4 Financial planning and financial management
4.1 Resources within scope of the Strategic Plan
4.1.1 The legislation requires that the Integration Authority produce a Strategic Plan (Sections 29 & 33), which sets out the services for their area over the medium term (3 years), see Statutory Guidance on strategic planning. Further, the role of clinicians and care professionals, along with the full involvement of the third and independent sectors, service users and carers, will be embedded as a mandatory feature of the commissioning and planning process, through the requirement for the Integration Authority to set up a strategic planning group (Section 32).
4.1.2 The Strategic Plan should incorporate a medium term financial plan (3 years) for the resources within scope of the Strategic Plan which comprises the Integrated Budget (see 4.2) plus the amount set aside by the Health Board (see 4.4) for commissioned services in large hospitals. It will be important for there to be full transparency of the use of these resources by the Integration Joint Board population and it will be required to publish an annual financial statement setting this out (Section 39). The Strategic Plan will set out the level of capacity required each year in all of the sectors on the care pathway and the allocation of the resource within scope of the plan across the sectors.
4.1.3 The ability to plan with the overall resource for defined populations and user groups and to use budgets flexibly is one of the hallmarks of integrated care. A premise of the policy is that the host partner will, through the Strategic Plan, be able to allocate resources within the Integrated Budget and to plan and agree transfers between the notional budget and the Integrated Budget. It will be for the host partner, through the strategic planning process and having regard to the duties in the legislation for consultation, co-production and co-operation with other Integration Authorities (Section 32), to decide what capacity is required in order to deliver the agreed performance on outcomes.
4.1.4 Accordingly, the relative proportions of partners' contributions to the resources within scope of the plan will not influence the proportion of services that will be commissioned through the plan, although it is likely that in the first years they will be similar.
Will the host partner be required to co-ordinate the development of the Strategic Plan with other Integration Authorities for cross system services?
4.1.5 Yes; this duty is specified in the legislation (Section 30(3)).
4.2 Integrated Budget
4.2.1 The legislation requires that a method for calculating the payment made to the host partner is included in the Integration Scheme (Section 1 (3)). The Integrated Budget will comprise this payment and the budget in the host partner for the services that will be managed in conjunction with the delegated services i.e. (A) and (B) in the financial model noted above.
4.2.2 Where the host partner is the Health Board, the budget for hospital services for the minimum scope of specialties will be included within the Integrated Budget.
What process should be used to determine the initial payment to the host partner?
4.2.3 The initial sums should be determined on the basis of the existing Health delegating partner budgets, actual spend and financial plans for the delegated services. It is important that the plans are tested against recent actual expenditure and that the assumptions used in developing the plans and the associated risks are fully transparent:
- The budget in the financial plan should be assessed against actual expenditure reported in the management accounts for the most recent two/three years. Ideally, the roll forward of the budget for the delegated services and the actual expenditure over this period should be understood;
- Material non-recurrent funding and expenditure budgets for the delegated services and the associated risks are identified and assessed;
- The medium term financial forecast for the delegated services and associated assumptions and risks should be reviewed;
- Savings and efficiency targets and any schemes identified should be clearly identified and the assumptions and risks understood by all partners;
- All risks should be quantified where possible and mitigating measures identified.
4.2.4 It is recommended that the first year/period is treated as transitional period and that partners agree to a risk sharing arrangement with adjustments being made through subsequent year's allocations; where it is used this provision should be incorporated in the Integration Scheme.
4.2.5 The integration authorities should carry out a process of financial assurance for the initial sums to be delegated. It is recommended that Health Board and Local Authority Directors of Finance foster an assurance process based on mutual trust and confidence involving an open-book approach and an honest sharing and discussion of the assumptions and risks associated with the delegated services.
4.2.6 IRAG has published detailed supplementary Statutory Guidance on financial assurance.
What process should be used to calculate payments to the host partner in subsequent years?
4.2.12 The process for agreeing the allocations to the Host Partner in subsequent years will be contingent on the respective financial planning and budget setting processes of the Local Authority and Health Board. The delegating partner should aim to give indicative three year allocations to the host partner, subject to annual approval through the respective budget setting processes.
