INTRODUCTION TO
NHS FINANCES
Paul Betts,
Economic Adviser,
FTN
How the money flows in the NHS
Parliament raises taxes and National insurance
The Treasury
New Sector Regulator- will
influence competition &
prices
Political
Decision
National Commissioning
Board
Non Political
Decisions?
Capitation Formula
Via contracts
Clinical
Commissioning
Groups
Services in Trusts &
other Providers
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.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
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)
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
How Does Monitor Assess Financial
Performance?
Consequence of Risk Ratings
Financial monitoring
Rating 5
Rating 4
Rating 3
Rating 2
Rating 1
Quarterly/ Six Month Monitoring
Quarterly Monitoring
Regulatory activity
None
None
Quarterly Monitoring but monthly in
case of deteriorating trend.
Supplementary info may be required
If significantly underperforming against
plan (FRR fall of at least 2), request analysis
to understand
Monthly monitoring with possible:
Supplementary financial info
Service line information
Remedial plan & updates
Liquidity recovery plan
Potential for escalation and consideration
for significant breach
Potential for intervention under section 52
of the Act
Monthly monitoring with possible:
Supplementary financial info
Service line information
Remedial plan & updates
Liquidity recovery plan
Potential for escalation and consideration
for significant breach
Potential for intervention under section 52
of the Act
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
Source: 5 Boroughs Partnership NHS Foundation Trust
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
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?
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?
How to get more information on the Annual
Report
• Useful guide to understanding
and interpreting your annual
report available from the Audit
Commission:
•http://www.auditcommission.gov.uk/health/fin
ancialmgmt/nhsaccountsgui
desfornonexecutives/Pages/f
oundationtrustsaguideforgov
ernors.aspx
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).
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 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
INTRODUCTION TO FT
BUSINESS DEVELOPMENT
Helen Crump,
Commercial and Regulatory
Adviser,
FTN
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
The NHS business
• English NHS employs more than 1.4m people
• 2011-12 budget of £106bn
• “Nicholson Challenge” saving 4% every year for four years up
until 2015
Source: Department of Health
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
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
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
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)
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
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
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 nonNHS activity
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
Examples
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
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
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