NHS Tayside Assurance and Advisory Group: staging report of findings and recommendations

3. Historical Financial Position

3.1 Background

There has been significant change in the NHS landscape in Tayside over the last 20 years, the first part of which is succinctly described in Audit Scotland's 2001 report:

"Prior to 1 April 1999 there were four NHS trusts operating in Tayside: Angus NHS Trust, Dundee Healthcare NHS Trust, Dundee Teaching Hospitals NHS Trust and Perth and Kinross Healthcare NHS Trust but, following the Government's reorganisation of the NHS in Scotland, these four trusts were dissolved and replaced by the Tayside Primary Care NHS Trust ( TPCT) and [Tayside University Hospitals NHS Trust] TUHT."

In 2001, 15 integrated territorial Health Boards across were established replacing the existing two tiers of Health Boards and Trusts. In Tayside, this led to the creation of Tayside Health Board (now commonly referred to as NHS Tayside) replacing the two separate healthcare trusts.

Following the implementation of The Public Bodies (Joint Working) (Scotland) Act 2014, responsibility for the strategic planning for a range of services provided by NHS Tayside has been delegated to three Health and Social Care Partnerships covering Perth and Kinross, Dundee City and Angus.

The geographic area covered by NHS Tayside and its HSCP partners had a combined population of 415,470 ^[10] in 2016. Over the next 20 years the Tayside area will, in common with the whole of Scotland, see major demographic changes which are expected to have a profound impact on the healthcare system including significant increases in the number and proportion of older people, as shown in the table below.

Projected population change - 2014-2039

Area	Growth (all ages) %	Growth (pensionable age) [11] %
Scotland	6.6	28.3
Perth and Kinross	12.2	32.0
Angus	3.5	25.2
Dundee	5.9	8.5

As at 31 March 2017, the Health Board employed 11,832 staff WTE (whole time equivalent) and currently owns 68 properties including Ninewells Hospital in Dundee City, Perth Royal Infirmary and Murray Royal Hospital in Perth and Kinross, Stracathro Hospital in Angus and a number of community hospitals and health centres across Tayside.

In 2017/18, NHS Tayside was allocated £721.4m in revenue funding, which represented an uplift of 3.2% and included £8.0m to bring it to within 1% of its target NRAC funding.

3.2 Overview of historical financial position

In the remainder of this section we set out an overview of NHS Tayside's recent financial performance with reference to:

• the findings from previous reviews into financial performance of health bodies in Tayside

• the review of financial performance in 2015/16 and 2016/17 undertaken by Ernst and Young ^[12]

• the report by Audit Scotland - 2015/16 audit of NHS Tayside - Financial Sustainability ^[13]

3.3 Key points

• Key areas of overspend in 2015/16 (primary care prescribing and Nursing and Midwifery and Medical staff costs) have persisted in 2016/17.

• The higher operating cost base in Tayside compared to other Health Boards in Scotland has been highlighted in previous reports as being financially unsustainable and unless addressed will result in NHS Tayside continuing to commit expenditure higher than its funding allocation.

• We acknowledge the significant challenge that the NHS Tayside faced during 2016/17, with a savings target of around £20m higher than in the previous years, after taking account of the agreed financial brokerage of £11.65m. During 2016/17, NHS Tayside's level of non-recurring savings was 49% of the total savings target achieved, which is an improvement on prior years.

• There has been a consistent shortfall in delivery of savings across the organisation in 2015/16 and 2016/17. Based on existing practice, we believe assigned savings targets are likely to remain unmet without detailed plans, milestones, ownership and accountability.

• Financial balance would not have been achieved in 2015/16 and 2016/17 (or the previous three financial years) without one-off, non-recurring savings, use of deferred expenditure and financial support from Scottish Government. The reliance on non-recurrent savings has been noted in a number of recent internal and external audit reports in 2016 and 2017 including the Internal Audit Service's The Follow up on Financial Planning and Management, Report No T22/17 on 5 March 2017 and Audit Scotland's The 2015/16 audit of NHS Tayside - Financial Sustainability, Section 22 in October 2016.

