NHS Grampian

2009/10 REVENUE BUDGET

Introduction

The NHS Grampian Board at its April meeting considered the constituent elements of the NHS Grampian Local Delivery Plan (LDP). A component part of the LDP wasfinancial planning templates which outlined NHS Grampian’s high level financial plans for the next five years. The detailed revenue budget for 2009/10 forms year one of those plans.

The Budget Steering Group (a sub-group of the Operational Management Team) at its meeting on 18 May 2009 was presented with a proposed revenue budget which was accepted subject to some amendments. Those amendments have now been incorporated in the final draft which is presented to the Board for approval.

NHS Grampian achieved (subject to external audit on behalf of the Scottish Parliament) a £6.4 million cumulative revenue surplus at the conclusion of the 2008/09 financial year, reflecting a break even financial performance in year. The 2009/10 revenue budget has been set to ensure a break even cumulative position at 31 March 2010 (i.e. a £6.4 million deficit for the 2009/10 year in isolation which will use up our cumulative surplus in full). Using the cumulative surplus is necessary to meet some of the new financial pressures which are expected to arise in 2009/10 but obviously is a non-recurring mechanism that must be replaced with recurring alternatives in future years.

The budget has been compiled using all available information including key assumptions based on current knowledge and reasonable expectations. Decisions and recommendations of the NHS Grampian Budget Steering Group have been followed as closely as possible in so doing. While this is considered to be the final budget, it will inevitably be subject to some change as the year progresses. This is normal practice and reflects the complexity and dynamism of the NHS environment and the need for flexibility in meeting changing demands. The Budget Steering Group will be called upon to agree any necessary material changes to the budget as required during the financial year. Should any such changes be so fundamental and material to require Board intervention, they will be presented to members for consideration and approval.

Aim

To present to members of the Grampian NHS Board, thefinal NHS Grampian 2009/10 revenue budget for approval.

Discussion

  1. NHS Grampian’s financial plans are based around the need to achieve a cumulative break even position on a year by year basis for the financial year 2009/10 and beyond. This has to be done in the context of reducing levels of uplift (possibly as low as 1% or less from 2010/11 onwards) on our core funding allocation whilst at the same time absorbing a variety of increases such as pay costs, capital charges, drugs costs and providing funding to support significant service redesign.
  1. The 2008/09 financial outturn is a cumulative surplus of £6.4 million.
  1. The revenue budget for 2009/10 produces a planned in-year deficit of £6.4million, giving a cumulative breakeven position at 31 March 2010.
  1. NHS Grampian will receive estimated additional funding of £31.0 million in 2009/10, including an uplift of 3.47% on our core allocation from the Scottish Government Health Directorates (SGHD). All of the new additional funding has already been committed incovering the cost of pay modernisation, new drugs, capital charges and other cost pressures. A small amount of funding will be invested in projects that have already been committed. The anticipated use of our new funding is shown in summary in Table 1 below: -

Table 1

Additional Income / £m / Additional Expenditure / £m
SGHD Uplift (3.47%) / 22.2 / Pay awards and Agenda for Change / 17.8
Other funding uplifts (ACT, NES etc) / 1.6 / Uplift on ACT, NES, Resource Transfer, NSD expenditure / 2.0
Surplus from 08/09 / 6.4 / Drugs / 9.8
Slippage on new SGHD Earmarked Funding / 0.8 / Energy & Non Pay Uplift / 2.7
Loss of Car Parking Income / 0.9
Capital Charges / 3.4
Recurring Cost Pressures / 6.9
Backlog Maintenance / 1.0
Contingency / 1.0
Make Good Non Recurring Funding / 7.5
Total / 31.0 / Total / 53.0

ACT = Additional Cost of Teaching. NES = NHS Education for Scotland

NSD = National Services Division of NHS Scotland Support Services

  1. Table 1 demonstrates that we have additional expenditure commitments of at least £53.0 million against our confirmed additional funding of £31.0 million. The balance between the two (£22.0 million) must be met by :-

a) A planned £6.4 million deficit for the 2009/10 financial year.

b) A requirement to further reduce proposed expenditure by£15.6 million in 2009/10.

