however they have arisen, are tackled. I believe we are almost at this point."

The PFI model is a method of utilising private sector capital as a way of funding major public infrastructure projects, but critics have suggested that higher borrowing costs as a result of the recent economic downturn have resulted in the long-term expense of the model becoming much higher than for other, more conventional, forms of borrowing. A Government report last year identified 22 healthcare trusts as facing difficulties because payments under PFI schemes were amounting to up to a fifth of their budgets.

The Health Secretary was given the power to appoint a special administrator to review an NHS Trust if "appropriate in the interests of the health service" in 2009 under the 'Unsustainable Provider Regime'. To use this power he must inform Parliament of the reason for his decision, after consulting with the trust and any regional health authority where the trust has hospitals or facilities. The administrator must publish its draft recommendations within 45 working days, and publish a final report after a 30-day consultation on that draft.

The Department of Health spokesman said that announcements regarding the "best way forward" for the organisation would be made following discussions with all involved.

"There are longstanding problems at South London Healthcare NHS Trust and they must not be allowed to compromise patient care in the future," he said. "The Trust has £150m of accumulated debt, is generating further debt at a rate of £1.3m every week and has required repeated financial support from the taxpayer – money which should be spent on improving care. That situation cannot be allowed to continue, which is why we are considering options for how the Trust is managed in the future."

Barry Francis of Pinsent Masons, the law firm behind Out-Law.com, said that the move could bolster confidence in some health sector reforms.

"The administration will be an important indicator of how the insolvency regime will work out in practice, so how it is handled will be an important indicator to those dealing with the NHS as to the risks of doing so," he said. "If this is handled well it will encourage private sector commercial entities and banks in their dealings with the NHS. It will also alleviate fears as to the political and social consequences of introducing market disciplines into the NHS."

"The implication that the problem is down to the PFI contract is unlikely to be anything like the full story. Its easy to blame PFI in the current climate, rather harder to justify," he said.

Earlier this year private healthcare provider Circle took over the management and day to day service delivery of Hinchingbrooke Hospital, Huntingdon, in a ten-year deal. The arrangement sees the company assume the financial risk of making the hospital more efficient and for paying off an estimated £39m debt.