Clinical Leadership Development Programme

Finance & BudgetingDavid BrownAssociate Director of Finance

Contract Negotiation/Timescales

CommissioningIntentions

ExternalInfluences

GPCommissioners

StandardNHS

Contract

FinancialGovernance

EconomicClimate

NonF2F

RiskRatings

CommissioningBoard

QIPP

Health Bill

CIP

BusinessPlanning

CQUIN

Penalties

Capacityand

Demand

Block

TariffsProductivity

New toReview Ratios

NELThreshold

BestPracticeTariffs

Lean

Marketing

PbR

ServiceDevelopment

OperatingFramework

Re-Admissions

Forecasting

Funding Flows

BudgetSetting

KPI’s

Yearof CareTariffs

Monitor

SchemeOf Reservation

Financial Planning

Tenders

Agenda

Financial Reporting

SFI’s

StandingOrders

NHSStructure

BoardReports

BudgetControl

SLM / SLR

PLICS

PCT’s

AWP

SchemeOf Delegation

ChoiceAudit

BusinessCases New

Hospital

Patients

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

How the money flows in the NHS

• NHS Structure & Funding

• PCT Commissioning

• Payment by Results

• Future Structure’s & Funding

NHS Organisations & Structure

NHS Revenue Funding Flows

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!• Allocation formula currently under review – cynical perspective

change in key variables to shift resources south!

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

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

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

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

Health & Social Care Bill 2011

• Abolish SHA’s & PCT’s

• Establish Commissioning Board

• GP Consortia

• New Monitor

Proposed NHS Structure

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

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 !

Corporate Governance

• Financial Governance

• Standing Orders

• Standing Financial Instructions (SFI’s)

• Scheme of Reservation & Delegation

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.

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

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

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

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

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”

Budgets – 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 organisations

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

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

Budgeting approaches

• Historic/incremental-based

• Zero-based

• Activity-based

Historic/incremental budgetingHistoric/incremental budgeting

Current year budgetNext 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

Zero-based budgeting

Review objectives of department

Assume zerobudget fornext year

Identify optimum staff, materials etc

Set entirely new budget

Activity-based budgetingIdentify

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

Historic/incremental budgetingAdvantages• 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

Zero-based budgetingAdvantages• 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

Activity-based budgetingAdvantages• 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

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

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

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

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

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

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

The Budget Setting Process - Expenditure • Expenditure budgets are based on:

- 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

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%

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

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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Annual Budget

Budget to Date

Actual to Date

VarianceVariance

Last Month

Income £000 £000 £000 £000 £000

HA/PCT Agreements 240,003 215,631 215,397 235 330Other Income from Patient Care 2,472 2,337 2,570 233 247Other Income from Non Patient Care 29,675 27,216 27,303 87 68

Total Income 272,150 245,184 245,269 85 15

Expenditure

Pay 182,332 167,298 166,333 965 828Non Pay 72,911 67,951 68,299 348 75Interest Payable Loans & Leases 173 159 158 0 0Reserves 6,732 0 0CIP (982) (313) 313 490

Total Expenditure 261,166 235,096 234,790 306 263

EBITDA 10,984 10,088 10,479 391 248

Depreciation 5,800 5,317 5,214 103 82PDC 3,300 3,025 3,085 60 54Interest Receivable (133) (122) (124) 2 5

Surplus/Deficit from Operations 2,017 1,869 2,305 436 280

EBITDA 10,984 10,088 10,479

EBITDA Margin % 4.04% 4.11% 4.3%

EBITDA % Achieved 103.87%

I&E Margin 0.74% 0.76% 0.94%

ROA 4.09% 4.11% 4.53%

Operating Expenditure YTD (234,790)

Income & Expenditure Summary as at February 2012

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March February Janauary March2012 2012 2012 2011

£000's £000's £000's £000's

Intangible Assets, Net 330 369 413 435

Property, Plant and Equipment, Net 118,827 118,469 118,189 118,597

On balance sheet PFI assets, Non-Current

PFI: Property, Plant and Equipment, Net 689 698 707 794

Trade and Other Receivables, Net, Non-Current

NHS Trade Receivables, Non-Current 973 1,189 1,149 1,003

Assets, Non-Current, Total 120,819 120,725 120,458 120,829

Assets, Current

Inventories 6,100 6,235 6,252 6,040

Trade and Other Receivables, Net, Current

NHS Trade Receivables, Current 3,200 6,395 4,832 2,887

Non NHS Trade Receivables, Current 400 835 653 94

Other Receivables, Current 451 571 475 509

Other Financial Assets, Current

Accrued Income 1,451 1,135 2,393 1,779

Prepayments, Current

Prepayments, Current, non-PFI related 3,000 6,010 5,907 2,405

Cash and Cash Equivalents

Cash 32,352 32,681 23,777 30,315

Assets, Current, Total 46,954 53,862 44,289 44,029

ASSETS, TOTAL 167,773 174,587 164,747 164,858

Deferred Income, Current (18,029) (19,448) (11,486) (12,540)

Provisions, Current (905) (66) (72) (882)

Current Tax Payables (3,600) (3,738) (3,618) (3,672)

Trade and Other Payables, Current

Trade Creditors, Current (2,700) (2,959) (2,531) (4,337)

Other Creditors, Current (3,218) (3,971) (3,140) (3,632)

Capital Creditors, Current (950) (525) (508) (937)

Other Financial Liabilities, Current

Accruals, Current (5,100) (7,616) (7,305) (5,712)

Payments on Account 0 0 (838) (1,320)

Borrowings, Current (69) (69) (69) (56)

PFI leases, Current (109) (122) (122) (109)

PDC dividend creditor, Current 0 (1,439) (1,159) 0

Liabilities, Current, Total (34,680) (39,953) (30,848) (33,197)

NET CURRENT ASSETS (LIABILITIES) 12,274 13,909 13,441 10,831

Liabilities, Non-Current

Provisions, Non-Current (1,255) (1,913) (1,913) (1,557)

Trade and Other Payables, Non-Current

Other Creditors, Non-Current 0 (375) (375) (375)

Other Financial Liabilities, Non-Current

PFI leases, Non-Current (1,075) (910) (918) (1,047)

Borrowings, Non-Current (204) (281) (281) (139)

Liabilities, Non-Current, Total (2,534) (3,479) (3,487) (3,118)

TOTAL ASSETS EMPLOYED 130,559 131,155 130,412 128,542

Taxpayers Equity

Public dividend capital 123,645 123,645 123,645 123,645

Retained Earnings (Accumulated Losses) 5,290 7,510 5,205 264

Donated Asset Reserve 1,624 0 1,562 1,624

Revaluation Reserve 0 0 0 3,009

TAXPAYERS EQUITY, TOTAL 130,559 131,155 130,412 128,542

Taxpayers' and Others' Equity

Statement of Financial Position as at February 2012

Assets

Assets, Non-Current

Liabilities

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.

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

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

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”

EBITDA Margin

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

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

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 !’

Budgetary control – budget holdersWhat 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

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

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

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

What 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.

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”