3.4 Previous reviews into financial performance

In understanding the historical financial performance we would acknowledge that health bodies in Tayside have been subject to a number of prior reviews in which financial and service challenges similar to those in this report have been highlighted. The key findings arising from these reviews are noted below.

Ministerial Taskforce (2000)

In February 2000, the Minister for Health and Community Care established a Taskforce to assist and support health service managers in Tayside. The key objectives set for the Taskforce were: "to assist in restoring the confidence of the NHS staff and the people of Tayside in the health service and ensure that everyone in Tayside receives the well-run, high quality health service which they deserve." ^[14]

In June 2000 the Taskforce reported four factors contributing to financial and operating difficulties in the health service in Tayside:

• lack of effective financial control;

• absence of obvious health leadership;

• absence of corporate working and governance;

• lack of effective communication.

The Taskforce also identified other factors, including " the relatively high level of health care services in Tayside and the robustness of reporting and monitoring arrangements between Tayside health bodies and the Department" which had to be considered.

Audit Scotland - Review of National Health Service bodies in Tayside (2001)

The conclusions arising from this review were as follows:

• "The financial difficulties experienced by the NHS in Tayside have not emerged suddenly. To a large extent, they have their origins in the trusts which existed before NHS reorganisation in 1999. The problems have persisted since reorganisation partly because of the legacy inherited by the new trusts, partly because trust reorganisation in Tayside was unusually complex and partly because of the need to manage the fundamental issue of re-configuring the delivery of health care services in Tayside."

• "The Department and the health care bodies each have roles to play in achieving the financial recovery necessary in the NHS in Tayside. The Department has the opportunity to review the rigour of its accountability arrangements in the light of the structural changes envisaged in 'Our National Health: A plan for action, a plan for change'. Similarly the NHS bodies in Tayside have the opportunity, through the financial recovery plans and other initiatives set out in 'Recovery Through Modernisation and Investment' and through their Acute Services Review, to identify areas for potential savings which will contribute to more effective management and financial equilibrium."

• "Financial recovery will take time, and the Tayside recovery plans recognise a need to establish a recurring financial balance before resolving the accumulated deficit. It is crucial therefore that no further delay to recovery occurs and that all partners in the management and the financial recovery of the NHS in Tayside commit to ensuring that existing targets are achieved."

The above reports highlight that the financial issues facing NHS Tayside have their roots in long standing challenges regarding configuration of services, a disparate property portfolio and operating costs higher than the resources available. The NHS Tayside 2017/18 - 2021/22 Financial Framework sets out in an open and transparent way the scale of the financial challenge that requires to be addressed, the key areas where savings will require to be delivered and the key assumptions on which the plan is based.

3.5 Review of financial performance - 2015/16 and 2016/17

For the purposes of the current review, we have focused on the last two financial years; 2015/16 and 2016/17. Ernst and Young were commissioned by the Scottish Government to undertake an independent review of the financial performance of NHS Tayside in the last two financial years, in particular the key budget variances and the underlying factors contributing to these variances, and to feed their findings into the work of the Assurance and Advisory Group.

The Assurance and Advisory Group also made their own enquiries into the management of financial resources within NHS Tayside, taking into consideration reports issued by NHS Tayside's External and Internal Auditors. A list of meetings is included at Appendix 3.

3.6 Overview of management of financial resources - 2015/16 and 2016/17

Whilst NHS Tayside has achieved financial balance over the last two financial years, this was only after the provision of financial support of £5.0m and £13.2m from the Scottish Government Health and Social Care Directorate in 2015/16 and 2016/17 respectively. These out-turns came on top of the three previous years where NHS Tayside had not operated within its allocated financial resources.

