3Purpose of the Session How the money flows in the NHS & PbR Current financial climateCorporate & Financial GovernanceBudgets, Budgeting approaches & Budget settingBoard level & Directorate level Financial InformationBudget Control & reportingFinancial planning & decision makingFinance & CliniciansQuestions
4How the money flows in the NHS NHS Structure & FundingPCT CommissioningPayment by ResultsFuture Structure’s & Funding
7How the money flows: Revenue A ‘weighted capitation’ formula (3 Years)Attempts to takes account of the scale and characteristics of each PCT –Population and demographicsDeprivation levelsHealth needs & profileResults in a ‘target share’ for each PCTTarget not the same as allocation - gradual move towards target allocations for all PCT’s from growth!Stockton & Hartlepool PCT’s circa £20m away from targetAllocation 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
8PCT CommissioningPCT’s commission healthcare for their local population. This can be from:NHS TrustsFoundation TrustsCommunity Service ProvidersIndependent Sector / Voluntary SectorDoctorsDentistsOpticians
9NHS Trusts and Foundation Trusts Income Majority of income received through commissioning process with PCT’s via payment by results tariffOther funding viaDirect allocations from Department of HealthLocal AuthoritiesResearch & TrainingCharitable DonationsCatering, Car Parking, Private Patients
10Payment by Results (PbR) PbR introduced in 2003/04 using HRG’s as currencyRules based approachLinks payments to activity undertakenIntended to support NHS Plan and reform agenda during period of unprecedented growthReduce waiting times - 18 WeeksPatient ChoiceNational Tariff set annually for each type of service / HRGIncome reflects volume and complexity of healthcare provided. Contract negotiations focus on volumes and quality
11Payment by Results Is it fit for purpose during period of austerity? – Original structure & scope incentivised FT’s to deliver increased volumesLatterly 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
12Health & Social Care Bill 2011 Abolish SHA’s & PCT’sEstablish Commissioning BoardGP ConsortiaNew Monitor
14Current Financial Context UK economic climateNHS implications – minimal growth for next 5 years (Tariff Deflation)DH need to generate cost efficiencies of £20bnProjected savings target for Teesside of £200m by 2014Banking sector collapse and the resultant credit squeezeLow interest ratesStagnant economic growthIncreased unemploymentReduced tax revenuesLow inflationQuantitative easing – national debt from £38bn to £180bn
15CIP Performance - 2011 / 2012 2011/12 – projected view CIP target = mRisk Rated PYE recurrent delivery = (5.554m)Further management action - Rec = (2.5m)Non-recurrent measures = (7.832m)Total ‘unidentified’ CIP shortfall in year = 0mImpact on 2012/13 based on currentRecurrent CIP shortfall ( ) = mFurther management action = (2.5m)Less fye of 11/12 schemes delivered in 12/13 = (2.991m)Recurrent shortfall of 11/12 schemes C/fwd = 4.806m15
162012 / 2013 CIP – Scenario 2 (Assessor) PYE recurrent shortfall on 11/12 CIP = mPYE of 11/12 schemes delivered in 12/13 = (2.991m)Corrective action undertaken in 11/12 = (2.500m)12/13 Monitor 4.4% = 9.428mLikely Case Scenario = £14.234m16
17Current 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 economies17
18Current Financial Context This 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 !
20Financial 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.
21Financial governance and accountability The BoardAccountable 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 accountsInternal & external auditStanding orders, standing financial instructions and schemes of delegation
22Standing OrdersTranslate 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 MembersCorporate governance underpins all the organisations activitiesAll FTs are required to establish registers of members, directors and governors interest (held by Trust Board secretary).
23Standing Financial Instructions SFIs detail the financial responsibilities, policies and procedures of all transactions in order to achieve probity, accuracy, economy, efficiency and effectivenessThe role of the Audit Committee, Internal & External Audit and the role of the DoFProcurement and tendering proceduresThe SFIs allow the Chief Executive to delegate budget management to budget holders
24Scheme of Reservation & Delegation The scheme of reservation specifies what powers the Board has chosen to exercise itself – e.g. land salesThe scheme of delegation specifies the delegation of powers from the Board throughout the organisation
25Budget 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”Key points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money – they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.
