FT FINANCIAL REGIME

1
FT FINANCIAL REGIME

• JANET BARKER/JOANNA MYERS
• Group Finance Managers
• Sheffield Teaching Hospitals NHSFT

2
Aims of Today

• FT Financial regime
• Contract income and other funding sources
• Monitor regulation
• QA session on a day in the life of

3
FT Financial Freedoms

• Plan driven vs Target driven
• Can borrow commercially
• Retain surpluses
• Retain proceeds of asset sales
• Invest to serve local needs
• Can set up investment companies
• Joint ventures with the private sector

4
FT Financial duties

• Set out in terms of Authorisation
• Must operate efficiently, effectively and
  economically and as a going concern
• Disclose information to Monitor and relevant
  third parties
• Comply with Operating framework, Principles of
  Cooperation and competition
• Protection of mandatory services and protected
  assets
• Major investments/disinvestments

5
Accounting Officer Responsibilities

• Chief Executive Delegates to DoF
• Duty to exercise its functions effectively,
  efficiently and economically
• Preparation of accounts
• Witness before Public Accounts Committee
• High standard of Financial Management
• Robust financial systems and procedures
• Safeguard assets
• Financial considerations are reflected in FT
  policy decisions
• Comply with Financial Terms of authorisation

6
NHS Funds Flow
Treasury
Department of Health
RD - Networks

• Primary Care Trust
• Patient Services
• (April 13 CCGs/SCB)

Health Authority - Education
Community Services Provider
Acute Provider (s)
Mental Health Provider
7
Sources of Income into STHFT

• m
• NHS Clinical 709.3
• Non-NHS Clinical 7.6
• RD 14.3
• Education Training 66.2
• Other income 62.7
• TOTAL 860.1
• (Source 2011/12 Accounts)

8
Clinical income

• m
• Elective/Day cases 148.0
• Non-elective 158.3
• Outpatients 109.9
• AE 12.9
• Other 227.1
• Block Contract (Community) 53.1
• PPI/NHSI 7.6
• TOTAL 716.9

9
Main PCT Commissioners

• of patient services income
• Sheffield 56.9
• Barnsley 4.3
• Rotherham 4.1
• Doncaster 2.7
• Bassetlaw 1.2
• Derbyshire County 4.3
• SCGs 23.2
• Others 3.3

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How Contracts are Agreed

• Agreements cover
• Volume of Activity
• Price of Activity
• Quality of Activity
• Timing of Activity
• Funding historically on a local negotiation on
  price
• Now funding largely based on Payment by Results
  (National Tariffs)

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PbR / National tariffs

• Payment by Results being paid for work we carry
  out at national tariff
• Tariffs are split between
• Elective inpatients/day case
• Non-elective inpatients
• Outpatients
• AE

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How is tariff derived?

• All Providers prepare and submit reference costs
  on an annual basis.
• Based at Healthcare Resource Group level e.g.
  FZ17A Abdominal Hernia gt 19yrs with major CC.
• Separate for elective and non-elective activity
• Tariff is a national average of all Providers
  Reference Cost submissions.

13
Pricing of STH Contract Tariff element

• Approximately 69.4 of the STH services are
  covered by national tariffs
• Income is calculated based on
• - Activity x national tariff
• - Get regional price adjustment (MFF)
  additional 2.9)
• Contract at indicative volume and case-mix, but
  ultimately get paid on reported actuals

14
Sources of Capital funding

• Depreciation
• IE surpluses
• Sale of fixed assets
• Public Dividend Capital
• Donations eg University/Charitable donation
• Government Grants eg Lottery/specific grant.
• Leases
• PFI
• FT Financing Facility Loans Govt bank loan up
  to 25 year term.

