FT FINANCIAL REGIME

1. FT FINANCIAL REGIME JANET BARKER/JOANNA MYERS Group Finance Managers Sheffield Teaching Hospitals NHSFT

2. Aims of Today • FT Financial regime • Contract income and other funding sources • Monitor regulation • Q&A session on “a day in the life of…”

3. FT Financial Freedoms • Plan driven vs Target driven • Can borrow commercially • Retain surpluses • Retain proceeds of asset sales • Invest to serve local needs • Can set up investment companies • Joint ventures with the private sector

4. FT Financial duties • Set out in terms of Authorisation • Must operate efficiently, effectively and economically and as a going concern • Disclose information to Monitor and relevant third parties • Comply with Operating framework, Principles of Cooperation and competition • Protection of mandatory services and protected assets • Major investments/disinvestments

5. Accounting Officer Responsibilities • Chief Executive – Delegates to DoF • Duty to exercise its functions effectively, efficiently and economically • Preparation of accounts • Witness before Public Accounts Committee • High standard of Financial Management • Robust financial systems and procedures • Safeguard assets • Financial considerations are reflected in FT policy decisions • Comply with Financial Terms of authorisation

6. NHS Funds Flow Treasury Department of Health R&D - Networks • Primary Care Trust • Patient Services • (April 13 CCGs/SCB) Health Authority - Education Community Services Provider Acute Provider (s) Mental Health Provider

7. Sources of Income into STHFT £m NHS Clinical 709.3 Non-NHS Clinical 7.6 R&D 14.3 Education & Training 66.2 Other income 62.7 TOTAL 860.1 (Source: 2011/12 Accounts)

8. Clinical income £m Elective/Day cases 148.0 Non-elective 158.3 Outpatients 109.9 A&E 12.9 Other 227.1 Block Contract (Community) 53.1 PPI/NHSI 7.6 TOTAL 716.9

9. Main PCT Commissioners % of patient services income Sheffield 56.9 Barnsley 4.3 Rotherham 4.1 Doncaster 2.7 Bassetlaw 1.2 Derbyshire County 4.3 SCGs 23.2 Others 3.3

10. How Contracts are Agreed • Agreements cover: • Volume of Activity • Price of Activity • Quality of Activity • “Timing” of Activity • Funding historically on a local negotiation on price • Now funding largely based on Payment by Results (National Tariffs)

11. PbR / National tariffs • Payment by Results – being paid for work we carry out at national tariff • Tariffs are split between: • Elective inpatients/day case • Non-elective inpatients • Outpatients • A&E

12. How is tariff derived? • All Providers prepare and submit reference costs on an annual basis. • Based at Healthcare Resource Group level e.g. FZ17A – Abdominal Hernia > 19yrs with major CC. • Separate for elective and non-elective activity • Tariff is a national average of all Providers Reference Cost submissions.

13. Pricing of STH Contract – Tariff element • Approximately 69.4% of the STH services are covered by national tariffs • Income is calculated based on: - Activity x national tariff - Get regional price adjustment (MFF) = additional 2.9%) • Contract at indicative volume and case-mix, but ultimately get paid on reported actuals

14. Sources of Capital funding • Depreciation • I&E surpluses • Sale of fixed assets • Public Dividend Capital • Donations – eg University/Charitable donation • Government Grants – eg Lottery/specific grant. • Leases • PFI • FT Financing Facility Loans – Govt bank loan up to 25 year term.

15. Public Dividend Capital • Direct allocations from DoH for specific initiatives • Limited – mainly applies to research e.g. BRUs • PDC draw down limit authorised for the year • Draw down to match capital spend • Must be able to demonstrate that Cap X exceeds Depreciation in that year (R&D exempted)

16. Leases • Operating Leases/rental • Finance leases • Recognise Fixed Asset and Creditor • “On-balance sheet” • Under IFRS it is more difficult to classify as an operating lease

17. Private Finance Initiative (1) • Operates on principle of primarily procuring a service rather than an asset • Can take many forms – e.g., design, build, finance and service a building • Payment is a unitary charge covering both service charges, interest charges and rental • Pre IFRS was mainly “Off-Balance Sheet” • Applies to core and non-core services – Car parks, ward blocks, equipment, whole hospitals

18. Private Finance initiative (2) • Operated on principle – private sector is more efficient and innovative • Reality was: • Hugely bureaucratic • Incurred high adviser costs • Long negotiation/approval processes • Private sector margins • Only value for money because of VAT savings and inclusion of costed risk • Sheffield FT - Sir Robert Hadfield Block

19. Private Finance Initiative (3) • Prime driver was avoiding Public Sector Borrowing! • Now largely discredited for major schemes • Now most schemes ‘on-balance sheet’ under IFRS • Potential still exists for niche schemes • CSSD Supercentres • Laboratory Supercentres • Non-care activities e.g. car parking

20. FTFF Loans (1) • Non-commercial bank loans • FT Financing Facility is part of DoH • Loans up to 25 years • Staggered draw down • Interest rate fixed at date of agreement (currently 3.8% for 20 years) • Half yearly repayments

21. Limits on Capital Spending • Availability of capital funding • Ability to afford the revenue consequences • Subject to internal business case approvals process • PFI > £25m needs DoH approval • Prudential Borrowing Code

22. Prudential Borrowing limit (“PBL”) • Approved Working Capital facility • Maximum cumulative long term borrowing • Applies to Loans and “On-Balance Sheet” PFI • Current loans for STH = Hadfield, NGH Critical care, NGH Laboratories • Predetermined as part of Authorisation/Monitor Regulation.

23. Monitor (1) • Independent Regulator of Foundation Trusts • Monitors performance using Compliance Framework • Regulatory principles • Self certification • Risk based approach • Based on trust • Confidentiality • Minimal information requirements

24. Monitor (2) • Four main components • Annual plan review (May) • In-year monitoring (Quarterly) + Accounts • Exception reporting • Escalation and intervention • Essentially split between: Finance and Governance • Finance returns (I&E, Balance Sheet, Cash Flow + variance analysis + CE commentary)

25. Governance risk assessment • Uses traffic light system (4 lights!) • Derived from a number of factors: • Performance against national targets • CQC registration and ongoing performance • Provision of mandatory goods and services

26. Finance risk assessment (1) • Based on annual plan and quarterly monitoring • Uses a number of primary indicators: • Delivery of Financial plan • Operating margin • Financial Efficiency (Return on assets) • Liquidity (min Cash balances) • Derives score for each element • Applies overriding rules and calculates FRR of 1- 5

27. Financial risk assessment (2) • FRR of 5 = low risk – get benefit of fewer returns • FRR of 3 or 4 = OK – quarterly monitoring • FRR of 2 or lower = Monitor intervention • Q4 FRR determines CQC rating 4 or 5 = “Excellent” for use of resources 3 = “Good” for use of resources

28. Interpreting FRR • Based on actuals – get better results in first quarters of year • Can bias plan profile to achieve better results in-year • No incentive to submit an ambitious Plan • Liquidity element includes overdraft facility! – can manipulate score up to limit • Adds back exceptional items! • Really a mixture of performance and risk of default! • Easier to achieve excellent than through ALE scores • Realistically cannot deliver a deficit

29. STH experience of Monitor • Independent Performance management – Not advocate for FTs • Generally “light touch” • Information requirements not onerous (except for Annual plan) • OK as long as delivering satisfactorily • Quick to intervene if performance starts slipping.