The crowd from the finance department were relaxing in the Rat and Weasel musing on life’s three inevitables: death, taxes… and the private finance initiative.
“Looks like Monitor’s scuppered PFI for good,” opined Rosemary. “Did you see that piece in HSJ?”
She was referring to a statement from a (wisely anonymous) trust chief executive, whose plans for a new hospital were frustrated by Monitor’s update of the prudential borrowing code. For new schemes, debt payments would now have to be less than 10 per cent of income.
“What they have effectively done,” the chief executive had said, “is cancel the rest of the PFI pipeline.”
Monitor’s response alluded to “the economic climate”, confirmed that the “challenge to demonstrate affordability” would now be “tougher than ever”, and didn’t exactly contradict the chief executive’s point of view.
“Tweedledum and Tweedledee at it again,” retorted Tony. “Whatever the DH wants, Monitor doesn’t. It’s David and Bill, fighting over a pair of trousers that won’t fit either.”
“They’ll find a way round it,” mused Iain. “PFI’s too important. There’ll be some adjustment or other. You’ll see.”
He was right, of course. We all knew these schemes were like lead weights round the ankles of trusts that had them. Yet the accountancy profession had nodded it through and the auditors had signed it off. Even now, with the economy in tatters, the NHS was being urged to spend non-existent capital to satisfy the PFI sector’s thirst for public money.
Iain leaned over. “Have you never heard,” he whispered, “of the optimism bias uplift?”
Later I opened the laptop and tracked down the Treasury’s Green Book on “Appraisal and Evaluation in Central Government”. And there it was:
“Optimism bias: there is a demonstrated, systemic, tendency for project appraisers to be overly optimistic. This is a worldwide phenomenon that affects both the private and public sectors. Many project parameters are affected by optimism - appraisers tend to overstate benefits and understate timings and costs, both capital and operational.
To redress this tendency, appraisers should make explicit adjustments for this bias. These will take the form of increasing estimates of the costs and decreasing, and delaying the receipt of, estimated benefits.”
The Green Book, HM Treasury
Anyone who has had an extension built knows it is not unusual for the works to take longer and cost more than the estimate, and yet leave you feeling underwhelmed.
But here was a methodology that could stand us in good stead in NHS finance. We tend to fix on the answer we want, and then build the business case to match. So why not adjust for this tendency? Accountants are used to making estimates of the uncertain: “provisions”. An adjustment for human error would be no different. The Treasury even allows that as long as you can create a credible empirical basis for the adjustment, you can “adjust for the unique characteristics of the project in hand”.
Why stop there? Why not adjust for the adjustments that others may make? I began to see how so many less than wonderful capital schemes had seen the light of day.
Next day I decided to apply this new knowledge to immediate work pressures: balancing this year’s budget, delivering the efficiency savings, pleasing the strategic health authority. But the productivity expectations of the SHA are growing increasingly onerous. Innovation was required.
Clearly the estates managers and IT types who had assembled the capital programme and the maintenance budget would not know about optimism bias, so it would seem prudent to make an adjustment. By slipping everything by a few months I was able to save several hundred grand. Strictly, there should also have been an adjustment for cost escalation, but one of the “unique characteristics” of this trust is a P45 culture when it comes to budget overruns.
I applied the same principle to the entire spreadsheet of cost improvement schemes. They always slip, so why not build that slippage in from the outset? And they probably won’t deliver the level of savings the managers claim, so let’s downgrade them by, oh, 20 per cent. Click.
Actually this did create a bit of a problem. £2m off the cash releasing efficiency savings projection might make the finance director a bit shirty, and would not please the SHA one bit. But surely the SHA would have adjusted for this already? Surely they would know about optimism bias? So I slipped in a balancing adjustment to bring it back to break-even.
The real biggie, though, is whether those projections of monstrous funding shortfalls after 2011 are actually based on over-pessimistic optimism bias adjustments at Richmond House. Up there they must know about the Treasury guidance. So I have emailed all the clinical directors advising them not to worry too much about savings next year, since the anticipated funding cuts are probably all in the baseline already.
It is good to feel that, when it comes to delivering innovation, the finance professional has so much to offer.