  1. The budget includes a contingency for non-specific unfunded cost pressures and emerging issues amounting to £1 million. This will provide for some new, unavoidable cost pressures arising during the financial year as well as a number of recognised risks that have not been fully provided for in the base budget (e.g. clinical negligence costs which are difficult to predict in terms of timing and value) andany additional costs incurred in complying with national guidance on combating Influenza A [H1N1] previously referred to as “swine flu”).
  1. Much work is taking place on developing our knowledge and skills in deploying Continuous Service Improvement (CSI) change methodology, in collaboration with the SGHD’s Improvement Support Team. The intention is to plan and implement 5or 6 priority projects within the current year that will contribute to some extent to our budget reduction targets. At this stage, no revenue savings from these projects have been built into our plans for 2009/10. Once realistic savings opportunities are identified, they will be incorporated into our budgets, taking some undue pressure off other areas.
  1. The £15.6million cost reduction target includes the requirement from the SGHD for all Health Boards to make additional 2% recurring efficiency savingseach year as part of the “Efficient Government” programme. These savings are available for retention by health boards for re-investment in priority services. NHSG’s target for 2009/10 is approximately £13.5 million.
  1. The attached papers set out the budget by department, showing key movements from the rolled forward budget to the final value for 2009/10.
  1. It will be exceptionallydifficult to meet our revenue financial targets in 2009/10 but budget managers are fully aware of the need to maximise efficiency and indeed to prepare for 2010/11 and beyond when funding allocations are almost certain to be lower than currently.

Key Risks

The main risks to achieving the 2009/10 revenue budget are set out in Appendix 1, paragraph 5.

Conclusion

The Budget Steering Group, supported by staff across the organisation, has spent several months in reviewing and debating construction of a balanced revenue budget for 2009/10. The task has been exceptionally difficult this year as a result of a series of substantial cost pressures arising in a very tight public sector financial environment. The budget as presented is considered to be achievable although much has to be done by managers to prioritise endeavours and eliminate wasted effort and cost to allow them to operate within constrained financial parameters. Meanwhile, we must be planning ahead already to 2010/11 and beyond when the financial environment will become significantly more challenging.

Recommendation

Members of the Grampian NHS Board are asked to approve the 2009/10 revenue budget as presented.

Paper presented by:

Alan Gall

Director of Finance

25 May 2009

Appendix 1
NHS Grampian Revenue Budget 2009/10
  1. Process to Date

1.1In development since October 2008.

1.2Budget Steering Group established as short life sub group of OMT to take forward process of setting the budget.

1.3Budget guidance and methodology agreed by Budget Steering Group .

1.4Detailed review of all cost pressures by focus groups of senior managers on 27th February.

1.5Two sets of meetings held with key budget holders in October 2008 and March 2009 to discuss cost reduction plans. Brainstorming session held in Kemnay in February. “Group Systems” session to score cost reduction schemes held with Executive Team in May 2009. Results from this exercise were also reviewed by a number of Non Executive Board Members.

  1. Summary of Outcomes

2.1All new funding arising from the 3.47% annual SGHD uplift taken up by centrally driven initiatives (e.g. pay modernisation) and unavoidable pressures such as capital charges and increases in drug budgets. Use of new funding is shown in Table 1 above.

2.2Agreement to fund £6.9 million (£6.3 million recurring / £0.6 million non-recurring) of prioritised service cost pressures. A small contingency provision of £1.0 million has been established to deal with unexpected cost pressures emerging during the course of the financial year.

2.3No development funding available apart from specific earmarked funding, including amounts announced from the Comprehensive Spending Review from 2008/09.

2.4The overall position of the draft budget is :-

£m

Net Resource Outturn Before New Savings Targets825.6

New Savings Targets allocated to Budgets (15.6)

Net Resource Outturn810.0

Revenue Resource Limit810.0

Projected Surplus 0.0

2.5All available NHSG reserves have been fed into budget to reduce the financial gap as far as possible although this has increased our exposure to unexpected cost pressures.

