Clinical Leadership Development Programme Finance & Budgeting

1. Clinical Leadership Development Programme Finance & Budgeting Ray Willis Divisional Finance Manager 11th May 2012

2. 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

3. How the money flows in the NHS • NHS Structure & Funding • PCT Commissioning • Payment by Results • Future Structure’s & Funding

4. NHS Organisations & Structure

5. NHS Revenue Funding Flows

6. 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! • Allocation formula currently under review – cynical perspective change in key variables to shift resources south!

7. 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

8. 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

9. Payment by Results (PbR) • PbR introduced in 2003/04 using HRG’s as currency • 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

10. 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

11. Health & Social Care Bill 2011 • Abolish SHA’s & PCT’s • Establish Commissioning Board • GP Consortia • New Monitor

12. Proposed NHS Structure

13. 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

14. 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 !

15. 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”

16. 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

17. 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

18. 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

19. Budget setting in the NHS • Combination of incremental and Zero Based Budgeting but needs to move towards Activity Based Costing – 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

20. 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

21. 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

22. 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

23. 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 • Block agreement – guarantees income & protects against risk • Non clinical Income – from catering, car parking, rents , education & training etc

24. The Budget Setting Process - Expenditure • Expenditure budgets are based on: - 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

25. 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%

26. 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

27. 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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30. 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

31. 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

32. 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 !’

33. 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

34. 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

35. 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

36. 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

37. 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.