Introduction to NHS Finance

Budget Manager Training Programme

Mark Mawdsley, Commercial Finance Manager

Contents

2

1 The regulatory framework

2

3

4

Making the best use of resources

Where do we get our income from

The financial context

The Regulatory Framework

3

Understanding the regulatory

framework we work within.

The Development of

Foundation Trusts

• Created as public benefit companies under Health & Social Care Act 2003.

• Have a greater level of freedom:

– Regulated by Monitor not the DH;

– Greater governance freedoms; and

– Greater financial independence.

• Accountability to public via members and governors;

• All NHS Trusts are expected to become a FT;

• Application process through the National Trust Development Agency (NTDA;

• Monitored through financial ratios.

Why are Foundation Trusts

different?

• Not directed by the Government so have

greater freedom to decide their own strategy

and the way services are run;

• They can retain their surpluses and borrow to

invest in new and improved services; and

• They are accountable to their local

communities through their members and

governors, their commissioners through

contracts, Parliament & Monitor as their

regulator.

How does Monitor judge our

performance?

• From 1 October 2013, the Risk assessment framework replaced the

Compliance Framework.

• Key change is to move away from simply monitoring existing performance to

whether the FT is a “going concern” to ensure it has “Continuity of

Service”;

• The aim of the Risk assessment framework is to show when there is:

– a significant risk to the financial sustainability of a provider of key NHS

services which endangers the continuity of those services; and/or

– poor governance at an FT.

• Risks at each FT are assessed annually by reviewing three-year plans, the

current financial position is monitored every quarter.

• Under the current system BCH has reported at least Green for Governance

and a Continuity of Service Risk Rating (CoSRR) of 4 (1=Lowest Level,

4=Highest Level) for Finance for the last 2 financial years.

• BCH has a strong all round and preferable performance.

• Monitor’s view in June 2014 was that BCH was in the Top 20 financially

strong FTs.

Annual submissions to Monitor

In-year submissions to Monitor

The financial risk rating

Old System – 5 metrics in total

• Achievement of plan (10%):

– Earnings before interest, taxes, depreciation and amortization. (% of plan

achieved).

• Underlying performance (25%):

– EBITDA margin with 11% providing highest rating and need 5% to get average score.

• Financial efficiency:

– Return on assets (20%) – need 3% return to get average rating.

– I&E surplus margin (20%) – Need to get a surplus to get an average rating.

• Liquidity (25%):

– The number of days operating costs covered by cash reserves. The higher the

number of days the better the score.

New System – simplified 2 metrics

• Liquidity (50%):

– The number of days operating costs covered by cash reserves. The higher the

number of days the better the score.

• Debt Coverage (50%):

– The funds available to service debts/debt interest – this works against hospitals

with large PFIs

The governance rating

• Monitor will incorporate information across a number of areas:

– performance against selected national access and outcomes standards;

– CQC judgments on the quality of care provided;

– relevant information from third parties;

– a selection of information chosen to reflect quality governance at the organisation;

– the degree of risk to continuity of services and other aspects of risk relating to

financial governance; and

– any other relevant information.

• Monitor will:

– assign a green rating if no governance concern is evident;

– where they identify potential material causes for concern in one or more of the

categories they will replace green rating with description of issue and steps taken;

– assign a red rating if taking regulatory action.

• Monitor will be informed by the:

– seriousness of the issue;

– information they already have concerning the situation;

– effectiveness of the Trust’s initial response to it; and

– time-critical nature of the situation.

Indicators of Governance

concerns

The Governance rating

Trust Income

13

Where do we get our income

from?

Changing Contracting Situation

Clinical Commissioning Groups Potential Contract Value - £54m

Potential % of Clinical Income Portfolio - 24%

NHS England Potential Contract Value - £164m

Potential % of Clinical Income Portfolio - 73%

Non-Contracted Activity/Non-English Potential Contract Value - £6m

Potential % of Clinical Income Portfolio - 3%

14

Where do we provide services

to?

15

Where do we generate our

income from?

Healthcare Income £225m predicted in 2015/16

• From the provision of healthcare services:

– 46% of which is covered by a national tariff under payment by results;

– 52% of which is determined by locally negotiated prices;

– 2% balance is based on meeting a range of quality targets called CQUINs.

– We benefit from a subsidy to the tariff we receive called the paediatric ‘top-up’. For this we receive circa £17m (included in above %s).

Other Income Sources £21m predicted in 2015/16

• Private patients (less than 0.5% of total Trust Income);

• Training & education funding (3% of Total Trust Income);

• Research & development funding (less than 2% of Total Trust Income);

• Over 200 other sources including SLAs with other Acute providers.

