MANAGEMENT REPORT

Variance analysis is the one way of budget monitoring (Health care management 2011). It shows where the variance has occurred and helps to take management action to bring the budget back on line. Somewhere in the NHS trust, as per month 10 financial statement trust was doing well. However, certain errors occurred at month 11 to the extent that dividend capital might have been breached. To find the source of error and take corrective measures variance analysis was calculated.

Variance analysis at 11 month (Appendix table 1)

Annual budget and actual 11 month budget was given. Annual budget was converted in to 11 month budget for the variance analysis. It was calculated by multiplying the figures with the constant [0.917]. Variances were calculated by taking difference between planned and actual figures (Appendix Table 1).  As per the variance analysis at 11 month they managed to achieve their target for the income from non-NHS private patient, education (SIFT, MPET/PGME, merit award, other) and donation. They achieved them before financial year end. However, the services level agreement income was more for service level agreement income (others), they have provided more other services, than what they usually provide. (E.g. this year they did more number of knee replacements than what they normally do) reason could be they are providing that service at cheaper rate, they have highly skilled professionals in those procedures and usually patient has good quality of life post operative. They have failed to achieve their income targeted for non-NHS (other non-protected) and other services (parking, catering, and accommodation).

As per pay cost variance analysis, they have under spent over clinical and non-clinical staff, while they have overspent paying the agencies. Several reasons like absenteeism on the first day of week, sick leaves, maternity leave, paternity leave, termination of contract, compensate leave, resignation etc could be responsible. To fill up those gaps and to avoid burdening or overworking the other staff they had to approach agencies, for clinical and nonclinical staff.

They have overspent on drugs compared to other non pay supplies. This could be due to increased stays of chronically ill patients (e.g. road traffic accident cases, spinal tumor) or due to overuse of drugs following surgery to deal with complications (e.g. following knee surgery due to excess blood loss patient was not stable  heamodynamically so they had to use more drugs to deal with complications) or this year they received more number of patients who required specific drugs (e.g. more number of COPD cases who were recovering well with the costly drugs).

This year they disposed of many fixed assets (e.g. old medical equipment, old ambulance etc.) as the cost of repairs was not worth incurring. By disposing assets they gained more income than the planned one.

They received more interest than the planned amount; however there was not much variation in the payment of interest. This year they did not consider cost improvement program and reserves, as they had to spend more on agencies and drugs.

Following table shows the total income and expenditure, planned as well as actual at month 11.

Planned 11 month £  Actual 11 month £ Income 889,779,449  850,500,186 Expenditure 891,797,031  850,088,695

Variance  (2,017,583)  411,491

 

 

 

 

From the graph it can be inferred that actual income and expenditure both were less than the planned ones. Copy of variance analysis report will be sending to each department.

Important consideration by the financial year end (Appendix table 2)

First of all actual month 11 budget was converted in to actual annual budget. It was done by multiplying actual 11 month figure by 12 and divides it by 11. (675,972,016*12/11=737,424,017£). In a similar manner it was done for each and every figure and grand total was calculated. Figures were calculated for interest and fixed assets disposal as per the given information. By the end of the financial year 2011/12, they should expect the estimates given in Table 2 as appendix. Now to control the expenditure over agencies they might consider not providing the particular service on that particular day when he/she is absent. They should consider virement of funds from one area to other to achieve the target (e.g. they can do it from interest receivable and from fixed assets disposal to other income).

After performing variance analysis, following are the Strengths, Weaknesses, Opportunities, and Threats identified and which should be considered while preparing budget for the next year. (SWOT analysis Health care management 2011) Education and other services are the strength of their income. Weakness is not considering cost improvement program at all. Their main threat is expenditure over agencies. There are several opportunities like start several training program, so as to increase income through education. Service priorities must be set to ensure the effective and efficient allocation of resources to meet the most important health needs of the population (Health care management 2011). Another main area to be considered is to allocate some amount to agencies to avoid unexpected expenditure. In future in order to control expenditure, they should either freeze the staff vacancies, or control over building and equipment maintenance or delay the purchases for future (Managing and reforming modern public services 2010)

