Transcript Document

Clinical Leadership Development
Programme
Finance & Budgeting
David Brown
Associate Director of Finance
07 October 2011
Patients
Economic
Climate
CIP
NHS
Structure
Funding
Flows
Lean
Productivity
QIPP
Standard
NHS
Contract
Financial
Governance
Budget
Setting
Financial
Planning
Operating
Framework
Financial
Reporting
Standing
Orders
CQUIN
NEL
Threshold
SFI’s
Forecasting
Re-Admissions
Penalties
Contract
Negotiation/
Timescales
New to
Review Ratios
Best
Practice
Tariffs
Non
F2F
Year
of Care
Tariffs
External
Influences
PbR
Tariffs
Block
Agenda
Business
Planning
Scheme
Of Reservation
Capacity
and
Demand
Scheme
Of Delegation
Marketing
Risk
Ratings
KPI’s
Budget
Control
Audit
Service
Development
Health Bill
Board
Reports
PCT’s
Choice
Business
Cases
New
Hospital
GP
Commissioners
Monitor
AWP
SLM /
SLR
PLICS
Commissioning
Board
Tenders
Commissioning
Intentions
Purpose of the Session
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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
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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:
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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
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Direct allocations from Department of Health
Local Authorities
Research & Training
Charitable Donations
Catering, Car Parking, Private Patients
Payment by Results (PbR)
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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
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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
CIP Performance - 2011 / 2012
• 2011/12 – projected view
CIP target
Risk Rated PYE recurrent delivery
Further management action - Rec
Non-recurrent measures
Total ‘unidentified’ CIP shortfall in year
= 15.851m
= (5.554m)
= (2.5m)
= (7.832m)
= 0m
• Impact on 2012/13 based on current
Recurrent CIP shortfall (15.851 - 5.554)
Further management action
Less fye of 11/12 schemes delivered in 12/13
Recurrent shortfall of 11/12 schemes C/fwd
= 10.297m
= (2.5m)
= (2.991m)
= 4.806m
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 @ 4.4%
= 9.428m
Likely Case Scenario
= £14.234m
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
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
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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 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
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
budgeting
Historic/incremental budgeting
Next year budget
Current year budget
Add: full year
effects of
recurring items
Set other reserves
Create inflation
reserve
Less: non-recurring
items
Less: cost
improvement
programme
Adjust for
changes
in service
Zero-based budgeting
Assume zero
budget for
next year
Set entirely
new budget
Review objectives
of department
Identify optimum
staff, materials etc
Activity-based budgeting
Flex variable
budget by
actual activity
Identify
workload
measure
Identify fixed costs
Calculate budget
Measure actual
activity
Estimate
planned
activity
Identify
variable costs
Calculate
marginal cost
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
Zero-based budgeting
Advantages
• 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 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
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:
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Prioritisation of objectives identified in the planning
process and formalised via the annual plan and
underpinning Service Level Agreements
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Assessment / quantification of total available
resources, both financial and non financial
The Budget Setting Process - Income
• Overall budget includes income from several different
sources:
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SLA’s with PCTs and other NHS bodies in
accordance with the National Tariff and PbRs
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Private patients, RTA’s
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Medical and non-medical training funding via the
Workforce Development Directorate of the SHA
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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:
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Forecast outturn at month 10 in 2010/2011 and
cover direct costs under the control of the budget
manager
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Pay – detailing the agreed establishment in terms of
WTE, £’s by AfC and local Trust grade
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Non-pay – by subjective category e.g. drugs, M&SE,
provisions, energy etc
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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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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.
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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
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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 holders
What is a budget holder’s responsibility?
 Tell the finance director there isn’t enough money ? – NO !
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understand and manage their budget
what drives income/costs ?
what influences outcomes/outputs ?
 What are a budget holder’s key objectives ?
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deliver required quantity/quality of care/service
maximise income, minimise cost
Budgetary control – budget holders
• So, to be an effective budget holder you must:
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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 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.
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”