hfma GP FINANCE B R I E F I N G Contributing to the debate on NHS finance February 2011

Budgeting and budgetary control for GP consortia A straightforward guide to NHS budgeting and budgetary control

Foreword

The Healthcare Financial Management Association (HFMA) is the representative body for NHS finance professionals. With a 60-year history, it has a long track record in issuing authoritative guidance, delivering training and helping to spread best practice in financial management. Good financial management is the responsibility of all staff and fundamental to delivering high-quality healthcare. The new structure for the NHS, set out in the government paper Liberating the NHS: legislative framework and next steps, is being introduced at a time of financial constraint throughout the public sector. The need to have a sound underlying approach to finance, financial management and governance will be increasingly important. This briefing, a follow-up to a GP finance briefing issued by the HFMA in September, is designed to help GP practices prepare for the challenges ahead. While the first briefing provided an overview to financial flows in the NHS and the way in which accountability is embedded in its structure now and in the future, this edition aims to provide a highlevel introduction to budgeting and budgetary control. It explains how it currently operates in primary care and how it might work for GP practices and consortia in the future. As statutory bodies, consortia will assume significant responsibilities in terms of governance and

accountability for taxpayers’ money when they take over from PCTs. Budgets, budget monitoring and control play a key role in ensuring the financial health of any organisation. Budgets will be an important tool for GPs, enabling them to keep track of what has been spent in purchasing healthcare for their patients and helping them manage their financial risks. The HFMA is active at national and local level in raising the awareness of how NHS finance works, influencing policy development and raising the skill base of those involved in financial management. We support NHS organisations and individuals in improving financial management through periods of challenge and change. We plan to release further bulletins over the coming months as the transition to the new NHS gathers speed. We trust that you will find this bulletin helpful and would be delighted to hear your feedback. We would also welcome any suggestions you may have for ways in which we might support your practice and the development of GP consortia. Cathy Kennedy, chair of the HFMA Primary Care Finance Group For more details see www.hfma.org.uk/gp and send your feedback to [email protected]

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Overview The government plans to put GPs at the heart of the NHS, responsible for about 80% of the service’s budget (£80bn). As this is taxpayer money it comes with strings attached – there is an absolute requirement to show that the money they receive is used well and for its intended purpose. To fulfil this responsibility, each consortium and its constituent practices will need to think through carefully and thoroughly the activities they plan to deliver or commission and their likely costs. Establishing a financial plan or budget in this way enables an organisation to determine likely levels of income, expenditure and savings by quantifying the resources available and the relative priorities for the period covered. It is then possible to compare what happens against the plan. Budgets will be an important tool for GPs. They will enable them to keep track of what has been spent on healthcare for their patients and help them manage their financial risks. If a practice overspends against its prescribing budget there will be pressure on it (and potentially on other practices in a consortium) to spend less in other areas to bring things back in line. Budgets, budget monitoring and control play a key role in ensuring the financial health of any organisation. This briefing looks at: ● What is a budget? ● Why having a budget is important at both local and national level ● The current arrangements for primary care trusts and practice based commissioning ● What consortia budgets will cover ● How they can be set and monitored ● What is budgetary control? ● How you can make budgeting work for your consortium and its practices.

What is a budget? A budget is a financial and/or quantitative statement prepared and agreed for a specific future period. It usually covers a year, but to help with planning, budgets can cover longer periods – three to five years are common. A budget is designed to fulfil agreed objectives and can be drawn up for separate activities or projects as well as for organisations as a whole.

Budgets are not just about money; they also look at activity levels, volumes and staffing requirements. For example, a commissioning budget for organisations purchasing healthcare will identify the type and amount of services to be commissioned for a defined period. Budgets are drawn up within the context of an overall strategy for a unit, department, or organisation as a whole. They translate aims into a statement of the resources needed to fulfil them.

Why is a budget important? So why is it important to set a budget? After all, it can be a time consuming and complex process. There are a number of reasons, some of which have been alluded to already: ● To quantify an organisation’s future plans and commitments ● To review aims and ensure planned activities meet them ● To determine the resources needed to deliver services ● To identify expected income and expenditure ● To authorise expenditure and activity to a certain agreed level ● As a basis for controlling income and expenditure ● As a yardstick for measuring performance ● To ensure statutory financial duties are met – for example, to achieve a ‘balanced budget’.

CONTENTS Overview

3

Budgets for PCTs, commissioning groups 4 and GP consortia What will consortia budgets cover?

5

Case study: Nene Commissioning

8

How do you monitor a budget?

10

How do you control a 11 budget? Case study: NHS Central Lancashire

12

How do you make budgeting work for your consortia?

