Clinical Leadership Development Programme

Finance & BudgetingDavid BrownAssociate Director of Finance

07 October 2011

Contract Negotiation/Timescales

CommissioningIntentions

ExternalInfluences

GPCommissioners

StandardNHS

Contract

FinancialGovernance

EconomicClimate

NonF2F

RiskRatings

CommissioningBoard

QIPP

Health Bill

CIP

BusinessPlanning

CQUIN

Penalties

Capacityand

Demand

Block

TariffsProductivity

New toReview Ratios

NELThreshold

BestPracticeTariffs

Lean

Marketing

PbR

ServiceDevelopment

OperatingFramework

Re-Admissions

Forecasting

Funding Flows

BudgetSetting

KPI’s

Yearof CareTariffs

Monitor

SchemeOf Reservation

Financial Planning

Tenders

Agenda

Financial Reporting

SFI’s

StandingOrders

NHSStructure

BoardReports

BudgetControl

SLM / SLR

PLICS

PCT’s

AWP

SchemeOf Delegation

ChoiceAudit

BusinessCases New

Hospital

Patients

Purpose of the Session• How the money flows in the NHS & PbR• Current financial climate• Corporate & Financial Governance• Budgets, Budgeting approaches & Budget setting• Board level & Directorate level Financial Information• Budget Control & reporting • Financial planning & decision making• Finance & Clinicians• Questions

How the money flows in the NHS

• NHS Structure & Funding

• PCT Commissioning

• Payment by Results

• Future Structure’s & Funding

NHS Organisations & Structure

NHS Revenue Funding Flows

How the money flows: Revenue • A ‘weighted capitation’ formula (3 Years)• Attempts to takes account of the scale and characteristics of each PCT –

– Population and demographics– Deprivation levels– Health needs & profile

• Results in a ‘target share’ for each PCT• Target not the same as allocation - gradual move towards target allocations

for all PCT’s from growth!• Stockton & Hartlepool PCT’s circa £20m away from target• Allocation formula currently under review – cynical perspective change in

key variables to shift resources south!• Current formula not sophisticated / sensitive enough to disaggregate to

GP / GPCC level

PCT Commissioning• PCT’s commission healthcare for their local

population. This can be from:– NHS Trusts– Foundation Trusts– Community Service Providers– Independent Sector / Voluntary Sector– Doctors– Dentists– Opticians

NHS Trusts and Foundation Trusts Income• Majority of income received through commissioning

process with PCT’s via payment by results tariff• Other funding via

– Direct allocations from Department of Health– Local Authorities– Research & Training– Charitable Donations– Catering, Car Parking, Private Patients

Payment by Results (PbR)• PbR introduced in 2003/04 using HRG’s as currency• Rules based approach• Links payments to activity undertaken• Intended to support NHS Plan and reform agenda during period of

unprecedented growth– Reduce waiting times - 18 Weeks– Patient Choice

• National Tariff set annually for each type of service / HRG• Income reflects volume and complexity of healthcare provided.

Contract negotiations focus on volumes and quality

Payment by Results• Is it fit for purpose during period of austerity? –

– Original structure & scope incentivised FT’s to deliver increased volumes

– Latterly tariff tweaked for Introduction of NEL 30% threshold; recalibration downwards of tariff; move to exclude excess bed days income.

• Is it results based or actually just volume based?– Direction of travel towards best practice tariffs ; CQUIN’s;

Financial penalties; readmissions penalties etc

Health & Social Care Bill 2011• Abolish SHA’s & PCT’s• Establish Commissioning Board• GP Consortia• New Monitor

Proposed NHS Structure

Current Financial Context

• UK economic climate• NHS implications – minimal growth for next 5

years (Tariff Deflation)• DH need to generate cost efficiencies of £20bn• Projected savings target for Teesside of £200m

by 2014

CIP Performance - 2011 / 2012 • 2011/12 – projected view

CIP target = 15.851mRisk Rated PYE recurrent delivery = (5.554m)Further management action - Rec = (2.5m)Non-recurrent measures =

(7.832m)Total ‘unidentified’ CIP shortfall in year = 0m

• Impact on 2012/13 based on currentRecurrent CIP shortfall (15.851 - 5.554) =

10.297mFurther management action = (2.5m)Less fye of 11/12 schemes delivered in 12/13 = (2.991m)Recurrent shortfall of 11/12 schemes C/fwd = 4.806m

