Audit Commission Review item 10

Audit Commission Review item 10

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Paper: 10/9/06 Title of Report Audit Commission review of the NHS financial management and accounting regime Executive Summary The report provides an update on the national review by the Audit Commission on the NHS Financial Management and Accounting Regime and the position in relation to the North West Actions requested The Board is asked to note the report SHA Objectives supported by this paper: To ensure sound governance and strong financial management in NHS organisations SHA Strategic aims supported by this paper: The Authority has a responsibility to develop NHS organisations to be able to deliver strong governance and financial management Race Equality Assessment: Not applicable Risks Attached to this project/initiative: As the Department of Health respond to the recommendations the risks will be assessed for the North West Public and/or patient involvement: Not applicable Resource implications: Not known at this stage Communication: Public Board reports provide regular updates on the financial situation in the North West Name Mark Ogden Job Title Director of Financial and Economic Management Month and Year September 2006 Email Mark.ogden@northwest.nhs.uk AGENDA ITEM 10 NORTH WEST STRATEGIC HEALTH AUTHORITY Audit Commission review of the NHS financial management & accounting regime Introduction 1. In July 2006 the Audit Commission produced a report for the Secretary of State for ...

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Paper:
10/9/06
Title of Report
Audit Commission review of the NHS financial management and
accounting regime
Executive Summary
The report provides an update on the national review by the Audit
Commission on the NHS Financial Management and Accounting
Regime and the position in relation to the North West
Actions requested
The Board is asked to
note
the report
SHA Objectives supported by this paper:
To ensure sound governance and strong financial management in NHS organisations
SHA Strategic aims supported by this paper:
The Authority has a responsibility to develop NHS organisations to be able to deliver strong
governance and financial management
Race Equality Assessment:
Not applicable
Risks Attached to this project/initiative:
As the Department of Health respond to the recommendations the risks will be assessed for
the North West
Public and/or patient involvement:
Not applicable
Resource implications:
Not known at this stage
Communication:
Public Board reports provide regular updates on the financial situation in the North West
Name
Mark Ogden
Job Title
Director of Financial and Economic Management
Month and Year
September 2006
Email
Mark.ogden@northwest.nhs.uk
Audit Commission Review – Board Meeting 1.9.06
1
AGENDA ITEM 10
NORTH WEST STRATEGIC HEALTH AUTHORITY
Audit Commission review of the NHS financial management &
accounting regime
Introduction
1.
In July 2006 the Audit Commission produced a report for the Secretary of State for
Health on the NHS financial management & accounting regime.
The review was
commissioned due to the current financial position of the NHS as a whole and in
particular, because of the number of NHS bodies with deficits.
The purpose of the
review was to consider and comment on the current financial regime and
recommend changes that:-
enable and encourage the NHS and individual bodies within it to operate on
a sound and sustainable financial footing;
support the identification of financial problems and facilitate recovery;
promote clear and transparent accountability;
support individual organisations to develop the necessary financial
management capacity and capability to operate effectively.
Strategic context
2.
In essence, the financial regime for the NHS dates back to the early 1990s but a
number of changes have been made.
Significantly, many of the flexibilities that
enable NHS organisations to meet their statutory duties to achieve financial balance
have been eroded or have disappeared.
Flexibilities, which helped organisations
‘report’ balance such as capital to revenue transfers (i.e. spending money
earmarked for capital expenditure to support the income & expenditure account),
and brokerage (i.e. where short-term repayable loans were made to organisations
in financial difficulty), have obscured the financial position of many organisations.
The need for more transparency and financial management discipline was therefore
required and necessary.
3.
In addition to the changing financial regime, the introduction of payment by results,
patient choice, practice based commissioning, foundation trusts, and the
introduction of independent sector treatment centres have all created a significantly
more complex and volatile financial landscape on which the NHS needs to operate.
4.
The Audit Commission identifies three important themes which run throughout the
report:-
a.
The tension between the performance of individual organisations and the
overall performance of the NHS at both local health economy and
national levels.
For example, individual organisations can find that their
surpluses are taken and used to support others with deficits.
b.
Many of the issues and problems raised with the Audit Commission were
cultural.
These include late agreement of service level agreements,
poorly managed arbitration procedures, inconsistency between the
reports presented to the SHA / Department and the organisation’s own
Audit Commission Review – Board Meeting 1.9.06
2
boards, the belief that finance is the sole responsibility of the finance
director and the way in which failure has been dealt with.
c.
The need for much better medium-term planning to make the best use of
resources available.
The Audit Commission emphasises that the
engagement of front line clinicians in both planning and financing is
crucial and sees that practice based commissioning is the key enabler for
achieving this in PCTs.
Audit Commission conclusions
5.
The Audit Commission concluded that the current financial regime, though complex,
has worked relatively successfully over many years.
However, the NHS
environment has changed and that weaknesses in the regime have become
increasingly evident.
6.
It concludes that while Departmental and SHA actions have been taken for the good
of the NHS collectively on a national or local basis, this has cut across the
accountability of individual organisations for their own performance.
This has
obscured the real position for many organisations but the introduction of payment