13

Looking ahead

15

This last point (the need to meet legal requirements) is fundamental to the financial health of the whole NHS. All NHS organisations must ensure they do not spend more money than

REVENUE RESOURCE LIMITS The revenue resource limit is the total funding allocated for revenue or day- to- day spending and is set by the Department of Health each year. Strategic health authorities (SHAs) and primary care trusts (PCTs) must stay within their resource limits, which are part of the annual statutory performance targets for these bodies. A similar limit applies to capital expenditure – spending on land, buildings and equipment. In the current financial climate, SHAs and PCTs are expected to do more than simply stay within their revenue and capital resource limits; they are required to deliver a surplus at the end of the financial year. This surplus is designed to help the NHS as a whole stay within its total budget in the coming years and smooth the transfer of commissioning from PCTs to GP consortia. So SHAs and PCTs are expected to end 2010/11 with an ‘aggregate surplus of £1bn’ (equivalent to about 1% of NHS allocations).

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FOUNDATION TRUST REGIME Foundation trusts (FTs) operate under a different financial regime to the rest of the NHS. They were created as new legal entities in the form of ‘public benefit corporations’ by the Health and Social Care (Community Health and Standards) Act 2003. The key financial requirement as set out under their authorisation is that FTs must ‘operate effectively, efficiently and economically and as a going concern’ and ‘comply with a range of operational and financial requirements’. This means that the main financial target is to remain solvent. There is no statutory duty to break even. FTs can generate and retain a surplus each year and re-invest. They can also incur a deficit, although the regulatory framework requires FTs to demonstrate financial viability over the medium term. In addition, FTs do not have access to financial support from their strategic health authority or the Department of Health: they must stand on their own two feet. They can decide locally the investment needed to improve their services and increase capacity, and are able to borrow in order to support this investment, subject to certain strict criteria. they have coming in – they must break even or deliver a surplus. NHS organisations and the Department of Health must stay within the available funding allocated by the government for healthcare. As this is so important, achieving financial balance is a statutory duty. At present, this financial duty is controlled through revenue and capital resource limits for both strategic health authorities (SHAs) and primary care trusts (PCTs) and a break-even duty for NHS non-foundation trusts. (To find out more about revenue resource limits see the box, previous page.) NHS foundation trusts operate under a separate financial regime and are not required to break even each year (see box, above).

Budgets are critical in helping organisations know how much income they are receiving, spending and saving

Given the importance of achieving break even, budgets are of critical importance in helping organisations know how much income they are receiving, what they are spending and how much is being saved at any point in the year.

How budgeting and budgetary control currently work for primary care trusts At present the 151 PCTs in England are responsible for planning and securing health services and improving the health of their local population using money allocated to them by the Department. In future this funding will be the responsibility of GP consortia. If you want to know more about how money flows from the taxpayer to frontline NHS services, see previous HFMA

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briefing, Finance and accountability for GP consortia, available at www.hfma.org.uk. Under the existing structure, PCTs are key to all aspects of the NHS because they: ● Contract for services from independent primary care practitioners, such as GPs or pharmacists ● Commission acute and non-acute services from hospital providers, both in the NHS and the independent sector ● Directly provide some healthcare services. To be able to fulfil their roles effectively, PCTs produce local operational plans each year that outline how they intend to meet national and local priorities within the allocation they receive – their revenue resource limit. Alongside these plans, PCTs produce long-term financial plans that look at the impact of achieving their goals over a longer period (usually three years). A PCT will also look at best and worst case scenarios. Once a PCT has its operational plan and revenue resource limit in place, it can produce its financial plan or budget for the year. However, the amount of money to be spent must remain within the revenue resource limit if the PCT’s financial duties are to be met. Accurate information through the year is essential to effective commissioning so that the PCT can monitor actual patient activity against that planned and the amount of money spent.

Budgets for commissioning groups Under current arrangements GP practices are encouraged to operate practice based commissioning (PBC) and hold indicative budgets for all services commissioned (and provided) by the PCT. PBC is an approach to commissioning that involves allocating responsibility for commissioning along with an associated ‘notional’ or ‘indicative’ budget to primary care clinicians. This is based on the premise that they are best placed to decide what services patients need and to redesign them accordingly. PBC was introduced in 2005/06 to engage clinicians in making decisions on the most appropriate and cost-effective treatment for patients. However, under PBC, the PCT remains legally responsible for managing the money and negotiating and managing all contracts with providers and there is no transfer of financial accountability. That is why the PBC budget is notional or indicative.

In practice this means that although primary care clinicians determine the range of services to be provided, the PCT acts as their agent to undertake any required procurements and carry out the administrative tasks that underpin this. Savings made by GP practices from operating their indicative budgets can be used for investment in other services provided by the practices with the agreement of the PCT. As the budget is indicative, there are no direct financial implications if a group of primary care clinicians overspends. PCTs are currently responsible for ensuring practices receive an indicative budget reflecting the needs of the population. They also oversee the overall commissioning strategy and ensure that PBC is implemented in the area they cover.

