Clinical Leadership Development Programme Finance

1
Clinical Leadership Development Programme
Finance Budgeting
James Richardson Associate Director of
Finance 16th December 2011
2
Patients
Agenda
Economic Climate
NHS Structure
External Influences
Budget Setting
Financial Planning
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
Forecasting
SFIs
Risk Ratings
Re-Admissions
GP Commissioners
Business Planning
KPIs
Scheme Of Reservation
Penalties
Board Reports
Best Practice Tariffs
Budget Control
Contract Negotiation/ Timescales
Scheme Of Delegation
Capacity and Demand
PCTs
Monitor
Non F2F
Audit
Choice
AWP
New to Review Ratios
Commissioning Intentions
Service Development
SLM / SLR
Year of Care Tariffs
Tenders
PLICS
Business Cases
Marketing
New Hospital
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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

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How the money flows in the NHS

• NHS Structure Funding
• PCT Commissioning
• Payment by Results
• Future Structures Funding

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NHS Revenue Funding Flows
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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

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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

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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

9
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

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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

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Health Social Care Bill 2011

• Abolish SHAs PCTs
• Establish Commissioning Board
• GP Consortia
• New Monitor

12
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

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CIP Performance - 2011 / 2012

• 2011/12 projected view
• CIP target 15.851m
• 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 (15.851 - 5.554)
  10.297m
• 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

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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 _at_ 4.4 9.428m
• Likely Case Scenario 14.234m

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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

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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!

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Corporate Governance

• Financial Governance
• Standing Orders
• Standing Financial Instructions (SFIs)
• Scheme of Reservation Delegation

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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Budgeting approaches

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

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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
Less cost improvement programme
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Zero-based budgeting
Assume zero budget for next year
Review objectives of department
Set entirely new budget
Identify optimum staff, materials etc
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Activity-based budgeting
Identify workload measure
Estimate planned activity
Flex variable budget by actual activity
Identify fixed costs
Calculate budget
Identify variable costs
Measure actual activity
Calculate marginal cost
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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

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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

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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

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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

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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

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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

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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

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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
• AE
• Emergency admissions
• Elective day case / General

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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

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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,
  MSE, provisions, energy etc
• - Internal recharges for services provided /
  received such as pathology, radiology etc

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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

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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

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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.

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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

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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

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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

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EBITDA Margin
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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

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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

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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
  !

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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

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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

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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

57
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

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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.

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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