This Paper Sets out the Revenue and Capital Budgets for 2015/16

Budget for 2015/16

Trust Board / Item: 8.1
25th March 2015 / Enclosure: G
Purpose of the Report / Paper:
This paper sets out the Revenue and Capital budgets for 2015/16.
For Information / For Decision
Sponsor (Executive Lead): / Nigel Baker, Interim Director of Finance
Author: / Nigel Baker, Interim Director of Finance
Author Contact Details: /
Financial / Resource Implications: / See below
Quality Governance: / N/A
Risk Implications - Link to Assurance Framework or Corporate Risk Register: / Objective 4: To deliver the 2014/15 financial plan
Document Previously Considered By: / Finance and Investment Committee - 24th March 2015
Recommendations & Action required:
The Board is recommended to approve this budget subject to further discussion on the cost pressures in the Part 2 meeting.

Budget for 2015/16

This paper sets out the Revenue and Capital budgets for 2015/16.

The national context is that over 70% of acute Trusts are in deficit in 2014/15. It appears that even more are likely to set deficit budgets for 2015/16.

The national planning deadlines have been put back following the late changes to the tariff proposals. A draft plan has to be submitted on 7th April 2015 with a final version on 14th May 2015. Between those dates NHS England, Monitor and the NTDA are planning to triangulate and review plans between commissioners and providers and may arbitrate and require plans to be changed.

1. REVENUE BUDGET

The proposed budget has been set following a rigorous bottom up review with each service line and corporate department. Where provided, national guidance has been used in calculating the impact of price changes, both on income under the tariff and for pay and non-pay costs.

Negotiations with commissioners on the Service Level Agreement and Contract for next year have not yet concluded. The Trust hastherefore set its activity and income levels based on the information it currently has.

Nationally and locally commissioners are setting standards for quality and safety including defining staffing levels. These have been critically examined and proposals made for increases in staff numbers where it is considered essential. Some further increases have also been made following patient and staff feedback through their surveys.

There are significant cost pressures relating to the electronic patient record system, both in revenue and depreciation, and from the estates capital maintenance programme.

All services were set the challenge to find cost improvements of 6% which is similar to previous years. However this has not been achieved in all areas and overall 3.6% of improvements have been identified. This is above the nationally efficiency factor of 3.5% set in the tariff.

Modelling all these elements has produced a proposed budget deficit of £8.8m for 2015/16.

The table below shows the movements from the recurrent surplus brought forward from 2014/15 of £0.2m to the proposed budget deficit for 2015/16 of £8.8m. Each item is analysed and explained in the notes following the table.

The setting of a deficit budget has an adverse impact on cash. As this deficit is greater than the level of cash balances held the Trust would need to take out a working capital loan to enable it to operate on a day to day basis. This eventuality has been notified to Monitor who are collating similar information from a number of Trusts to assess the situation nationally.

Notes

1. National Tariff

The national tariff guidance for 2015/16 was initially published in December but following the consultation which resulted in a majority of providers challenging the proposals, Monitor and NHS England have now issued alternative proposals. Providers were given the choice of an ‘Enhanced Tariff Option’ which gave 3 key improvements against the original proposals, or to stick with the 2014/15 tariff although this would be effectively deflated by not paying the 2.5% CQUINs. The Board has decided to opt for the ETO which is more favourable than the alternative for KHFT. Over 85% of Providers have made the same choice.

The impact for 2015/16 is:

• Net deflator 1.6% (gross 3.5%)£(3.1)m
• CNST uplift£ 2.3 m
• Specialist services growth only paid at 70%£(0.3)m
• Increase in non-elective threshold payment£ 0.8 m

Total£(0.3)m

1. Pay inflation

The pay bodies are concluding their negotiations so we have set the budget based on the latest information. There are four elements to the pay inflation figure. The national pay award at 1%, annual increments for staff through the pay bands at 1.1%,

clinical excellence awards for consultants, and finally a national increase in the employer pension contribution of 0.3%.

The impact for 2015/16 is:

• National pay award£1.3m
• Annual increments£1.5m
• Clinical excellence awards£0.2m
• Employer pension contribution£0.4m

Total£3.4m

1. Non-pay inflation

The national guidance issued with the tariff suggests appropriate levels of non-pay inflation to be budgeted for. They have indicated 1.6% for general items, 4.5% for drugs and £2.4% for PFI contracts and we have adopted these levels. The figure below for drugs is only based on in tariff drugs as any increase in excluded drug prices will be passed onto commissioners.

The impact for 2015/16 is:

• General£0.6m
• Drugs£0.3m
• PFI£0.3m

Total£1.2m

The other element of non-pay facing a significant increase is the CNST premiums. Nationally these are facing a 35% increase, which is reflected in the funding uplift built into the tariff. We have therefore budgeted for a cost increase of £2.3m to match the extra funding. However due to the excellent claims record of the Trust we have been notified that there will be virtually no change in our premium in 2015/16 over 2014/15. This saving will be recorded as an achievement towards the Cost Improvement Plan.

1. Capital charges

Capital charges are the depreciation and Public Divided Capital (PDC) costs on our fixed assets. There is an inflationary allowance of 0.2% within the tariff, which would be £0.4m. However the increase in these costs for KHFT in 2015/16 will be £2.4m which includes the £0.7m shown under the Estates cost pressure below. The most significant element of the increase relates to the capitalisation of the Electronic Patient Record implementation which has been carried as an ‘asset under construction’ for the past two years and has therefore not previously been depreciated. A further increase arises due to an increase in the valuation of the estate of £1.5m recently made by the District Valuer.