by results and Foundation Trusts (FTs) has meant that this approach is no longer
sustainable.
Many of the recommendations they make are linked, and they believe
these will result in a further, more transparent regime.
Whilst they conclude that the
recommendations in themselves would not prevent NHS bodies from incurring
deficits, they would put trusts and PCTs in a better position not to do so and give
them a better prospect of recovery.
Key Audit Commission recommendations
7.
One of the key areas of concern that the Audit Commission recommends is
changed is the resource accounting and budgeting (RAB) carry forward regime.
RAB is a system of accounting and budgeting that applies to Government, based on
expenditure incurred and income earned during an accounting period.
The problem
of RAB is that it is inconsistent with the trust financial regime, which requires trusts
to breakeven taking one year with another.
For example, if a trust makes a deficit
of say £5 million in year 1, its income in year 2 is reduced by an equivalent amount.
The deficit in year 1 is also carried forward to the trust balance sheet in year 2 and
this is the cumulative deficit.
So the trust has to make a £5 million surplus in a
future year to recover the £5 million deficit it incurred in year 1.
But as its income
has been reduced by £5 million, in effect, it has to make a £10 million surplus.
This
is known as the “RAB double whammy” in that instead of having to make a £5
million surplus, the trust has, in effect, to make £10 million savings because of the
reduction in income it has sustained due to the original deficit.
8.
The key recommendations made by the Audit Commission are set out below:-
Resource accounting and budgeting
The RAB regime should not be applied to NHS trusts.
The Audit Commission
believes the Department should establish a central buffer fund to absorb any short-
term deficits incurred by NHS trusts and NHS FTs.
Audit Commission Review – Board Meeting 1.9.06
3
To ensure that all NHS trusts are treated consistently, it recommends that any
element of the deficit which has resulted from RAB adjustments should be
eliminated through provision of cash-backed income.
Trusts
There would be merit in moving all NHS trusts on to a financial regime which gives
greater emphasis to cash and liquidity and has transparent arrangements for
borrowing both capital and revenue.
The Department should encourage NHS trusts to analyse financial performance by
service type and (where multiple locations are involved) by site to understand how
each part of the business performs financially.
Primary Care Trusts
The Department should set their allocations and agree 3-year funding objectives.
The plans themselves could identify the need for resource allocations and
associated resource limits to be flexed over the 3-year period.
PCTs should be encouraged to underspend against their resource limits in order to
offset possible overspends later and also to ensure best use of resources.
The Department should now require the PCT programme budgeting information to
be disclosed as a note to the accounts (PCT programme budgeting is an analysis of
how the PCTs spend their money in terms of which areas of healthcare such as
mental health, circulatory diseases, general medicine etc.).
Financing and financial support
The Department should establish an NHS banking function to enable a more
transparent financing and borrowing regime.
Failure regimes
There needs to be a more effective and swifter mechanism for identifying and
dealing with financial distress, with clear trigger points and matched intervention
strategies.
There should be more explicit and in some cases tougher consequences for dealing
with personnel issues associated with financial distress.
Recruiting and developing staff with the right skills
The Department should review the operation of the finance trainee scheme at both
the national and local level and use the SHA reconfiguration as an opportunity to
develop the national and other schemes at SHA level.
The Department should promote a greater flow of commercial financial skills into
the NHS through the development of exchange programmes with the private sector.
The PCT Fitness for Purpose review should be used to undertake skills and needs
assessments of the commissioning arrangements for the new PCTs.
Audit Commission Review – Board Meeting 1.9.06
4
Strengthening financial governance
The Department should provide training for non-executive directors on the
integrated governance handbook and best practice risk management processes to
help boards and audit committees to use internal audit appropriately.
Re-deployment should be used much more sparingly.
The Department should
develop revised guidance on executive director appraisal, including a formal rating
system and detailed guidelines for the treatment of poor performance.
The legal basis for appointments should be reviewed to see if there is scope for
removing non-executive directors on the grounds of corporate as well as individual
failure.
9. There were a series of recommendations made by the Audit Commission on the
departmental oversight and management and their role.
These included making
their costing processes more transparent, the way the tariff is set, the release of
planning and guidance to NHS bodies, and a review of the data collected for its own
and SHA monitoring purposes.
Commentary
10.
The report is a well-considered and timely piece of work.
It makes a number of
recommendations and it will be important to know the extent to which the
Department acts on all of these.
Some of the recommendations will be more
difficult than others for the Department of implement.
11.
The North West NHS has operated successfully in recent years under the old
financial regime.
Indeed, at an individual organisational level, trusts and PCTs have
operated corporately and generated surpluses to offset the deficits incurred in a
small number of organisations with financial difficulties.
The North West has also
posted an overall surplus which has helped the national position and has put the
North West in a relatively good financial position.
Importantly, the vast majority of
NHS boards in the North West have taken the requirement for financial balance and
good financial management very seriously, recognising that this is a fundamental
pre-requisite to our service development strategies and improving the overall health
of our patients.
Recommendation
The Board is asked to note the report.
Mark Ogden
Director of Financial & Economic Management
September 2006