26Budgets – 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 organisationsKey points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money – they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.
27Reasons for preparing budgets Quantify the organisation’s future plans and commitmentsReview aims and ensure planned activities are achievedDetermine the resources needed to deliver servicesBasis for controlling income and expenditureA yardstick for measuring performanceTo ensure statutory financial targets are metKey points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money – they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.
28When are budgets prepared ? Each year – linked to Directorate business plans, the Annual operating plan and the FT Annual plan submission to MonitorFor new servicesFor major changes in the way in which services are deliveredDynamic not staticThis slide lists some of the many different reasons why budgets are drawn up.It is worth emphasising that the overriding reason is to establish a realistic and affordable plan for the future that will meet the department’s/unit’s/organisation’s aims and reflect their agreed priorities for the period covered.Once a budget is agreed it is used to monitor how things are turning out – actual performance is compared with that planned. This applies both to income and expenditure.The next slide looks at the final bullet point in more detail.
30Historic/incremental budgeting Current year budgetLess: non-recurringitemsNext year budgetSet other reservesAdd: full yeareffects ofrecurring itemsCreate inflationreserveAdjust forchangesin serviceThis is the most commonly used approach in the NHS. Historic based budgets are ‘rolled-over’ from one year to the next with changes (increments) made each year for:Pay awardsInflationCost improvementsDevelopments (for example if a new service is introduced or another discontinued).Refer to the fact that allowance also has to make for the financial consequences of any new policy developments.Less: costimprovementprogramme
31Zero-based budgeting Assume zero budget for next year Set entirely new budgetReview objectivesof departmentZero based budgeting (ZBB) assumes that you will be starting the new year with a blank piece of paper – rather that using last year’s budget it produces a completely fresh financial plan, having re-evaluated the entire service and its costs.Obviously ZBB is a far more time consuming approach to setting a budget and can also be unsettling for the organisation. Its use tends to be restricted to:New servicesService reviews.Identify optimumstaff, materials etc
32Activity-based budgeting IdentifyworkloadmeasureFlex variablebudget byactual activityEstimateplannedactivityIdentify fixed costsCalculate budgetIdentifyvariable costsMeasure actualactivityActivity based budgeting produces not one, but a whole range of possible budgets which vary according to activity levels. It involves being clear about what costs are fixed and those that are variable (i.e. will increase/decrease as activity increases/decreases). The aim is to ensure that no matter what the actual level of activity, the correct resources are available to fund it. Activity based budgeting is sometimes referred to as ‘flexible’ budgeting, as the budget is ‘flexed’ to cope with changes in activity.You may need to explain what the marginal cost is – the cost of an additional unit of output.An activity based budget will look different – instead of listing cost types (salaries, equipment etc) it costs activities.You may want to mention at this point that activity data is extremely important in the NHS – without information about activity levels and associated income/costs, it is not possible to assess or understand properly the outputs/outcomes achieved or begin to make decisions about improving value for money or changing the way things are done.Calculatemarginal cost
33Historic/incremental budgeting AdvantagesEasy to operateSimple to understandUses an established baseLess demanding on management timeCan operate with weak information systemsDisadvantagesPerpetuates inefficienciesLack of ownership by managersChanges in activity/objectives/working practices not readily reflectedNot responsive to changed prioritiesThis slide shows the advantages and disadvantages of historic based budgeting – it is much more suited to an environment that is stable with few changes year on year. You could reflect on the fact that policy/organisational change is common in the NHS, so incremental budgeting cannot be relied upon to cover all situations/organisations.
34Zero-based budgeting Advantages Identifies inefficiencies Links budget to an organisation’s objectives and activity plansManagement ownershipChallenges existing practiceDisadvantagesTime consumingDifficult to implementLack of certaintyMay raise expectationsThis slide shows the advantages and disadvantages of zero-based budgeting – it may be worth emphasising that although it is impractical to use ZBB every year it can be applied to selected activities on a sample basis. It is also used when a new service is involved or there is a major organisational change.