Budgets for GP consortia The coalition government’s white paper Equity and excellence: liberating the NHS proposes a major change to these arrangements. From April 2013, it is intended that newly formed GP consortia will directly receive taxpayers’ money in the form of a budget calculated by a new NHS Commissioning Board. They will use this to buy the healthcare needed by the patients of each consortium’s practices. It means consortia will take over the role undertaken by PCTs and there will no longer be indicative budgets. Instead, a consortium will have a real budget and there will be real cash consequences of under or overspending. GP consortia will play a vital role in managing total NHS resources. The NHS Commissioning Board will have a commissioning resource limit that will only be achieved if GP consortia stay within their allocated commissioning budgets. Each GP consortium will be directly accountable to the NHS Commissioning Board (see box, right). As GP consortia will have responsibility for 80% of NHS funding, individual consortium budgets will need to be agreed and adhered to to ensure the financial stability of the NHS as a whole.

What will consortia budgets cover? GP consortia will commission the majority of NHS services for their patients including: ● Planned hospital care ● Rehabilitative care ● Urgent and emergency services ● Maternity services

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● Community health services ● Mental health services ● Learning disabilities services. Consortia budgets will also include a maximum allowance to cover the running costs incurred in carrying out commissioning activities. As well as covering the costs directly associated with commissioning, it is expected that the allowance will need to cover all salaries and payments incurred in running the organisation, including the costs of the ‘accountable officer’ and the ‘chief financial officer’, both of which will be key roles in consortia governance arrangements (see box, overleaf, for more on the accountable officer). The running cost allowance budgets will begin to be rolled out in 2011/12. What type of budget do you set? Each consortium will have an overall budget allocated by the NHS Commissioning Board, which will then be spread across its constituent practices. It is not yet clear exactly how individual practice budgets will be calculated, although the government’s proposals refer to ‘funding which follows the registered patient, on a weighted capitation model adjusted for quality’. To find out more about how weighted capitation works in the NHS, the HFMA briefing Finance and accountability for GP consortia can be found at www.hfma.org.uk.

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However budgets are set, each practice will need to develop its own financial and activity plans to indicate how it will use its money to meet local needs and priorities. In effect this means there will be a number of separate budgets at consortium and practice level. Within each budget, income and expenditure should be clearly linked to the expected activities and a budget holder identified

NHS COMMISSIONING BOARD As well as directly commissioning some services and allocating budgets to GP consortia, there are a number of other key roles and responsibilities proposed for this new independent board. Along with the responsibility for managing the commissioning revenue limit, the board will report the consolidated financial position of consortia. Linked to this, it will have powers to intervene where there is financial or systemic failure, or a significant risk of this happening. It is envisaged that the board will determine the structure of future payment systems, promote and extend choice, and champion patient and carer involvement. The board will also set commissioning guidelines and establish the model contracts for consortia to use when commissioning services. Under the proposed timescale, the NHS Commissioning Board will be live from April 2012.

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However, this will mean GPs will need to make (and be accountable for) hard decisions about relative priorities. That may mean rationing treatments for certain patients, changes to services available in hospitals and the community, and applying criteria to ensure consistency of decisions. The responsibility also brings with it the need for transparency as to how the money is spent and how the decisions to spend the money have been reached. This is a new challenge for GPs but one for which they can readily equip themselves.

to assume responsibility. Obviously, practice budgets will need to be consistent with, and stem from, the overall consortia commissioning plans. (To find out more about types of expenditure for which budgets are set, see the box, right.) Setting a budget in this way will ensure resources are allocated in line with the consortium’s aims and objectives. Without consistency and clear linkages between the strategic objectives, the service plans and outputs to be secured, the financial plans and the annual budget, the consortium’s ambitions are unlikely to be met.

ROLE OF THE ACCOUNTABLE OFFICER Each consortium will have an accountable officer. It is important that all organisations spending public money are able to account fully and transparently for their use of public funds. The role of the accountable officer is key to this in ensuring that the organisation: • Operates effectively, economically and with probity • Makes good use of its resources • Keeps proper accounts. This is a key role in governance terms and with the support of the chief financial officer, will involve ensuring that there are arrangements in place to keep robust financial records at consortia level and consolidate individual practice accounts; a sound system of internal control is established and maintained; the necessary financial records are retained; financial considerations are taken fully into account in decision making and constituent practices are held to account in meeting their objectives. The accountable officer will therefore be pivotal to ensuring that the consortium meets its statutory duties and will in turn be accountable to the NHS Commissioning Board as clearly stated in Liberating the NHS: Legislative framework and next steps: ‘ The NHS Commissioning Board in turn will hold the individual Accountable Officers of each consortium responsible for their share of the total funding allocation, and this will include the duty to achieve financial balance.’

