4. Financial Planning and Projections
Within this section we summarise our comments and conclusions on NHS Tayside's five year financial plan, with reference to:
- NHS Tayside 2017/18 - 2021/22 Financial Framework document dated 27 March 2017
- The findings of the review undertaken by Ernst and Young of the 2017/18 financial plan and service plans supporting the delivery of the Transformation Programme.
- Reports undertaken by internal audit into the financial planning arrangements within NHS Tayside.
4.1 Key points
- The anticipated £4m requirement for financial support from Scottish Government in 2017/18 is likely to be understated.
- Based on the risk assessment performed by NHS Tayside management of the achievability of recurring savings at the time of our review, adding our own sensitivity analysis and risk assessment, the financial support required for 2017/18 could be as much as c£11.1m.
- The work performed by Ernst and Young, based on the status of the savings plans at the time of their review and their own sensitivity analysis and risk assessment, indicates that the financial support required for 2017/18 could be c£17.0m or higher. We would however expect that the savings plans will be developed further by NHS Tayside and that as a consequence there is the potential to reduce the risk to the financial plan from the position assessed at the time of our review.
- As the service plans underpinning the five year transformation programme are insufficiently developed it is not possible to provide assurances on the deliverability of the financial plan over the five year period as set out, including achievement of financial balance and repayment of brokerage by 2021/22.
- The Internal and External Auditors have both highlighted the need to further improve the financial planning and budgetary controls operating within NHS Tayside, whilst recognising the progress that has been made and the plans to implement further improvements during 2017/18.
4.2 Overview of the NHS Tayside five year financial framework
NHS Tayside's 2017/18 - 2021/22 Financial Framework document dated 27 March 2017, sets out NHS Tayside's five year financial plan with reference to the NHS Scotland Health and Social Care Delivery Plan and the NHS Tayside Five Year Transformation Plan 2017-22.
Over the five year period of the financial plan NHS Tayside will require to generate £209.8m of cash releasing savings in order to achieve financial balance and repay all but £2.6m of the financial brokerage as at 31 March 2018  .
|Annual savings £m||49.8||40.0||40.0||40.0||40.0|
|% of baseline funding||7.0||5.7||5.7||5.7||5.7|
Over the period of the five year plan, £144m of savings have been targeted to be delivered on a recurring basis and £66m on a non-recurring basis.
The five year financial plan acknowledges:
- The need to deliver a ' stepped change in mindset and focus ... that will see the organisation transform';
- That the Health and Social Care Partnerships will be ' integral to the development of models of care within the primary care sector that will see the balance of care shift towards more community based care';
- The requirement to establish the Transformation Programme Board to deliver the following outcomes - sustainable financial balance, improving patient outcomes, quality and safety and cost effective service delivery.
4.3 Review of the financial plan for the year ending 31 March 2018
NHS Tayside has identified within the financial plan for 2017/18 a requirement to achieve £49.8m of savings in order to achieve financial balance.
In the draft local delivery plan NHS Tayside has given a commitment to the delivery of a savings programme as noted below of £45.8m and has forecast a requirement for additional financial support from Scottish Government of £4m.
The profile of the savings programme for 2018/19 and 2019/20 is provided for information.
|Workforce and Care Assurance||4.9||3.9||9.0||7.0|
|Service Redesign and Productive Opportunities||5.4||1.4||4.0||4.7|
|Facilities and Estates||0.4||0.3||0.8||0.6|
|Hospital and Community Services||3.8||1.8||5.4||3.8|
|Property Asset Disposals||2.9||2.5||2.5|
In assessing the deliverability of the above savings for 2017/18 the review has taken into consideration the following:
- NHS Tayside management's own assessment of the risk associated with the delivery of the above plans to deliver recurring savings;
- The assessment of the recurring savings plans undertaken independently by Ernst and Young;
- Evaluation of the risk associated with the non-recurring savings plans; and
- Evaluation of additional costs pressures identified by NHS Tayside management not reflected in the budget estimates for 2017/18  .
4.4 Assessment of risk of delivery of recurring financial savings plans - NHS Tayside
Within the draft local delivery plan NHS Tayside submitted the following indicative analysis of risk against the overall savings target of £49.8m.
The savings not identified were attributed to three specific areas and were considered at risk of delivery:
- Achievement of savings in relation to nursing arising from implementation of e-Rostering (£1m);
- Reduction in elective care capacity (£1m)
- Achievement of savings in relation to primary care prescribing (£2m)
These areas account for the £4m requirement for financial support from Scottish Government projected for the year ending 31 March 2018.
Subsequent to the submission of the local delivery plan, the NHS Tayside management team have continued to re-assess the deliverability of the financial savings for 2017/18.
