· Reduce demand on services generally.

2. Current Position on the Isle of Wight (Option 1)

2.1 Using the SHA guidance and principles the IOWPCT and IOWHCT have both prepared an LDP, with the IOWHCT ‘mirroring’ the IOWPCT submission in terms of tariff and investment income.

2.2 The recurrent planned 2004/05 activity baseline forms the start point for 2005/06. This applies equally to Acute, Mental Health, Ambulance, Community and Primary Care services. Variations to the 2005/06 starting point are as follows:-

2.2.1 Activity adjustments required to achieve NHS targets in line with the Capacity Plan, less any adjustments based on investments made in community services, designed to avoid admission to or manage demand on secondary care.

2.2.2 Other service developments explicitly agreed by Commissioners e.g. approved specialist service schemes.

2.2.3 Other service shifts between providers.

2.3 The recurrent 2004/05 finance baseline forms the start point for 2005/06. This has been adjusted as follows:-

2.3.1 The Tariff Uplift. The tariff uplift for acute secondary care has been in accordance with national guidance. Separate tariffs have been agreed for Mental Health, Ambulance, Community Care, Primary Care and Prescribing by the SHA and have been applied consistently by the PCT and the Trust across all services and providers.

2.3.2 Service Changes. These include increased/decreased activity adjustments to achieve NHS Plan targets, service developments, and service shifts. Where appropriate the financial impact of these have been matched in both the PCT and Trust’s LDP. Within the Trust, at this time, it is assumed that the income received will cover the expenditure incurred, i.e. the effect of any new investment is cost neutral.

2.3.3 A number of specific issues affecting Primary and Community Care, which need to be incorporated into the LDP including new dental and pharmacy contracts, new GMS (Quality Framework and Out of Hours), Choose and Book, etc.

2.3.4 The Gershon Efficiency Review agreed a cash releasing efficiency saving (CRES) target for the NHS of 2.7% per annum for the next three years. After making an allowance for central NHS savings this translates into the tariff uplift in 2005/06 as a decrease of 1.7%, which has been applied to both the PCT and Trust LDP.

2.3.5 All pay reform is to be managed within the agreed tariff uplift i.e. cost neutral. In order to be open and transparent about the size of the associated cost pressure and the risk both the PCT and the Trust have increased the cost base to take account of known or modelled pay reform i.e. Agenda for Change, Consultant Contract and nGMS costs, less tariff uplift and the resultant gap has been shown explicitly as part of the recovery plan.

2.4 In summary, the PCT LDP shows the following:-

	£’000
Growth	14,540
Underlying Deficit	(796)
Repayment of Brokerage	(1,000)

Tariff Uplifts / Generic Costs Pressures	(9,598)
Investment in Key Targets	(3,491)
Other Investments	(3,659)

	(4,004)

Efficiency Savings	2,128
Recovery Plan	1,876
	______
Overall Surplus/Deficit	---

2.5 In summary the Trust LDP shows the following:-

	£’000
Growth	4,720
Investment Funding	2,381
Underlying Deficit	(3,693)
Deficit Repayment	(3,000)

Generic Cost Pressures (inc. 1.7% CRES)	(8,638)
Investment Key Targets	(2,136)
	______

Shortfall	10,366 ______
Recovery Plan	10,366 ______

Overall Surplus/Deficit	---

2.5.1 Trust Recovery Plan

	£’000
CRES	2,542
Pay Reform	1,824
MHLD Service Reconfiguration	1,000
Land Sale (Non Rec)	3,000
Service Redesign	2,000
	______

Total	10,366 ______

3. Risks Around Current LDP Submission

3.1 The Trust is assuming a net saving of £2m through bed closures and the PCT is assuming a net saving of £850K on non-elective admissions, based on investments in community services designed to avoid admission or manage demand on secondary care. These community services have not yet fully been developed, costed, modelled or implemented therefore there is a risk that a net saving of £2.8m may not be delivered in the next financial year.

3.2 The LDP assumes pay reform is cost neutral for the Trust and PCT this equates to £2.5m cost pressure over tariff and this has been put into the recovery plan with as yet no real plans as to how this will be delivered.

3.3 CRES at 1.7% amounts to in excess of £2.5m for both organisations, for the Trust is in addition to significant CRES programmes in previous years and for the PCT this is a significant challenge given the relative size of the budget and the limited flexibility therein.

3.4 The PCT must from December 2005 introduce Choice at Referral, i.e. must commission a choice of 4 or 5 providers for all elective patient referrals. The impact is difficult to quantify, but early modelling suggests a 10% movement would equate to £2m. This represents a risk for both the PCT and the Trust. If Choice is taken up the Trust will lose income and may have difficulties, given its location, in attracting an inflow of new patients, which would therefore jeopardise the viability of some departments. If Choice is not taken up the PCT will have to pay the Trust, with whom it has contracted for Choice, as it is likely they will negotiate minimum activity levels and pay the Trust for over performance, thus paying twice for activity.