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Which budgeting method do you use? Most NHS organisations use a combination of budget-setting methods. Traditionally in the NHS the historic or incremental approach is used, where budgets are rolled forward year on year and adjusted for new developments and inflation. Although GP consortia will be new organisations, information relating to previous years and to practice based commissioning will be available from PCTs. This information can be used to establish budgets for the first time. Alternatively, zero-based budgeting (ZBB) assumes you will be starting the new financial year with a blank piece of paper – rather than using last year’s budget it produces a fresh financial plan, having re-evaluated the entire service and its costs. It tends to be used when introducing new services or when services are under review. It is also commonly used by commissioners to set budgets that reflect the outcome of the detailed annual contract negotiations with service providers. Most NHS organisations use a combination of incremental budgeting – for services that experience little change between financial years – and ZBB for new contracts or services that are undergoing significant change. The third approach to budget setting is activitybased, which closely links finances to the costs of delivering activity. It requires those involved in setting the budget to know and understand the costs involved in delivering particular activities and services, and is particularly used by service providers. It encourages a focus on efficiency and an understanding of costs that remain fixed over time. It does mean, however, that variances from the plan are easier to explain. (To find out more about this approach to budget setting, see box, far right.)

TYPES OF EXPENDITURE There are two types of expenditure: revenue and capital. Revenue expenditure is current and used for the day-to-day running costs of the organisation or service. In most businesses, capital refers either to shareholder investment funds or buildings, land and equipment owned by a business that have the potential to earn income in the future. The NHS uses this second definition, but adds a further condition – that the cost of the building/equipment must exceed £5,000. Capital is thus an asset (or group of functionally interdependent assets), with a useful life expectancy of greater than one year, whose cost exceeds £5,000. If each consortium is allocated an overall budget for revenue and capital expenditure, a detailed budget will be required for each allocation at consortia and/or practice level.

What must be considered when setting a budget? All budgets must be based on realistic projections of activity levels, pay, inflation, priorities and known cost pressures. All available information about future changes and developments must also be considered. If the cost of the plans to purchase and/or deliver services exceeds anticipated levels of income, savings must be included within the budget to bring it back in line with the resources available. Budgets should be transparent, specific and allocated to an individual budget holder.

Similarly, utility invoices may be received on a quarterly rather than monthly basis. Budgets need to accurately reflect the pattern of income and expenditure across the financial year – this is known as budget profiling. A budget profile presents the likely spending pattern during the time period covered by the budget, recognising that not all expenditure is likely to be incurred evenly over the period. Above all, budgets must be in ongoing or recurrent balance – that is, expenditure is not greater than the income received. Whose budget is it? Budgets are usually developed by finance staff who work closely with the budget holder to ensure ownership of the financial plan. Negotiation and agreement when setting a budget are key to its success. We’ll look closer at the role of the budget holder later in the briefing. For any budget to be effective, it is important that it is linked to the overall financial plans and objectives of the consortium. Once initial budgets are set with individual budget holders – who may be GPs, practice or service managers – they should be approved by the consortia managers before the beginning of the financial year. This will allow plans to operate effectively from 1 April (the first day of the new financial year in the NHS).

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It will also support the necessary governance requirements of the organisation by helping the accountable officer to fulfil his or her duties.

ACTIVITY-BASED BUDGET SETTING At a wider level, it is worth considering the likelihood and possible impact of an increase in costs or essential expenditure during the year and anticipating how you might deal with this situation, were it to occur. The pattern of income and expenditure also needs to be taken into account. Although some costs are incurred in equal amounts throughout the year, this is not always the case. A good example is invoices for the contracted level of healthcare to be purchased from a local foundation trust. If more or less patients are referred to that foundation trust than was planned, quarterly adjustments will be required to the original amounts invoiced.

Activity-based budget setting produces a budget associated with a defined activity level and focuses on the way in which costs alter if those activity levels change. It requires you to be clear about the way costs behave in relation to changes in activity and be able to measure and count the activity concerned. The result is a unit cost for every unit of planned activity – for example, the number of outpatient appointments anticipated for urology. Activity-based budgeting is becoming more widespread within NHS organisations that provide healthcare because information about the costs incurred when delivering a consultation, procedure or treatment to patients is more readily available. This way of setting budgets was prompted by the introduction of payment by results – the means by which providers of NHS care are paid for the treatments they deliver.

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CASE STUDY: NENE COMMISSIONING

The budget monitoring process is a ‘two-way thing’. Nene staff can challenge GPs and practices about monthly performance