Budget proposal for the year 2012/13 (Appendix table 3)

From the variance analysis we have come to know about the current services and about the organization. To deter mine the future directions and goals key stakeholders and health professionals did participate actively and they also gave their suggestions for drafting the budget. We have considered the incremental budget approach for the year 2012/13, with necessary inflation in several areas for the saving purpose. Four areas have been considered for the change, tariff, staff growth, pay cost and drug supplies. We have kept in mind all 3 ‘E’s of the services i.e. services should be Effective, Efficient, and Economical. (Managing and reforming modern public services (2010)). This year we have set Specific, Measurable, Achievable, Realistic and Time related objectives for the trust (health care management 2011)

To cut down the cost of the services  -1.5% tariff inflation has been applied to service level agreement of actual 2011/12 figure.(SLA= 737424017*98.5%= 726362657£) (SLA (other) = 16749205*98.5%= 16497967£).

Last year education was around 9.14% of our income (actual income 927,818,384£ total income from education was 84,865,928£) [84,865,928/927,818,384*100= 9.14%] hence for this year we will be focusing equally to maintain that income. To improve income through education we will be starting fellowship program in any specialty. From the past record I can say that we have highly qualified and skilled professionals for joint replacement surgeries, so probably we will be starting fellowship programs in those areas. We are also planning to conduct a workshop in medical procedure (e.g. advance suturing and wound repair, procedure for contraception etc.), and we will also conduct several CMEs. We failed to achieve the target for other incomes (catering, parking, and accommodation) so this year we are keeping it on lower side only. Income through Non NHS private patients are non recurring, so we are expecting the same amount for the year 2012/13.

For research and development we have taken the average value of 2011/12 annual and actual figures and decided figure for the year 2012/13. (18,401,222+29,033,615/2= 23,727,429£) This year we will undertake several researches, which will be beneficial to the patient as well as to trust e.g. we will be testing the efficacy of drugs over most prevalent diseases in the demographic area, this will also help to control the cost of drugs, as the most effective drug will be the first preference by doctors. Donation is the non-recurring income, so it has been kept on lower side only.

This year we are reducing the staff by 1.2% and their pay by 2.5% this will lead to drastic control over pay cost expenditure, (100,276,189*98.9%= 99,072,875£) (99,072,875*97.5%= 96,596,053£). Last year we did spend over agencies, which was unexpected expenditure for us. By considering it this year we are keeping 2.2% of the total pay for the agency staff both clinical as well as non clinical. (Total pay 529,046,916 and 2.2% of it =11,639,032£). This amount will be used as per the requirement for both clinical and non clinical staff. Following graph shows reduction in our pay cost for the year 2012/13.

 

Drug is an essential medical tool. By looking at the following chart we can say that our drug requirement was higher in 2011/12 than the annual budget. Hence this year we are increasing the drug supply by 5% (96,841,565*105%= 101,683,644£). We are keeping the expenditure same for the remaining supply, however out type of supply will vary depending upon which services we are providing more. (E.g. If this year we are doing more number of replacement surgeries than we may require those type of prosthesis more, while we will reduce the supply required for other surgeries)

 

We will not be disposing any of our fixed assets this year; hence we have kept 70% of the last year amount for the fixed asset impairment. (757,000*70% =529,900£). Depreciation is 10% (34,902,116*10/100= 3,490,212£) of the last year figure .so it will reduce to 31,411,904£ .We have considered the same figures for other finance cost.

Public dividend capital represents the department of health’s equity interest on public assets across the NHS; the department is required to make a return on its net assets, including the assets of NHS trusts, of 3.5% (Lord Warner, Parliamentary Under-Secretary, Department of Health; Labour). It is calculated once and the same amount is being paid every year. For our trust it is 10,978,000£.