2012 / 2013 CIP – Scenario 2 (Assessor)

PYE recurrent shortfall on 11/12 CIP = 10.297m

PYE of 11/12 schemes delivered in 12/13 = (2.991m)

Corrective action undertaken in 11/12 = (2.500m)

12/13 Monitor Assessor @ 4.4% = 9.428m

Likely Case Scenario = £14.234m

Current Financial Context• In 2010/11 CIP target was £12.8m (5%), actual delivered

= £9m(3.5%) • National efficiency in tariff for 2011/12 = 4%,but due to

10/11 slippage, PCT financial position etc target = £16m(6.25%)

• CIP over next 6 years = circa £57 million (not including savings required for new hospital)

• New Hospital scenario – adds a further £26m of savings based on 2 to 1 site rationalisation economies

Current Financial ContextThis level of saving can only be contemplated if we look at major system transformation & radical solutions as well as tried and tested options

The need for real efficiency savings !

Corporate Governance• Financial Governance• Standing Orders• Standing Financial Instructions (SFI’s)• Scheme of Reservation & Delegation

Financial governance and accountability

Governance can be described as the rules, processors and behaviour that affect the way in which powers are exercised. It is therefore concerned with how an organisation is run, how it is structured and how it is led.

Financial governance and accountability• The Board• Accountable officer (Chief Executive)

– Responsible for ensuring that their organisation operates efficiently economically and with probity and that they make good use of their resources and keep proper accounts.

• Board of directors - held to account by Council of Governors! (FT’s only)

• Audit committee (Non Execs – safeguarding assets / Internal control)

• Annual report and accounts• Internal & external audit• Standing orders, standing financial instructions and schemes of

delegation

Standing Orders• Translate statutory powers into a series of practical rules:

- Composition of Board and its sub committees- How meetings are conducted- Form, content and frequency of reports - Voting procedures- Duties and obligations of Board Members

Standing Financial Instructions• SFIs detail the financial responsibilities, policies and

procedures of all transactions in order to achieve probity, accuracy, economy, efficiency and effectiveness

• The role of the Audit Committee, Internal & External Audit and the role of the DoF

• Procurement and tendering procedures

• The SFIs allow the Chief Executive to delegate budget management to budget holders

Scheme of Reservation & Delegation

• The scheme of reservation specifies what powers the Board has chosen to exercise itself – e.g. land sales

• The scheme of delegation specifies the delegation of powers from the Board throughout the organisation

Budget Definition

“a financial plan that sets out in clear and concise terms the resources assigned to the delivery of service and operational targets for a defined period”

Budgets – what they areForward planning allows the Trust to shape its future, rather than to react to events and is critical in the achievement of organisational objectives.

• Budgets are:- Financial and/or quantitative statements- Prepared and agreed for a specific future period- Designed to fulfil agreed objectives- Drawn up for separate activities/projects and for

organisations

Reasons for preparing budgets• Quantify the organisation’s future plans and

commitments• Review aims and ensure planned activities are

achieved• Determine the resources needed to deliver

services• Basis for controlling income and expenditure• A yardstick for measuring performance• To ensure statutory financial targets are met

When are budgets prepared ? • Each year – linked to Directorate business

plans, the Annual operating plan and the FT Annual plan submission to Monitor

• For new services• For major changes in the way in which

services are delivered• Dynamic not static

Budgeting approaches• Historic/incremental-based• Zero-based• Activity-based

Historic/incremental budgetingHistoric/incremental budgeting

Current year budgetNext year budget

Set other reserves

Create inflation reserve Less: cost

improvement programme

Adjust for changes in service

Add: full year effects of

recurring items

Less: non-recurring items

Zero-based budgeting

Review objectives of department

Assume zerobudget fornext year

Identify optimum staff, materials etc

Set entirely new budget

Activity-based budgetingIdentify

workload measure

Estimate planned activity

Identify fixed costs

Identify variable costs

Calculate marginal cost

Flex variable budget by

actual activity

Calculate budget

Measure actual activity

Historic/incremental budgetingAdvantages• Easy to operate• Simple to understand• Uses an established base• Less demanding on

management time• Can operate with weak

information systems

Disadvantages• Perpetuates inefficiencies• Lack of ownership by

managers• Changes in

activity/objectives/working practices not readily reflected

• Not responsive to changed priorities

Zero-based budgetingAdvantages• Identifies inefficiencies• Links budget to an

organisation’s objectives and activity plans

• Management ownership• Challenges existing

practice

Disadvantages• Time consuming• Difficult to implement• Lack of certainty• May raise expectations