Nene Commissioning, a not-for-profit community interest company set up in 2007, has led the country in practice based commissioning (PBC). Identified as one of the first ‘pathfinder’ organisations by the Department of Health at the beginning of December, it has received many plaudits from national health leaders. Health secretary Andrew Lansley sees the commissioning group as ‘proof that GPs are ready and willing’ to take the lead role in commissioning through new GP consortia. The group has taken responsibility for nearly all the GPs in the Northamptonshire PCT area since its inception. With some 350 GPs across 76 practices, it is the biggest PBC consortium in the country. Nene’s three years of experience in getting GPs more involved with commissioning leaves the group well placed to make the transition to the new world spelled out in the Liberating the NHS white paper. But while it gives an insight into how GP consortia could or should work, it also has practical experience of supporting GPs in the commissioning process – including the key aspect of budgeting. The entire PCT budget – £1bn in 2010/11 – is broken down by GP practice, in line with Department guidelines. Some £371m of the overall budget can be directly attributed to individual practice activity against which each practice is actively monitored. These funds cover acute inpatient and day case activity, outpatients and outpatient procedures, accident and emergency attendances and prescribing, and form the focus for the commissioning group’s work. The remaining two thirds of this budget – for public health, mental health, primary care and specialist commissioning – is allocated on a capitation basis. As the new structure of the NHS develops, practice budgets will expand to include mental health and other primary care services. Practice budgets (currently indicative) are set based on the PCT capacity plan and the contracts agreed by the PCT with the main acute providers. These are then split by practice using historic activity, population changes and ‘fair share’ calculations – the target amount of money that would enable each practice to commission the same level of healthcare for its population – as dictated by the PBC toolkit.

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Relevant budgets can be broken down to healthcare resource group level – although it is recognised that the deeper this drill-down, the less reliable the information becomes. In practical terms, budgets are monitored at point of delivery (elective, non-elective, day case, A&E and outpatients – first, follow-up and procedures). PCTs’ plans to manage demand – based on activity levels commissioned in contracts with main providers – are reflected in practice budgets. This is done in a broad brush way. For instance, a planned 5% reduction in referrals/admissions would lead to a 5% reduction in relevant budget for all practices, irrespective of the different performance by different practices. Helen Ellis, head of PBC finance at Nene Commissioning, acknowledges some practices may have less scope for reductions based on previous improvements in referral practice. But this would be picked up during budget monitoring rather than by applying different percentages to the budgets up front. For example, a practice receives its figures comparing actual expenditure to the budget, but figures are also looked at year on year, practice by practice to identify outliers and give some context to the review. To ensure information is meaningful, the focus is on activity changes that will affect the financial position, rather than starting with the money and looking for activity consequences. If a practice knows five fewer referrals for a procedure will save £5,000, then this is more comprehensible than asking a practice to ‘save money’.

Best Practice Scheme The Best Practice Scheme set up by Nene Commissioning gives practices a means to compare clinical practice between surgeries on specific topic areas and note best practice within and between localities. There are other adjustments to practice budgets too. For instance, the market forces factor (MFF) – a payment index applied to all NHS bodies providing services under payment by results to account for unavoidable geographical variations in the cost of providing healthcare – is stripped out to ensure practices are not influenced by local relative cost in deciding where to send patients. However, in the future as consortia take on more budgets, MFF may become a factor that GPs will

have to manage, as any geographical variation in cost will probably have to be borne by the consortium. Budget profiling takes account of the different phasing of monthly activity and cost for the different providers used by practices. The group’s practices are arranged in four localities and eight sub-localities (covering about 10 practices each). Reporting against budget is at all these levels. While earlier activity data is shared with practices directly from trusts, all the budgeting data comes from the secondary uses service (SUS) system.

This ‘all in it together’ approach is reinforced by the PBC incentive schemes. For instance, the consortium would need to have produced savings overall before an individual locality could access the money. The intention is to recognise shared responsibilities and engage GPs in securing improvements and sharing best practice across the whole health economy. Ms Ellis says the budget monitoring and analysis process is a ‘two-way thing’. Nene Commissioning staff can challenge GPs and practices about monthly

This means a two-month delay from the end of a month to practices receiving budget reports for that period, although practices get their information as soon as possible after the SUS data is released.

Using SUS Using SUS means that, for financial purposes, the data can be as accurate as possible. Practices are using data by which acute hospitals are paid, rather than earlier versions that can change considerably as patient activity is agreed. A single report at a point in time is more logical. Some data is received by practices in a more timely manner, but this tends to be activity data rather than pure financial data. Ideally, practices would receive financial data earlier, although this would depend on mechanisms at a national level. Once the data is passed on from the PCT, Nene prepares reports for its board, looking at year-todate spending against budget for localities and sublocalities along with a forecast out-turn. Practices then receive their own reports examining performance against budgets by point of delivery. Comparisons are also provided against other practices in the locality. In addition, the data is discussed at monthly locality meetings. The PCT is developing systems to report this direct to practices via the internet, although patient-level data is already available to GPs via a web reporting tool. If there are specific areas that look like they have a particular overspend, further analysis can be provided down to specialty level, and this could be the subject of a best practice session. Ms Ellis says the aim is for GPs within each locality to hold each other to account and for localities to hold each other to account and share proven approaches to common issues.

performance and any outlier areas. Equally, GPs can look for support from the centre in terms of more data or analysis to help them understand their own performance or identify any required remedial action if budgets are being exceeded.

