Item 8iii Draft financial Plan Document for 2016-17 Moorfields Eye Hospital NHS Foundation trust Prepared by: Steven Davies NHS Finance Director & Deputy Chief Financial Officer Board of Directors Meeting 28 th January 2016 Date produced 21 st January 2016 Action for Board: For information For consideration For decision 1
1.0 Introduction This paper is intended to brief the Board regarding the initial financial plan for 2016/17 and the major assumptions underpinning it. Further iterations of the financial plan will be included within the overall annual plan, which the Board will receive in February and March 2016. The Trust is required to submit a first draft cut of the financial plan to NHS Improvement on the 8 th of February with a final submission in March 2016. 2.0 Synopsis The initial financial plan is to maintain the surplus at 2M for 2016/17, in line with our forecast outturn for 2015/16. To meet this target the Trust will need to deliver a challenging 10M efficiency programme, or 5.3% of NHS expenditure. This efficiency challenge is significantly more than the national planning assumptions which anticipate a 1% increase in tariff prices. The tariff for ophthalmology and Moorfields mix of activity sees a decline in tariff (net of CQUIN) of 1.5M, or 3M worse than the national assumptions. We are in dialogue with NHS Improvement about this. In addition to the tariff reductions, the Trust needs to fund significant inflationary pressures next year, including pay and non-pay inflation, incremental drift and a significant increase in NI (1.75% of pay), where historic reduced employers NI rates for the members of the NHS pension scheme are being increased. Further assumptions are included within the paper regarding commercial units, NHS activity growth and other pressures. For 2017/18, an initial plan has also been prepared. We currently anticipate the impact of new tariff pricing, introduced in that year, will reduce our income by 3M over and above national assumptions. This signals a further challenging year for efficiency delivery where an estimated target of 11.8M will be required. 2
3.0 Financial forecasts 3.1 Summary income and expenditure position The plan for 2016/17 and 2017/18 has been formulated using draft published tariff pricing and financial assumptions yet to be fully agreed with all commissioners. The table below sets out the current income and expenditure plans based on the latest planning and budget setting assumptions. In addition an income and expenditure bridge which takes the existing planned surplus of 2m for 2015/16 and reflects the key planning changes is set out in appendix 1. All M 2016/17 2017/18 NHS Clinical Income 166.76 173.65 Non NHS Clinical Income 25.96 27.85 Non clinical income 26.12 27.04 Total Income 218.83 228.55 Pay expenditure (116.05) (120.79) Non pay expenditure (87.99) (92.65) EBITDA 14.79 15.11 Depreciation, Interest and Dividends (12.64) (13.11) Surplus /Planned surplus 2.15 2.01 The following material movements reflecting the key financial assumptions for 2016/17 and 2017/18 should be noted: NHS clinical income: increases due to general income growth 3.0M (2%) in 2016/17 and 3% in 2017/18. In addition, directorate developments in 2016/17 include full year effect of the planned growth in intravitreal injections 5.9M (as projected and shared with commissioners in 2015/16). Finally, assumptions about the gross level of income required to deliver 30% of the planned efficiency programme are included in both years. A cost response reserve has been created to support the increased costs of delivering this activity. Counting and coding changes have been included for 2016/17 and 2017/18. Tariff deflation has been set based on the latest tariff prices. This has been calculated at -2.06% of tariff income for 2016/17 prior to our receiving CQUIN of 3