4.2.13 The Chief Executive of the host partner will develop a case for the resources required for the delegated functions, based on the Strategic Plan and present it to the Delegating Partner for consideration and agreement as part of the annual budget setting process. This case should take account of:
- Activity changes. The impact on resources in respect of increased demand (e.g. demographic pressures and increased prevalence of long term conditions) and for other planned activity changes;
- Cost inflation. Pay and supplies cost increases;
- Efficiencies. All savings (including increased income opportunities and service rationalisations/cessations) should be agreed between the Local Authority and Health Board as part of the annual rolling financial planning process to ensure transparency;
- Performance on outcomes. The potential impact of efficiencies on agreed outcomes must be clearly stated and open to challenge by the partner Local Authority and Health Board;
- Legal requirements. Legislation may entail expenditure commitments that should be taken into account in adjusting the payment;
- Transfers to/from the notional budget for hospital services set out in the Strategic Plan. Where the Local Authority is the host partner, the budget for hospital services will remain in the Health Board with the corresponding notional budget within scope of the plan. The resources delegated to the Local Authority will be adjusted for changes in the resource needed for hospital capacity agreed through the plan. Where the Health Board is the host partner, this will be an internal budget adjustment within the Health Board. See 4.4 below.
- Adjustments to address equity. The Local Authority or Health Board may choose to adjust contributions to smooth the variation in use of weighted capita resource allocations across partnerships. This will apply when the Local Authority is host partner and the Health Board is the delegating partner. It will be an internal budget adjustment within the Health Board in cases where it is the host partner. Information to support this will be provided by ISD and ASD.
4.2.14 The delegating partner will evaluate the case relative to its other priorities and negotiate the payment to the host partner. This will be a discretionary process and it cannot be assumed that the payment will be adjusted in line with national uplifts. This process should be included in the Integration Scheme.
How should resource transfer be treated?
4.2.15 Some social work expenditure budgets will be funded by resource transfer payments. It is important that partners identify these and adopt a consistent approach to their inclusion in the resources delegated between each other.
Partners have the option to:
- Continue the current arrangement with the Health Board making the resource transfer payment to the Local Authority and the Local Authority including the services funded by resource transfer in the resources that are included in the integrated arrangements ; or
- Adjust the resource transfer payment from the Health Board to the Local Authority for the services that are being integrated and either add this sum to the payment to the Local Authority (where the Local Authority is the host partner) or use the resource transfer budget to fund social work services (where the Health Board is the host partner).
4.2.16 It is recommended that the local decision on treatment of resources transfer is set out in the Integration Scheme.
Should hosted services be included in the integrated budget?
4.2.17 Yes; some health services that are used by multiple partnership populations are hosted and operationally managed by one partnership on behalf of the others. The resources used by the population of a partnership for services that are managed on a hosted arrangement, should be included in the Integrated Budget for each partnership. The legislation takes powers for Ministers to set this out in regulations. Each partnership will be required to include in its Strategic Plan the planned use of the hosted service by its population. It is recommended that the officer responsible for managing the hosted service take the lead in coordinating the partnerships in development of their Strategic Plans for hosted services.
4.3 Managing financial performance
18.104.22.168 The Local Authority and Health Board should set out in their Integration Scheme the process for managing in-year financial performance for the Integrated Budget, including treatment of under/overspends. The legislation takes powers for Ministers to set this out in regulations.
How will the Directors of Finance of the Health Board and Local Authority ensure financial management of the Integrated Budget?
22.214.171.124 The financial management process of the host partner will apply to the delegated resources. Within a short period, it is likely that the delegated services will be integrated with host partner services and will not be separately reported in the host partner accounts.
4.3.1 Budget variances
Will the host partner be expected to break even on the Integrated Budget?
126.96.36.199 Yes; the joint committee should ensure that the Integrated Budget at least breaks even.
Will the host partner be able to vire between operational budgets?