Activity-based budgetingAdvantages• Links finances to activity• Budgets realistic compared

with activity• Encourages management

to focus on efficiency and fixed costs rather than uncontrollable workload

• Variances easier to explain

Disadvantages• Identifying activity levels is

difficult• Total income may not flex to

balance• Changes to standard costs

may not be recognised• Case mix is often excluded

Budget setting in the NHS• Combination of incremental and ZBB but needs to move

towards ABC – PLICs will provide the platform to do this• Robust timetable• Set and approved before the year it relates to• Realistic forecasts (for pay, inflation, cost pressures)• Takes account of previous year’s experience• Budget holder involvement• Profiled across the year• Balanced

FT Annual Plan• Monitor requires FT to submit an annual plan

by 31st May each year

• The plan includes forward planning information over a three year period

• Detailed implications i.e. development of a particular service will have implications for capital spend, tariff income etc

The Budget Setting Process• Comprises several basic steps:

- Prioritisation of objectives identified in the planning process and formalised via the annual plan and underpinning Service Level Agreements

- Assessment / quantification of total available resources, both financial and non financial

The Budget Setting Process - Income• Overall budget includes income from several different

sources:

- SLA’s with PCTs and other NHS bodies in accordance with the National Tariff and PbRs

- Private patients, RTA’s

- Medical and non-medical training funding via the Workforce Development Directorate of the SHA

- Commercial sources of income – car parking, catering etc

Trust Income• Contracts / Service Level Agreements (SLA’s)

– Legally binding, very detailed– Standardised national format for Acute & community

services– Specified / planned levels of activity agreed with

PCT’s– By Point of delivery e.g.

• Outpatients – New / review / procedures• Diagnostics• A&E• Emergency admissions• Elective – day case / General

Trust Income• Contract types – clinical Income

– Cost per case – trust paid for each treatment under the national payment by results tariff – a schedule of prices based on HRG v4 – circa 1400 prices e.g. Hip replacement = £4k

– Cost & volume / Block Contract – Trust paid for a set level of service e.g. Training of junior Medical staff, community services

• Non clinical Income – from catering, car parking, rents , education & training etc

The Budget Setting Process - Expenditure • Expenditure budgets are based on:

- Forecast outturn at month 10 in 2010/2011 and cover direct costs under the control of the budget manager

- Pay – detailing the agreed establishment in terms of WTE, £’s by AfC and local Trust grade

- Non-pay – by subjective category e.g. drugs, M&SE, provisions, energy etc

- Internal recharges for services provided / received such as pathology, radiology etc

Trust Expenditure• Pay – circa 68% of costs = 4,685 wte’s of which -

– Medical – 11%– Nursing & Midwives - 55%– AHP’s & Scientific staff - 13%– Admin & Estates - 17%– Management – 4%

• Non pay – circa 32%– Clinical supplies inc drugs ,prosthesis etc – 15%– Premises , plant & other – 12%– Capital charges – depreciation / Dividend – 5%

The Budget Setting Process - CIP • CIP agreed as part of the planning process and enables

the Trust to set the annual plan and budget within its resources

• Current economic climate, outlook and Monitor efficiency assumptions outline the need for increasing levels of efficiency savings

• Due to economic climate input sought from BDO with regard to best practice & development of schemes and governance

• In-year monitoring process includes a monthly report to Exec Team and Trust Board with escalation to the Finance Committee

Budgetary control - reporting• Monthly reports to board and management

• Performance against plans and targets using key performance indicators (KPIs)

• Financial and non financial information

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Financial Risk Rating (FRR)• When assessing financial risk, Monitor will assign a risk rating using

a system which looks at four criteria:

- achievement of plan; - underlying performance; - financial efficiency; and - liquidity.

•  Achievement against each of these criteria is scored from 5 to 1 (5 indicates low risk, 1 indicates high risk). A weighted average of these scores is then used to determine the overall financial risk rating.