1.8M. This gives us a net tariff reduction of 1.5M. The statutory tariff consultation (February 2016) may change these prices. For 2017/18 the introduction of new tariff pricing is expected, which is likely to further reduce our prices by 3M, in addition to expected further national tariff reductions of 2.6M Income for CQUIN has been calculated at 1.7m assuming delivery at 85%. A similar level has been assumed for 2017/18. Non-NHS clinical income: This is primarily our commercial divisions which have been allocated targets for 1.04M net surplus growth in 2016/17 ( 0.7M 2017/18) This level of growth is currently being validated with the commercial divisions to ensure that growth is deliverable. Pay costs inflate at 3.75% in 2016/17 which includes incremental drift at 1%, pay inflation at 1% and a further 1.75% to cover the changes to national insurance levied on staff who participate in the contracted out NHS pension scheme. Final pay awards are yet to be announced. Pay inflation in 2017/18 has been estimated at 2% which includes 1% for pay inflation and 1% for incremental drift. Non-pay inflates at 2% in 2016/17 and 2017/18; costs also increase to deliver new developments and growth, offset by efficiencies. Depreciation and interest charges show an increase during the period in respect of additional capital investments and their associated financing costs. The current planning position includes reserves of 5.1M in 2016/17 and 5.2M in 2017/18 being 1% of total costs, 1% of NHS costs and 1.5% of commercial costs. Key Planning assumption 2016/17 2017/18 NHS Income nominal tariff movement (2.06%) (1.5%) Income generic growth 2.00% 3.00% Pay Inflation (Inc incremental drift) 3.75% 2.00% Inflation Drugs 2.00% 2.00% Inflation - Clinical Supplies 2.00% 2.00% Inflation - Other costs 2.00% 2.00% Efficiency Programme (% of NHS Expenditure) 5.69% 6.30% Reserves 3.50% 3.50% 4
3.2 Productivity, efficiency and cost improvement plans (CIPs) There is continued uncertainty around tariff prices and the outcome of the engagement with commissioners as part of the contracting round. Current proposals have been used as the basis for planning of efficiency requirements, accepting that they may change. The 2016/17 efficiency target has been set at 10.0M (5.6% of NHS expenditure) which is sufficient to deliver a 2M surplus. The potential impact of HRG4 + in 2017/18 will increase this target further to 11.75M. The challenging nature of this efficiency requirement is in contrast to NHS Improvement s published assumptions for acute providers. This is due primarily to tariff pricing levels and has been raised with NHS Improvement. Regardless, work has now advanced to begin the process of identifying and developing plans for delivery of this CIP programme, including recruitment of dedicated project resources and review and enhancement of efficiency programme governance. 3.3 Continuity of Service Risk Rating (COSRR) 2016/17 2017/18 FSRR - Capital service 4 3 FSRR - liquidity 4 4 FSRR - I&E Margin rating 4 4 FSRR - I&E Margin Variance rating 4 4 Overall FSRR 4 4 The draft financial plan shows the FSRR at 4. This has assumed that the financial plans and margins will be achieved without material variance. Capital service ratio is forecast to degrade in 2017/18 as debt levels and associated servicing costs rise. To avoid this, the Trust would need to lift its surplus performance. 5
3.4 Capital requirements Requests for capital investment are now being collated and prioritised and will be included with the next version of the plan once finalised. The high level capital plan has been set out below: 'm 2016/17 2017/18 Land Assumed land acquisition 24.02 Other land 12.00 New Building - Purchased 1.10 4.56 Estates - City Road 1.50 1.25 Estates Other 0.25 0.25 Information Technology 0.25 0.50 Intangibles 2.00 0.30 Medical Equipment 0.75 0.75 MEH East and Other satellites 5.00 St Georges Hospital - 5.64 Carried forward schemes ex 2015/16 1.00 Contingency 1.00 Total 31.87 30.25 There are a range of schemes included which are subject to business case approval and final agreement. These will be included when approval has been granted. The level of expenditure is still subject to considerable uncertainty and will change once final prioritisation has been completed. 6
