ICU Economy and Finance

COSTING MODELS

ICU costing methodology

• Many attempts have been made to measure the resources used in critical care. However, as noted in a review by Gyldmark, comparisons between studies are difficult, if not impossible, as different studies have included different elements of resource use. ‘Critical to Success’ reported large variations in ICU practice and subsequently costs, questioning the efficiency of ICUs. While this is only a ‘snapshot’ view of critical care, and these data should be interpreted with caution, it demonstrates that resource data collected in a standardised manner is an essential component of modern ICU practice.

• Two basic methods of costing care were identified from the review, namely the ‘top down’ approach and the ‘bottom up’ approach.

• Various hybrid costing methodologies have been used in critical care. Defining patients according to a dependency measure (in its simplest form high dependency or  intensive care) attempts to overcome the assumption that resources are distributed evenly between patients in the ‘top-down’ approach. A period of ‘bottom-up’ calculation may be used to define the costs of the high dependency patient assuming remaining costs are distributed amongst the intensive care patients.

• A further refinement is to apportion costs according to dependency using the Therapeutic Intervention Scoring System (TISS. Some studies have found a significant relationship between daily TISS scores and individual patient costs, yet other studies do not support this hypothesis. TISS was originally described as a method for quantifying therapeutic interventions and has been adapted extensively in individual ICUs to reflect local practice. This clearly affects comparison between different ICUs.

The Cost Block Programme

• The Intensive Care National Working Group on Costing convened between 1994 and 1999 to tackle the methodological problems of undertaking cost comparisons of intensive care provided in different hospitals. For intensive care units (ICUs), a standard method for measuring costs of resources did not exist and this made the evaluation of resource use difficult. The Group was multidisciplinary, comprising professional members from the fields of intensive care, health economics and accountancy and health services research.

• The Group formulated a list of costing-related questions and sought answers to these questions from a literature review. Having reviewed those papers published between 1974 and 1994, it was apparent that a suitable method, capable of answering more than two of the costing-related questions, did not exist. It was also clear than none of the methods described in the literature could be deemed appropriate for routine use, due to their complexity and resources required for implementation. The Group therefore developed a standard method of costing to overcome this specific problem and others relating to the heterogeneity of accounting practices employed by individual NHS trusts.

• The ‘top-down’ approach was thought capable of providing data that would answer a number of the questions raised by the Group, because it enabled the identification of the major cost components. However, the ‘top down’ approach would not be useful for providing answers to questions such as ‘how does cost per category of patient vary with throughput?’ or ‘how do we include quality?’. It would have several practical applications. For example, if data were collected annually, it would provide a means for determining average daily costs per patient and the marginal costs of opening an additional ICU bed.

• The Group developed their own method, starting with the identification of budgetary components associated with resource use in critical care. The selection of the most important components was based on relevance, data availability and ease of collection. The validity of the data was considered. Proportion of cost contributed by each of the components was considered together with whether the costs were incurred by the ICU. This process led to the definition and grouping of components as ‘cost blocks’.

• The methodology was piloted in eleven ICUs, after which the definitions were refined; a second pilot study was repeated in twenty-one ICUs. The pilot studies revealed that cost blocks 1-3 (Capital Equipment, Estates and Non-Clinical Support Services) accounted for only 15% of the total cost of the ICU and were difficult to collect, inaccurate and not within the control of the ICU.

• The Intensive Care National Cost Block Programme was launched in November 1999.

How does the cost block method compare to other methods for costing?

• The cost block method was developed with the principle aim of facilitating meaningful comparisons between individual ICUs. It was intended that the method be suitable for use in any ICU. The cost block method determines the total expenditure of an ICU and apportions this by the throughput of the ICU (number of patients and their length of stay) and organizational capacity (number of beds). In this way, average costs per patient, per patient day and per ICU or HDU bed can be deduced.

• In nine of the studies reviewed by Gyldmark, it was unclear what cost components were included. Of the remaining eleven studies, four excluded medical and nursing staff costs which represented 53% of total ICU costs in cost block pilot studies. Three of the eleven studies excluded the cost of disposables, and one excluded the cost of drugs and fluids. It was often the case that the inclusion of other cost components within the studies reviewed was assumed rather than known.