Staff outside one of the Nene Commissioning practices who will shortly be part of the GP consortium

She says the whole process – involving GPs in commissioning, budgeting and monitoring – has been a long process. ‘The first two years was more about helping practices understand the figures they were receiving, but they have become increasingly engaged,’ she says. She adds that there is a growing enthusiasm to understand and, more importantly, act on the data. She admits it is hard to identify specific savings that can be attributed directly to the budgeting process or obvious direct improvements in financial control. But she says the process has helped inform service and patient pathway change and provides a good foundation for the move to real budgets and direct GP control of commissioning through GP consortia.

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How do you monitor a budget?

UNDERSTANDING SKILL MIX

Once a budget is agreed it is used to monitor how actual performance compares with what was planned. This applies to income, expenditure, savings and activity. However, things rarely go according to plan – you spend more or less than intended, there is less income than anticipated or the savings schemes you planned fail to deliver as expected.

Staffing costs account for 70% to 80% of NHS expenditure, so understanding skill mix is an important aspect of both budget setting and budgetary control for any NHS organisation. Budget setting is an ideal time for a budget holder to review whether or not they have the right hours of each grade of staff to deliver the service in the most effective way. So it may be that a role previously established for a senior nurse would be more effectively delivered by fewer hours of the nurse with support from a healthcare assistant. Similarly, a practice may find that by appointing a nurse, GPs are able to rearrange their workload to increase the number of patient appointments available. This review also comes into play in the event of staff absence through long-term sickness or maternity leave, when new ways of working may help to contain costs within the budget. It is important to remember that the aim is to make the best use of available resources while recognising that effective patient care is always the priority.

Regular reviews will highlight areas where action needs to be taken in order to keep finances on track and stay within the original plan. If a consortium plans to make a surplus in order to invest in a new service, an effective budget will ensure that this plan is possible. To fully understand your financial position you will find it useful to have the following information to hand: ● The budget report for each month of the current financial year – this shows the exact pattern of expenditure ● The budget reports for the whole of the last financial year if they are available – this helps identify the profile of income and expenditure ● Planned patient activity compared with the actual figures ● Details of any savings schemes implemented in the current year – it could be that projected savings have not been made and the scheme should be more closely monitored or an alternative found ● Details of any developments or changes funded in the current year

Regular reviews will highlight areas where action needs to be taken in order to keep finances on track and stay within the original plan

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● Budget and actual income and expenditure for the financial year to date ● Other major items relevant to the particular budget holder ● A report showing the level and skill mix of the staff funded against the actual staff in post each month. This shows the level of vacancies or additional staff currently working. (To find out more about skill mix see box, above.)

What are you looking for? When all the information outlined above is considered, it should be possible to identify what is known as a variance – the difference between what was budgeted and what has actually happened, the actual income received or money spent. A variance is an accounting tool used to identify any under or overspend against budget, which is then investigated with a view to proposing rectifying action. By reviewing the information regularly you will be able to see whether this is the first month when such a variance has materialised or whether the situation has been building for some time. This will go some way to helping to identify the cause of the change in income or expenditure and the corrective action necessary. There will be a number of reasons why a budget is under or overspent and it is important that these are understood as soon as possible. For example, there may be more patients needing referral for a hip or knee replacement than was anticipated when the commissioned services budget was set. A new rheumatology procedure may have become available during the year following the appointment of a specialist consultant at the local hospital and the treatment offered is of particular benefit to a group of patients who previously could only be offered physiotherapy. Or perhaps an individual GP has a different approach to referring to a hospital consultant for specific conditions than his or her colleagues. When looking at the management allowance budget, having more or less staff in post than envisaged at the start of the year, or higher or lower paid staff than originally planned, will also cause a variance to materialise.

practice for budget holders to meet with their finance colleagues regularly for budget monitoring meetings, so that the financial position can be clearly understood and, where necessary, timely corrective action can be agreed and taken. Budget reports should therefore be timely, and available to budget holders as soon as possible after the end of the month to which they relate. At a consortium level, the management team will also need to regularly review the state of the consortium’s finances to ensure it will achieve its financial duties and remain within its allocated funding. The team can only work effectively if members are kept fully informed. They need to specify what information they need and the style and format that suits them best.

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Whatever format a team opts for, the key requirement for all budget monitoring reports is that they are timely and accurate.

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How do you control a budget?

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As we have seen, the agreed budget is not just put on a shelf: it is used as the year progresses as a yardstick against which variances are identified, investigated and corrective action taken. Budget management in the NHS is carried out by devolving budgets to the lowest practicable level of management and should rest as unambiguously as possible with those who commit the related expenditure. This is a key tenet of the coalition government’s planned reforms to the NHS and underlies the establishment of GP consortia.

There will be a multitude of reasons why the actual level of income or expenditure starts to deviate from what was originally planned but the most important thing is to recognise what is happening and take action as soon as possible.

Effective budgetary control depends on there being regular, timely, accurate monitoring reports 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 expenditure and the associated activity levels in line with what you expected? If not, you must do something about it.

