Clinical Director / Associate Medical Director Introductory

Development Programme Finance Session

John Maddison Director of Finance & Information

15/04/11

Purpose of the Session• Corporate & Financial Governance• How the money flows in the NHS & PbR• Budgets, Budgeting approaches & Budget setting• Board level & Directorate level Financial Information• Budget Control & reporting • Financial planning & decision making• Finance & Clinicians• Current financial climate• Questions

Corporate Governance

• How the Trust is led and structured

• Operates in line with fundamental principles of openness, integrity and accountability

• Provide high quality healthcare

• Trusts objectives are delivered economically, efficiently and effectively

Corporate Governance

• Protect interests of both the individual and the Trust

• Protects staff against any possible accusation that they acted less than properly

• Budget holders are required to read and understand Standing Orders and Standing Financial Instructions

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

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

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 Financial Instructions

• SFIs detail the financial responsibilities, policies and procedures of all transactions in order to achieve value for money

• 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

How the money flows in the NHS

• NHS Funding

• PCT Commissioning

• Payment by Results

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!• 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

PCT Commissioning• PCT’s commission healthcare for their local

population. This can be from:– NHS Trusts– Foundation Trusts– PCT’s (Community Services)– 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 etc

• Is it results based or actually just volume based?– Direction of travel towards best practice tariffs ; CQUIN’s;

Financial penalties; readmissions penalties etc

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:

- 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

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

The Budget Setting Process - CIP

Budgetary control – financial reports to the Board & Monitor

• Income & Expenditure

• Balance Sheet

• Cash flow

Budgetary control - reporting

• Monthly reports to board and management

• Performance against plans and targets using key performance indicators (KPIs)

• Financial and non financial information

Annual Budget

Budget to Date

Actual to Date

VarianceVariance

Last Month

Income £000 £000 £000 £000 £000

HA/PCT Agreements 226,457 206,754 209,266 2,513 2,139Other Income from Patient Care 1,413 1,297 1,489 193 100Other Income from Non Patient Care 25,437 21,368 21,680 312 372

Total Income 253,308 229,419 232,436 3,017 2,611

Expenditure

Pay 184,965 169,667 169,096 571 521Non Pay 59,189 53,676 53,694 18 186Reserves 3,603 812 812 0CIP (5,361) (4,639) 4,639 3,019

Total Expenditure 242,396 219,515 222,789 3,274 2,683

EBITDA 10,912 9,903 9,646 257 73

Depreciation 5,500 5,042 4,936 106 64PDC 4,250 3,896 3,531 364 96Interest Payable Loans & Leases 160 147 150 3 2Interest Receivable (133) (122) (77) 45 42

Surplus/Deficit from Operations 1,135 941 1,106 165 43

EBITDA 10,912 9,903 9,646

EBITDA Margin % 4.31% 4.32% 4.2%

EBITDA % Achieved 97.41%

I&E Margin 0.41% 0.48%

ROA 4.19%

Operating Expenditure YTD (222,789)

Income & Expenditure Summary as at February 2011

March February January March2011 2011 2011 2010

£000's £000's £000's £000's

Intangible Assets, Net 424 456 477 251

Property, Plant and Equipment, Net 118,797 115,729 115,563 109,315

On balance sheet PFI assets, Non-Current

PFI: Property, Plant and Equipment, Net 794 803 812 899

Trade and Other Receivables, Net, Non-Current

NHS Trade Receivables, Non-Current 1,085 965 1,050 1,025

Assets, Non-Current, Total 121,100 117,953 117,901 111,490

Assets, Current

Inventories 4,726 5,135 4,682 4,695

Trade and Other Receivables, Net, Current

NHS Trade Receivables, Current 4,748 7,839 7,434 5,538

Non NHS Trade Receivables, Current 167 187 212 395

Other Receivables, Current 288 627 495 533

Other Financial Assets, Current

Accrued Income 7,253 4,224 4,697 2,270

Prepayments, Current

Prepayments, Current, non-PFI related 3,421 2,673 3,604 1,658

Cash and Cash Equivalents

Cash 21,534 23,331 19,243 19,956

Assets, Current, Total 42,137 44,015 40,368 35,045

ASSETS, TOTAL 163,238 161,968 158,269 146,535

Deferred Income, Current (5,500) (5,559) (4,315) (5,374)

Provisions, Current (372) (322) (328) (1,106)

Current Tax Payables 0 0 0 0

Trade and Other Payables, Current

Trade Creditors, Current (3,949) (2,513) (2,510) (4,857)

Other Creditors, Current (6,999) (7,642) (7,040) (5,605)

Capital Creditors, Current (1,332) (586) (1,002) (823)

Other Financial Liabilities, Current

Accruals, Current (7,646) (6,690) (7,482) (6,663)

Payments on Account (6,158) (8,193) (5,745) (2,243)

Finance Leases, Current 0 0 0 0

PFI leases, Current (109) (96) (96) (96)

PDC dividend creditor, Current 0 (1,561) (1,239) 0

Liabilities, Current, Total (32,064) (33,163) (29,758) (26,767)

NET CURRENT ASSETS (LIABILITIES) 10,073 10,852 10,610 8,278

Liabilities, Non-Current

Provisions, Non-Current (1,640) (1,913) (1,913) (1,954)

Trade and Other Payables, Non-Current

Other Creditors, Non-Current (375) (375) (375) (413)

Other Financial Liabilities, Non-Current

PFI leases, Non-Current (1,047) (1,091) (1,098) (1,156)

Liabilities, Non-Current, Total (3,062) (3,379) (3,386) (3,523)

TOTAL ASSETS EMPLOYED 128,111 125,427 125,126 116,245

Taxpayers Equity

Public dividend capital 123,645 123,645 123,645 115,545

Retained Earnings (Accumulated Losses) 594 200 (127) (906)

Donated Asset Reserve 1,579 1,582 1,608 1,606

Revaluation Reserve 2,293 0 0 0

TAXPAYERS EQUITY, TOTAL 128,111 125,427 125,126 116,245

Taxpayers' and Others' Equity

Statement of Financial Position as at February 2011

Assets

Assets, Non-Current

Liabilities

Financial Risk Rating

Metric Criteria Actual Rating Weight 5 4 3 2 1EBITDA margin Underlying Performance 4.2% 2 25% 11% 9% 5% 1% <1%EBITDA, % achieved Achievement of Plan 97.4% 4 10% 100% 85% 70% 50% <50%ROA Financial Efficiency 4.2% 3 20% 6% 5% 3% -2% < -2%I&E surplus margin Financial Efficiency 0.48% 2 20% 3% 2% 1% -2% < -2%Liquid ratio Liquidity 29.2 4 25% 60 25 15 10 <10Weighted Average 2.9 100%

Current Risk Ratings:

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

The role of the finance department• Lead by the Finance Director• Responsible for:

– Preparation of financial statements for external purposes– Transaction Processing – Providing management information, accounts and advice to the

board, departments and budget holders.– Safeguarding assets– Cash Management– Assistance with business case preparation– Assess proposed capital developments– Liaise on financial contractual matters– Prepare & monitor budgets and financial forecasts

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”

Current Financial Context

• UK economic climate

• NHS implications – minimal growth for next 5 years

• DH need to generate cost efficiencies of £20bn

• Projected savings target for Teesside of £200m over the next 5 years

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 £51 million (not including savings required for new hospital)

• New Hospital scenario – adds a further £25m of savings based on 2 to 1 site rationalisation economies

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 !

The key message ….

• The Director General for NHS Finance

“ The NHS will have to deliver efficiency like never before”