	2015/16	2016/17
	£m	£m
Forecast financial outturn per local delivery plan	-	(11.65)
Variance from forecast position	(4.9)	(1.45)
Final out-turn before provision of brokerage	(4.9)	(13.1)
Financial support provided by Scottish Government	5.0	13.2
Actual financial out-turn reported per annual accounts	0.1	0.1

In terms of achieving financial balance over the last two financial years NHS Tayside has relied on a number of measures:

• a) Non-recurring savings
• b) Deferment of expenditure
• c) Financial support from the Scottish Government
• d) Proceeds from property disposals

a) Non-recurring savings

	2014/15	2015/16	2016/17
	£m	£m	£m
Annual savings target	22.0	27.0	46.8 [15]
Savings achieved	19.4	23.4	45.5
Shortfall	2.6	3.6	1.3
Savings achieved - recurring (%)	39%	35%	51%
Savings achieved - non-recurring (%)	61%	65%	49%

The 2015/16 Section 22 report issued by Audit Scotland noted: "While it can be appropriate to have some non-recurring savings, recurring savings are needed to ensure boards' ability to continue to meet their financial commitments." ^[16] In concluding, the Audit Scotland report commented that "increasing reliance on non-recurring savings and the need to identify further, unprecedented levels of savings, there is a significant risk that it will not achieve its financial plan for 2016/17 and future years." ^[17]

We would acknowledge the significant challenge that NHS Tayside faced during 2016/17, with a savings target of around £20m higher than in the previous year, after taking account of the agreed financial brokerage of £11.65m. During 2016/17, NHS Tayside's level of non-recurring savings was 49% of the total savings target achieved, an improvement on previous years.

NHS Tayside has committed within the five year financial plan to reduce its dependence on non-recurring savings.

b) Deferment of expenditure

During the course of any financial year, NHS Tayside, along with all other territorial boards, receives a number of financial allocations from Scottish Government which are in addition to the baseline revenue allocation confirmed at the start of the year. Over many years NHS Tayside's financial plan has had a stated assumption around the level of deferred spend.

In effect earmarked commitments are being used as a form of internal financial flexibility, with the deferred commitments requiring to be funded from allocations made in the following year. Within the Internal Audit report, Follow up of Financial Planning, issued in March 2017, the Chief Internal Auditor comments that the "practice of deferring expenditure relating to SGHSCD [Scottish Government Health and Social Care Directorates] allocations has been a recurring feature of the NHS Tayside budget setting process for many years."

As at 31 March 2017, the level of deferred expenditure was £22.5m, a reduction of £3.2m from the previous year. As reflected in the Board's five year financial plan there is a stated commitment to reducing the planned level of deferred spend annually as noted below.

	2017/18 £m	2018/19 £m	2019/20 £m	2020/21 £m	2021/22 £m
Deferred expenditure	16.5	13.5	10.5	7.5	4.5

In concluding the Chief Internal Auditor comments that " there is a risk that the income from SGHSCD allocations previously utilised to fund the deferred expenditure from the previous year will not be accessible in the same way that it has been previously with a corresponding and significant impact on future savings plans." NHS Tayside has recognised the need to reduce the level of deferred expenditure through the five year plan, and the associated risk of achieving the planned reductions. We would concur with this approach and the risk to the five year financial plan if the level of deferred expenditure is not reduced.

c) Financial support from the Scottish Government

In each of the last five financial years, the NHS Tayside Board has required financial support from the Scottish Government to break even. NHS Tayside was the only Board that required financial support in 2016/17.

The following table details the financial support provided over the last five years by the Scottish Government; a total of £37.5m, with £4.3m repaid during that period and £33.2m still outstanding as at 31 March 2017. A further £4m of financial support has been requested by NHS Tayside within its draft financial plan for 2017/18.