We get paid in three ways

1. By a nationally determined tariff for eg: – accident & emergency;

– planned inpatient and planned emergency care;

– Outpatients procedures and attendances;

– Diagnostic imaging in Outpatients;

– Best practice tariffs;

– CF Pathway;

– Direct access.

2. By a locally determined tariff with a range of commissioners where activity can be quantified and costs attached.

3. By a ‘block contract’ for a range of services where eg we cannot identify an activity or the agreement is to supply a service irrespective of volume.

Payment by Results

• Implemented to:

– improve efficiency;

– increase value for money;

– facilitate choice;

– reduce waiting times; and

– improve quality and service innovation.

• PBR uses a national tariff of fixed prices that reflect national average prices for hospitals;

• Patient treatments within a cluster of diagnosis and procedure that consume the same level of resource are assigned to a Healthcare Resource Group;

• A range of areas are excluded from the national tariff e.g. high cost drugs;

• PBR does allow unbundling of the tariff to enable different aspects of treatment to be provided by different service providers – Diagnostic imaging unbundled in 2013/14;

• Increasing use of Best Practice Tariffs.

2015/16 Tariff

National tariff was consulted on in December 2014 Tariff Decision • 2015/16 tariff objected to by over 50% (by supply) of provider organisations including BCH. Our

objections were based on; – Proposed 50% marginal rate on specialised services given our portfolio would have a clear impact; – Proposed 1.9% efficiency was too high.

• Monitor offered providers the choice of an enhanced alternative putting a further £0.5bn into the provider sector. This was termed the Enhanced Tariff Option (ETO) and was a voluntary interim arrangement. The alternative is to remain with the Default Tariff Rollover (DTR);

• This was the biggest decision the Trust has had to make in this year’s planning round. ETO • Base tariff remains the same; • MRET (marginal rate emergency threshold) – increased from current 30% to 70% (initial 2015/16 tariff

said 50%); • Marginal cost reimbursement for specialised services increased to 70% (from proposed 50%); • Gross tariff deflator reduced to 3.5% from 3.8% (of this the tariff deflator drops from 1.9% to 1.6%) ; • 2.5% CQUIN (quality incentive payments) funds available; • CNST (insurance contribution) funding available; • Requirement to take part in national benchmarking exercise; • Early intervention mental health monies available. DTR • Current 2014/15 prices remain until they are formally suspended – gain on efficiency; • MRET remains at 30%; • No CNST or mental health funds available; • No/limited CQUIN funds or lower efficiency available for the whole of 2015/16.

20

Tariff Decision and Impact

£m

Base Tariff compared with 2014/15 -3.1

Default Tariff Rollover (DTR) compared with 2014/15 -4.7

Enhanced Tariff Option (ETO) compared with 2014/15 -2.4

Benefit of ETO over DTR 2.3

Source: Contracting Department Impact Analysis March 2015

For BCH there was a clear benefit in accepting the ETO. Additionally, for BCH the nature of the Trust’s balanced portfolio is important.

£'000 % £'000 %

Planned Care -889.0 -1.31 -497,948.0 -2.44%

Emergency Care 271.0 5.78 106,293.3 6.40%

Outpatients -447.0 -3.29 51,618.6 0.94%

Total -1,065.0 -1.23 -340,036.1 -1.24%

Source: National Casemix Office

BCH Income Impact v 14/15 National Income Impact v 14/15

HRG CZ14U Major Nose Procedure 18 years & under

21

PBR Example 1

HRG PA15A Acute Bronchiolitis with CC

22

PBR Example 2

Outpatient – Paediatric ENT

and Gastroenterology.

23

Factor determining price receive - ENT £

1st attendance single professional £105

1st attendance multi-professional £138

Follow up attendance single professional £63

Follow up attendance multi-professional £82

Factor determining price receive - Gastroenterology £

1st attendance single professional £247

1st attendance multi-professional £262

Follow up attendance single professional £157

Follow up attendance multi-professional £157

Issues

• Tariff does not = price it is based on average costs.

• Best practice tariffs are being introduced: – Per 2013/14 PbR Guidance “277. A best practice tariff (BPT) is a national

tariff that has been structured and priced to adequately reimburse and

incentivise care that is high quality and cost effective. The aim is to reduce

unexplained variation in clinical quality and universalise best practice.” –

Paediatric Diabetes and Paediatric Epilepsy impact on BCH.