Based on the work undertaken by Ernst and Young, a summary of the most recent assessment of the savings plans by NHS Tayside is noted in the following table:
|Area||Risk Assessment||Recurring savings £m|
|Reduction in non-contract agency staffing and overtime||Medium||3.0|
|Additional reduction in non-contract agency staffing||High||0.7|
|Reduction in non-compliant rotas||Medium||0.4|
|Implementation of standardised shift patterns||Medium||0.5|
|Reduction in primary care prescribing||High||1.9|
|Reduction in secondary care prescribing||Medium||0.7|
|Delivery of 72 hour delayed discharges||High||1.5|
|Risk associated with impact on elective care targets||High||0.4|
|Reduction on unscheduled care admissions||High||0.5|
|Reduction in private sector placements||Medium||1.4|
|Implementation of National Burns review||Medium||0.2|
|Redefining pathways and reducing average length of stay||Medium||0.5|
Assessing the risk, if a weighting of 75% and 50% were allocated respectively to the high and medium risk savings actions the potential risk to the financial position in 2017/18 would be £7.1m.
We acknowledge that the high and medium risk weightings attributed to the savings programmes reflect management's assessment of the scale and the timing of delivery of the actions at the time of our review. NHS Tayside will continue to further develop the actions supporting the savings plans with the expectation that the high and medium weightings and risk to the financial plan will continue to be re-assessed.
4.5 Assessment of the risk of delivery of recurring financial savings plans - provided by Ernst and Young
The Scottish Government commissioned Ernst and Young to undertake an independent assessment of the savings plans that had been developed by NHS Tayside. In undertaking the assessment, Ernst and Young:
- applied their established methodology for assessing savings plans against a set of agreed criteria; and
- interviewed key NHS Tayside staff across service lines to further inform their assessment of the plans as established at the time of the review. It is acknowledged that as the plans are developed during 2017/18 the level of risk associated with non-delivery of the stated savings may reduce.
A summary of the assessment undertaken by Ernst and Young is presented below:
|Area||Risk Assessment||Recurring Savings, £m|
|Workforce and Care Assurance||Medium||4.9|
|Prescribing and Diagnostics|
|Primary Care Prescribing||High||2.5|
|HSCP - hospital and community services||Medium||3.8|
|Facilities and estates||Low||0.4|
In terms of assessing the risk, if a weighting of 75% and 50% were allocated respectively to the high and medium risk savings actions the potential risk to the financial position in 2017/18 would be £10.5m.
In assessing the previous areas as high risk Ernst and Young highlighted the following:
- Primary Care prescribing - Whilst the HSCPs have committed to making savings and the new formulary has been implemented, there was a high level of uncertainty regarding the ability to deliver the savings target that had been set.
- Service redesign - Whilst this is year two of the Transformation Programme the individual service or operational delivery plans remain insufficiently developed or detailed to give confidence in delivery. Further details are provided in Section 6.
4.6 Evaluation of non-recurring savings
NHS Tayside has committed within the five year financial plan to reduce its dependence on non-recurring savings as set out below:
In terms of the deliverability of the non-recurring savings for 2017/18, the Ernst and Young review highlighted the following:
- Financial Flexibility (£10.5m) - In the preceding years, £7.0m has been allocated from Scottish Government to cover impairment and other one-off non-recurrent costs identified during the financial year. An additional £3.5m relates to planned non-recurrent balance sheet reserve adjustments. Subject to audit and based on an historical position, it is likely that the level of savings to be delivered through financial flexibility can be achieved in 2017/18.
- Asset disposals (£2.9m) - There will be challenges in realising property assets not already under offer due to drawn out lead-in time to complete sales. Based on confirmed offers Ernst and Young estimated that a total value of £0.9m of property disposal proceeds would be achieved in 2017/18 compared to the £2.9m in the financial plan.
The remaining non-recurring savings of £9.3m are attributed to six workstreams  . Based on historical performance, it is considered that NHS Tayside should be able to deliver the non-recurring savings, with the risks of non-delivery being mainly attributed to the achievement of recurring savings as noted earlier in this section.
4.7 Evaluation of additional cost pressures
The Ernst and Young review highlighted a number of additional cost pressures that had been identified by NHS Tayside management but were not reflected in the budget nor savings requirement for 2017/18.
Given the dynamic nature of the health sector, it is not unusual for costs pressures to be identified. However, as highlighted in the previous section, there is limited flexibility within the current budgetary management processes in NHS Tayside to manage unplanned or unexpected cost pressures that emerge during the year. In prior years, a number of such pressures have necessitated the requirement for provision of additional financial support.
The additional cost pressures identified by NHS Tayside management are noted below:
|Medicines cost and volume higher than planned||Medium||1.0|
|Activity growth, acuity levels of service pressures greater than anticipated||Medium||2.0|
|Inability to maintain costs in line with central funding allocations||Medium||1.0|
|Costs for healthcare provided by other Boards higher than planned||Medium||0.8|
In terms of assessing the risk, if a 50% weighting was allocated to medium risk areas the potential risk to the financial position as assessed by Ernst and Young in 2017/18 would be £2.4m. We would expect that at this level, the impact of the cost pressures arising could be met from the £3m set aside by NHS Tayside for contingent events
4.8 Summary assessment of the 2017/18 financial plan
The above analysis of the financial plan for 2017/18 highlights that both NHS Tayside management and Ernst and Young have assessed that there are risks to achieving the planned forecast outturn based on the state of development of the savings plans at the time of our review.