188.8.131.52 Yes; It is recommended that the host partner vire resources within the Integrated Budget but not between the Integrated Budget and those budgets that are outside of the scope of the Strategic Plan, unless agreed by the Chief Executives and Directors of Finance of both organisations.
Where the host partner is the Health Board, will a variance on the Integrated Budget affect the RRL?
184.108.40.206 Yes; the Health Board will be required to deliver the RRL on its total budget i.e. including the budget for hosted delegated functions.
Will the host partner be able to hold reserves?
220.127.116.11 This depends on the identity of the host partner. Local Authorities can hold reserves including an earmarked reserve in the General Fund. Health Boards cannot hold reserves, so where the Health Board is the host partner, the Local Authority would need to carry forward resources on behalf of the Health Board through its reserves. Partners should ensure a clear audit trail for transfers between the Health Board and Local Authority for reserves.
How will they be used?
18.104.22.168 The use of reserves by Local Authorities is set out in the Code and CIPFA guidance  . It is recommended that the Local Authority reserves strategy is amended to include the Integration Authority reserve where the Local Authority is the host partner and to facilitate a reserve where the Health Board is the host partner.
What will happen in the event of an in-year overspend on the Integrated Budget?
22.214.171.124 Over time it will not be possible to disaggregate variances within the Integrated Budget between those attributable to the delegated resources and those attributable to host partner resources.
126.96.36.199 If, following remedial management actions, an overspend is still forecast for the Integrated Budget, the Chief Executives and Directors of Finance of the host partner and delegating partner, will consider additional expenditure reductions on targeted areas and/or use reserves.
188.8.131.52 If savings are unsuccessful and there are insufficient reserves to fund the forecast overspend, then the Local Authority and Health Board will make additional in-year allocations to the Integrated Budget. This method should be set out in the Integration Scheme and be clear as to how the Local Authority and Health Board will share the additional contributions, if required. The legislation takes powers for Ministers to set this out in regulations.
Will the host partner be able to retain in-year underspends?
184.108.40.206 Yes; It is recommended that anunderspend on the Integrated Budget is retained and carried forward to the next year. The exception is for underspends that arise due to fortuitous material differences in the assumptions used in setting the respective contributions to the Integrated Budget. In these cases, the Directors of Finance and Chief Executives of the Health Board and Local Authority may make adjustment to the payment and the host partner contribution.
Will the host partner be able to use the Integrated Budget to contribute to the management of in-year overspends on other host partner budgets?
220.127.116.11 Ordinarily, no. In the event of a projected in-year overspend elsewhere in the host partner's non-integrated budgets, it is recommended that the host partner should contain the overspend within the non-integrated resources and would normally not require the use the Integrated Budget to contribute to any remedial action.
18.104.22.168 However, in exceptional circumstances it may be necessary for the host partner to re-direct resources to their non-integrated budgets. This provision should only be used in extremis and with agreement of the delegating partner Chief Executive and Director of Finance; the process should be clearly set out on the Integration Scheme.
22.214.171.124 The Chief Executives and the Director of Finance of both organisations will determine the actions required to be taken to deliver the necessary savings in the Integrated Budget.
Will the delegating partner be able to reduce the payment to the host partner to contribute to the management of in-year overspends on other delegating partner budgets?
126.96.36.199 Ordinarily, no. In the event of a projected in-year overspend elsewhere in the delegating partner's budgets, it is recommended that the delegating partner should contain the overspend within the non-integrated resources and would normally not require to reduce the payment to contribute to any remedial action.
188.8.131.52 However, in exceptional circumstances it may be necessary for the delegating partner to reduce the payment and re-direct resources to their non-integrated budgets. This provision should only be used in extremis and with agreement of the Chief Executive and Director of Finance of the Local Authority and Health Board; the process should be clearly set out on the Integration Scheme.
184.108.40.206 The Chief Executives and the Directors of Finance of both organisations will determine the actions required to be taken to deliver the necessary savings in the Integrated Budget to fund the reduction in the payment.
Will the host partner be required to contribute to overspends in other Integration Authorities?
220.127.116.11 No; it is recommended that the responsibility for this lies with the overspending Integration Authority and the process noted above should apply.