• Non elective-care tariff adjustment – was 30% - now 50%

• Specialist top up: – Paediatrics 64% and 44%

– Orthopaedics 24%;

– Spinal Surgery 32%

– Neurosciences 28%

• Coding and data collection are important if we: – Want good quality information

– Are to be appropriately rewarded

• Commissioning quality initiative – CQUIN

• We need to look for new income streams.

Depth of diagnosis coding

Depth of procedure coding

Summary of coding depth by

specialty

Using Resources

Making the best use of the

resources we have available.

Where do we spend the money

we have available?

• Most of the money we get is spent on staff almost 67p out

of every £1.

• Therefore using our staffing resource efficiently is crucial

to the delivery of the savings targets we have to make.

• Independent benchmarking shows opportunities for

efficiencies when compared to similar organisations in all

staff groups other than estates.

• Other major spend categories:

– Drugs £22m;

– Clinical Supplies £21m;

– Clinical Negligence £1.6m;

• Overall Spend is Pay £157m and Non-Pay £80m.

Why do we need to make

efficiencies?

We have set a 4.0% efficiency requirement across all budgets in 2015/16, in effect this means taking £10million savings out of the Trust’s budget. Against those budgets we can influence, this equates to 4.9%. So why is this necessary?

1

• Legacy CIP not met by the Trust – shortfall on savings achieved in previous year

2

• Efficiency assumed in the original tariff – for every £1 we received in 2014/5 we will now receive 98.4p

3

• Pay inflation – Doctors and Agenda for Change staff will receive a pay rise in 2015/16. This is unfunded as is the rise in Employer pension costs.

4

• Non-pay inflation – although national inflation is low, NHS inflation especially drugs continues to rise. No external funds are provided.

5

• Allowance for cost pressures – there are numerous local pressures to be met eg loss of education and R&D income.

6 • Total

£1.00m

£3.35m

£2.31m

£2.34m

£1.00m

£10.0m

0.5%

1.7%

1.1%

1.1%

0.5%

4.9%

CIP in the outside world

ETO DTRRejected

both

Average

CIP %

No of

Trusts

with

known CIP

Specialist focus hospitals £2,222,714 9 5 4 5.90% 8

Medium sized university and specialist hospitals £9,268,052 20 15 2 3 8.10% 13

Larger university & specialist hospitals (>£690m turnover) £13,924,363 15 2 2 11 7.80% 13

ALL AUKUH Trusts £25,415,129 44 23 4 18 7.00% 34

No of Trusts opting forCIP required to break

even in 15/16Aggregate

turnover 13/14

£000s

No of

Trusts

Making Efficiency Savings

• We need to make sure that we have made best use of taxpayers money.

• Cash releasing savings – decrease in the amount of money that we spend on services.

• Non-cash releasing savings – More activity for the same costs – for example through reducing the average length of stay.

• Our cash releasing savings target:

– 4.0% - £10.0 million

– Split between trust-wide schemes and local schemes;

– How do we engage clinicians in delivering this?

– Do we change our approach in future years?

Why do we need a financial

surplus?

• There are four good reasons why we need to

make a surplus:

1. To provide financial cover for unforeseen

events.

2. To provide money to modernise equipment and estate. £35m Clinical Build.

3. To provide funds for service innovation and

improvement.

4. The credibility of the organisation with key

stakeholders.

Why are clinicians so important

in helping manage finances

• Improving quality of care and providing more responsive

services for patients can only be advanced if there is strong

involvement of local clinicians.

• This includes having the understanding, the tools and the

ability to manage resources effectively and use them well to

the benefit of patients.

• This is not about focusing on cost and cost alone. It is about

how money can best be used to improve the quality of care.

• The efficient use of resources and good quality services go

hand in hand.

• This is enshrined in the Medical Leadership Competency

Framework developed with the Academy of Medical Royal Colleges.

The Financial Context

Understanding the current

financial context.

Where does NHS Money Go?

Back in 2010/11

• The coalition Government agreed that the NHS

would be ‘protected’.

• What did this actually mean?

• No cash reduction at overall NHS level.

• Only minimal real growth.

• Sir David Nicholson, the Chief Executive of the

NHS, indicated that between £15bn to £20bn

needed to be saved on a budget of £105bn.

• Ageing population

• Medical technology

• NHS inflation

• Have things changed?

