INTRODUCTION TO NHS FINANCES. Paul Betts, Economic Adviser, FTN

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1 INTRODUCTION TO NHS FINANCES Paul Betts, Economic Adviser, FTN

2 How the money flows in the NHS Parliament raises taxes and National insurance Political Decision The Treasury National Commissioning Board Non Political Decisions? New Sector Regulator- will influence competition & prices Via contracts Capitation Formula Services in Trusts & other Providers Clinical Commissioning Groups Via contracts

Triggers for transfer of Funding to FT Contracts/Service Level Agreements (SLAs) Legally binding Standardised Local concordat Financial penalties for failures in quality e.g. MRSA rates Incentives for success i.

3 Triggers for transfer of Funding to FT Contracts/Service Level Agreements (SLAs) Legally binding Standardised Local concordat Financial penalties for failures in quality e.g. MRSA rates Incentives for success i.e. Discharge summaries Specified levels of activity Quality funding 12/13 2.5% of contract value Main types Cost per case (most common in acute hospitals): Paid for each treatment undertaken under payment by results a list of tariff prices by Healthcare Resource Group e.g. For each hip replacement the trust receives circa 5K Block: Fixed amount paid for a service for a year e.g. Doctors training Cost and Volume: Like a block but activity over or below certain levels triggers increases or reductions to the annual amount e.g. ambulance journeys

4 Investment Funding Fixed assets & equipment Foundation Trusts: Power to borrow up to limits included in Terms of Authorisation (refreshed each year with Risk Rating) Use Existing Resources e.g. re-invest cash generated from Current Operational Surpluses Sale of Assets Enter into other arrangements/partnerships to develop facilities/services Subject to restrictions around Private Patient Income Cap (for now)

5 Monitor Performance Regime Risk rating of 1 to 5 set on both the plan at the beginning of the year and financial performance in year (usually each quarter) 1 indicates high risk of significant breach of authorisation 5 indicates low risk of significant breach of authorisation Ask questions if below 3

6 How Does Monitor Assess Financial Performance?

7 Consequence of Risk Ratings Financial monitoring Regulatory activity Rating 5 Quarterly/ Six Month Monitoring None Rating 4 Quarterly Monitoring None Rating 3 Rating 2 Rating 1 Quarterly Monitoring but monthly in case of deteriorating trend. Supplementary info may be required Monthly monitoring with possible: Supplementary financial info Service line information Remedial plan & updates Liquidity recovery plan Monthly monitoring with possible: Supplementary financial info Service line information Remedial plan & updates Liquidity recovery plan If significantly underperforming against plan (FRR fall of at least 2), request analysis to understand Potential for escalation and consideration for significant breach Potential for intervention under section 52 of the Act Potential for escalation and consideration for significant breach Potential for intervention under section 52 of the Act

8 Source: 5 Boroughs Partnership NHS Foundation Trust The annual planning cycle Budget setting One year financial plan Process runs from September to March Approved by Trust Board Annual Plan Three year plan for Monitor Process runs from September to May Includes consultation with Council of Members Annual Accounts Process runs From April to June Presented by Council of members to annual members meeting Important role for Compliance with Authorisation Committee

9 Useful topics and metrics beyond the FRR Cost improvement programmes and savings (how much is recurrent) Capital and investment programmes (change in level of assets) Levels of activity Split of income and expenditure Risk analysis

10 Digging deeper into the finance report What is the impact in terms of services, staff, quality and patients? Why has it changed? How are we doing against the plan? What are the board doing about it? What is the forecast? What are the risks? Is over performance always good? Are these recurrent savings? (or one offs) How does this support the FTs overall strategy?

11 How effective is your finance report? Can you clearly see the key financial metrics? Do you understand them? Which ones are truly key? Have they been interpreted to explain what they really mean? Can you see performance over time and forecasts? How much detail do you want and need? Is it better to have it presented in a combined report with quality and other performance metrics and activity? Do these accounts give you enough to judge the performance of the trust and the board of directors? How should this be presented to you e.g. in person with commentary, commentary in the papers?

12 How to get more information on the Annual Report Useful guide to understanding and interpreting your annual report available from the Audit Commission: ancialmgmt/nhsaccountsgui desfornonexecutives/pages/f oundationtrustsaguideforgov ernors.aspx

13 Glossary EBITDA Margin: The EBITDA (Earnings before Interest, Taxation, Depreciation and Amortisation) Margin is the earnings from day to day activities to date compared to the income earned in that same time period, expressed as a percentage, before taking account of Interest earned, Taxation paid, Depreciation of Assets or Amortisation of Assets. EBITDA Achieved: This is the actual performance achieved to date compared to the plan to date expressed as a percentage. I&E Margin: This is the surplus or deficit generated to date divided by the Total Income received to date expressed as a percentage. Liquidity Ratio: This is the number of days Working Capital that the Trust has at the end of a given time period divided by the expenditure in that same time period. (Working Capital is cash plus debtors minus creditors). Return on Assets: Measures the efficiency in the use of the Trust s Assets. It is the year end forecast Net Surplus (Including PDC Dividend) compared to the average Total Assets employ Net return after financing ( the new version of Return on Assets): Defined as (I&E surplus less PDC dividend, interest, PFI financing and other financial lease costs) divided by (total debt + total balance sheet PFI and finance leases + taxpayers equity).