35Activity-based budgeting AdvantagesLinks finances to activityBudgets realistic compared with activityEncourages management to focus on efficiency and fixed costs rather than uncontrollable workloadVariances easier to explainDisadvantagesIdentifying activity levels is difficultTotal income may not flex to balanceChanges to standard costs may not be recognisedCase mix is often excludedThis slide shows the advantages and disadvantages of activity-based budgeting – run through each point. You may want to mention that with the introduction of payment by results, the need to be clear about the cost of activities and their associated income stream will mean forms of activity based budgeting may become more prominent in the NHS. There is a separate module that looks in detail at costing and PbR.
36Budget setting in the NHS Combination of incremental and ZBB but needs to move towards ABC – PLICs will provide the platform to do thisRobust timetableSet and approved before the year it relates toRealistic forecasts (for pay, inflation, cost pressures)Takes account of previous year’s experienceBudget holder involvementProfiled across the yearBalanced
37FT Annual PlanMonitor requires FT to submit an annual plan by 31st May each yearThe plan includes forward planning information over a three year periodDetailed implications i.e. development of a particular service will have implications for capital spend, tariff income etc
38The 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
39The 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
40Trust Income Contracts / Service Level Agreements (SLA’s) Legally binding, very detailedStandardised national format for Acute & community servicesSpecified / planned levels of activity agreed with PCT’sBy Point of delivery e.g.Outpatients – New / review / proceduresDiagnosticsA&EEmergency admissionsElective – day case / General
41Trust 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 = £4kCost & volume / Block Contract – Trust paid for a set level of service e.g. Training of junior Medical staff, community servicesNon clinical Income – from catering, car parking, rents , education & training etc
42The 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
43Trust 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%
44The 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 resourcesCurrent economic climate, outlook and Monitor efficiency assumptions outline the need for increasing levels of efficiency savingsDue to economic climate input sought from BDO with regard to best practice & development of schemes and governanceIn-year monitoring process includes a monthly report to Exec Team and Trust Board with escalation to the Finance Committee
45Budgetary control - reporting Monthly reports to board and managementPerformance against plans and targets using key performance indicators (KPIs)Financial and non financial informationThe board and senior managers need to review regularly the state of the NHS organisation’s finances to ensure that it will achieve its statutory financial duties.Rather than wading through pages of figures, key performance indicators are used to highlight quickly how the organisation is doing.Boards can only work effectively if they are kept fully informed. They need to specify what information they need and the style and format that suits them best. Whatever format a board opts for, the key requirement for all budget monitoring reports is that they are timely and accurate.Non financial targets include:Standards set by the Healthcare CommissionNational targets covering health and well being of the population, long term conditions, access to services and the user/patient experienceLocal targets to reflect local needs and priorities.
49Financial 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.49
50The 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 Lowest risk - no regulatory concernsRating 4 - No regulatory concernsRating Regulatory concerns in one or more components. Significant breach of Terms of Authorisation is unlikelyRating 2 - Risk of significant breach in Terms of Authorisation in the medium term, e.g. 9 to 18 months in the absence of remedial actionRating 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
51The Trusts FRR – 2011/2012For 2011/12 the Trust are planning to achieve a FRR 3 which assumes full delivery of the £15.8 million CIP targetIf the Trust failed to deliver the CIP target this would have the effect of reducing the FRR from a 3 to a 2This deviation from plan and reduction in the FRR to a 2 would trigger immediate action by Monitor who would implement special measuresThe Trust would move to monthly / weekly reporting with a view to implementing and monitoring a corrective action plan
53EBITDA MarginEBITDA Margin is the metric that Monitor use to measure underlying financial performanceDefinition : EBITDA % = EBITDA Actual (Operating expenses)Total Income actualNTH EBITDA margin historically low in comparison to FT sector average, mainly due to structure of NTH finances – no major PFI’sSector average over 7% , NTH position has declined from circa 6% to 4% over the last 3 yearsMonitor view is that it is an indication of deteriorating financial position that will lead to the Trust “burning cash”53
55Budgetary control – what it is ? Budgetary control monitors actual results against the agreed budgetVariances are identifiedCorrective action taken or budget revisedRegular reportsBudget management in the NHS is carried out by devolving budgets to the lowest practicable level of management, such as a ward manager.Budget responsibility should rest as unambiguously as possible with those who commit the related expenditure.Effective budgetary control depends on there being regular, timely, accurate monitoring reports that are produced in a consistent format and with clear concise information that allows a budget holder to act.If you are a budget holder you need to understand your budget and keep a close eye on how things are going – are you meeting your budget or not? Are income levels in line with what you expected? If not, you must do something about it.
