Agenda Item 8.2.1

CENTRAL MANCHESTER UNIVERSITY HOSPITALS

NHS FOUNDATION TRUST

Report of: / Adrian Roberts - Executive Director of Finance
Paper prepared by: / Ursula Denton - Director of Financial Strategy
Date of paper: / March 2015
Subject: / Provisional 2015/2016 Financial Plan
Purpose of Report: / Indicate which by 
  • Information to note
  • Support
  • Resolution
  • Approval 

Consideration of Risk against Key Priorities / (Impact of report on key priorities and risks to give assurance to the Board that its decisions are effectively delivering the Trust’s strategy in a risk aware manner)
Long term financial sustainability of the Trust
See companion risk paper “Assessment of key risks associated with the provisional Financial Plan 2015/2016” for an assessment of risk in relation to key items contained within this paper.
Recommendations / After consideration of risks contained within the companion papers referred to above, the Board is recommended to:
  • Approve the provisional Financial Plan for 2015/2016 set out in this paper.
  • Note the assessment of risks in the accompanying paper “Assessment of key risks associated with the provisional Financial Plan 2015/2016” together with the mitigating actions in place to manage these.
  • Receive regular progress reports.

  1. Introduction

Following the Board Finance Scrutiny Committee meeting held on Monday, 2nd March 2015, Board members will all be aware of the scale and range of continuing uncertainties which are currently attached to NHS income streams for all of our delivery of services to patients, teaching and research, which will be undertaken through the course of the 2015/16 financial year.

This uncertain operating context for the financial year which begins in just over three weeks’ time, adds further to the customary importance of the Board approving a provisional Financial Plan for 2015/16. This will provide a framework for continuing clarity and focus internally, on the expectations and requirements in place across the whole organisation for the new financial year, regardless of the level of uncertainty surrounding aspects of our income.

  1. Purpose of paper

The Board is requested to approve the provisional Financial Plan as contained within this paper which summarises the provisional income and expenditure budget, capital programme and cash flow management plans for 2015/2016.

The provisional Financial Plan for 2015/2016 results in a financial deficit of £20.4m and a Monitor Continuity of Service Risk Rating(CoSRR) of 3 under the Risk Assessment Framework.

This provisional plan represents the framework within which further revision will take place to inform the draft Annual Plan which is due to be submitted to Monitor on 7th April 2015. The formal Financial Plan that will be presented to the Board of Directors in May will inform the final Annual Plan submission to Monitor on 14th May 2015.These dates have changed from the original timeline, following a recent postponement of 6 weeks, communicated by Monitor.

  1. 2015/2016 Financial challenge

The plan has been prepared on a consistent basis to previous yearsin that it takes the 2014/15 plan as a starting-point, and then reflects the significant impacts arising from factors such as:

  • Proposed reductions to prices, or to overall income received, for treating NHS patients
  • reduced funding for teaching medical students
  • proposed under-reimbursement for increased specialist activity over 2014/15 contract baselines
  • pay settlement cost
  • clinical, facilities & estate cost inflation
  • reduced funding for urgent care system resilience

This results in a financial challenge faced by the Trust for2015/2016 of £68.5m as set out below:

  1. Nationally set efficiency challenge for 2015/2016 at 3.5%(+)

For 2015/2016, a 3.5% national efficiency target has been set which equates to£27m of further savings for the Trust in 2015/2016. Theimpact on the Trust of £27m is in excess of the notified 3.5% and the year-on-year impact of over 20% over the 5years from 2011 clearly represents a massive cumulative challenge.

The efficiency challenge comprises the below elements:

a)Reduced prices for NHS workwith an impact of£10.8m in 2015/2016, for the same level of work undertaken.

b)Pay settlements of £6.2mcombining the impact of 1% basic pay uplift, net impact of incremental costs (consultant medical staff) and employers’ pension costs.

c)Clinical, facilities and estates cost inflationof £10.0m includingthe increased cost ofnon-pay itemse.g. inflationary increases on drugs, clinical supplies and facilities operating costs; this also includes the impact of revaluation of the Trust’s estate.