The Monitor Risk Rating• The risk rating is forward-looking and is intended to reflect the likelihood of a

financial breach of the Terms of Authorisation. The ratings of 5 to 1 indicate:

Rating 5 - Lowest risk - no regulatory concerns

Rating 4 - No regulatory concerns

Rating 3 - Regulatory concerns in one or more components. Significant breach of Terms of Authorisation is unlikely

Rating 2 - Risk of significant breach in Terms of Authorisation in the medium term, e.g. 9 to 18 months in the absence of remedial action

Rating 1 - Highest risk - high probability of significant breach of Terms of Authorisation in the short term, e.g. less than 9 months, unless remedial action is taken

The Trusts FRR – 2011/2012• For 2011/12 the Trust are planning to achieve a FRR 3 which

assumes full delivery of the £15.8 million CIP target

• If the Trust failed to deliver the CIP target this would have the effect of reducing the FRR from a 3 to a 2

• This deviation from plan and reduction in the FRR to a 2 would trigger immediate action by Monitor who would implement special measures

• The Trust would move to monthly / weekly reporting with a view to implementing and monitoring a corrective action plan

EBITDA Margin• EBITDA Margin is the metric that Monitor use to measure underlying

financial performance

• Definition : EBITDA % = EBITDA Actual (Operating expenses) Total Income actual

• NTH EBITDA margin historically low in comparison to FT sector average, mainly due to structure of NTH finances – no major PFI’s

• Sector average over 7% , NTH position has declined from circa 6% to 4% over the last 3 years

• Monitor view is that it is an indication of deteriorating financial position that will lead to the Trust “burning cash”

EBITDA Margin

Budgetary control – what it is ?

• Budgetary control monitors actual results against the agreed budget

• Variances are identified

• Corrective action taken or budget revised

• Regular reports

Budgetary control – how it is used• Not an end in itself

• To identify the unexpected and investigate the cause

• To improve value for money

• Focus on what drives costs/generates income

Budgetary control – budget holders• Aligned with responsibilities and the ability to

control income and expenditure

• Simple published budgetary control policies

• Ownership – finances cannot be simply written off as ‘the responsibility of the finance department !’

Budgetary control – budget holdersWhat is a budget holder’s responsibility?

Tell the finance director there isn’t enough money ? – NO !

- understand and manage their budget - what drives income/costs ? - what influences outcomes/outputs ?

What are a budget holder’s key objectives ?

- deliver required quantity/quality of care/service- maximise income, minimise cost

Budgetary control – budget holders• So, to be an effective budget holder you must:

- Clarify objectives – what are you required to deliver?- Understand what other organisation-wide targets

you contribute to- Maximise income – look for opportunities- Minimise costs - Cash releasing savings: the same work for less

money - Cost improvement: more work for the same money- Focus on VFM.

Financial planning & decision making– Development of Service Line Reporting -

• Inform areas to develop the business & market services that are profitable

• Inform areas to apply lean principles to improve efficiency & ensure as a minimum services deliver a contribution

• Provide a road map for investment decisions targeting Capital resource to generate sustainable revenue growth

– Patient level information & costing – • Successful implementation dependent upon data warehouse

of patient interventions to support costed profiles of care• Will provide information to constructively challenge practice –

best practice tariffs• Provide the information to underpin business cases for new

procedures; service expansion/contraction etc

Financial planning & decision making

– Effective demand & capacity planning, linking PCT demand plans to Trust capacity

– Ensure these are consistent with operational budgets– Utilise lean thinking principles to ensure internal

capacity is utilised efficiently to deliver correct & appropriate care pathways & clinical interventions

What I need from youThe purpose of the NHS is to serve patients and the public by whom it is funded. Clinicians seek to do this by using their skills to provide the best possible advice, treatment and care. But they can only do this if the money available to the NHS is used well. Failure to do so results in less care and lower quality. Money will only be used well if clinicians are fully engaged in managing it. Ultimately, it is clinicians who are responsible for the way in which services are delivered to individual patients and it is they who commit the necessary resources.

Where do we need to get to - Clinicians & Finance -

business partners“The finance team have provided me with the advice, support and business understanding to enable me to develop and expand my service; increase volume, efficiency & profit which has benefited my clinical team, benefited the Trust and resulted in health gain for my patients”