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Clinical Leadership Development Programme Finance & Budgeting. James Richardson Associate Director of Finance 16 th December 2011. Patients. Agenda. Economic Climate. NHS Structure. Budget Setting. Financial Planning. External Influences. Financial Governance. Funding Flows.

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clinical leadership development programme finance budgeting
Clinical Leadership Development Programme Finance & Budgeting

James Richardson

Associate Director of Finance

16th December 2011





















Health Bill



























Of Reservation
















Of Delegation











New to

Review Ratios








of Care









purpose of the session
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
How the money flows in the NHS
  • NHS Structure & Funding
  • PCT Commissioning
  • Payment by Results
  • Future Structure’s & Funding
how the money flows revenue
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 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
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
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
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
Health & Social Care Bill 2011
  • Abolish SHA’s & PCT’s
  • Establish Commissioning Board
  • GP Consortia
  • New Monitor
current financial context
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
CIP Performance - 2011 / 2012

2011/12 – projected view

CIP target = 15.851m

Risk Rated PYE recurrent delivery = (5.554m)

Further management action - Rec = (2.5m)

Non-recurrent measures = (7.832m)

Total ‘unidentified’ CIP shortfall in year = 0m

Impact on 2012/13 based on current

Recurrent CIP shortfall (15.851 - 5.554) = 10.297m

Further management action = (2.5m)

Less fye of 11/12 schemes delivered in 12/13 = (2.991m)

Recurrent shortfall of 11/12 schemes C/fwd = 4.806m

2012 2013 cip scenario 2 assessor
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 context15
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 context16
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
Corporate Governance
  • Financial Governance
  • Standing Orders
  • Standing Financial Instructions (SFI’s)
  • Scheme of Reservation & Delegation
financial governance and accountability
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 accountability19
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
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
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
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
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
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
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
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
Budgeting approaches
  • Historic/incremental-based
  • Zero-based
  • Activity-based

Historic/incremental budgeting

Current year budget

Less: non-recurring


Next year budget

Set other reserves

Add: full year

effects of

recurring items

Create inflation


Adjust for


in service

Less: cost




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 fixedcosts

Calculate budget


variable costs

Measure actual



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
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
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
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
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
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 income39
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
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
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
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
Budgetary control - reporting
  • Monthly reports to board and management
  • Performance against plans and targets using key performance indicators (KPIs)
  • Financial and non financial information
financial risk rating frr
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 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
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”

budgetary control what it is
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
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
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 holders54
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

budgetary control budget holders55
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
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 making57
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
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
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”