• There are a number of different ways of arriving at individual patient costs. The ‘topdown’ method has the disadvantage of being inaccurate at the individual patient level but is easy to calculate. The ‘bottom-up’ approach is much more time-consuming as resource costs are summated from individual items of care and then ascribed to individual patients. Despite its higher degree of accuracy, it is a difficult method to reproduce in different hospitals.

• The ‘bottom-up’ method is used to produce a cost per patient day by adding together the patient’s use of individual resources. The cost block method, on the other hand, is unable to measure differences in resource use incurred by individual or groups of patients. In bottom-up costing, each resource is broken down into its smallest unit and multiplied by the number of units used. For example, if a patient requires a nurse for ten minutes then a cost per minute of a nurse’s time is required in order to produce an accurate total cost.

• Micro-costing or activity-based costing are terms frequently used to describe bottom- up costing principles. Activities of care have been used for costing individual intensive care patients since 1995 at the Royal Hallamshire Hospital, Sheffield. The concept behind the activity-based costing methodology is that the clinical care delivered to patients is partitioned into discrete elements (the activities). The cost of patient care is then determined by allocating resources (and therefore costs) against each activity. The total patient-related cost of care for an individual patient is determined from the sum of the costs of the activities delivered to that patient. The disadvantage of this method of costing is that it requires a Patient Data Management System with a computer terminal at each patient’s bed-side for the nursing and medical staff to record the clinical procedures and interventions performed on each patient. These data are collected prospectively and have to be checked against the medical records for any omissions. Therefore, the commitment of staff working on the ICU is mandatory to ensure accurate recording of data.

Practical implications of the cost block method

• A number of factors influence the varying degrees of expenditure on intensive care in different hospitals. Technological developments, differences in unit characteristics and differences in methods of costing are thought to be three such factors. Heterogeneous case-mix is another problem. A study of the cost of individual patients admitted to a Canadian ICU found that the 8% of their ICU patients who consumed the highest costs equated to the same amount of resources as the 92% of patients with the lowest costs. The cost block method overcomes the problem associated with different methods of costing, insofar that more accurate study of the costs and consequences of intensive care can prevail. The cost block method takes accounts of the size of the ICU, its geographical location, whether it is located in a university or a nonuniversity hospital and its throughput. The cost comparisons, made possible through a representative sample of ICUs using the cost block method, are very useful to individual hospitals as it allows them, for the first time, to compare their levels of expenditure with other ICUs.

• Future research correlating standardised mortality ratios (SMRs) to the cost components of the cost block method should supply further knowledge of the resources required to achieve optimal outcomes.

• The cost block method is being collected in approximately one third of hospitals. The investigation of routinely collected data for its ability to explain observed expenditure variation between individual units has identified throughput to be a key factor.

• The method has wider implications for the comparison of cost data across Europe. The collection of cost data using a standard method in different European countries would enable inter-country cost comparisons to be made providing adjustments for economic differences between countries were ensured.

FINANCIAL MANAGEMENT SYSTEMS IN THE CRITICAL CARE UNIT

Balancing supply and demand

• All systems for financial management within the critical care unit have to operate within the resource constraints of the overall structure of the NHS and local health economies. Demand for critical care services continues to increase and is not matched by a commensurate increase in healthcare resources. The reasons for the increase in demand are multifactorial but include:

  • Ageing population

  • Increased public expectation

  • Technological advance

  • Changes in disease demography.

• Strategies for dealing with the imbalance between resource and demand include:

  • Reduction in demand

  • Limitation of supply (rationing)

  • Improved efficiency.

• Implicit rationing is already imposed within the NHS but the degree varies between health authorities and trusts as local priorities determine the proportion of resource allocated to critical care. This is largely a result of the ‘overhead’ approach to funding and the effect of multiple paymasters.

• Separation of critical care funding from other specialties’ costs and a reduction in the number of paymasters by moving to regional funding could remove some of the inequities of present funding systems.

• Critical care financial management systems must seek to rationalise expenditure since the only other alternative in a resource limited healthcare system is rationing of the service.

• All systems have to function within the design of local trust structures. All have the advantage, however, of making explicit the resources available to the unit and, therefore, allowing clinicians and managers the baseline information they need to lead the unit and to make explicit the service targets that they are expected to deliver.

The fixed budget model

• This model focuses on the use of expenditure budgets as the overall control mechanism (as opposed to a financial reconciliation of income and expenditure budgets).

