A committee of MPs reports that the Department of Health (DH) has been unable to explain to them how it would deal with an NHS trust that goes bankrupt.

Nor could it explain what would trigger a trust being placed into the failure regime, or exactly how that process would work, says the Committee on Public Accounts, publishing its latest report on the financial sustainability of the NHS.

Commenting on the evidence provided to the panel by the DH, committee chair Margaret Hodge said: "we do not know whether a bankrupt trust would be allowed to fail or how and when Ministers would intervene. And it is not clear how the Department would ensure that essential services are protected if a trust fails."

"It very much looks like the Department is inventing rules and processes on the hoof rather than anticipating problems and establishing risk protocols," she added.

The overall surplus of £2.1 billion across all NHS bodies in 2011-12 masks the fact that a significant minority are in financial difficulty, says the MPs' report. In London, two trusts have a combined deficit of £115 million, one of which, South London Healthcare NHS Trust, has been placed in special administration.

"We are particularly concerned that the financial viability of a number of trusts is being undermined by the fact that they are locked into unaffordable private finance initiative [PFI] contracts. It is unclear how the Department will continue to underwrite payments once most of the money moves to the NHS Commissioning Board," added Ms Hodge, Labour MP for Barking.

The Committee's findings, which are based on evidence provided by the DH and the regulator Monitor, show that 377 NHS organisations reported a surplus for 2011-12, but 10 NHS trusts, 21 NHS foundation trusts and three Primary Care Trusts (PCTs) reported a combined deficit of £356 million. Moreover, they add that, without extra funding from PCTs, Strategic Health Authorities (SHAs) and the DH, a further 31 NHS trusts and 11 foundation trusts may not have broken even for the year. The latter group would not have made foundation trust status today given their financial performance, and there is a real concern that some organisations will fail, the MPs warn.

The DH was unable to tell the Committee clearly what would trigger a trust being placed in the failure regime, and how decisions would be made about the future of a trust in financial difficulty, say the MPs. "We were particularly surprised that the Department was unable to tell us how the process will work for South London Healthcare NHS Trust, which is already in special administration. We also fear that they new system creating central 'risk pools' to deal with trusts in financial difficulties is likely to put more pressure on other health trusts who are already seeking financial savings to meet the £20 billion efficiency savings target," they add.

A number of trusts in financial difficulty have PFI contracts with fixed annual charges that are so high the trusts cannot break even, the report notes. Paying these charges is one of the first calls on the NHS budget, and the DH is liable for supporting all PFI payments because it underwrites the Deed of Safeguard given to contractors. It already expects to have to find £1.5 billion to bail out seven trusts facing problems with PFI repayments over the remaining life of their contracts, equivalent to £60 million annually.

Moreover, the MPs note, the guarantee provided by the Deed of Safeguard gives PFI providers the upper hand in any attempt by trusts to renegotiate the contracts, "which experience suggests can result in reduced service levels rather than greater efficiency. The priority given to meeting PFI annual charges inevitably distorts priorities, which is especially worrying at a time when resources are constrained," they say.

Overall, the Committee reports that the DH had been unable to spell out to it a clear plan to achieve financial sustainability or a clear strategy for dealing with financial failure at individual trusts, or to provide reassurance that such problems would not damage the quality of care or equality of access to all citizens, wherever they live.

The incentives for Clinical Commissioning Groups (CCGs) to work collaboratively within regional health economies remains unclear, the report adds. "Given the scale of the challenge, it is alarming that there is a lack of comparative data that could inform a debate on reconfiguration of services, particularly because the Department expects that every trust will need to reconfigure services," it concludes.