In Cost improvement program (CIP) we will be emphasizing on follow up care so that patient can recover quickly and go back to their normal lives. This will reduce the length of the stay, which allows us to reduce the number of beds also corresponding staff posts. Pay cost CIP was over achieved by £200K, so we are adding that to last year, and expecting following amount in coming year (12,100,000+200,000= 12300000 £), similarly even non-pay CIP was overachieved by £500K due to further saving of the two clinical departments, so we are adding that to last year and expecting that in coming year (4,000,000+500,000=4,500,000 £).

We will be receiving the same interest and will be paying the similar interest like last year. For both pay and non pay reserves same amount has been considered. To deal with the risk associated with implementation of the preferred option, pay target adjustment has been kept in the budget.

By considering 2011/2012 annual budget as the base, we have prepared incremental budget proposal for the 2012/13 year. We have made necessary changes by applying inflation in several areas. As mentioned, we will be focusing over education along with the medical services. This year we are controlling our expenditure by reducing the number of staff and their pay. This year we have also allocated some amount to agencies. We are also cutting down the cost of the services. However we have not done major changes in clinical supply except drugs. After doing all the changes we have positive balance of around 14,104,481£ as surplus.

Following table and graph shows annual, actual and proposed the income and expenditure with the grand total.

Annual budget2010/11  £ Actual budget 2011/12  £ Proposed budget 2012/13 £ Income 970,668,489 927,824,699 938,276,102 Expenditure 972,869,489 928,114,001 924,171,621 Grand total (2,201,000) (289,302) 14,104,481

 

So from the graph we can say that if things go as per proposed budget our income will be more than expenditure. After implementing this new budget we should conduct a variance analysis either monthly or quarterly. So we can take desired action either by controlling or revising the operational plan or by revising the budget (Managing and reforming modern public services 2010).  In certain cases we will also consider virement i.e. transfer of funds from one budget heading to other, if at all necessary (Health care management 2011)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

APPENDIX Note:  All figures are in million £

• Table 1 VARIANCE ANALYSIS FOR THE MONTH 11

Category Account code  Month 11  budget £ Month 11 actual budget £ Variance £ Income Service Level Agreement Income (689,081,250)  (675,972,016) 13,109,234

Service Level Agreement Income (Others) (14,770,683)  (15,353,438) (582,755)

Non-NHS – Private Patient (5,021,906)  (4,853,657) 168,249

Non-NHS – Other Non-Protected (2,658,862)  (3,274,091) (615,229)

Education – SIFT (33,545,328)  (33,549,310) (3,982)

Education – Other (1,836,010)  (2,001,656) (165,646)

Education – MPET/PGME (34,881,225)  (35,085,298) (204,073)

Education – Merit Award (7,069,411)  (7,157,503) (88,092)

Research & Development (26,614,147)  (16,867,787) 9,746,360

Non-Patient Services (42,588,635)  (41,008,138) 1,580,497

Other – Comm Income – Parking (3,085,428)  (2,915,273) 170,155

Other – Comm Income – Catering (1,225,593)  (997,406) 228,187

Other – Comm Income – Accommodation (1,028,694)  (935,915) 92,779

Other – Misc Income (10,627,763)  (9,470,949) 1,156,814

Other – Donated Depn (940,153)  (942,102) (1,949)

Income total (874,975,088)  (850,384,539)  (24,590,549)

Pay Consultants Pay 95,985,063  91,919,840 4,065,223

Junior Medical Pay 67,819,944  63,589,023 4,230,921

Nurses Pay 169,501,780  162,949,249 6,552,531

Scientific Pay 92,368,197  87,999,141 4,369,056

Non-Clinical Pay 105,247,492  96,978,513 8,268,979

Agency Consultants Pay 0 2,789,073 (2,789,073)  Agency Junior Medical Pay 0 3,830,962 (3,830,962)  Agency Nurses Pay 0 991,083 (991,083)  Agency Nurses Pay 0 787,582 (787,582)  Agency Non-Clinical Pay 0 1,506,315 (1,506,315) Pay total 530,922,476  513,340,781  17,581,695

Non-pay Drugs 88,224,484  88,771,435 (546,951)