3.5 Initial feedback from the SHA confirms that the current LDPs are not acceptable to them given the relatively small recovery plan in the PCT and the much larger recovery plan in the Trust which they doubt is achievable.

4. Funding Issues

4.1 In addition to the risks around the development of the 2005/06 LDP, there are a number of underlying issues which have developed as a result of the purchaser/provider split and the ensuing funding and commissioning methodologies used over the years.

4.2 The IOWHCT is an integrated Trust providing Acute, Community & Rehabilitation, Mental Health & Learning Disabilities, and Ambulance Services. Until recently all of these services were commissioned by the PCT through one Service Level Agreement (SLA), essentially an agreed amount of funding for access to all services.

4.3 The introduction of Payment by Results (PbR) and a desire on both sides for greater clarity about the funding, led in 2004/05 to four separate SLAs being negotiated between the PCT and the Trust. It was agreed to split the original SLA based on the 2003/04 Reference Costs, as these are subject to national guidelines and external audit review and, therefore, agreed by both the PCT and Trust as being robust.

4.4 In line with PbR, the majority of Acute activity was valued using National Tariffs. It was agreed to use 2003/04 Reference Costs prices plus 7.8% (tariff uplift) for Community & Rehabilitation, Mental Health & Learning Disabilities and Ambulance Services, because of issues around current activity measures (a national problem).

4.5 This process gave four values which, compared to funding, gave the baseline gap for each SLA. The gap has arisen because the funding was based on historical funding, plus or minus service changes. This funding has never been zero based and this has led to a gap between the funding received and the cost of providing the services.

4.6 During 2004/05 staff from both the PCT and the Trust have worked together to understand and refine the ‘gap’ to ensure that it reflected the true funding shortfall. A number of adjustments have been made and as a result, the majority of the Acute SLA is now priced at national prices.

4.7 The funding gap on the Acute SLA is circa £3.5m, there are also gaps on each of the other SLAs. The funding shortfall is currently sitting entirely with the Trust. Agreement needs to be made, as part of the PCT and Trust’s corporate objective to fix the deficit, as to how this shortfall is to be addressed.

5. Principles for Developing a Shared LDP and Recovery Plan

5.1 Given that there is broad agreement that the PCT and Trust want to develop a shared approach to financial recovery and fixing the deficit, we need to agree some principles in support of this objective as follows:

5.1.1 the first call on growth funding is to fix the deficit, i.e. repay overspends and brokerage and eradicate underlying deficits

5.1.2 cost pressures are open and transparent, understood by all and kept to a minimum

5.1.3 a number of redesign projects are established to deliver affordable and sustainable healthcare services from 2006/07 (see below)

5.1.4 the deficit is treated as a joint problem with any shortfalls or additional savings shared – ‘share the pain and the gain’

5.1.5 both the PCT and the Trust receive regular progress reports on the Joint Recovery Plan and the Redesign Projects

5.1.6 the establishment of a Joint Professional Group by April which will be used to engage clinicians in both primary and secondary care.

6. Way Forward (Option 2)

6.1 The current position is neither affordable nor sustainable, neither the PCT nor the Trust can continue to meet the targets and achieve financial balance as services are currently configured. Whilst service redesign and modernisation are necessary for both financial and clinical reasons, the scale of the changes required mean that they cannot be fully implemented in time to support the financial position in the short to medium term.

6.2 If we agree that we cannot do it all, we must agree where we are going to focus our efforts in the short term, whilst in parallel putting in place schemes to deliver recurring balance.

6.3 Although the PCT and the Trust are independent statutory organisations, a key principle as we move forward is that, for the purposes of fixing the money, the deficit is regarded as a shared one. Likewise, any benefits, i.e. land sale income, are also shared across agreed strategic priorities. In recent forums we have discussed our priorities and received broad agreement to the idea that our number one priority is to ‘fix the money’ with other targets coming after, but what would this mean in reality?

PCT Growth 14,540

Repay PCT Brokerage (1,000)

Repay Trust overspend (3,000)

Eradicate PCT underlying deficit (796)

Eradicate Trust underlying deficit (3,693)

Sub Total 6,051

Tariff Uplifts to all providers/generic

Cost pressures (9,598)

Surplus (Deficit) (3,547)

======

This would leave the PCT with a £3.5m deficit and in the Trust:

Tariff Uplift 4,720

Generic cost pressures (8,638)

Surplus/Deficit (3,918)

======

This would leave the Trust with a £3.9m deficit.