Facing very real pressures in the next few years…

Eco

no

mic

Political

Technological

Social £

•Increased morbidly across children and

young people •Retirement of

paediatric consultant workforce across the

West Midlands – increasing the demand

for our services

•Review of tariff likely •Changing nature of commissioning for specialist paediatric services •Growing support for a health campus at UHB •Legal challenges to reconfigurations

•Predicted ‘no-growth’ in acute sector •Pay restraint likely to come under pressure in 2013/14 and beyond •NHS inflation remains high – tariff is therefore likely to reduce in real terms value •Local authority financial squeeze

•New facilities at Manchester, planned at Liverpool & Sheffield •Cost of entry for new technologies becoming increasingly prohibitive

There remains a significant

challenge for the NHS

39

Annual productivity growth assumptions Funding requirement in 2020/21 above inflation

0.80% £21bn

1.50% £16bn

2-3% £8bn

Source: Health Foundation April 2015

NHS England estimates of funding pressures facing the NHS in England by the end of the decade

External Views Foundation Trust Network

• There will be a small but growing number of Trusts running annual deficits and without

financially sustainable plans;

• Greater flexibility and scope for innovation around T&Cs of employment are essential;

• The current track record in realising substantial savings through extensive reconfiguration is

not a cause for optimism;

• McKinsey’s international Hospital Institute believes that there are no current international

examples of hospitals systematically realising savings of 5% or more on a sustainable basis;

Association of UK University Hospitals

• Workforce reductions expected to be significantly greater in most organisations in 2013/14;

• Financial landscape is deteriorating in majority of Trusts.

Nuffield Trust

• Post 2014/15, to avoid cuts to the service or a

fall in the quality of care patients receive, the

NHS must achieve unprecedented sustained

increases in productivity or funding will need to

increase in real terms;

• Future pay settlements will be crucial to

limiting the levels of efficiency required;

• “This represents a profound challenge for the

NHS”

Where Are We Now?

Where Are We Now?

2014/15 …. Not a good year!

3rd quarter financial reports paint gloomy picture - Local NHS bodies have produced their gloomiest figures for years, with providers in particular showing significant aggregate deficits in the first few months of 2014/15.

• Reports from Monitor, the NHS Trust Development Authority and NHS England showed an aggregate year-to-date overspend of over £0.5bn in trusts, foundation trusts and clinical commissioning groups. This includes the first aggregate foundation trust deficit.

• Monitor said foundations reported an aggregate year-to-date deficit of £321m in the 3rd quarter of the financial year with a projected deficit of £375m. In its report on 3rd quarter performance, the regulator said 78 foundations reported deficits. Financial pressure was felt particularly in the acute sector, where 72% of trusts reported deficits, accounting for 100% of the total gross deficit.

• The FT sector’s performance at Q3 is as follows:

2014/15 summary

What About BCH 2014/15?

Category Sub-Set Metric Period Plan Actual Variance Weight Score Category Sub-Set Metric