Year	Support provided £m	Repaid £m	Details
2012/13	2.25	(2.25)	Received to support deferred income for sales made in the year and to cover the impairment which was charged in the year.
2013/14	2.85	(2.05)	Received on the strength of planning delays associated with four former healthcare sites declared as surplus.
2014/15	14.20	-	Brokerage was allocated to help NHS Tayside meet financial commitments due as a result of Enhancements During Leave ( EDL) payments and overspends in operational areas.
2015/16	5.0	-	Brokerage was allocated to help NHS Tayside meet financial commitments due as a result of additional EDL exposure of £5 million and increased costs resulting from Treatment Time Guarantee, prescribing and workforce pressures.
2016/17	13.20	-	Brokerage was allocated to support delivery of a balanced position in 2016/17.
Total	37.5	(4.3)

Financial support from Scottish Government is normally provided to a Board to address issues that are temporary in nature and the receiving Board will take action to address the circumstances that required financial support to be provided. As noted above, financial support has required to be provided to NHS Tayside in 2016/17 and in each of the four financial years prior to this.

As we will comment in the following section of our report, there is a significant risk that this financial support will not be repaid in full over the remainder of the period covered by the five year Transformation Plan and that further financial support may be required to enable NHS Tayside to meet its target of in year breakeven in the coming years.

d) Proceeds from the sale of property disposals

For a number of years NHS Tayside's plans have assumed a level of income from the disposal of surplus properties to support its financial position. The timing of property disposals is inherently difficult to forecast due to factors such as market conditions, legal negotiations and planning consents.

As a result of delays to the receipt of sales from property disposals in 2012/13 and 2013/14, Scottish Government financial support was required to enable NHS Tayside to meet planned financial commitments. Further financial support was provided in 2014/15 and the following commitment was set out in the NHS Tayside Annual Reports for that year:

"The Board received brokerage from SGHSCD of £14.2 million in respect of former healthcare sites that are in the process of being sold or are being prepared for sale and a potential profit share regarding a disposed site pending planning approval. The brokerage is planned to be repaid in 2015/16 from sales proceeds and the profit share. The risk associated with the arrangement is considered to be low due to the progress with the implementation of the disposal strategy, progress on major disposals and the potential profit share." ^[18]

The 2015/16 Section 22 report issued by Audit Scotland noted that " NHS Tayside has agreed with the Scottish Government that in its 2016/17 plan receipts from sales will be used to help it break even rather than to repay outstanding brokerage'. Further the Auditor General notes that 'money from one-off sales of property is not a sustainable way to help manage the Board's finances."

Whilst receipts from property disposals continue to be factored into NHS Tayside's financial plan, the need for a change in approach to the delivery of financial savings has been recognised.

3.7 Factors contributing to the budget overspend

In overall terms the main factors contributing to the financial overspend are noted below:

	2015/16 £m	2016/17 £m
Prescribing	4.7	6.7
Nursing and midwifery staff costs	6.5	6.2
Medical and dental staff costs	1.7	2.0
Unidentified savings	3.6	1.3
Other variances [19]	(11.6)	(3.1)
Net position prior to receipt of financial support	4.9	13.1

The two primary drivers of NHS Tayside's current overspend in the last two financial years are prescribing costs and workforce, alongside the under-delivery of efficiency savings across the organisation. These aspects are examined in more detail below.

a) Prescribing

Prescribing represents the largest single area of overspend against budget in 2016/17 at £6.9m, following a £4.7m overspend in the previous year. A benchmarking report for NHS Tayside's own Prescribing Support Group has identified that prescribing costs in the Tayside region are 9.4% higher per weighted patient than the Scottish average (year to February 2017).

NHS Tayside has targeted a reduction in the prescribing budget. Some actions have been taken to address the financial challenge including the establishment of a Prescribing Management Group ( PMG) in 2016, the introduction of a Tayside-wide formulary at the end of 2016/17, and a benchmarking tool highlighting individual GPs variance against their peers.

Prescribing costs were lower in the last three months of 2016/17, reducing by 10% from December 2016 to March 2017 ^[20] . However, it is too early to conclude whether such savings are attributable to the actions taken and, therefore, sustainable into 2017/18.

Based on total prescribing costs of £144.5m in 2016/17, estimated savings that could be generated from bringing prescription spend in line with the national average would be in the region of £7-8m.