4.3.2 Financial risk
18.104.22.168 Financial risk will be managed through the use of reserves and the financial management process noted above. In addition, some parts of the Integrated Budget that are subject to high risk or uncertainty (e.g. Prescribing) may require separate risk pooling arrangements. These should be subject to local consideration.
4.4 Amount set aside for directed hospital services
22.214.171.124 The Act and regulations require that the budget for hospital services used by the partnership population are included within scope of the Strategic Plan.
126.96.36.199 Where the host partner is the Local Authority, these resources are likely to be retained by the Health Board and set aside for use by the host partner. . Where the Health Board is the host partner, the resources will be included (as conjunction functions) in the integrated Budget within the Health Board.
188.8.131.52 The objective is to create a coherent single cross-sector system for local joint strategic commissioning of health and social care services and a single process through which a shift in the balance of care can be achieved.
184.108.40.206 Fundamental to this will be a clear understanding of how "large hospital" services are being consumed and how that pattern of consumption and demand can be changed by whole system redesign. As a first step it is critical that there is transparency for Partnerships and localities on how resources are being used. As a second step, there needs to be clarity about the financial impact of changes agreed through the strategic planning process.
220.127.116.11 Where more than one partnership exists within a Health Board area, the change programme for hospital services will have to be coherent across individual strategic plans (under S30 (3) of the Act). Consequently, there should be an overarching strategic plan for the hospital services delegated to Integration Authorities that is a consolidation of the individual partnership plans and this should be coordinated and held by the Health Board hospital sector.
18.104.22.168 The strategic plans produced by the Integration Authority/ies must in turn be consistent with the strategic context set by the Health Board and Local Authority. The hospital capacity and hosted services included in the strategic plan should evolve from the existing capacity and plans for those services. Strategic plans will reflect locality planning in due course.
22.214.171.124 It is recognised that this is a complex journey and detailed Statutory Guidance has been the jointly produced by IAG and the Joint Commissioning Steering Group on which the following is based.
How should the set aside budget be determined?
126.96.36.199 Legislation requires that the method for determining the amount to be set aside by the Health Board should be included in the Integration Scheme (Section 1(3).
188.8.131.52 It is recommended that the consumption of hospital services by partnership populations should be determined by analysis of hospital activity and cost information.
Hospital activity is recorded on Health Board hospital patient administration systems (PAS) which are based on the individual record of each inpatient hospital episode. This data, aggregated to locality and partnership level, should be used to identify the hospital activity and capacity used by patients for each partnership; the data can be obtained from either:
- Local Health Board information teams; or
- National Services Scotland (NSS), which produce these datasets for each partnership through the Health and Social Care Data Integration& Intelligence Project (HSCDIIP).
184.108.40.206 It is recommended that an average of three years of activity is used to scope partnership consumption for the first year of the strategic plan.
Attaching a £ value to activity can be achieved in a number of ways, for example:
- Blue book admission or bed day rates;
- Local Costing methodologies;
- NSS patient level costing (PLICS) available through HSCDIIP.
220.127.116.11 It is a local decision as to which method is used, however it is recommended that a consistent method is used for all partnerships in a Health Board area.
Should cross boundary functions be included in the set aside budget?
18.104.22.168 Yes; where material; the set aside budget should include the resources for the in scope hospital services used by the partnership population in all Health Boards.
22.214.171.124 Alternatively, where the Local Authority is the host partner, the respective cross boundary flow budget may be included in the payments to the Local authority.
How should 'fair share' information be used?
126.96.36.199 Using historical consumption as a starting point inevitably builds in any existing inequity of resource use in the historic position. It is difficult to avoid this without causing immediate destabilisation. Over time, issues of equity can be considered by Health Boards and may be addressed through their subsequent allocations to partnerships.
188.8.131.52 It is recommended that partnerships use fair share information based on the National Resource Allocation Committee (NRAC) methodology available from NSS (through the HSCDIIP project) for benchmarking partnership expenditure.
How should the financial consequences of planned changes in capacity be determined?