  1. Excess and disproportionate reductions to income, arising from changes set at national level

In addition to the efficiency challenge set out in section 4 above, there are a number of nationally-determined factors which combine tohave an extreme and disproportionate impact on the Trust; these are detailed below:

a)Reduced funding for teaching ofmedical students, £6mlower than the funding that the Trust has been receiving up to the 2014/15 financial year.

b)Excess impact of reduced prices for NHS work of £4.5mas a result of thedifferential impacts within the national tariff reductions on providers with higher levels of specialised services activities.

c)Proposals to under-reimburse any increased specialised activity with forecast impacts of £6.0m,where theproposed payment rate of only 70% would fail tocover the actual costs of high-cost drugs, devices and blood products, for the most complex and specialised patients. These incurred costs have been reimbursed separately, alongside the operation of nationally-set tariffs for servicesthroughout the last decade, recognising that the highly variable incidence of these costs patient-by-patient, cannot be accurately recompensed through average tariff payments.

d)Reduced funding for urgent care system resilience of £3.0m–based upon the provisional planning forecast that CCGs will at least honour funding in 2015/2016 to the same level as the first tranche of system resilience funding received in 2014/15, which is broadly in line with additions to CCG allocations for 2015/2016- but only half of the overall urgent care system resilience fundingreceived in 2014/15.

  1. Underlying challenge continuing from 2014/15 financial year

In addition to the significant challenge for 2015/2016 detailed above, the Trust also has a number of continuing challenges from shortfalls in delivery of existing plans, which arose in 2014/15 - and which require substantive solutions to be embedded in on-going operational delivery as we move into 2015/16.

These underlying shortfallsessentially arose from the level of actual financial risk which materialised in-year, in the capacity to deliver the 2014/15 plan in the face of:

  • A 10% increase in the level of emergency admissions to hospital year-on-year; and
  • Increased use of agency staff as a result of difficulties with recruitment and retention, time to fill vacancies and sickness absence.

Capacity and workforce plans across Divisions have now been fully assessed to test how the challenges experienced in 2014/15, are being overcome over the fourth quarter of the current year, to establish a strongeroperational platform from which to deliver the 2015/2016 plans.

  1. Key areas of focus for solutions for the 2015/2016 challenge

The total financial challenge for the 2015/16 financial year is £68.5m. Divisions have thus far developed solutions which if fully delivered would address £48m of this challenge,over the following key areas of focus:

Activity/Income–Put into placerobust capacity and workforce plans to deliver sustainable levels of activity and income performance in 2015/2016.

Workforce - Address the excess costs of sickness absence, medical cover, and vacancies through the following measures:

•Strengthened performance management

•Revised governance arrangements

•Improved reporting arrangements

•Improved working between Divisions and Human Resources

Urgent care - Manage a “containment strategy” for urgent care system resilience - starting from consolidating capacity and workforce resources which supportcurrent operating practice to ensure that patient safety is sustained, then drivingthrough improved patient flow from clinical and operational productivity improvements developed and supported through the sustained transformation programmes now in place.

Divisional solutions - Identification and delivery of specific savings programmes within Divisions and corporately, to resolve the remaining gaps. Examples include:

•Diagnostic demand management

•Medicines management

•Reduction of use of private sector outsourcing

•Prohibited/controlled expenditure savings

•Continuing procurement savings programmes

These solutions and the financial impact they have in addressing the financial challenge are illustrated in the bridge diagram below:

  1. Risks to the Financial Plan (see separate paper)

As demonstrated in the above bridge diagram, the identified solutions do not address the full financial challenge; a gap of £20.4m remains.

In addition, all identified solutions have been risk assessed and of the identified solutions, £18.3mhave been financially assessed as “high risk”, reflecting that the scale or timing of delivery of the solutions may fall materially short of the planned contribution.