Clinical Supplies 103,636,263  100,800,754 2,835,509

General Supplies 7,585,715  7,390,992 194,723

Establishment 6,461,634  6,062,178 399,456

Premises 42,230,607  40,290,910 1,939,697

Other 45,095,589  39,444,599 5,650,990

Non pay total 293,234,292  282,760,868  10,473,424

Finance cost Fixed Asset Disposal (197)  (20,872) (20,675)

Fixed Asset Impairment 693,917  0 693,917

Depreciation 31,989,376  31,993,606 (4,230)

Other Finance Costs 22,917  20,556 2,361

Finance cost total 32,706,013  31,993,290  671,373

Interest Interest Receivable (45,833)  (94,775) (48,942)

Interest Payable 11,982,429  11,907,718 (74,711)

Interest total 11,936,596  11,812,943  (123,653)

PDC PDC Dividend 10,063,167  10,065,166 (1,999)

PDC total 10,063,167  10,065,166 (1,999)

CIP Pay – CIP (11,091,667)  0 (11,091,667)

Non pay- CIP (3,666,667)  0 (3,666,667)

CIP total (14,758,334)   (14,758,334)

Reserves  Pay Reserves  6,011,540   0  6,011,540

Non-Pay Reserves 6,876,669  0 6,876,669

Reserve total 12,888,209 0 12,888,209 Risk Pay target adjust 247  0 247

Risk total 247 0 247 Grand total 2,017,583  (411,491) 2,429,074

 

• Table 2

STATEMENT FOR THE FINANCIAL YEAR END 2011/12

Category Account code Annual budget  £   Month 12 actual £ Income Service Level Agreement Income (751,725,000) (737,424,017)  Service Level Agreement Income (Others) (16,113,472) (16,749,205)  Non-NHS – Private Patient (5,478,443) (5,294,899)  Non-NHS – Other Non-Protected (2,900,576) (3,571,736)  Education – SIFT (36,594,903) (36,599,247)  Education – Other (2,002,920) (2,183,625)  Education – MPET/PGME (38,052,246) (38,274,871)  Education – Merit Award (7,712,084) (7,808,185)  Research & Development (29,033,615) (18,401,222)  Non-Patient Services (46,460,329) (44,736,151)  Other – Comm Income – Parking (3,365,921) (3,180,298)  Other – Comm Income – Catering (1,337,010) (1,088,079)  Other – Comm Income – Accommodation (1,122,211) (1,020,998)  Other – Misc Income (11,593,923) (10,331,944)  Other – Donated Depn (1,025,621) (1,027,748) Total income (954,518,274)  (927,692,224) Pay

 

 

 

 

 

Consultants Pay 104,710,978 100,276,189  Junior Medical Pay 73,985,394 69,369,843  Nurses Pay 184,911,033 177,762,817  Scientific Pay 100,765,306 95,999,063  Non-Clinical Pay 114,815,446 105,794,741  Agency Consultants Pay 0 3,042,625  Agency Junior Medical Pay 0 4,179,231  Agency Nurses Pay 0 1,081,181  Agency Nurses Pay 0 859,180  Agency Non-Clinical Pay 0 1,643,253 Pay total 579,188,157  560,008,123

Non-pay Drugs 96,244,892 96,841,565  Clinical Supplies 113,057,741 109,964,459  General Supplies 8,275,326 8,062,900  Establishment 7,049,055 6,613,285  Premises 46,069,753 43,953,720  Other 49,195,188 43,030,472 Non-pay total 319,891,955  308,466,401

Finance cost Fixed Asset Disposal (215) (24500)  Fixed Asset Impairment 757,000 0  Depreciation 34,897,501 34,902,116  Other Finance Costs 25,000 22,425 Finance cost total 35,679,286  34,900,041

Interest Interest Receivable (50,000) (107,975)  Interest Payable 13,071,741 13,172,718 Interest total 13,021,741  13,280,693

PDC PDC Dividend 10,978,000 10,980,181 PDC total 10,978,000 10,980,181 CIP Pay – CIP (12,100,000) 0  Non pay- CIP (4,000,000) 0 CIP total (16,100,000) 0 Reserves Pay Reserves 6,588,044 0  Non-Pay Reserves 7,501,821 0 Reserve total 14,089,865 0 Risk Pay target adjust 270 0 Risk total 270 0 Grand total 2,201,000 (289,302)

