Royal National Orthopaedic Hospital NHS Trust

AUDIT COMMITTEE MEETING AND TRUST BOARD MEETING
8 JUNE 2009

2008/09 ANNUAL ACCOUNTS REPORT BY

THE DIRECTOR OF FINANCE

FOR ADOPTION

·  This report sets out the 2008/09 Annual Accounts for approval and adoption by the Board of Directors;

·  For the period 1 April 2008 to 31 March 2009 the Trust has achieved a surplus of £483,000.

This Report enables the Board of Directors to be assured that the Trust is meeting its objective of:

Providing a financial base that is robust for the future development of the Trust and to provide economic and efficient services.

Ahmet Koray

Director of Finance

1.  INTRODUCTION

1.1.  The 2008/09 Annual Accounts for the Trust have now been completed and are appended to this report for the Board of Directors to consider for adoption.

1.2.  Audit certification of the Annual Accounts will follow upon approval and adoption of the Annual Accounts by the Board of Directors.

2.  2008/09 FINANCIAL PERFORMANCE

2.1.  The table and commentary below reports upon the financial duties the Trust has been required to achieve in 2008/09 financial year. These results will be confirmed upon completion of the annual audit.

Financial Duties / Target / Actual / Target met
·  / Break-even on Income and Expenditure / £485k / £483k / ✓
·  / Achieve a 3.5% Capital Cost Absorption Rate / 3.5% / 3.6% / ✓
·  / Meet the External Financing Limit (EFL) / -£6,246k / -£7,749k / ✓
·  / Meet the Capital Resource Limit (CRL) / £2,898k / £1,674k / ✓
·  / Meet the Better Payments Practice Code - Non NHS Payments (by number) / 95% / 42.8% / X

2.2.  Break-even Duty – NHS London approved a revised target surplus of £485k with flexibility between £283k and £530k. Therefore, although actual surplus was slightly below target, break-even duty has been met.

2.3.  Capital Cost Absorption Rate (CCAR) - The Trust achieved a CCAR of 3.6%. This target is intended to demonstrate that the Trust has provided sufficiently robust estimates in setting its prices to recover income in order to pay capital financing charges. This takes the form of dividend payments to the Treasury and during the year all such payments were made.

2.4.  External Financing Limit (EFL) - The EFL places a limit on borrowing if it is positive and a repayment of debt if it is negative. The Trust was set a negative EFL, representing the repayment of £4,279k PDC relating to the funding of the Bolsover St impairment on valuation prior to disposal, and the payment of the capital loan of £2,100k received in 2007/08. This was partially offset by the PDC capital funding referred to below.

2.5.  Capital Resource Limit (CRL) – The Trust declared an affordable CRL in its plan of £1,600k, based on cash generated from capital financing charges. PDC funding for the proposed regional decontamination project increased the CRL to £2,898k, but the Trust did not commit any expenditure against this funding. The outurn for the year is therefore an undershoot of £1,224k. Undershoots against CRL are permitted.

2.6.  Better Payments Practice Code - The Department of Health requires Trusts to pay their non-NHS trade creditors and NHS creditors in accordance with the CBI prompt payment code and Government Accounting rules. The target set for the Trust was to pay 95% of non-NHS trade and NHS creditors within 30 days of receipt of goods or a valid invoice (whichever is the later) unless other payment terms have been agreed with the supplier.

2.6.1.  Cumulative performance in the first four months of the year exceeded 70% as the Trust had the advantage of £4,279k cash from the Bolsover Street impairment funding. Repayment of this cash in mid-year necessitated restraint in creditor settlement which resulted in a fall in performance against this measure. The Financial Services Manager is developing a plan to maximise performance within available cash resources for 2009/10.

3.  ANALYTICAL REVIEW OF ANNUAL ACCOUNTS

3.1.  INCOME & EXPENDITURE

3.1.1.  2008/09 Income & Expenditure Account - the Trust’s Income and Expenditure Account for the period ending 31st March 2009 is as follows:

Full Year
Plan / Out-turn / Movement
£k / £k / £k
Total Income
Income From Activities / 78,871 / 78,487 / -384
Other Operating Income / 5,890 / 6,661 / 771
Total Income / 84,761 / 85,148 / 387
Operating Expenses
Total Pay / -45,654 / -45,112 / 542
Non-Pay Total / -36,729 / -37,659 / -930
Operating Expenses / -82,383 / 82,771 / -388
Operating Surplus / 2,378 / 2,377 / -1
Disposal Of Fixed Assets / 0 / 12 / 12
Interest Receivable / 189 / 172 / -17
Interest Payable / -62 / -59 / 3
Other finance costs- unwinding of discounts / -13 / -12 / 1
PDC Dividends Payable / -2,007 / -2,007 / 0
Retained Surplus for the year / 485 / 483 / -2

3.1.2.  Income for the period 1st April 2008 to 31st March 2009 achieved an overall over performance against plan of £387k. The main drivers for this were: actual NHS activity at a higher level than budgeted assumptions; and accruals of income for part-completed spells of treatment (£1.6million). These favourable variances were partly offset by an adverse variance of approximately £3million for private patient income, which occurred because private patient capacity was used to meet NHS demand and the 18-week performance target.

