FT FINANCIAL REGIME

JANET BARKER/JOANNA MYERS

Group Finance Managers

Sheffield Teaching Hospitals NHSFT

Aims of Today

• FT Financial regime

• Contract income and other funding sources

• Monitor regulation

• Q&A session on “a day in the life of…”

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

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

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

Department of Health

Primary Care Trust-Patient Services

(April 13 CCGs/SCB)

Community Services Provider Acute Provider (s) Mental Health

Provider

Treasury

NHS Funds Flow

Health Authority- Education

R&D - Networks

Sources of Income into STHFT

£m

NHS Clinical 709.3

Non-NHS Clinical 7.6

R&D 14.3

Education & Training 66.2

Other income 62.7

TOTAL 860.1

(Source: 2011/12 Accounts)

Clinical income£m

Elective/Day cases 148.0

Non-elective 158.3

Outpatients 109.9

A&E 12.9

Other 227.1

Block Contract (Community) 53.1

PPI/NHSI 7.6

TOTAL 716.9

Main PCT Commissioners

% of patient

services income

Sheffield 56.9Barnsley 4.3Rotherham 4.1Doncaster 2.7Bassetlaw 1.2Derbyshire County 4.3SCGs 23.2Others 3.3

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)

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– A&E

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 > 19yrs with major CC.

– Separate for elective and non-elective activity– Tariff is a national average of all Providers

Reference Cost submissions.

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

Sources of Capital funding

• Depreciation• I&E 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.

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 (R&D exempted)

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

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

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

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

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

Limits on Capital Spending

• Availability of capital funding

• Ability to afford the revenue consequences

• Subject to internal business case approvals process

• PFI > £25m needs DoH approval

• Prudential Borrowing Code

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.

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

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 (I&E, Balance Sheet, Cash Flow + variance analysis + CE commentary)

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

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

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

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

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.