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Public Dividend Capital

• Direct allocations from DoH for specific
  initiatives
• Limited mainly applies to research e.g. BRUs
• PDC draw down limit authorised for the year
• Draw down to match capital spend
• Must be able to demonstrate that Cap X exceeds
  Depreciation in that year (RD exempted)

16
Leases

• Operating Leases/rental
• Finance leases
• Recognise Fixed Asset and Creditor
• On-balance sheet
• Under IFRS it is more difficult to classify as an
  operating lease

17
Private Finance Initiative (1)

• Operates on principle of primarily procuring a
  service rather than an asset
• Can take many forms e.g., design, build,
  finance and service a building
• Payment is a unitary charge covering both service
  charges, interest charges and rental
• Pre IFRS was mainly Off-Balance Sheet
• Applies to core and non-core services Car
  parks, ward blocks, equipment, whole hospitals

18
Private Finance initiative (2)

• Operated on principle private sector is more
  efficient and innovative
• Reality was
• Hugely bureaucratic
• Incurred high adviser costs
• Long negotiation/approval processes
• Private sector margins
• Only value for money because of VAT savings and
  inclusion of costed risk
• Sheffield FT - Sir Robert Hadfield Block

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Private Finance Initiative (3)

• Prime driver was avoiding Public Sector
  Borrowing!
• Now largely discredited for major schemes
• Now most schemes on-balance sheet under IFRS
• Potential still exists for niche schemes
• CSSD Supercentres
• Laboratory Supercentres
• Non-care activities e.g. car parking

20
FTFF Loans (1)

• Non-commercial bank loans
• FT Financing Facility is part of DoH
• Loans up to 25 years
• Staggered draw down
• Interest rate fixed at date of agreement
  (currently 3.8 for 20 years)
• Half yearly repayments

21
Limits on Capital Spending

• Availability of capital funding
• Ability to afford the revenue consequences
• Subject to internal business case approvals
  process
• PFI gt 25m needs DoH approval
• Prudential Borrowing Code

22
Prudential Borrowing limit (PBL)

• Approved Working Capital facility
• Maximum cumulative long term borrowing
• Applies to Loans and On-Balance Sheet PFI
• Current loans for STH Hadfield, NGH Critical
  care, NGH Laboratories
• Predetermined as part of Authorisation/Monitor
  Regulation.

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Monitor (1)

• Independent Regulator of Foundation Trusts
• Monitors performance using Compliance Framework
• Regulatory principles
• Self certification
• Risk based approach
• Based on trust
• Confidentiality
• Minimal information requirements

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Monitor (2)

• Four main components
• Annual plan review (May)
• In-year monitoring (Quarterly) Accounts
• Exception reporting
• Escalation and intervention
• Essentially split between Finance and Governance
• Finance returns (IE, Balance Sheet, Cash Flow
  variance analysis CE commentary)

25
Governance risk assessment

• Uses traffic light system (4 lights!)
• Derived from a number of factors
• Performance against national targets
• CQC registration and ongoing performance
• Provision of mandatory goods and services

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Finance risk assessment (1)

• Based on annual plan and quarterly monitoring
• Uses a number of primary indicators
• Delivery of Financial plan
• Operating margin
• Financial Efficiency (Return on assets)
• Liquidity (min Cash balances)
• Derives score for each element
• Applies overriding rules and calculates FRR of 1-
  5

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Financial risk assessment (2)

• FRR of 5 low risk get benefit of fewer
  returns
• FRR of 3 or 4 OK quarterly monitoring
• FRR of 2 or lower Monitor intervention
• Q4 FRR determines CQC rating
• 4 or 5 Excellent for use of resources
• 3 Good for use of resources

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Interpreting FRR

• Based on actuals get better results in first
  quarters of year
• Can bias plan profile to achieve better results
  in-year
• No incentive to submit an ambitious Plan
• Liquidity element includes overdraft facility!
  can manipulate score up to limit
• Adds back exceptional items!
• Really a mixture of performance and risk of
  default!
• Easier to achieve excellent than through ALE
  scores
• Realistically cannot deliver a deficit

29
STH experience of Monitor

• Independent Performance management Not advocate
  for FTs
• Generally light touch
• Information requirements not onerous (except for
  Annual plan)
• OK as long as delivering satisfactorily
• Quick to intervene if performance starts
  slipping.