Published: 07/08/2003, Volume II3, No. 5867 Page 31
The new system of 'payment by results' will mean more pressure from budget holders on finance staff. However, they will need to work together to succeed, says Noel Plumridge
You are the finance director of an acute trust in the spring of 2005. The trust's service level agreements, structured around new national tariffs for surgical procedures, are being negotiated with primary care trust commissioners.
They ask why the cost of treating an elderly patient with a fractured neck of femur is significantly above the national tariff level of£3,766.Your own clinical director, who always maintains the service is working at full stretch, wants to know too.
After a small adjustment for local factors,£3,766 is all the income the trust will get.
You sigh. The trust's 'costs' are last year's reference costs with some supporting apportionments and will probably not stand up to scrutiny.You also know the impossibility of analysing the costs that other trusts make for fractured neck of femur when the tariff, a national average, was calculated. Software does not exist and the definitions are open to local interpretation.
You know that there are other procedures for which the trust seems to offer good value.
However, the clinical director is looking anxious. And what if it is not just 'swings and roundabouts' and the directorate really is not able to compete?
If 'payment by results' is to work effectively, NHS finance departments need to sharpen up their performance on reference costing, traditionally an activity that sees little involvement from budget holders. Audit scrutiny of reference costs is offered as a solution.Yet why is there a problem, if reference costs are already usually prepared by qualified accountants?
The answer lies partly in loose definitions, but more in the way that benchmarking rarely forms part of the core management processes.However, this will change when financial flows come into full operation in 2005, and managers need to be prepared. Openness within the costing process, and responsible challenge from line managers and budget holders, will become normal. Clinical directors, expected to manage costs to conform with a national tariff, will expect assurance that 'their' costs have not undergone arbitrary manipulations.
Accountants will find themselves caught in the crossfire.
And the threat of external competition is real. One explicit purpose of the new system is to stimulate new capacity and 'diversity of provision'. Would-be entrants to the market have enough information to pick services and specialties with the potential to generate a surplus, analyse margins and risk, and design facilities with an affordable cost base.
Their detailed analyses of care pathways, drawing from overseas experience and sometimes based on very different approaches to staffing, suggest that NHS providers can be undercut.
What are trusts with high-cost specialties to do? They can attempt to maintain the status quo with a combination of crosssubsidisation, using alternative sources of income and pleas for special treatment. This may work in the short term, but will always leave one's corporate destiny in the hands of others.Or, more boldly, they can apply the logic of the tariff system within the organisation. They can leave the incremental approach to budgeting behind ('last year, plus x for growth, less y for savings') and begin to build up expenditure budgets from the tariff.
This offers trusts their best chance of staying competitive.
Surviving and flourishing under the tariff system requires a far better understanding of the costs of a procedure - akin to industrial job and process costing.How many NHS finance departments know the labour cost input to a hip replacement at standard tariff rates?
Moreover, this approach to budgeting offers an effective way of engaging clinicians. For example, Tameside and Glossop Acute Services trust reported on a 'trading account' basis for specialties within the trust, with a statement for each specialty matching income, direct spend and internal recharges for support services such as diagnostics. Finance and information director Colin Dunn notes that lead clinicians responded positively to the approach.
Helen Chalmers, chief executive of Kingston Hospital trust and a supporter of the new financial flows model, does not foresee radical changes to NHS budgeting practice in the short term. She cites the Australian experience: 'Case-mix funding is working in New South Wales, but there is no evidence of internal hospital budgeting matching external funding.The income stream for, say, surgery will not necessarily equal costs.'
She sees the tariff 's prime value as a benchmark, an indicator of relative efficiency.
Caution may also be advisable in view of the complexity of the forthcoming changes and the scale of the culture shift involved.
Initial NHS emphasis will be on stability.
But failure to link expenditure budgets with tariff income may leave trusts financially vulnerable and finance directors without the levers they need to maintain financial balance - and, indeed, without convincing answers to questions from board colleagues.
Noel Plumridge is a former NHS finance director and is a consultant and member of the health panel of the Chartered Institute of Public Finance Accountancy.
(NoelPlumridge@aol. com) HSJ is holding a conference on 'Payment on results: making patient choice work' on 23 September in London, with speakers from London patient choice, Dorset and Somerset strategic health authority and Bob Ricketts, head of NHS capacity, plurality and choice.
www. conferencesites. co. uk/ paymentbyresults
Further information This is the first of HSJ 's fortnightly pages on financial issues, aimed at both specialists and general managers with a financial aspect to their job.
For details on how to contribute or to find out what subjects we will cover in future, e-mail nick. edwards@emap. com
No comments yet