Feature / Piecing it together

On 1 October the commitment made by the Welsh Assembly government in the One Wales coalition agreement to abolish the internal market within the NHS in Wales becomes a reality. Seven NHS trusts and 21 local health boards will be merged into six new health boards.

These new organisations, along with the Powys Local Health Board, which remains unchanged, will bring together into one organisation the responsibility for planning, funding and providing healthcare from primary through to tertiary for their local populations. It is the most significant NHS reorganisation in Wales since the early 1990s when the internal market was established.

To complete the picture, there will be three remaining trusts, covering ambulance services, specialist cancer services and public health. Specialist services, currently commissioned by Health Commission Wales, an executive agency of the Welsh Assembly government, will in future be planned and funded by a joint committee of the new health boards.

The implications of this reorganisation for NHS finance in Wales are considerable, not least because the changeover is happening in the middle of the financial year. A project has been in place for over a year, with national workstreams covering funding flows, accounting and governance issues, capital, shared services and finance staff development.

As the go-live date gets closer, the focus of work is shifting towards local implementation. Finance director designates have been appointed for four of the six new organisations.

Funding flows

It was important that the design of the finance regime for the new organisations reflected the objectives of reorganisation, which were to strengthen partnership working between organisations in the best interests of the citizen and to remove bureaucratic competition.

Once the decision had been taken that the integrated health organisations would follow the existing local health board framework, a workstream was set up to craft a funding flow regime. The following principles were established to guide this work:

• There should be absolute clarity about which organisation holds the funding for ensuring the delivery of healthcare. The current arrangements have been beset with funding disputes between existing local health boards, NHS trusts and the specialist services commissioner.
• There should be an emphasis on ensuring a fair distribution of funding to the new boards following the principles developed by the late Professor Peter Townsend. Progress on implementing the Townsend direct needs allocation formula had been hampered by the volatility of the formula at the level of the current 22 local health boards.
• All NHS revenue funding should initially be allocated to the new local health boards, and then an agreed pooling arrangement should operate for specialist services that require planning and funding on an all-Wales basis. This contrasts to the current arrangements, where Health Commission Wales receives its own allocation directly from the Welsh Assembly government.
• The new arrangements should provide an incentive to challenge inefficiencies in delivery.

The new funding flow arrangements are based on allocating all devolved NHS revenue funding to the new boards for their population. This will initially be based on the current distribution of funding to existing boards, but over time funding should be redistributed in favour of areas with greater health needs, in line with the Townsend direct needs formula.

While the reorganisation and new funding flows put an end to thoughts of introducing a tariff system in Wales, the Welsh Assembly government is still keen to ensure that the new organisations are putting in processes to increase efficiency in the system.

Existing NHS trusts were mandated by Jeff Buggle, the Department’s former director of resources, to introduce service line reporting (SLR) by quarter one in 2009/10. This task is under way and there remains an expectation that SLR will be a key tool for the organisations in managing their internal budgets.

At the same time, consideration is being given to using a standard cost as the basis for funding patient flows between the new local health boards. This activity will be significantly less than existing funding flows between trusts and local health boards, but nevertheless will remain as a reasonably substantial element of income and expenditure for the new boards, particularly in south Wales.

Accounting and governance

Other workstreams were established to consider the accounting and governance issues arising from the reorganisation.

The health minister’s statement in November 2008 that the new integrated health bodies would follow the legal format of local health boards meant that the income and expenditure method of accounting currently used by trusts would be replaced with the resource accounting regime used by existing health boards and other parts of the public sector.

A new format of accounts was developed that aimed to capture the new organisation’s responsibilities as both a provider of healthcare for a catchment population and a commissioner of healthcare for a resident population.

There were particular concerns that adopting the local health board legal model would remove flexibilities currently enjoyed by trusts, particularly the statutory financial duty dating back to the establishment of the internal market that allowed differences between income and expenditure to be managed ‘taking one year with another’.

In practice, since 2007 the Welsh Assembly government has required trusts to break-even in each financial year, and this has been achieved for the last two financial years.

Another issue has been how cash will be managed under the new regime. Trusts have traditionally had freedom to hold and invest reasonable cash balances, which has generated interest to increase funding for healthcare, although amounts have reduced with recent falls in interest rates. The new health board regime will have much tighter controls over cash, which will remove this flexibility almost entirely. 

The mid-year implementation of the new organisational structure has created its own set of accounting issues that needed resolution. It was confirmed early on that the Treasury’s ‘merger accounting’ principles would apply. This means that the new local health boards, which come into existence on 1 October, will have to prepare full year accounts for 2009/10 in addition to six-month accounts being prepared for the 21 boards and seven NHS trusts that are disappearing at the end of September 2009.

These additional accounting requirements come on top of the introduction of international financial reporting standards, which in themselves have significantly added to the workload of accounts staff. Needless to say, NHS finance staff in Wales are bracing themselves for a very busy year.

The reorganisation has also provided an opportunity to review existing governance arrangements within NHS bodies. A new model set of standing orders and standing financial instructions have been developed in tune with the responsibilities and focus of the new bodies, and a governance e-manual is also under development.

Coinciding with the reorganisation has been a review of the capital funding regime within NHS Wales. Until 2008/09, NHS trusts were operating under the external financing limit controls, which limited the cash they could draw down from the Welsh Assembly government to finance capital expenditure.

However, there were no restrictions to using cash they had generated from income and expenditure surpluses to add to their capital financing. From 2009/10, the Welsh Assembly government has issued capital resource limits, which control the total capital expenditure allowed by the new health boards.

Looking ahead

There is always a danger that reorganisations create a distraction from core business. This would have been a challenging financial year without reorganisation, with significant cash-releasing efficiencies of around 5% having to be achieved to meet cost pressures and ensure delivery of the Welsh Assembly government’s commitment to achieve a maximum 26-week wait between referral and treatment by this December.

The structured approach to managing the financial elements of reorganisation and the planning structure that has been established has ensured that business as usual has not been significantly hampered by the additional workload needed to develop the new finance regime, although this has placed a heavy burden on many finance staff within the NHS.

Although there is a lot of work still to be done, it is anticipated that there will be a relatively smooth transfer of financial responsibilities from the old organisations to the new boards.

After the dust has settled, ensuring the benefits of the reorganisation are delivered will be crucial. The reorganisation of NHS Wales has never been about change for change sake. It has been about developing a new culture of collaboration and partnership, coupled with strong clinical engagement, consistent with the aims of One Wales.

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