The risks associated with the delivery of the financial plan are explained further in the companion paper “Assessment of key risks associated with the provisional 2015/16Financial Plan”.

  1. Resultant deficit budget

Despite the identified solutions, the current national payment system proposals for 2015/16 leave no realistic prospect of the Trust being able to produce a balanced financial plan, resulting in the Trust’s provisional income & expenditure budget for 2015/16leading to a deficit of £19.5m.

The high level Income & Expenditure Account for forecast outturn 2014/15 and plan for 2015/16 and 2016/17 is set out below. Based on current assumptions, the forecast plan for 2016/17 also forecasts a similar level of deficit.

  1. Capital Programme

TheTrusts capital programme is funded from Public Dividend Capital, land sales, loans and internally generated cash. Based upon the provisional financial plan, the financing identified for 2015/2016is £28.0m, as set out below:

The provisional capital programme comprises the following investment projects:

The 2015/2016 plan includes on-going programmes in relation to lifecycle and health and safety investments; equipment and IT rolling replacement programmes and the Strategic Informatics programme.

The total planned expenditure for all projects is £28.0m, including those re-programmed from 2014/15.

Business cases for projects contained in the capital programme are at varying stages of development and will continue to be rigorously evaluated against the Trust’s overall priorities and for their economic impact on the financial sustainability of the Trust, as they progress through the Trust’s approval process. The timing and delivery of projects will remain under regular review through theEstates Strategy Board.

  1. Working Capital

Annual self-certification includes requirement that the Board must assure themselves of the adequacy of working capital to service the Trust’s on-going commitments over the 12 months ahead.

The cash flow graph below indicates the forecast monthly cash receipts and outgoings and illustrates the ability of the Trust to meet its current obligations as these fall due, throughout the year.

The following timing assumptions have been made in the 2015/16 cash flow forecasts:

•The forecast run rate on income & expenditure items is worse in the first half of the year and stabilises in the second half.

•The Trust’s planned loan draw down is accessed in the first half of the year.

•The forecast profile of capital spending increases in later quarters, reflecting long-established patterns.

  1. 2015/16Monitor Continuity of Service Risk Rating (CoSRR)

The £19.5m deficit plan results in a quarterly Capital Service Cover (CSC) rating of 1; the Trust’s liquidity rating would remain at a level 4 throughout the year with a resultant Monitor Continuity of Service Risk Rating (CoSRR) remaining at a level 3.

In quarter 4, the liquidity days’ cover is very close to zero (the trigger point at which the liquidity risk rating decreases from the strongest level (4) to level 3, which when triggered would result in an overall CoSRR of 2. This is illustrated below:

  1. 2016/17 Plan

The Trust has also modelled forward the high level plan for 2016/17 which at present forecasts a similar deficit budget as referenced in section 9 of this report.

Based on all reasonable forecasts including assessment of risks, the Trust’s ability to meet current obligations as they fall due, is not in immediate jeopardy over 2015/17 as illustrated below:

  1. Summary

The provisional financial plan results in a forecast income & expenditure deficit for 2015/16 of £19.5m. Under Monitor’s current Risk Assessment Framework this would maintain the Trust’s presentContinuity of Service Risk Rating of 3.

The overall 2015/16 financial challenge faced by the Trust is £68.5m. To date £48m of solutions have been identified with £18.3m of these assessed as having a high risk of falling short of full delivery. Delivery of the full set of currently identified plans continues to receive very high levels of Executive review, challenge and support in interactions with all divisional leadership teams, to reduce the level of this risk.

The key risks and related mitigation measures have been identified; these are detailed in the “Assessment of key risks associated with the provisional Financial Plan 2015/16” companion paper.

The provisional capital programme for 2015/16 is £28m.

  1. Recommendations

The Board is recommended to:

  • Approve the provisional Financial Plan for 2015/16 set out in this paper.
  • Note the assessment of risks in the accompanying paper “Assessment of key risks associated with the provisional Financial Plan 2015/16” together with the mitigating actions in place to manage these.
  • Receive regular progress reports.

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