184.108.40.206 Strategic Planning will be a cyclical process of Analyse, Plan, Do and Review and this will likely involve a two stage process for developing cases for change: from considering initial proposals to full inclusion in locality and strategic plans. This will require cost and activity information at different levels of detail, depending on whether consideration is of an outline case or a full case proposal.
220.127.116.11 It is recommended that practical and easily used cost information is made available to stakeholders to enable outline cases to be developed.
18.104.22.168 It is recommended that detailed estimates of the effect of change proposals should be developed and reflected in the financial plan underpinning the Strategic Plan. This should set out the capacity and resource levels required for the set aside budget for the partnership/locality populations. This should be based on an agreed implementation plan with assumptions for:
- Activity changes based on demographic change;
- Agreed activity changes from new interventions;
- Cost behaviour;
- Hospital efficiency and productivity targets;
- An agreed schedule for timing of resource released/additional resource.
22.214.171.124 It is recommended that the approach to producing detailed financial plans based on the agreed changes should be similar to those previously used for Learning Difficulty Same As You (SAY) and other major redesign exercises.
How will overheads in directed hospital services be treated?
126.96.36.199 It is a matter for local determination. It is recommended that a consistent approach is adopted for Integration Authorities in partnership with the same Health Board.
Will resource be able to be transferred between the Integrated Budget and the set aside budget for directed hospital services?
188.8.131.52 Yes, where there is a planned increase in consumption, the Integration Authority will need to consider how to fund the additional capacity through the Strategic Plan. Similarly, where resource is released, the Integration Authority will be able to consider how to use this resource through the Strategic Plan.
4.4.1 Reporting Performance against Plan
184.108.40.206 Partnerships, Localities and the hospital sector will require information on their performance against the plan for hospital capacity in order to flex the strategic plan and also to take remedial action if necessary. This information will need to be available at two levels: for each partnership; and for the overarching hospital plan.
220.127.116.11 The Local Authority and Health Board should establish a process for the manager of the integrated services and the hospital sector to jointly receive regular activity reports comparing the expected capacity set out in the strategic plan with actual capacity used. Where the host partner is the Health Board, this will be an internal process and it is recommended that reports are at locality level.
18.104.22.168 Actual activity and expected activity information will be available from ISD HSCDIIP reports or alternatively from local Health Board information teams.
Will there be in-year virement between the Integrated Budget and the notional budget?
22.214.171.124 The legislation enables this (Section 28). However, it is recommended that in-year resource adjustments should be avoided and that changes be made through annual adjustments to the Strategic Plan.
126.96.36.199 If partners consider that in-year resource adjustments should be made, it is recommended that minimum thresholds for activity variances are agreed, below which no resource adjustments will be required. Where the host partner is the Health Board, the virement would be an internal budget adjustment.
188.8.131.52 It is recommended that the process for making adjustments to the set aside resource to reflect variances in performance against the plan are agreed and clearly set out. This should explicitly deal with cases of offsetting variances between Integration Authorities.
4.4.2 Accountability Framework
184.108.40.206 It is recommended that there is a clear understanding of where the balance of risk lies, between each Integration Authority and the Health Board hospital sector, for delivering planned hospital capacity. There are two main risks:
- Activity and case mix: i.e. the agreed capacity set out in the plan is not delivered or not delivered on the agreed schedule; and
- Resources: i.e. the capacity set out in the plan is delivered, but the resource required is different to that agreed.
220.127.116.11 The balance of the financial risks for planned changes in hospital capacity depends on the identity of the host partner. Where this is the Local Authority these risks are ultimately shared between the Local Authority and the Health Board; however, it is recommended that the primary responsibility for delivering capacity (i.e. activity and case mix) should lie with the Local Authority; and that for providing the capacity within agreed resources should lie with the Health Board hospital sector.
18.104.22.168 Where the host partner is the Health Board, clearly both risks will lie with the Health Board, in which case it is recommended that the primary responsibility for delivering capacity should lie with localities.
22.214.171.124 It is recommended that these respective responsibilities are set out in the Strategic Plan.
126.96.36.199 The basis of the accountability framework should be a local decision.
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