Budgetary information At a practice or service level, summarised budget reports should be available to managers who oversee a number of individual budgets. It is good

Budgetary control is not an end in itself but rather a means of ensuring that value for money is achieved. It is not enough simply to identify a variance between expected and actual income or

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Budget holders have to understand the relevant inputs – what drives or triggers costs, outputs and outcomes

expenditure. Meaningful budgetary control involves getting behind the figures and looking at: ● Economy – sourcing resources as cheaply as possible ● Effectiveness – ensuring desired goals/targets are achieved ● Efficiency – ensuring outputs/outcomes are maximised for the resources (inputs) used. This means that budget holders have to understand the relevant inputs – what drives or triggers costs, outputs and outcomes for their area. (To find out more about cost drivers see box, right.) Once you have understood what is causing the deviation from the plan, action must be taken. You could consider some of the following to balance the budget: ● Communicate the current financial position to the whole team and ask for their co-operation in making economies ● Delay spending on any one-off items until the next financial year ● Review who is authorised to charge to your budget and what their spending limits are – you may decide that anything ordered over a certain cost should have your authorisation first ● Review prescribing practices to ensure

COST DRIVERS Understanding what drives or triggers costs can help budget holders to control expenditure and deliver or commission services within the available budget. As we have seen, one of the main cost drivers in the NHS is staff time and costs, but there are other drivers you should be aware of: ● Activity/volume based – these tend to be used for homogenous activities. For example, processing an invoice for £50 involves the same actions as one for £500 ● Time based – these are used when the amount of time varies for different outputs/outcomes. For example, an appointment will take more time if the patient has a number of complex issues to be addressed ● Resource based – when there is a direct charge for materials, and so on, for a particular activity.

consistency, effectiveness and economy, as illustrated by oxygen prescribing in NHS Central Lancashire (see case study, below) ● Consider delaying referrals if that is clinically appropriate or limiting referrals to those patients who meet particular healthcare criteria.

CASE STUDY: NHS CENTRAL LANCASHIRE NHS Central Lancashire has taken a fresh look at areas where there is significant pressure on expenditure, including the prescribing of oxygen where overspends against budgets have been an issue. The oxygen prescribing team operates as a specialist oxygen assessment service with clear budgetary responsibility and accountability. The team systematically assesses all patients referred from both primary and secondary care in central Lancashire. The team undertook a review of oxygen prescribing beginning with an analysis of all invoices for oxygen. This identified many prescriptions for excessive amounts of oxygen as well as specific issues in relation to invoice administration. The review highlighted some simple and common errors in prescribing and ordering – for example, the ordering of ambulatory oxygen instead of longterm oxygen, resulting in significant increases in costs. These costs were not just financial: under or oversupply posed a significant clinical risk to patients. As a result of the review, prescribing guidelines have been reissued to practice staff. The review also considered the compliance data (average oxygen consumption versus that prescribed), which showed that 25% of patients appeared to be under-using their oxygen by more than 95% of the prescribed usage, and were therefore unlikely to need repeat prescriptions. By using a clinically initiated review within a budgetary control cycle, NHS Central Lancashire has taken a series of actions and agreed a number of recommendations. As a result the PCT expects to reduce oxygen prescribing costs by almost 20% year on year, thereby delivering a safer, better quality and more costeffective service.

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How do you make budgeting work for your consortium? There are a number of steps that can be taken to ensure that budgeting and budgetary control work well in your consortium: Clearly identified budget holders One of the most important pre-requisites for successful budgeting is the clear identification of

ROLE OF THE BUDGET HOLDER The role of the budget holder is simply to understand and manage their budget. This can be more clearly defined through two key objectives: ● To deliver the required quantity/quality of care/service ● To maximise income and minimise cost. To be an effective budget holder you must clearly understand what you are required to deliver and which organisational, local and national objectives you contribute to. Maximising income requires budget holders to look for opportunities to grow services, such as through the sale of spare capacity, as well as minimising costs through cash-releasing savings (the same work for less money) and cost improvements (more work for the same money). A budget holder must have a clear view and focus on delivering value for money as well as an understanding of when it is being achieved.

budget holders. Consortia finances will not be the sole responsibility of the chief financial officer. Rather, it is essential to have a single named individual responsible for each budget.

