Feature / Testing times

The NHS has made major strides forward in the quality of its financial forecasting in recent years. But a cocktail of financial changes that take effect in England from April this year look set to test these predictive skills to the limit.

In previous years, perhaps the single biggest influence on a trust’s income was the uplift to tariff, containing as it did both the Department of Health acknowledgement of the cost pressures facing the service and the expected efficiency requirement. But while the 1.7% uplift to tariff for 2009/10 remains a key piece of information for finance managers, it is only one of the forces that will have a significant bearing on the funds flowing out of commissioning bodies and into provider organisations in the coming year.

Managers are used to changes in the tariff as individual healthcare resource group (HRG) prices are updated on an annual basis using more recent reference costs. But in 2009/10 the tariff is based on a new currency – HRG4. The doubling in HRGs should mean payments more accurately matching the activities undertaken. But while accuracy may improve, the switchover will inevitably create winners and losers.

At the same time there have been major changes to the market forces factor. In 2008/09 the MFF effectively provided top-ups for organisations that in extreme cases were worth as much as 42% of tariff payments. The impact of the revised MFF setting process has been capped at 2% of tariff income, but for many organisations this represents a significant loss of resources.

Add to this significant changes to the rules and scope of the payment by results system and a new allocation formula for primary care trusts and the service potentially faces some big challenges.

The first of these is simply getting a handle on the overall impact of the changes. The best that can be attempted is a straight comparison of the impact using the first nine months’ activity for 2008/09, looking at what the impact would have been in the last full year – 2007/08. But this will not take account of likely or expected activity changes in 2009/10. And most finance directors say attempts to isolate the individual impact of so many changes is near impossible.

Finance managers have been running the numbers since the tariff was published in December. There are a range of impacts – significant winners, losers and surprisingly, given the sheer number of changes, quite a few organisations that are reporting an overall neutral outcome on their initial forecasts. But the common theme running through many finance managers’ assessments is that of increased uncertainty.

One PCT finance director tells Healthcare Finance that local trusts were having problems ‘running the system leaving commissioning discussions way behind schedule’. He adds

that current estimates suggested a £12m cost to the PCT, although this was without any confirmed data from trusts. A comment from another PCT director, sitting on a £4m estimated loss due to tariff and MFF changes,

is typical of many. ‘There are a number of changes in HRG4 and this has proved very difficult to analyse,’ he says.

A trust finance director agrees. ‘The changes are multi-factorial and, in the case of the shift to HRG4, complex,’ he says. ‘This leads me to the conclusion that we do not have the same level of certainty in forecasting results.’

HFMA chairman Bill Shields, finance and performance director of NHS South West, says finance managers are fully committed to the new tariff. ‘We recognise the benefits of the extra granularity and sophistication in HRG4,’ he says. ‘But the complexity means that rigorous road testing is absolutely vital. There is a significant and challenging role for the finance function in understanding the impact for 2009/10.’

Managers are generally reporting greater volatility around HRG4 with the software grouper throwing up larger numbers of U-codes where correct coding is not in place. Specific issues have caused concern, particularly around the unbundling of diagnostics and the approach to outpatient procedures.

In 2008/09, tariffs were set for eight outpatient procedures, such as colposcopies, biopsies and subcutaneous injections, as replacements for the normal outpatient attendance. But in 2009/10, the costs of all procedures undertaken in outpatients have been stripped out of the outpatient tariff and require separate funding.

The Department has set a non-mandatory tariff for these procedures and it is the non-mandatory aspect that concerns some organisations. One foundation trust said there was no guarantee PCTs would agree to pay this suggested tariff and there are problems in some areas with coding and counting.

The unbundling of diagnostics has caused similar concerns for some trusts, particularly those whose patient administration systems do not include details of radiology activity.

One trust told Healthcare Finance it was hoping its PCT would accept a feed from its radiology system as the source of information to trigger the non-mandatory tariff, rather than insisting the information came through the secondary uses service. It also hoped it would agree to the non-mandatory tariff rates.

Maternity impact

Maternity has been another area of concern. One PCT says HRG4 led to a 20% increase – £5m – in its maternity expenditure compared with 2008/09. Early analysis suggests this is partly because activity that would previously have coded to Caesarian section without complications is now coming through with complications and attracting a higher payment.

In addition, the replacement of N12s – admissions not related to delivery – with several different HRGs has led to an increase in cost compared with local arrangements in place last year of paying as an outpatient.

Another trust claims it faces the prospect of double-digit efficiency savings to cover the drop in income across its whole portfolio, despite an earlier indication from the strategic health authority of a favourable impact.

Children’s service providers have also been in discussion with the centre after local estimates of the impact differed significantly from Department estimates because of differences in methodology and assumptions. While a specialist top-up for children’s services remains in place, it is at a reduced level and covers a reduced amount of activity (as a result of the more granular HRG4).

Teaching trusts face particular volatility this year. Central London-based organisations are likely to have taken a hit on the revision of the market forces factor. 2009/10 will also see the end of transitional relief on the new research funding arrangements. And there is still the prospect of a rebasing of the service increment for teaching (SIFT) levy in the coming years.

The nature of the system means that for every winner there has to be a loser. Speaking to the HFMA annual conference in December, Department of Health director general of finance David Flory said this was understood at the centre. He urged managers to help the Department get a full understanding for any major changes in income rather than ‘snipe’ from the sidelines.

So far managers have taken this to heart. There are concerns, particularly among the big losers, but support for the direction of travel is high – even if some question the sense of unleashing so many changes at the same time.

One thing is clear. Good working relationships between trusts and their commissioners will be vital. Colin Gentile, executive director of finance at Brighton and Sussex University Hospitals NHS Trust underlines this. He says the changes taking place, and the assumptions that have to be made, make accurate forecasting challenging and demand a partnership approach. ‘We are working closely with our PCTs to look at ways to manage so that there aren’t any unforeseen financial consequences,’ he says. ‘It is important that we ensure sustainable financial health for the whole health economy. But the changes for 2009/10 have undoubtedly levered up the complexity of the system.’

Strategic health authorities have been granted flexibilities in managing the transition towards full implementation of the revised MFF indicies and the move to HRG4. Given the increase in complexity in understanding the impact of the financial changes, it is likely these flexibilities will be needed.

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