56Budgetary control – how it is used Not an end in itselfTo identify the unexpected and investigate the causeTo improve value for moneyFocus on what drives costs/generates incomeIt is important that delegates do not see budgetary control as a dry and dusty accounting technique that is an end in itself. Instead they should see it as a mechanism for highlighting unexpected variations (good and bad or ‘favourable/adverse’) that can be looked into with a view to getting things back on track so that planned aims/targets/improvements are met or achieved.
57Budgetary control – budget holders Aligned with responsibilities and the ability to control income and expenditureSimple published budgetary control policiesOwnership – finances cannot be simply written off as ‘the responsibility of the finance department !’This slide focuses on budget holders and the importance of aligning responsibilities with the ability to manage and control budgets. This is one of the most important pre-requisites for successful budgeting and it is sometimes referred to as Responsibility Accounting.It is essential to have a single named individual responsible for each budget. That person must have the authority to take decisions about the budget they are responsible for.Every NHS organisation should have a budgetary control policy which sets out the rights and responsibilities of budget holders together with the financial rules under which budgets operate. This is usually set out in an organisation’s standing financial instructions.At this point you may want to refer again to the Audit Commission report ‘Achieving 1st class financial management in the NHS.’ This states (para 60) that ‘current best practice in reporting to budget holders is that the information should be available online, accruals based, linked to activity data, and highlighting future trends based on an assessment of risk.’The Korner VI report from the 1980s contained many useful pointers on the appropriate criteria for successful budgeting – the key points are set out in handout 2.2 which you could distribute now.
58Budgetary control – budget holders What 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 costWe now look at what it means to be a budget holder in practice. It is not about complaining that you need more money – it is being committed to and understanding your budget and managing it effectively so that pre agreed aims are achieved.
59Budgetary 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.This looks in more detail at what a budget holder needs to do in practice. Run through each point and give a few examples. Suggestions are:What a budget holder may have to deliver – type of activity, quantity, quality, access targetsOrganisation wide targets – business plan, Healthcare Commission, balanced scorecard (see slide 31)Income – ‘sell’ spare capacity, reduce waiting times by increasing capacityCosts – avoid non essential spend, look at staffing levels (e.g. is the balance of permanent/non permanent right?), non pay (e.g. reduce stock, maximise procurement savings)VFM – use cost/benefit analyses. Is VFM being achieved?
60Financial planning & decision making Development of Service Line Reporting -Inform areas to develop the business & market services that are profitableInform areas to apply lean principles to improve efficiency & ensure as a minimum services deliver a contributionProvide a road map for investment decisions targeting Capital resource to generate sustainable revenue growthPatient level information & costing –Successful implementation dependent upon data warehouse of patient interventions to support costed profiles of careWill provide information to constructively challenge practice – best practice tariffsProvide the information to underpin business cases for new procedures; service expansion/contraction etc
61Financial planning & decision making Effective demand & capacity planning, linking PCT demand plans to Trust capacityEnsure these are consistent with operational budgetsUtilise lean thinking principles to ensure internal capacity is utilised efficiently to deliver correct & appropriate care pathways & clinical interventions
62What 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.
63Where 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”