Clinical Leadership Development Programme Finance & BudgetingRay WillisDivisional Finance Manager

11th May 2012

Purpose of the SessionHow the money flows in the NHS & PbRCurrent financial climateCorporate & Financial GovernanceBudgets, Budgeting approaches & Budget settingBoard level & Directorate level Financial InformationBudget Control & reporting Financial planning & decision makingFinance & CliniciansQuestions

How the money flows in the NHSNHS Structure & Funding

PCT Commissioning

Payment by Results

Future Structures & Funding

NHS Organisations & Structure

NHS Revenue Funding Flows

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 demographicsDeprivation levelsHealth needs & profile Results in a target share for each PCTTarget not the same as allocation - gradual move towards target allocations for all PCTs from growth!Allocation formula currently under review cynical perspective change in key variables to shift resources south!

PCT CommissioningPCTs commission healthcare for their local population. This can be from:NHS TrustsFoundation TrustsCommunity Service ProvidersIndependent Sector / Voluntary SectorDoctorsDentistsOpticians

NHS Trusts and Foundation Trusts Income

Majority of income received through commissioning process with PCTs via payment by results tariffOther funding viaDirect allocations from Department of HealthLocal AuthoritiesResearch & TrainingCharitable DonationsCatering, Car Parking, Private Patients

Payment by Results (PbR)PbR introduced in 2003/04 using HRGs as currencyLinks payments to activity undertakenIntended to support NHS Plan and reform agenda during period of unprecedented growthReduce waiting times - 18 WeeksPatient ChoiceNational Tariff set annually for each type of service / HRGIncome reflects volume and complexity of healthcare provided. Contract negotiations focus on volumes and quality

Payment by ResultsIs it fit for purpose during period of austerity? Original structure & scope incentivised FTs to deliver increased volumesLatterly 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 ; CQUINs; Financial penalties; readmissions penalties etc

Health & Social Care Bill 2011Abolish SHAs & PCTsEstablish Commissioning BoardGP ConsortiaNew Monitor

Proposed NHS Structure

Current Financial ContextUK economic climateNHS implications minimal growth for next 5 years (Tariff Deflation)DH need to generate cost efficiencies of 20bnProjected savings target for Teesside of 200m by 2014

Current Financial ContextThis 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 !

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 organisations future plans and commitmentsReview aims and ensure planned activities are achievedDetermine the resources needed to deliver servicesBasis for controlling income and expenditureA yardstick for measuring performanceTo 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 MonitorFor new servicesFor major changes in the way in which services are deliveredDynamic not static

Budget setting in the NHSCombination of incremental and Zero Based Budgeting but needs to move towards Activity Based Costing PLICs will provide the platform to do thisRobust timetableSet and approved before the year it relates toRealistic forecasts (for pay, inflation, cost pressures)Takes account of previous years experienceBudget holder involvementProfiled across the yearBalanced

FT Annual PlanMonitor 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 ProcessComprises 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 - IncomeOverall budget includes income from several different sources:

-SLAs with PCTs and other NHS bodies in accordance with the National Tariff and PbRs

-Private patients, RTAs

-Medical and non-medical training funding via the Workforce Development Directorate of the SHA

-Commercial sources of income car parking, catering etc

Trust IncomeContract types clinical IncomeCost 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 = 4kCost & volume / Block Contract Trust paid for a set level of service e.g. Training of junior Medical staff, community servicesBlock agreement guarantees income & protects against risk Non clinical Income from catering, car parking, rents , education & training etc

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

Trust ExpenditurePay circa 68% of costs = 4,685 wtes of which - Medical 11%Nursing & Midwives - 55%AHPs & 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 governanceIn-year monitoring process includes a monthly report to Exec Team and Trust Board with escalation to the Finance Committee

Budgetary control - reportingMonthly reports to board and management

Performance against plans and targets using key performance indicators (KPIs)

Financial and non financial information

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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 usedNot 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 holdersAligned 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 holders responsibility?

Tell the finance director there isnt enough money ? NO !-understand and manage their budget -what drives income/costs ? -what influences outcomes/outputs ?

What are a budget holders key objectives ?-deliver required quantity/quality of care/service-maximise income, minimise cost

Budgetary control budget holdersSo, 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 makingDevelopment of Service Line Reporting - Inform areas to develop the business & market services that are profitableInform areas to apply lean principles to improve efficiency & ensure as a minimum services deliver a contributionProvide a road map for investment decisions targeting Capital resource to generate sustainable revenue growthPatient level information & costing Successful implementation dependent upon data warehouse of patient interventions to support costed profiles of careWill provide information to constructively challenge practice best practice tariffsProvide the information to underpin business cases for new procedures; service expansion/contraction etc

Financial planning & decision makingEffective demand & capacity planning, linking PCT demand plans to Trust capacity Ensure these are consistent with operational budgetsUtilise lean thinking principles to ensure internal capacity is utilised efficiently to deliver correct & appropriate care pathways & clinical interventions

What I need from youThe 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.