Further detail on prescribing benchmarks against the national average is set out in a Section 5. It is worth noting that while the national average is a useful benchmark, other comparators/benchmarks require to be considered. Prescribing is a complex area and further work is required to understand the underlying reasons for the variations from the Scottish national average as well as the scope and potential impact of tackling variations in prescribing practice. There are multiple prescribing initiatives presently underway in NHS Tayside. They are described further in Appendix 2.

b) Workforce

While nursing and midwifery is the highest area of overspend, NHS Tayside ranks higher than the Scottish average against all workforce categories. The table below sets out the NHS Tayside workforce position as at 31 March 2017 based on Information Services Division data and the Board's percentage share of the overall NHS Scotland WTE staff position.

NHS Tayside Target NRAC 7.85%
	NHS Scotland (exc National Boards)	NHS Tayside
	WTE	WTE
Total Staff	126,058.4	11,832.4	9.33%
Medical and dental	12,241.4	1,184.4	9.70%
Medical and dental support	1,868.7	181.6	9.72%
Nursing and midwifery [21]	58,168.9	5,251.9	9.03%
Allied health professions	10,026.0	877.2	8.75%
Other therapeutic services	4,138.2	432.7	10.46%
Personal and social care	1,110.2	32.7	2.94%
Healthcare science	4,966.3	495.5	9.98%
Administrative services	20,627.6	2,018.0	9.78%
Support services	12,910.9	1,358.3 [22]	10.52%

The NHS Tayside target NRAC of 7.85% represents their target share determined by the National Resource Allocation Formula. This does not however take account of the population particularly from North East Fife who access secondary care services in Tayside. If taken into account this would increase Tayside's share of the national funding allocation to c8.2%.

Within the 2015/16 - Report to those charged with governance, the External Auditor comments that " NHS Tayside has an expensive operating model that results in inpatient costs per week being third highest in Scotland and above the national average".

The high cost and level of health provision within NHS Tayside relative to other Boards in NHS Scotland has been referenced in previous Audit reports including The 2015/16 audit of NHS Tayside - Financial Sustainability, Section 22, October 2016, Audit Scotland, all the way back to 2000 in the March 2001 Audit review of National Health Service bodies in Tayside, published by the Auditor General.

In response to these challenges NHS Tayside has developed a five year transformation programme with the aim of developing service models that are sustainable, affordable and will continue to meet standards of quality and safety.

The overspend position noted above for nursing and medical staffing is therefore with reference to a budgeted establishment that is higher than can be sustained within the resources available to the Board. Further information in relation to benchmarking of staffing costs is set out in Section 4 of this report.

Until new service models are developed and implemented, the permanent staffing levels within NHS Tayside are likely to remain higher than the funding available to the Board.

3.8 Health and Social Care Partnerships

The three integration authorities, or Health and Social Care Partnerships in NHS Tayside's geographical area cover Dundee City, Angus and Perth and Kinross.

The first full operational financial year for the HSCPs ended on 31 March 2017. Risk sharing agreements are currently in place with the host partners ( NHS Tayside and the local authorities) liable for any HSCP overspend during the risk sharing periods.

In 2016/17, the local authority budgets were generally balanced with a small overspend or underspend. The overspend positions have mainly arisen within the NHS Tayside delegated budgets. However, to put this in context, the overspend is equivalent to 2% of the combined delegated budgets of £435m and 1.2% of the 2016/17 baseline revenue funding for NHS Tayside.

In terms of 2017/18, the three Health and Social Care Partnerships are forecasting overspends as set out below: ^[23]

	Perth and Kinross	Angus	Dundee	Total
	£m	£m	£m	£m
Primary care prescribing	(1.7)	(1.9)	(1.1)	(4.7)
Hosted services	(0.5)	(1.4)	-	(1.9)
Totals	(2.2)	(3.3)	(1.1)	(6.6)

In relation to primary care prescribing, the Health and Social Care Partnerships believe that they can reduce prescribing costs, but not at the level set out within NHS Tayside financial plan. At the time of this report, work was on-going to assess the potential benefit to be delivered from actions that were being taken forward. The risk to the NHS Tayside financial plan arising from primary care prescribing is further considered in the next section of the report.