Purpose of the Session

1. Clinical Director / Associate Medical Director Introductory Development Programme Finance SessionJohn Maddison Director of Finance & Information 15/04/11

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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.

8. 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

9. 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

10. How the money flows in the NHS • NHS Funding • PCT Commissioning • Payment by Results

11. NHS Organisations & Structure

12. NHS Revenue Funding Flows

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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”

19. 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

20. 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

21. 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.

22. Budgeting approaches • Historic/incremental-based • Zero-based • Activity-based.

23. Historic/incremental budgeting Historic/incremental budgeting Current year budget Less: non-recurring items Next year budget Set other reserves Add: full year effects of recurring items Create inflation reserve Adjust for changes in service Less: cost improvement programme

24. Zero-based budgeting Assume zero budget for next year Set entirely new budget Review objectives of department Identify optimum staff, materials etc

25. Activity-based budgeting Identify workload measure Flex variable budget by actual activity Estimate planned activity Identify fixedcosts Calculate budget Identify variable costs Measure actual activity Calculate marginal cost

26. 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.

27. 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.

28. 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.

29. 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.

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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%

37. 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

38. The Budget Setting Process - CIP

39. Budgetary control – financial reports to the Board & Monitor • Income & Expenditure • Balance Sheet • Cash flow

40. Budgetary control - reporting • Monthly reports to board and management • Performance against plans and targets using key performance indicators (KPIs) • Financial and non financial information

45. 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

46. 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

47. 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 !’

48. Budgetary control – budget holders What 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

49. 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.

50. 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