Guidance on NHS finance for finance and non-finance professionals

www.hfma.org.uk/gp

That person must have the authority to take decisions about the budget they oversee. Responsibility for a budget must therefore be aligned with the ability to control income and expenditure. It is generally considered good practice in the NHS for budget holders to be as far down the management structure as is effective, given local management arrangements. This has the following notable benefits: ● It involves more staff in the financial management process ● It places the management of finance close to where decisions on healthcare are taken. (To find out more about the role of the budget holder in the NHS see box, left.) Budgetary control policy Every NHS organisation, including GP consortia, should have a budgetary control policy that sets out the rights and responsibilities of budget holders together with the financial rules under which budgets operate. For PCTs and trusts this is usually found in the standing financial instructions. It is the chief financial officer who is responsible for ensuring that such a policy is established, implemented, maintained and operated within

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the organisation. A budgetary control policy should be explicit and well understood – although there should be room for flexibility both within and between budgets. Those producing savings as a result of good management should be allowed to benefit. Bringing together financial and non-financial information Budgeting and budgetary control is strongest where financial and non-financial information is brought together at every level of the organisation. This enables the financial consequences of operational decisions to be clearly seen throughout the organisation. A range of non-financial information could be reflected in the budget monitoring information. You could consider some, or all, of the following: ● National targets covering the health and wellbeing of the population, long-term conditions, access to services and the user/patient experience ● Local health promotion and local Health Watch targets to reflect local needs and priorities ● Performance against resources and budgets with a commentary on variances ● Performance against the Better Payment Practice Code (see box, above right, for more information) ● Activity levels linked to financial data. Activity information relating to the patients for whom the consortium has commissioned hospital care is likely to be the most important nonfinancial information for GPs.

Every NHS organisation should strive to achieve a culture of strong financial awareness to deliver the best possible patient care

It will be essential for consortia to understand the cost of treatment for their patients both on a case by case basis and in terms of the amount being spent against the budget each month. Once again, understanding the reasons underpinning under or overspending will be crucial to keeping within the revenue limit. Special attention for specific budgets Although all budgets will need to be reviewed each month, special attention and monitoring of some key budgets during the year will help to maintain control. You may wish to consider a specific review of the following: ● Prescribing ● Individual packages of care ● Services that have been jointly commissioned with another organisation, local authority or consortium.

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BETTER PAYMENT PRACTICE CODE The Better Payment Practice Code is a key measure of financial performance for NHS organisations. The code requires organisations to pay agreed invoices within the timescales agreed with the supplier or, in the absence of an agreement, 30 days of receipt of the goods or invoice. The Department of Health sets a target for NHS organisations to meet at the beginning of the financial year, which is currently 95%. Organisations are required to maintain statistics to show their performance against this target and publish them in their annual report and accounts. These statistics show the percentage of invoices paid within the required timescale for both NHS and non-NHS invoices.

Monitoring of particularly volatile or high-value areas will ensure that any issues are identified as soon as possible. This will help decisions to be made to bring spending back in line, while improving services for patients – as was the case following the review of oxygen prescribing by NHS Central Lancashire (see case study box, page 12). A culture of strong financial awareness Every NHS organisation should strive to achieve a culture of strong financial awareness in order to deliver the best possible patient care through good management of taxpayers’ money. Such a culture is based on good financial, business planning and budgeting processes, which are likely to include: ● A clear framework of financial control ● Effective monitoring and management information systems producing timely, accurate and usable information ● A strong working relationship between the accountable officer, the chief financial officer and clinicians ● Firm links between individual budget holders and finance colleagues ● Long-term operational plans supported by robust financial plans ● Realistic/achievable budgets aligned with forecasts of clinical activity ● Incentives within the budgetary system ● Accurate monthly reports to managers ● Performance against plans and targets using key performance indicators to highlight how the organisation is doing.

HFMA The professional body representing NHS finance for 60 years:

• Providing high quality advice to members and the wider healthcare community

• National and local networks to promote best practice and innovation in financial management and leadership

• Exerting influence to shape the wider healthcare agenda

www.hfma.org.uk/gp How is it likely to work in the future? As we have seen, overseeing such a large amount of public money comes with real responsibilities. Consortia will hold 80% of NHS funding, with a real budget and real consequences for both under and overspending against that budget. To ensure this money is used economically, effectively and efficiently, each consortium will, through its chief financial officer, need to ensure that the appropriate budgetary monitoring and

control mechanisms are in place. With resources held locally and decisions as to how to spend them made so close to the patient, the aim is that the best care possible and improved patient health, well-being and experience of the NHS will be delivered. Performance against budgets for GP consortia and the revenue resource limit for the NHS Commissioning Board will be a clear measure of the financial success of these emerging organisations. ■

Published by the Healthcare Financial Management Association (HFMA) Albert House, 111 Victoria Street, Bristol BS1 6AX Tel.: 0117 929 4789 Fax.: 0117 929 4844 E-mail: [email protected] Web: www.hfma.org.uk This briefing was produced under the guidance and direction of the HFMA’s Primary Care Finance Group. The author was Sarah Bence, HFMA technical editor. While every care has been taken in the preparation of this publication, the publishers and authors cannot in any circumstances accept responsibility for error or omissions, and are not responsible for any loss occasioned to any person or organisation acting or refraining from action as a result of any material within it. © Healthcare Financial Management Association 2011. All rights reserved. The copyright of this material and any related press material featuring on the website is owned by Healthcare Financial Management Association (HFMA). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopy, recording or otherwise without the permission of the publishers. Enquiries about reproduction outside of these terms should be sent to the publishers at [email protected] or posted to the above address.

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