*Banking sector collapse and the resultant credit squeezeLow interest ratesStagnant economic growthIncreased unemploymentReduced tax revenuesLow inflationQuantitative easing national debt from 38bn to 180bn*Key points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.

Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.

Key points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.

Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.

Key points you may want to emphasise are:Budgets are drawn up for income and expenditure. In the public services the focus tends to be on the cost side but budgeting for income is equally important.Budgets are not just about money they also look at such things as activity levels, volumes and resources needed.You put budgets together in advance of the period they relate to.Someone else has to agree or approve them.They usually cover a year but to help with planning budgets over a longer period (3-5 years) are common.They are drawn up within the context of an overall strategy for a unit, department, organisation as a whole (or all 3!). In other words a budget translates your aims into a statement of the resources (staff, equipment etc) needed to fulfil them.

Depending on your audience you may also want to mention that budgeting is a key function of a management accountant in the NHS. The focus of a management accountant is on providing information to people within the organisation to help them make better decisions. Financial accountants focus on providing information to external bodies.

This slide lists some of the many different reasons why budgets are drawn up.

It is worth emphasising that the overriding reason is to establish a realistic and affordable plan for the future that will meet the departments/units/organisations aims and reflect their agreed priorities for the period covered.

Once a budget is agreed it is used to monitor how things are turning out actual performance is compared with that planned. This applies both to income and expenditure.

The next slide looks at the final bullet point in more detail.

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The board and senior managers need to review regularly the state of the NHS organisations finances to ensure that it will achieve its statutory financial duties.

Rather than wading through pages of figures, key performance indicators are used to highlight quickly how the organisation is doing.

Boards can only work effectively if they are kept fully informed. They need to specify what information they need and the style and format that suits them best. Whatever format a board opts for, the key requirement for all budget monitoring reports is that they are timely and accurate.

Non financial targets include:

Standards set by the Healthcare CommissionNational targets covering health and well being of the population, long term conditions, access to services and the user/patient experienceLocal targets to reflect local needs and priorities.

Budget management in the NHS is carried out by devolving budgets to the lowest practicable level of management, such as a ward manager.

Budget responsibility should rest as unambiguously as possible with those who commit the related expenditure.

Effective budgetary control depends on there being regular, timely, accurate monitoring reports that are produced in a consistent format and with clear concise information that allows a budget holder to act.

If you are a budget holder you need to understand your budget and keep a close eye on how things are going are you meeting your budget or not? Are income levels in line with what you expected? If not, you must do something about it.

It is important that delegates do not see budgetary control as a dry and dusty accounting technique that is an end in itself. Instead they should see it as a mechanism for highlighting unexpected variations (good and bad or favourable/adverse) that can be looked into with a view to getting things back on track so that planned aims/targets/improvements are met or achieved.

This slide focuses on budget holders and the importance of aligning responsibilities with the ability to manage and control budgets. This is one of the most important pre-requisites for successful budgeting and it is sometimes referred to as Responsibility Accounting.

It is essential to have a single named individual responsible for each budget. That person must have the authority to take decisions about the budget they are responsible for.

Every NHS organisation should have a budgetary control policy which sets out the rights and responsibilities of budget holders together with the financial rules under which budgets operate. This is usually set out in an organisations standing financial instructions.

At this point you may want to refer again to the Audit Commission report Achieving 1st class financial management in the NHS. This states (para 60) that current best practice in reporting to budget holders is that the information should be available online, accruals based, linked to activity data, and highlighting future trends based on an assessment of risk.

The Korner VI report from the 1980s contained many useful pointers on the appropriate criteria for successful budgeting the key points are set out in handout 2.2 which you could distribute now.

We now look at what it means to be a budget holder in practice. It is not about complaining that you need more money it is being committed to and understanding your budget and managing it effectively so that pre agreed aims are achieved.

This looks in more detail at what a budget holder needs to do in practice. Run through each point and give a few examples. Suggestions are:What a budget holder may have to deliver type of activity, quantity, quality, access targetsOrganisation wide targets business plan, Healthcare Commission, balanced scorecard (see slide 31)Income sell spare capacity, reduce waiting times by increasing capacityCosts avoid non essential spend, look at staffing levels (e.g. is the balance of permanent/non permanent right?), non pay (e.g. reduce stock, maximise procurement savings)VFM use cost/benefit analyses. Is VFM being achieved?

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