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Clinical Leadership Development Programme Finance & Budgeting

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Presentation on theme: "Clinical Leadership Development Programme Finance & Budgeting"— Presentation transcript:

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

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

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 Structure’s & 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 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

8 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

9 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

10 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

11 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

12 Health & Social Care Bill 2011
Abolish SHA’s & PCT’s 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 Banking sector collapse and the resultant credit squeeze Low interest rates Stagnant economic growth Increased unemployment Reduced tax revenues Low inflation Quantitative easing – national debt from £38bn to £180bn

15 CIP Performance - 2011 / 2012 2011/12 – 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 15

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 16

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 17

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 (SFI’s) 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! (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

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 Corporate governance underpins all the organisations activities All FTs are required to establish registers of members, directors and governors interest (held by Trust Board secretary).

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” 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.

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 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.

27 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 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.

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 This 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.

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

30 Historic/incremental budgeting
Current year budget Less: non-recurring items Next year budget Set other reserves Add: full year effects of recurring items Create inflation reserve Adjust for changes in service This 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 awards Inflation Cost improvements Developments (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: cost improvement programme

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

32 Activity-based budgeting
Identify workload measure Flex variable budget by actual activity Estimate planned activity Identify fixed costs Calculate budget Identify variable costs Measure actual activity Activity 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. Calculate marginal cost

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 This 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.

34 Zero-based budgeting Advantages 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 This 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.

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 This 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.

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 year’s experience Budget holder involvement Profiled across the year Balanced

37 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

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: - 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

40 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

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 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%

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 The 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 Commission National targets covering health and well being of the population, long term conditions, access to services and the user/patient experience Local targets to reflect local needs and priorities.

46 d d d d

47 d d d d

48

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. 49

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 Lowest risk - no regulatory concerns Rating 4 - No regulatory concerns Rating 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 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” 53

54 EBITDA Margin 54

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 Budget 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.

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 It 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.

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 !’ 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.

58 Budgetary 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 cost We 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.

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. 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 targets Organisation wide targets – business plan, Healthcare Commission, balanced scorecard (see slide 31) Income – ‘sell’ spare capacity, reduce waiting times by increasing capacity Costs – 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?

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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