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Clinical Leadership Development Programme Finance & Budgeting David Brown Associate Director of Finance 07 October 2011.

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Presentation on theme: "Clinical Leadership Development Programme Finance & Budgeting David Brown Associate Director of Finance 07 October 2011."— Presentation transcript:

1 Clinical Leadership Development Programme Finance & Budgeting David Brown Associate Director of Finance 07 October 2011

2 Contract Negotiation/ Timescales Commissioning Intentions External Influences GP Commissioners Standard NHS Contract Financial Governance Economic Climate Non F2F Risk Ratings Commissioning Board QIPP Health Bill CIP Business Planning CQUIN Penalties Capacity and Demand Block Tariffs Productivity New to Review Ratios NEL Threshold Best Practice Tariffs Lean Marketing PbR Service Development Operating Framework Re-Admissions Forecasting Funding Flows Budget Setting KPIs Year of Care Tariffs Monitor Scheme Of Reservation Financial Planning Tenders Agenda Financial Reporting SFIs Standing Orders NHS Structure Board Reports Budget Control SLM / SLR PLICS PCTs AWP Scheme Of Delegation Choice Audit Business Cases New Hospital Patients

3 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

4 How the money flows in the NHS NHS Structure & Funding PCT Commissioning Payment by Results Future Structures & Funding

5 NHS Organisations & Structure

6 NHS Revenue Funding Flows

7 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 PCTs from growth! Stockton & Hartlepool PCTs 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

8 PCT Commissioning PCTs commission healthcare for their local population. This can be from: –NHS Trusts –Foundation Trusts –Community Service Providers –Independent Sector / Voluntary Sector –Doctors –Dentists –Opticians

9 NHS Trusts and Foundation Trusts Income Majority of income received through commissioning process with PCTs 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

10 Payment by Results (PbR) PbR introduced in 2003/04 using HRGs 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

11 Payment by Results Is it fit for purpose during period of austerity? – –Original structure & scope incentivised FTs 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 ; CQUINs; Financial penalties; readmissions penalties etc

12 Health & Social Care Bill 2011 Abolish SHAs & PCTs Establish Commissioning Board GP Consortia New Monitor

13 Proposed NHS Structure

14 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

15 CIP Performance / /12 – projected view CIP target = m Risk 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 current Recurrent CIP shortfall ( )= m Further 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

16 2012 / 2013 CIP – Scenario 2 (Assessor) PYE recurrent shortfall on 11/12 CIP= m PYE of 11/12 schemes delivered in 12/13= (2.991m) Corrective action undertaken in 11/12= (2.500m) 12/13 Monitor 4.4%= 9.428m Likely Case Scenario= £14.234m

17 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

18 Current 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 !

19 Corporate Governance Financial Governance Standing Orders Standing Financial Instructions (SFIs) Scheme of Reservation & Delegation

20 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.

21 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! (FTs 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

22 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

23 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

24 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

25 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

26 Budgets – what they are Forward 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

27 Reasons for preparing budgets Quantify the organisations 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

28 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

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

30 Historic/incremental budgeting Current year budget Next 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

31 Zero-based budgeting Review objectives of department Assume zero budget for next year Identify optimum staff, materials etc Set entirely new budget

32 Activity-based budgeting Identify 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

33 Historic/incremental budgeting Advantages 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

34 Zero-based budgeting Advantages Identifies inefficiencies Links budget to an organisations objectives and activity plans Management ownership Challenges existing practice Disadvantages Time consuming Difficult to implement Lack of certainty May raise expectations

35 Activity-based budgeting Advantages 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

36 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 years experience Budget holder involvement Profiled across the year Balanced

37 FT Annual Plan Monitor requires FT to submit an annual plan by 31 st 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

38 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

39 The Budget Setting Process - Income Overall budget includes income from several different sources: -SLAs with PCTs and other NHS bodies in accordance with the National Tariff and PbRs -Private patients, RTAs -Medical and non-medical training funding via the Workforce Development Directorate of the SHA -Commercial sources of income – car parking, catering etc

40 Trust Income Contracts / Service Level Agreements (SLAs) –Legally binding, very detailed –Standardised national format for Acute & community services –Specified / planned levels of activity agreed with PCTs –By Point of delivery e.g. Outpatients – New / review / procedures Diagnostics A&E Emergency admissions Elective – day case / General

41 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

42 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

43 Trust Expenditure Pay – circa 68% of costs = 4,685 wtes of which - –Medical – 11% –Nursing & Midwives - 55% –AHPs & 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%

44 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

45 Budgetary control - reporting Monthly reports to board and management Performance against plans and targets using key performance indicators (KPIs) Financial and non financial information

46 d d d d

47 d d d d

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49 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.

50 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

51 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

52

53 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 PFIs 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

54 EBITDA Margin

55 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

56 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

57 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 !

58 Budgetary control – budget holders What is a budget holders responsibility? Tell the finance director there isnt enough money ? – NO ! -understand and manage their budget -what drives income/costs ? -what influences outcomes/outputs ? What are a budget holders key objectives ? -deliver required quantity/quality of care/service -maximise income, minimise cost

59 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.

60 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

61 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

62 What I need from you The 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.

63 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


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