4.0 Financial risks The key financial risks and their mitigations are shown in the following table: Risk Description Mitigation Under-delivery on efficiency plans Unplanned cost pressures occur in year Changes to tariff structures for CCG and specialist commissioned activity detrimental to our financial position Anticipated growth for our commercial businesses may not materialise with consequent impact on profitability Inflation is above expectations Capital costs increase to Efficiency target set at a high level of 5.6% of NHS expenditure for 2015/16. Historic underperformance against targets set. A range of additional unplanned costs pressures may crystallise in year. e.g. mandated investment post CQC inspection Financial planning is currently based on draft prices with the statutory tariff consultation and associated guidance yet to be received. Change to tariff prices and business rules still possible. Commercial businesses experience volatility as against anticipated growth rates with a consequent impact on profitability. Inflation is above expectations, leading to pay and non-pay pressures that are not fully funded. Capital cost steps in service capacity improvements turn 7 Resources recruited to focus on efficiency and transformation within the organisation. Efficiency programme governance being enhanced. Cost pressure and contingency reserves to remain uncommitted until programme delivery s assured. Discussions with NHS Improvement have commenced. Moorfields has limited contingency reserves (1.5% of NHS costs) for this eventuality and a further 1.0% Trust contingency for such eventualities. Moorfields has limited contingency reserves (1.5% of NHS costs) for this eventuality and a further 1.0% Trust contingency for such eventualities.. We would need to seek to generate additional savings and revenues in order to maintain contingency reserves for other uncertainties. Formal submitted plans only address activities likely to be going ahead. New opportunities are likely to crystallise to some degree. Residual risk is accepted in line with past practice at Moorfields. Commercial contingency of 1.5% has been included within planning. Prudent assumptions have been included. Moorfields has limited contingency reserves (1.5% of NHS costs) for this eventuality and a further 1.0% Trust contingency for such eventualities. We would need to seek to generate additional savings and revenues. Some contingency included in capital planning; reprioritisation of capital
address service capacity improvements Cash balances adversely impacted from an array of poor commissioner practices and processes Broader health system planning changes and political shifts adversely impact on our operational and financial position out to be substantial. A consistent theme at satellites is that existing and recent additional space is constrained. Cash balances are hit by continued weak commissioner operational and planning performance. Broader health system planning changes. Moorfields is atypical in its range (many) and scale of commissioners. There is a risk that there will be unforeseen effects from a more general health system approach on Moorfields operational and financial position. expenditure priorities to meet any new arising schemes in year. Moorfields has an additional working capital facility of 6M; Contract negotiations to target higher base contract values to minimise payment delays. Engagement, where offered, in the relevant consultation processes. 5.0 Request for Trust Board The Trust Board is asked to note the financial plan at this stage, with further iterations to be presented at future Board meetings for approval. 8
Appendix 1 Income and Expenditure Bridge 2016/17 2017/18 TOTAL TOTAL '000 '000 '000 '000 2015/16 Full Year Forecast @ Month 5 2,000 2,152 Income Changes - Non-Recurrent Income in 2016/17 (422) 0 NHS Generic Growth 3% 3,058 5,003 Full Year Effect of 2015/16 Service Developments 5,980 0 Tariff Deflator and Price Changes (3,336) (2,576) CQUIN 1,748 HRG 4+ Implementation (3,000) Specialised commisioning 0 0 Coding & Counting 397 423 Other Income Inflation 51 51 7,475 (100) 9,475 2,052 Expenditure Adjustments - Non-Recurrent Expenditure in 2015/16 1,093 0 Cost Response For Generic Growth in Activity (1,835) (3,002) Full Year Effect of 2015/16 Service Developments (4,889) 0 Pay Inflation, Incremental drift and NIC changes (3,812) (2,158) Non-Pay Inflation (1,401) (1,471) Other pay cost changes (900) 0 Depreciation Buildings (600) 0 Public Dividend capital (200) 0 (12,544) (6,631) (3,068) (4,579) Below the Line - Developments - Impact in depreciation and interest (767) (668) (3,835) (5,247) Reserves Contingency and Cost Pressure Reserve (5,058) (5,259) (5,058) (5,259) (8,893) (10,506) Commercial Unit Contribution Increase 1,045 763 Deficit Before Efficiency (7,848) (9,744) Efficiency Target 10,000 11,750 Budgeted Surplus 2,152 2,006 9