14 Appendix 1: CIP historic performance Variance (to plan): - 14m - 41m - 88m A significant proportion (27%) of CIPs delivered in 2009/10 were from income generation schemes; this type of CIP will be increasingly difficult to generate in the future given expected spending constraints.

Appendix 2: Responsibilities of Governors Considering the Foundation Trust s annual report and its annual plan, plus now receiving board papers Appointing, removing and deciding the terms of office

15 Appendix 2: Responsibilities of Governors Considering the Foundation Trust s annual report and its annual plan, plus now receiving board papers Appointing, removing and deciding the terms of office of the chair and other non-executive directors Approving the appointment of the chief executive Ability to call executives to meetings Approve/ Remove auditors Informing Monitor if the FT is at risk of breaching its terms of authorisation if these concerns cannot be resolved locally Including operate effectively, efficiently and economically and as a going concern Approving transactions e.g. mergers & acquisitions Approving changes to the FT constitution

16 INTRODUCTION TO FT BUSINESS DEVELOPMENT Helen Crump, Commercial and Regulatory Adviser, FTN

17 We will consider three main areas: The nature of the NHS as a business The health reforms and governors new responsibilities around FT business development How foundation trusts carry out their commercial development functions

18 The NHS business English NHS employs more than 1.4m people budget of 106bn Nicholson Challenge saving 4% every year for four years up until 2015 Source: Department of Health

19 Foundation trusts Not for profit public benefit corporations Accountable to local communities through members and governors Can retain surpluses and borrow to invest in new and improved services FT sector currently spends 31bn a year and has 480,000 employees Source: Monitor/FTN

20 Existing drivers of competition 1990: NHS internal market reforms 1991: GP fundholding 2002: establishment of primary care trusts 2006: choice of 4-5 providers at referral to hospital (inc. independent sector ISTCs) 2008: free choice of all providers at referral to hospital 2011: Any Qualified Provider (AQP) choice extended into some community and mental health services

21 Health and Social Care Act 2012 Liberating the NHS No decision about me without me With patients empowered to share in decisions about their care, with professionals free to tailor services around their patients and with a relentless focus on continuously improving results... Andrew Lansley, secretary of state for health, 2010

22 Health and Social Care Act I No competition on price Providers must not select only patients requiring simple (and therefore cheaper) treatment i.e. cherry picking EU and UK competition law applies to the NHS Commissioners must not engineer a variation in the proportion of services provided by a particular type of provider (eg. Foundation trust, independent sector provider, social enterprise)

23 Health and Social Care Act II Mergers and Acquisitions (M&A), separations and other significant transactions must be approved by at least half the governors of each organisation involved This means that a majority of governors will need to endorse any significant structural changes before they can happen

24 Why will M&A and significant transactions take place? Abolition of NHS trust model leading to universal FT coverage It may not be possible for all NHS trusts to become FTs In some areas, reconfigurations may lead to FTs taking on parts of other trusts, rather than acquiring the whole trust Some FTs may also wish to use approaches such as joint ventures or acquisitions in order to expand the range or number of services they offer

25 Health and Social Care Act III Governors must be satisfied that any activity an FT undertakes which is not for the NHS will not to any significant extent interfere with the fulfilment by the trust of its principal purpose This means governors will ensure that the interests of NHS patients are not detrimentally affected if an FT expands its non- NHS activity

26 Why might FTs undertake non-nhs activity? Demand exists for products and services which FTs can offer including innovative products developed by FTs where they own the intellectual property Increasing market share of NHS activity can mean taking business away from other NHS organisations though this is inevitable to a degree in a system with competition An alternative is to bring in new revenue from sources outside the NHS without affecting provision for NHS patients In some cases, a trust may have surplus space (eg. a decommissioned ward) which is no longer required for NHS services

27 Examples

28 Marketing and Business Development Identifying new market opportunities Developing and maintaining market intelligence systems Identifying potential areas for service/business development including private patient activity Ensuring adherence to code of practice for promotion of NHS-funded services Relating new business opportunities to the foundation trust s strategic objectives Service development Customer relations Contract monitoring and development

29 What do governors need to do? Consider and approve board proposals for mergers, acquisitions and transactions Consider and approve rationale for increasing non-nhs activity Act to ensure the interests of patients are reflected this means that the trust operates in the interests of patients, but also that it can operate in a way which enables it to remain sustainable in the future

30 In summary... In a challenging financial climate, FTs need to think innovatively and strategically about developing their businesses Business development is essential to enable organisations to stay strong and to protect provision of NHS services for patients FT governors will need to be aware of issues relating to competition, income generation and structural change (i.e. mergers, acquisitions etc) in the context of the Health and Social Care Act 2012

Annual Audit Letter. Hereford Hospitals NHS Trust Audit 2010/11

Annual Audit Letter. Hereford Hospitals NHS Trust Audit 2010/11 Annual Audit Letter Hereford Hospitals NHS Trust Audit 2010/11 Contents Key messages...2 Current and future challenges...4 Financial statements and statement on internal control...5 Overall conclusion