1. Activity changes

Whilst the Trust expects there to be the normal levels of demographic growth, there has also been recentincreasesover and above that. Commissioners have indicated that they will be setting out to deliver a level of QIPP schemes to match overall growth. However past performance does not reflect that and so we have included a modest level of net growth of less than 1%, offset by the relevant costs, giving a net benefit of £0.5m.

1. Other income changes

There are some small favourable movements in other income, particularly in education funding where there is a reduction in the transitional adjustment.

1. Costs moved from national to local

A number of costs that were previously borne nationally have been effectively transferred to be incurred directly by the Trust.

• The largest of these is the Trust’s contract with the national programme in respect of CRS, the electronic patient record system. From 2015/16 the Trust has to re-procure the system directly with the supplier. This results in an annual cost pressure of £2m but will only be effective from October 2015, so an additional cost of £1m in 2015/16
• A number of junior doctor posts are being reallocated and the Trust will need to employ a number directly to maintain effective shift cover, £0.4m
• Elements of the maternity pathway which were previously commissioned directly from other providers now have to be borne by the Trust, £0.6m

1. Estate maintenance strategy

The increase in the estates maintenance programme that commenced in 2014/15 continues in 2015/16. To provide the necessary cash to undertake this work the Trust took out a loan of £10m at an interest rate of 2.27% over 20 years. In 2014/15 £3.2m of this was drawn down and the balance will be drawn down during 2015/16 in line with the expenditure profile. No repayments are due in 2015/16 as they commence once the works are complete. Interest payments start immediately.

The revenue impact of this increased programme in 2015/16 will be £0.7m in depreciation and interest charges.

1. London Quality Standards

As discussed at the November Board the Trust needs to increase staffing levels in Maternity, Paediatrics, Emergency Medicine and Emergency Surgery to meet the LQS set by commissioners. A thorough review of options in each case has been explored, and mitigations sought where possible. The proposals included in this budget are considered to be the most appropriate way forward towards meeting these standards. The net additional cost is £1.7m.

1. 7 day working and improved quality

To ensure that patients receive the same standard of care throughout the week it is proposed to invest across a range of staff groups to enable 7 day working. This includes inter alia doctors, physician assistants, therapists, pharmacists, and ward clerks.

There are also proposals to invest in some other quality improvements, e.g practice development nurses, HCAs on AAU, and toast for patients

1. Admin

Some small increases are proposed in specific areas to improve services, £0.1m

1. Cost Improvement Plans

At the beginning of the budget setting process all service lines and corporate departments were set a CIP target of 6% of their cost base, which was a target of £9.8m. Over a period of several months and review meetings with executive directors, and finally a meeting with the Chief Executive,not all have managed to achieve this. Schemes totalling £6.3m has been identified and implementation plans and quality and equality impact assessments have been prepared and reviewed. This value has been included in the budget proposed for next year together with the £2.3m from the CNST saving, a total of £8.6m. Further work is being undertaken on three cross Trust schemes, length of stay, theatre utilisation and procurement in a continued effort to increase the level of savings achievable.

1. Contingency

A contingency of 1% has been included, £2.3m

1. Non recurrent costs

To tackle recruitment difficulties in some areas it is planned to incur non-recurrent spend to improve this situation. A sum of £0.7m has been set aside

A bridge diagram of the movements is shown on the following page.

The overall Income & Expenditure plan for the Trust will be as follows:

Income & Expenditure 2015/16
£m
Patient Care Income / 202.2
Other Income / 23.5
Total Income / 225.7
Pay / (144.1)
Non-Pay / (74.4)
EBITDA / 7.2
Depreciation, PDC and Interest / (16.0)
Deficit / (8.8)

CAPITAL BUDGET

The Capital budget was reviewed at the January Board meeting where some changes were agreed. The final plan is shown below:

SUMMARY

However, being in deficit has consequences in itself. It is unclear what these would be given that almost all Trusts are likely to be in deficit in 2015/16. However, the Trust is taking the following actions:

1. The Trust has co-commissioned with the CCGs a piece of work to understand why, if the Trust is the most efficient in the country, it is unable to put together a balanced budget. This will support the development of a recovery plan.
2. The Trust has proposed a new approach to developing a productivity programme that is much more granular and looks at profitability by HRG. This may enable a more strategic approach to the development of the Trust’s portfolio of services.
3. SWL acute providers programme is already considering joint work to help reduce costs. This includes options for sharing clinical services and rotas.
4. Work with local GPs, community services, mental health and social services to develop a new model of care. This is aimed at keeping people well and sufficiently supported in the community by working together rather than in organisational silos. This should reduce activity in the hospital and reduce duplication of services and enables clinical staff to spend more time caring for patients rather than filling in forms to access services for patients from one of the other providers.

This budget proposal reflects many of the issues affecting the provider sector nationally. Setting a deficit budget will have consequences both in the short and longer term, however it is essential that the Trusts services are delivered to the required standards of care across quality, safety and access. Furthermore the Trust’s staff must be supported to do their jobs effectively.

The Board is recommended to approve this budget subject to further discussion on the cost pressures in the Part 2 meeting.