If the Ernst and Young methodology is applied to both the NHS Tayside and Ernst and Young assessment of the savings plans the assessed risk to the financial position for 2017/18 would be as follows:
Ernst and Young
|Financial support - forecast||4.0||4.5|
|Recurring savings (at risk)||7.1||10.5|
|Asset disposals (at risk)||-||2.0|
|Financial support - if risks are realised||11.1||17.0|
4.9 Assessment of the five year financial plan
As set out in Section 6, the service plans underpinning the Five Year Transformation Programme are insufficiently developed to provide adequate assurance of the deliverability of the financial plan as set out, including achievement of financial balance and repayment of brokerage by 2021/22.
4.10 Financial control environment
The review has also considered the findings and recommendations arising from:
- Reports by the external auditor in 2014/15 and 2015/16
- The report by Audit Scotland - 2015/16 audit of NHS Tayside - Financial Sustainability
- Reports issued by the Chief Internal Auditor
- Comments and observations arising from the independent review undertaken by Ernst and Young.
4.11 Overall assurances provided in relation to internal controls across NHS Tayside
Both the External Auditor and Chief Internal Auditor have provided annual reports to the Board of NHS Tayside and its Audit Committee in relation to their assessment of the overall control environment operating within NHS Tayside.
The overall conclusions arising from the annual reports for 2014/15 and 2015/16 are noted in the following table. 
|External Auditor  - Report to those charged with governance||Internal Audit Annual report|
4.12 Findings in relation to financial planning and budgetary control
Whilst noting the above conclusions in relation to NHS Tayside's overall internal control environment, the review considered the findings of specific reports by Internal Audit in relation to the internal financial controls operating within NHS Tayside.
The table below summarises the grades allocated to the financial controls reviews undertaken during the period 1 April 2013 to 31 March 2016. The Chief Internal Auditor has highlighted that a diminution in grade assigned to an internal audit review does not necessarily represent a diminution in the controls in place. The grade assigned reflects the changing risk environment in which the Board is operating and that improvement are required to the controls in place in order to effectively mitigate associated risks down to an acceptable level.
|Standing Financial Instructions||A||A||A|
|Standards of Business Conduct||A||A||A|
Key - A: Good, B: Satisfactory, C: Adequate, D: Inadequate
A follow up report of Financial Planning and Management was undertaken during 2016/17 and issued in March 2017. This report followed up on the implementation of a number of Internal Audit recommendations as well as the External Audit recommendation made in their 2014/15 report in relation to NHS Tayside reviewing the effectiveness of their annual budgeting process.
In concluding on the review and with reference to the Red (Very High) risk rating assigned in the NHS Tayside Corporate Risk Register - Strategic Financial Plan, the Chief Internal Auditor stated that:
"our opinion is necessarily Category D - there is increased risk that objectives may not be achieved. Whilst considerable work has been undertaken and many improvements made, further improvements are still required and the pace of change will need to be accelerated if targets are to be achieved."
The Chief Internal Auditor further comments as follows:
"The planned improvements to the budget setting process, from financial year 2017/18 onwards, will assist in further aligning resources to corporate priorities; will identify and factor in known cost pressures and will allow early discussion and identification of the projects to deliver required efficiency savings. However, the cumulative effect of the recurring efficiency savings required to achieve financial balance in the last four years of the five year Strategic Financial Plan (Revenue) will place significant pressure on the system."
In their report to those charged with governance within NHS Tayside in 2014/15, the external auditors recommended that NHS Tayside undertake a review of the effectiveness of their annual budgeting process.
Whilst further work is required as evidenced by the recent internal audit review, NHS Tayside has taken steps to more realistically project its financial trajectory in 2016/17.
A comparison of the financial trajectories forecast in the local delivery plans and actual financial performance reported through the monthly financial performance reports to Scottish Government for 2016/17 is shown below. The movement at the end of the financial year reflects the provision of £13.2m of financial support to enable NHS Tayside to breakeven.
In undertaking their work, Ernst and Young made the following observations:
- A number of pay and non-pay related controls have been pursued by NHS Tayside with realised benefits. We believe there are additional control measures that could potentially be adopted to deliver greater impact. These measures are set out within the Ernst and Young report and indicate potential savings of £4m to £7m if implemented.
- The potential level of savings is based on Ernst and Young experience and track record supporting other NHS organisations to enhance and strengthen their expenditure controls, and may therefore provide a useful potential savings target. It is acknowledged that these would need to be reviewed and validated on a case by case basis for local context.