Continuity of Service Risk Rating * YTD 4 4 0.00 50% 50% 100%

Continuity of Service Risk Rating * Forecast 4 4 0.00 50% 50% 100%

Debt Service Cover Rating * YTD 4 4 0.00 0% 0% 100%

Debt Service Cover Rating * Forecast 4 4 0.00 0% 0% 100%

Liquidity Rating * YTD 4 4 0.00 0% 0% 100%

Liquidity Rating * Forecast 4 4 0.00 0% 0% 100%

I&E Position (£m) In-Month -0.40 -1.14 -0.74 10% -8% -82%

I&E Position (£m) YTD 4.38 4.40 0.02 30% 30% 100%

I&E Position (£m) Forecast 4.38 4.40 0.02 30% 30% 100%

I&E Position (£m) Underlying 2.10 2.10 0.00 30% 30% 100%

Profitability - EBITDA (£m) In-Month -0.59 -0.65 -0.07 15% 13% 88%

Profitability - EBITDA (£m) YTD 11.82 11.53 -0.29 35% 34% 98%

Profitability - EBITDA (£m) Forecast 11.82 11.53 -0.29 50% 49% 98%

Cash (£m) YTD 45.49 51.55 6.05 50% 57% 113%

Cash (£m) Forecast 45.49 52.32 6.82 50% 58% 115%

Capital Expenditure (£m) YTD 12.74 12.14 -0.60 50% 48% 95%

Capital Expenditure (£m) Forecast 12.74 12.14 -0.60 50% 48% 95%

CIP Achievement (£m) In-Month 1.32 0.47 36% 10% 4% 36%

CIP Achievement (£m) YTD 9.46 6.91 73% 20% 15% 73%

CIP Achievement (£m) Forecast 9.46 6.91 73% 35% 26% 73%

CIP Achievement (£m) Recurrent 9.46 6.42 68% 35% 24% 68%

Income per £1 Pay Expenditure (£) YTD 1.56 1.57 101% 50% 50% 101%

Income per wte (£) In-Month 70.27 80.94 115% 50% 58% 115%

% of Pay Bill on Temporary Staff (%) in-Month 5.0% 5.5% 110% 25% 23% 110%

% of Pay Bill on Temporary Staff (%) YTD 5.0% 5.3% 106% 75% 71% 106%

Contract Penalties/CQUIN Target (£m) YTD 5.01 4.93 -0.08 50% 49% 98%

Contract Penalties/CQUIN Target (£m) Forecast 5.46 5.23 -0.23 50% 48% 96%

OVERALL 96%

Temp Spend 93%

FINANCIAL BALANCED SCORECARD - MARCH

97%

Liquidity

Efficiency

CQUIN/

Penalties

100%

82%

96%

114%

95%

68%

100%

88%

109%

85%

Governance

I&E and

Profitability

CoSRR

I&E

Profitability

108%

Cash

Capex

CIP

Productivity

What About BCH 2015/16?

2014/15 Annual

Plan

2015/16

Provisional Plan -

Year 2 of 2014/15

Op Plan

2015/16

Provisional Plan

£'000 £'000 £'000

Income from activities

Elective Inpatients 25,894

Elective Day Cases 16,964

Non-Elective 33,478

Outpatients 23,029

ED 4,843

Other 113,102

ROH 475 476 470

Total Income from Activities 217,785 215,159 225,799

Other Income 19,877 21,086 21,088

Operating Expenses -225,841 -223,855 -237,334

EBITDA 11,822 12,390 9,553

Interest Receivable 243 188 150

Depreciation -4,624 -5,291 -4,559

Profit/(Loss) on Asset Disposal 0 0 0

Impairment 0 0 0

PDC Dividend -2,762 -2,979 -2,730

Interest Paid -300 -300 -300

Net Surplus/(Deficit) 4,379 4,008 2,113

EBITDA Margin % 4.2% 4.2% 3.7%

I&E Surplus % 1.8% 1.7% 0.9%

214,683 225,329

Key Risks As reported at the March FRC the key financial risks for 2015/16 are as follows:

• CIP delivery – in value terms at £10m this is the Trust’s biggest CIP target yet. Performance in 2014/15 has improved on previous years although this falls short of the target needed in 2015/16;

• The threat to contract income through the fine/penalty regime. This is an area that will be targeted in 2015/16. We were fortunate to escape penalties during Q1-Q3 in 2014/15 and this will not be an option in 2015/16. Mitigations around demand management will be pursued by the Contracting Team;

• The demand risk and the impact of receiving 70% for specialised services above the Stated Base Value (SBV). This risk will be tempered the higher that the SBV can be negotiated. Further mitigations around market share and demographic growth will also be pursued;

• CAMHs Community contract. Financial mitigations for this have been put in place. However, the full magnitude of what is required will not be known prior to the agreement of the 2015/16 Plan;

• Controlling our temporary pay bill. At just under £10m this is an area where greater financial rigour will benefit the efficiency and core finance agenda.

Since the March FRC meeting no events have occurred which require further risksto be added to the above.

14

Forecast Original Revised

Outturn Base £4.1m Plan

Statement Metric 2014/15 2015/16 2015/16

SOCI EBITDA 11.09 9.0 9.1

SOCI EBITDA margin 4.5% 3.8% 3.7%

SOCI Net Surplus/(Deficit) 4.4 4.1 2.1

SOFP Cash and Cash Equivalents 52.3 37.7 40.8

SOFP Net Current Assets (Liabilities) 31.1 18.0 16.9

SOFP Total Assets Employed 133.1 137.3 133.7

Risk rating

COSRR Liquidity ratio score 4 4 4

COSRR Capital servicing capacity score 4 4 4

COSRR OVERALL Continuity of Service Risk Rating (CoSRR) 4 4 4

Finance Is Everyone’s

Responsibility Academy of Medical Royal Colleges says

• Clinicians should understand the basics of NHS Finance.

• Senior clinical staff should be familiar with the financing arrangements for their service and understand the basics of budgetary management.

• Clinicians should be encouraged to take financial responsibility for their service with freedom to makes changes to improve their services.

• Clinicians have the right to expect prompt, reliable information presented in a way they understand.

NHS Leadership Academy - Managing resources Leaders manage resources: knowing what resources are available and using their influence to ensure that resources are used efficiently and safely, and reflect the diversity of needs. Competent leaders: •Accurately identify the appropriate type and level of resources required to deliver safe and effective services •Ensure services are delivered within allocated resources •Minimise waste •Take action when resources are not being used efficiently and effectively