2.6As there is no development funding available as noted above, departments wishing to develop or improve services that involves additional investment must identify funding sources in advance of proceeding. The contingency fund is available to cater for unavoidable costs and not developments or improvements per se.

2.7The detailed budget for each operational area is shown at Appendix 2.

  1. Assumptions and Conditions Incorporated Into Budget

3.1Where agreed that cost pressures cannot be managed out of the system, they have been built into budgets in line with the outcome of the review of cost pressures by Senior Managers and the Budget Steering Group.

3.2Budget managers do not have authority to spend beyond their budgetary limit. Support will be offered through performance management reviews in the event of budgets being at risk of being breached.

3.3Pay uplift assumed to be 2.5% but specific provision made for the estimated costs of Agenda for Change, incremental drift and zero basing of medical staffing budgets.Provision has also been made for the ongoing costs of Agenda for Change reassimilations.

3.4Drug budgets have been set in line with the recommendations of the Grampian Medicines Management Group. For GP Prescribing, this involves an increase of 5.0% on 2008/09 budget (increase of 2.6% on forecast spend). No benefit has been assumed from continued cost savingsas a result of the national negotiations on drug pricing as we have been informed that any benefit is likely to be withdrawn from Boards by the Health Directorate. For secondary care drugs,this involves an increase of 15.0% on 2008/09 budget (increase of 9.6% on expenditure). A provision of £0.5 million has also been established for the introduction of new drugs and a separate provision of £1.87 million has been established to fund the use of new drugs for the treatment of Age Related Macular Degeneration (AMD) in line with guidelines from the Scottish Medicines Committee (SMC).

  1. Cost Reduction Targets in 2009/10

4.1The required new cost reduction target of £15.6 million for 2009/10 will be met from several sources. In addition, we have to repeat £2.6 million of non-recurring targets from 2008/09 making a total savings’ requirement of £18.2 million.

4.2All budgets have been reduced with an element of protection provided to direct, essential clinical services. Other services, including administrative services, have suffered a proportionately larger budget cut. Respective percentage reductions from 2008/09 are 1.48% and 5.54%. In an environment of continuing demand for new, improved and faster services, these cuts will prove very difficult to implement to everyone’s satisfaction.

4.3The following budget areas have been excluded from the calculation of percentage based cost reduction targets. Exclusion is generally as a result of centrally managed budgets (eg Dental Non Cash Limited) or rebased budgets (eg Primary Care Prescribing):-

  • Primary Care Family Health Services(FHS) funding (£90.7 million)
  • Primary Care Prescribing Budget (£82.0 million)
  • Pharmacy Non Cash Limited expenditure (£17.8 million)
  • Dental Non Cash Limited expenditure (£22.2 million)
  • Resource Transfer to Local Authorities (£31.3 million)
  • Service Purchasing / Cross Boundary (£15.7 million)
  • Capital Charges (£35.3 million)
  • Central Reserves and Provisions (£58.2 million)
  1. 2009/10 Revenue Budget Risks

5.1We face a significant financial challenge in funding our plans for achieving Waiting Times access targets in 2009/10. We invested heavily in building capacity in 2008/09 but much of this investment only took place part way through the year. We therefore have to fund the costs for the full year in 2009/10 and we have assumed that we will receive £2.3 million of additional funding from the National Waiting Times Unit to fund this. This funding has yet to be confirmed. Moderate

5.2A substantial risk is the achievement of the new cost reduction targets of £15.6 million.This level of reduction is higher than has been achieved by NHS Grampian in the past, historically achieved on a non recurring basis by holding vacancies and avoiding non essential spend. Continuous Service Improvement is unlikely to deliver significant levels of short term savings in the 2009/10 financial year. Substantial.

5.3Several high value commitments are based on estimates (e.g. Agenda for Change, GP Prescribing, Capital Charges, Energy costs). Actual costs may be substantially higher or lower in practice. Acceptable.