 

 

• Table 3

BUDGET FOR THE YEAR 2012/2013

Category Account code  Actual 2011/12  £ Adjustment for 2012/13 Annual budget for 2012/13  £ Income Service Level Agreement Income (737,424,017) Tariff inflation -1.5% (726,362,657)  Service Level Agreement Income (Others) (16,749,205)  (16,497,967)  Non-NHS – Private Patient (5,294,899)  (5,294,899)  Non-NHS – Other Non-Protected (3,571,736)  (3,236,156)  Education – SIFT (36,599,247)  (36,599,247)  Education – Other (2,183,625)  (2,183,625)  Education – MPET/PGME (38,274,871)  (38,274,871)  Education – Merit Award (7,808,185)  (7,808,185)  Research & Development (18,401,222)  (23,727,429)  Non-Patient Services (44,736,151)  (44,736,151)  Other – Comm Income – Parking (3,180,298)  (3,180,298)  Other – Comm Income – Catering (1,088,079)  (1,088,079)  Other – Comm Income – Accommodation (1,020,998)  (1,020,998)  Other – Misc Income (10,331,944)  (10,331,944)  Other – Donated Depn (1,027,748)  (1,025,621) Total income (927,692,224)  (921,368,127)

Staff Growth -1.2% Pay Cost Inflation -2.5% Pay

 

 

 

 

 

Consultants Pay 100,276,189 99,072,875 96,596,053  Junior Medical Pay 69,369,843 68,537,405 66,823,970  Nurses Pay 177,762,817 175,629,663 171,238,922  Scientific Pay 95,999,063 94,847,074 92,475,897  Non-Clinical Pay 105,794,741 104,525,205 101,912,074  Agency Consultants Pay 3,042,625 2.2 % of the total pay cost for all the agency staff 11,639,032

Agency Junior Medical Pay 4,179,231    Agency Nurses Pay 1,081,181    Agency Nurses Pay 859,180    Agency Non-Clinical Pay 1,643,253   Pay total 560,008,123   540,685,948

Non-pay Drugs 96,841,565 Drug Inflation 5% 101,683,644  Clinical Supplies 109,964,459  109,964,459  General Supplies 8,062,900  8,062,900  Establishment 6,613,285  6,613,285  Premises 43,953,720  43,953,720  Other 43,030,472  43,030,472 Non-pay total 308,466,401   313,308,480

Finance cost Fixed Asset Disposal (22,769)  0  Fixed Asset Impairment 0 70% of the 2011/12 annual budget 529,900  Depreciation 34,902,116 10% less 31,411,904  Other Finance Costs 22,425  22,425 Finance cost total 34,901,772   31,964,229

Interest Interest Receivable (107,975)  (107,975)  Interest Payable 13,172,718  13,172,718 Interest total 13,064,743   13,064,743

PDC PDC Dividend 10,980,181  10,980,181 PDC total 10,980,181  10,980,181 CIP Pay – CIP 0  (12,300,000)  Non pay- CIP 0  (4,500,000) CIP total 0  (16,800,000) Reserves Pay Reserves 0  6,558,044  Non-Pay Reserves 0  7,501,821 Reserve total 0  14,059,865 Risk Pay target adjust 0  200 Risk total 0  200 Grand total (289,302)  14,104,481

 

 

Textbook • K.Walshe and J. Smith (2011) Health care management England (open university) • Prawl, Malcolm (2010) Managing and reforming modern public services (Harlow, England New York Financial Times Prentice Hall) Internet sites • Health and Social Care (Community Health and Standards) Bill (HL Deb, 13 October 2003, c730) : available http://www.theyworkforyou.com/lords/?gid=2003-10-13a.730.

• West Middlesex hospital NHS trust (2011) http://www.west-middlesex-hospital.nhs.uk/about-us/cost-improvement-programme-2011cost-improvement-programme-2011.