3.1.3.  Overall net operating expenses recorded an overspend against the budgeted position with pay underspent £542k and non-pay overspent by £930k. The pay variance is a complex picture with overspends in wards and theatres partly offset by underspends elsewhere. The major contributors to the non-pay variance were: the activity-related expenditure on prostheses and patient transport; and the impact on utility bills of energy cost inflation. The Trust benefited from a reduction in the depreciation charge relative to plan due to the reduction in land and building asset values following the application of new indices in accordance with Dept of Health instructions.

3.1.4.  Profit from the sale of assets relates to the disposal of obsolescent medical equipment.

3.1.5.  There were no significant issues with interest payments or receipts.

3.1.6.  Other finance costs unwinding of discount relates to the annual adjustment for the present value discounting of provisions for pension contributions for historical early retirements.

3.1.7.  NHS London recognised the costs that the Trust has incurred on its redevelopment project during the financial year 2008/09, but rather than provide funding to cover these costs, they approved a £0.5million reduction in the target surplus for the year.

3.1.8.  The table below shows an analysis of the changes to the Income & Expenditure Account between 2007/08 & 2008/09:

2007/2008 / I&E category / 2008/2009 / Movement / % Change
£k / £k / £k
84,103 / Total Income / 85,148 / 1,045 / 1%
-42,259 / Total Pay / -45,112 / -2,853 / -7%
-39,409 / Non-Pay Total / -37,659 / 1,750 / 4%
81,668 / Operating Expenses / 82,771 / -1,103 / -1%
2,435 / Operating Surplus / 2,377 / -58 / 2%
566 / Disposal Of Fixed Assets / 12 / -554 / -98%
331 / Interest Receivable / 172 / -159 / -48%
-4 / Interest Payable / -59 / -55 / -1375%
-12 / Other Finance Costs – Unwinding of Discount / -12 / 0 / 0%
-2,207 / PDC Dividends Payable / -2,007 / 200 / 9%
1,109 / Retained Surplus / 483 / -626 / -56%

3.1.9.  Increases in Income of £1,045k from 2007/08 include the following major items:

2007/08 / 2008/09 / Movement
£k / £k / £k / %
Service Agreements / 70,174 / 72,367 / 2,193 / 3 / See note 3.1.10
Private Patients / 5,562 / 5,334 / -228 / -4
-11
-- / See note 3.1.11
Education, Training & Research / 4,164 / 3,724 / -440 / -11 / See note 3.1.12
Donation Reserve tfrs / 372 / 355 / -17 / -5
Other Income / 3,831 / 3,368 / -463 / -12 / See note 3.1.13
Total / 84,103 / 85,148 / 1,045

3.1.10.  Service agreement income changes arose in the main from the following:

·  Activity-related increase in income from National Commissioning Group for bone tumour;

·  8.4% increase in PCT commissioned in-patient activity;

·  Gains arising from the revised in-patient tariff structure estimated at £4million;

·  Tariff inflation uplift of £1.3million;

·  Increase in the accrual for part-completed spells at the year end of £1.5million;

·  Non-recurrent impairment funding received from Barnet PCT in 2007/08.

·  The Trust received transitional relief for Payment by Results of £4.8million in 2007/08, which ceased in 2008/09. This was partly offset by an increase in MFF from £4.9million to £5.8million.

3.1.11.  The decrease in private patient income was caused by a reduction in activity relative to prior year as PP capacity was taken up with NHS patients. The shortfall relative to plan was much greater of the order of £3m.

3.1.12.  Transitional R&D income received reduced by £924,000 in 2008/09, although this was partly offset by new forms of R&D income (FSF - £86k and CLRN -£111,000 funding).

3.1.13.  Included here are effects of the following:

·  high-cost drug recharges to PCTs included in SLAs for 2008/09 £175,000;

·  non-recurrent deep-cleaning income received 2007/08 £106,000.

