WHIPPS Cross Hospital is facing "substantial" financial problems and cannot continue in its current form, a report has concluded.

Public spending watchdog the National Audit Office (NAO) says the Leytonstone site is "not viable" and the trust which runs it agrees.

The Government wants all hospitals to gain Foundation status, but the NAO said Whipps will not be able to do this as a stand-alone organisation because of its cash problems.

A spokesman for the hospital said the report demonstrated the necessity of the hospital's planned merger with Barts and The London NHS Trust and Newham University Hospital NHS Trust.

If the merger goes ahead, the hospitals will combine to form a new Foundation trust, which would give them greater managerial freedom and allow them to share resources.

But unions fear the merger will lead to job losses and cuts in the number of services based at the Leytonstone site.

It comes after the Guardian revealed that management at Whipps have asked staff to sacrifice their annual leave and do unpaid overtime.

The hospital is in a severe cash crisis, notching up a £4.5million deficit in just five months. It has also failed to achieve its savings targets for this year so far and is burdened with a £23million historical deficit as well.

Whipps has been named as one of just 20 trusts in the country which is either financially or clinically unviable.

A spokesman for the hospital said management had long held the view that the merger was the best way to secure its future.

He said: "We believe that the best option for the people of Waltham Forest and our patients from further afield is a merger with Barts and The London NHS Trust and Newham University Hospital NHS Trust.

"The merger offers exciting potential to not only improve access to care for those most in need, but also to further improve standards of care for our patients.

"We believe that the creation of a single trust, sharing the best of the talent, technology and facilities across all three organisations, can only be beneficial to the people of Waltham Forest and beyond."

Speaking about the national picture, Amyas Morse, head of the NAO, said: "The Department of Health has made a concerted effort to identify the challenges faced by the 113 NHS trusts seeking foundation status.

"Many of their problems stem from longstanding issues around financial viability, underlying performance and clinical quality.

"The department will have to tackle these issues head on if high quality and affordable health services are to be available to all."

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