6.4 In addition to there still being deficits in both the PCT and the Trust, we are not investing to meet NHS targets and, therefore, will not achieve all of our key targets, nor will we be able to meet other initiatives such as Choose and Book, NICE guidance, etc. and indeed, we will have to disinvest in some areas. In addition, we will not be able to meet our commitments to other Trusts through SLAs or Specialist Commissioning. However, the cost of Pay Reform across both primary and secondary care (Agenda for Change, Consultant Contract and nGMS) is included.

6.5 Clearly, further work would need to be undertaken to model and quantify the impact of no new investment on services and in terms of targets.

6.6 In addition, both the PCT and Trust will need to develop Recovery Plans to address the remaining in year deficits because the underlying recurrent deficit has been eradicated.

7. Financial Balance (Option 3)

7.1 Given that financial balance is a statutory duty for both the PCT and the Trust, we must through the LDP have plans in place to achieve breakeven.

7.2 Assuming that fixing the underlying deficit, repaying the brokerage and deficit, and funding cost pressures at tariff, still leaves a deficit for the Island of circa £7.5m (Option 2). We need to identify what more can be done and the impact of further measures.

7.3 Given that service redesign must take place but will take time to implement, what we need to do is undertake a number of radical steps to buy us time for the sustainable, long term solution to be delivered. This could be to manage down expenditure as follows:

£’m

7.3.1 Implement all pay reform within existing funding,

including A4C, Consultant Contract and Primary Care

through service redesign 3.5

7.3.2 Prescribing: roll forward 2004/05 prescribing budget

into 2005/06 with no uplift in both primary and secondary

Care, including NICE 2.0

7.3.3 Non Pay: roll forward 2004/05 non pay budget for all

Providers with no uplift 0.5

7.3.4 Disinvestment in services based on national averages,

i.e. ensure investment is in line with benchmarks, e.g.

physiotherapy, and ensure expenditure is in line with

national Reference Costs, e.g. allergy and asthma 1.0

Total 7.0

===

7.4 This is a radical solution but could in the coming year fix the deficit. However, it should be understood that it is not sustainable in the longer term and is designed to eradicate the underlying deficit and manage the in-year deficit, while a sustainable, affordable model of care is implemented through a number of workstreams and redesign projects as mentioned above.

7.5 These projects are linked to the Local Delivery Agreement (LDA) and are in line with the Beyond Healthfit Strategy:

· Redesign unscheduled care (one front door)

· Redesign services for Older People (managed care and continuing care)

· Transforming Mental Health Care (implement LIT)

· Achieving the 18 week wait through changes to diagnostics

· Pay reform and workforce redesign

· Integration of Children’s Services within the CYPS Programme Board

7.6 A fall back in support of the shared deficit would be to utilise the land sale receipt from the St. Mary’s site. However, if we were to use this, assuming it can be realised within 12 months, this would mean that this will not be available to support the service redesign and modernisation agenda in primary and secondary care.

8 Conclusion and Recommendation

8.3 In summary, this paper identifies 3 options:

		PCT Deficit	Trust Deficit	Total
Option 1	Carry on as we are trying to ‘do it all’ which is having a detrimental effect on staff and patients as we manage from financial crisis to financial crisis. Also a Recovery Plan of circa £12m is clearly not achievable in one year	£2m	£10m	£12m
Option 2	This option tackles the underlying deficit and prior year brokerage and overspend, but also tries to fund all cost pressures. This option does effectively reduce the overall deficit and share the risk across the Trust and PCT.	£3.5m	£4m	£7.5m
Option 3	This option builds on Option 2 and seeks to demonstrate that we can deliver breakeven in 2005/06 but in order to do so difficult decisions need to be make and risks taken.	---	---	---

8.4 The Boards are asked to discuss the options outlined in this paper and, in particular, debate and understand the risks around and the impact of each of the options. In addition, we need to agree a preferred option which will then need to be agreed with the SHA and shared with other partners.

8.5 Once agreement has been reached as to the preferred option, the JMT will model the impact on services, targets, budgets and staff, and then put plans in place to manage and monitor delivery during 2005/06.

8.6 In 2006/07 the PCT will receive £15.5m growth and in 2007/06 £19.5m, in addition there will be income from anticipated land sale receipts. By eradicating the deficit, the additional funding and income can be used to develop services, both within primary and secondary care.

GRAHAM ELDERFIELD LYNDA BLUE

Joint Chief Executive Joint Director of Finance

18 February 2005

LB/lm

Overall Surplus/Deficit

Overall Surplus/Deficit

Total