3.2.  EXPENDITURE

3.2.1.  The pay cost increase of £2.853million is explained by the following:

·  Increase of £1million due to the 2008/09 pay award and the full-year effect of the 2007/08 award.

·  The marginal pay cost of additional patient activity

3.2.2.  Non-pay cost reduced by £1.75million between 2007/08 and 2008/09.

3.2.3.  The principal cost reductions from 2007/08 to 2008/09 were:

·  the impairment cost of the valuation of Bolsover St property prior to disposal included in 2007/08 - £4.279million.

·  the reduced depreciation charge arising on the reduction in fixed asset values following the application of indices as required by DH - £233,000.

3.2.4.  This was partly offset by the following increases:

·  Utility bills £461,000 higher due to energy cost inflation

·  Bolsover St lease cost were £280,000 higher due to the full-year effect.

·  Activity-related increase in clinical supplies, particularly prosthetic implants £1.3million.

·  Activity-related increase in patient transport cost – 12% increase on 2007/08 and cost per journey increase – 14% increase;up

.

·  Payments to Spire Bushey for hip and knee replacements commenced in 2008/09 and cost the Trust £1million, although income was received for this activity.

3.3.  BALANCE SHEET

The Trust’s summary Balance Sheet as at the 31st March 2009 compared to the previous year was as follows:

Balance Sheet item / 2007/08 / 2008/09 / Movement
£k / £k / £k / %
Fixed Assets / 70,257 / 62,732 / -7,525 / -11
Stocks / 2,040 / 1,887 / -153 / -8
Debtors / 10,472 / 8,072 / -2,400 / -23
Cash at Bank and in Hand / 935 / 2,305 / 1,370 / 147
Creditors / -9,841 / -11,735 / -1,894 / 19
Provision For Liabilities / -630 / -607 / 23 / -4
Total Assets Employed / 73,233 / 62,654 / -10,579 / -14
Capital And Reserves:
Revaluation Reserve / 30,455 / 24,576 / -5,879 / -19%
Donation Reserve / 11,742 / 10,833 / -909 / -8%
I&E Reserve / 2,428 / 2,916 / 488 / 20%
Public Dividend Capital / 28,608 / 24,329 / -4,279 / -15%
Total Capital And Reserves / 73,233 / 62,654 / -10,579 / -14%

3.4.  Fixed Assets – Total Trust capital expenditure was £1.678milllion, but the balance reduced due to the impact of the application of indices supplied by DH. The purpose of the indexation is to represent the current value of the Trust’s assets in the balance by estimating the effect of the general fall in market value of land and buildings. The total movement in fixed assets is summarised below:

Opening balance 1/4/08 / £70,257k
Indexation / -£6,432k
Additions / £1,678k
Depreciation and amortisation / -£2,771k
Closing Balance 31/3/09 / £62,732k

3.5.  Debtors:

2007/08 / 2008/09 / Movement
£k / £k / £k
5,352 / NHS debtors / 3,673 / -1,679
2,590 / Non-NHS trade debtors / 2,564 / -26
-392 / Provision for doubtful debts / -225 / 167
2,482 / Prepayments and accrued income / 1,563 / -919
440 / Other debtors / 497 / 57
10,472 / 8,072 / -2,400

3.5.1 NHS debtors: recognising the likelihood of activity increases to meet the 18- week target, 2008/09 SLAs were increased over 2007/08 resulting in fewer overperformance accruals at the year end. In addition credit notes issued to PCTs for Q3 activity adjustments were still outstanding at the year end, depressing the value of the debtor.

3.5.2 Prepayments reduced over the year due to the amortisation of the prepaid lease rental on the old Bolsover St buildings.

3.6.  Creditors - Creditors consisted of:

2007/08 / 2008/09 / Movement
£k / £k / £k
2,100 / Loan from DH / 0 / -2100
4,609 / NHS Creditors / 3,903 / -706
469 / Non-NHS Trade Creditors / 3,917 / 3448
260 / Non-NHS Trade Creditors-Capital / 662 / 402
0 / Tax and Social Security / 1017 / 1017
108 / Other Creditors / 704 / 596
2,295 / Accruals & Deferred Income / 1,532 / -763
9,841 / 11,735 / 1,894

3.6.1 NHS creditors have shown a fall due to the clearance of some long-standing disputes with other NHS bodies. Non-NHS trade creditors increased substantially due to the restraint on creditor payments in the second half of the financial year. This was necessary to ensure repayment of the £2.1million loan and £4.279million PDC referred to above, and to end the year with the planned cash balance of £2.1million to ensure that the EFL was met.