5.4We have yet to receive our allocation for FHS contracts. Current assumptions include the expectation that the General Medical Services (GMS) contract (including funding extended opening hours) and the contracts for Pharmacy and Ophthalmic Services will be fully funded. If this proves not to be the case, additional savings will be required to fund the shortfall. Acceptable.

5.5There are continuing demands which are often centrally driven to improve and develop our services. Recent examples include the draft report on Cancer Services, pressures to improve staffing levels in Neonatology and the need to respond to emergencies such as the recent swine flu preparations. Moderate

5.6The European Working Time Directive for junior medical staff comes fully into force on 1st August 2009. This will limit the availability of junior doctors in many specialties and force those specialties to either curtail services or redesign using a different staff mix. There is a risk to service levels from this but also a financial risk in that the solutions we may need to put into place may cost significantly more than our existing arrangements. We have some potential salary banding savings that can go towards funding these changes but it is likely that there will be a total net cost increase in resolving EWTD compliance challenges. Moderate

5.7Equal pay claims are currently a major issue for local authorities and may potentially become so for the NHS. A national unit has been set up to deal with claims in Scotland. Our budget currently includes no provision for settlement of equal pay claims on the assumption that the Scottish Government will fund the impact from central reserves. Moderate.

5.8Unfunded cost pressures as noted in paragraph 2.2 above. Moderate.

  1. 2009/10 Revenue Budget Opportunities

6.1The Comprehensive Spending Review in 2007 announced significant amounts of earmarked funding for areas such as Alcohol Misuse, Health Protection, MRSA screening, Specialist Childrens Services, Health Improvement and Health Inequalities. We are expecting increased amounts from a number of these funding streams in 2009/10 which will provide very welcome service improvement opportunities.

6.2Staff turnover providing the opportunity for skillmix reviews and service redesign.

6.3Increased savings from our use of the National Distribution Centre for product purchasing as more Boards use the Centre leading to greater purchasing power for the NHS in Scotland. This may be extended to include the public sector as a whole.

6.4Adherence to good practice guidelines to manage expenditure in areas such as equipment, travel, hospitality, printing and training.

6.5Lower than expected energy prices reflecting falling wholesale prices.

6.6Lower than expected NHS inflation levels for non-pay items reflecting the continuing economic downturn.

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Appendix 2

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Appendix 3

Budget Setting Methodology

Rebasing

In setting budgets over the last three financial years, there has been a majority decision to allocate savings’ targets on a pro rata basis which was considered by advocates of the principle to be fair. For whatever reason, this process has allowed the organisation to meet its financial targets but only by means of a wide range of overspends and compensating underspends. In each year, we have had to seek assurance from underspending departments that they would continue to underspend to compensate for overspending departments. This arrangement is not only risky and inefficient but has also created an ever worsening budget skewing which we must eliminate or at least reduce substantially if we are to have budgets fit for purpose.

Appendix 2 above shows the outcome of applying the rebasing methodology. The steps taken are as follows:

  • Note actual 2008/09 outturn (budget over and underspends) for each department
  • Add back 2008/09 non-recurring savings’ targets
  • Reflect cost pressures incurred in 2008/09 to be met by agreed funding in 2009/10
  • Adjust for Drug budget variances covered by Grampian Medicines Management Group (GMMG) rebasing exercise

The result of this is a total of £8.526 million of rebasing required.

Setting Budgets

  • Starting point is the full year budget rolled forward from 2008/09 adjusted for non-recurring elements
  • Agreed cost pressures funding of £6.961 million added
  • Rebasing of £8.526 million applied
  • Budget reductions totalling £8.526 million to meet rebasing requirements applied. In doing so:
  • 25% of the rebasing requirement allocated to “overspending” departments as an efficiency target
  • The remaining 75% allocated to departments based on a line by line review
  • Finally, budget reductions totalling £11.2 million allocated to departments on the basis of 1.48% for direct patient care services and 5.54% for all other areas.

Paper Ends

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