• Under this model, all income for the trust is centrally pooled and redistributed to cost centres as an allowance, or expenditure budget. Each cost centre is expected to deliver a service to either patients, usually expressed in activity terms, or (for cost centres such as theatres, radiology, pathology and critical care) to support other departments. Targets are set and must be delivered within the scope of the budget allocated.

• Some flexibility can be built in at trust budget setting meetings. This forum is an opportunity to negotiate an adjustment to the expenditure budget based on known or projected changes in activity, demand or performance. This would normally occur on an annual basis, with ad-hoc meetings during the year if either the directorate or the trust needed to review financial plans. The release of new sources of funding or new demand expectations – such as those in ‘Comprehensive Critical Care’ – ought to be a catalyst for in year review.

• The budget for a critical care unit should, as a general principle, reflect the actual make-up of the department. That is to say that each component of the service should be represented on the balance sheet just as it is represented in the actual delivery of service. In a fixed budget, overhead and indirect costs (e.g. cost of main taining buildings, costs of support by other departments) are not attributed to the ICU and are treated as a hospital overhead or as part of another department’s budget. Indeed some direct costs (e.g. sterile supplies, laundry of sheets) are often not attributed to the ICU budget.

• Within this system, the ICU management team attends a fixed service planning/budget setting meeting. The ICU budget is negotiated in the context of the previous year’s performance and an estimate of ICU activity required to support the trust’s performance targets for the next year.

• Throughout the year, the ICU performance is monitored against agreed activity, quality and financial targets. Variances are discussed and explained – for example any resulting from an increase in another directorate’s activity. Where expenditure is in excess of budget, the ICU management team would need to negotiate an additional budget allocation. Success is likely to be dependent on whether the trust has obtained additional income for the source of the increased activity.

• The main advantages and disadvantages of the expenditure budget system in ICUs are summarised below.

• Advantages:

  • The cost centres negotiate a financial framework in which to deliver services, based on a discussion around demand, activity and other targets.

  • A fixed budget within a financial framework leaves the cost centres with scope to make incremental or small-scale changes.

  • There is relatively little bureaucracy, as there is no cross charging (trading account, internal purchasing). Once the budget is set financial management is focused on containing expenditure.

  • A fixed budget helps to focus attention on trust objectives (rather than individual or directorate agendas).

  • A fixed budget may promote a culture of mutual co-operation between departments.

  • The expenditure-budget system can work extremely well in smaller trusts, where close liaison across cost centres is possible and staff can work together towards common shared goals.

• Disadvantages

  • Without a cross-charging mechanism, there is no strong incentive to ensure accurate and timely activity monitoring across the trust.

  • The ICU is exposed to the risk of increased demand, due to a change in another department’s activity.

  • It can be difficult for cost centres to make significant service changes, or to develop new services, as there is no direct link between externally-negotiated funding and the budget.

  • There is an inbuilt financial disincentive around the care of expensive patients.

• Disadvantages can be overcome. Data accuracy can be assured by a strong culture of clinical audit and quality monitoring. The risk to support departments of an increase in activity in another department can be minimised with close liaison between cost centres.

The trading account model

• This model recognises that ICU activity is determined by the activity of user departments. A trading account allows the ICU to recoup costs related to patient activity (variable costs) from user departments thus maximising flexibility. User departments gain access to ICU beds that may otherwise be closed to contain expenditure within a fixed budget. A small fixed budget is maintained to cover costs that are not related to patient activity (fixed costs).

• The central theme of the trading account is the direct relationship between income and expenditure. It seeks to factor in relevant aspects of providing critical care services: availability of staff, resources for equipment, consumables and drugs and the relationship between referring clinicians and the unit.

• The model attempts to match the flexible use of capacity with a parallel flexibility in funding. For ICUs this principle has the added advantage of minimising the financial risk to the department which does not have control of referred activity. For the trust that risk is taken on board elsewhere, for instance within the budgets of referring departments.

• Fixed costs of managing the unit remain exactly the same irrespective of the number of beds occupied although extreme changes in activity may require adjustment of the fixed cost budget. Fixed costs include:

  • Staff

    • ICU managerial staff

    • Medical staff

    • Senior nursing staff

    • Administrative support staff

    • Technical support staff

  • Equipment

    • Educational staff

    • Research staff

    • Replacement

    • Maintenance

Generally, the costs of the above categories are determined by the number of beds expected to be available or the predicted activity. In this respect the fixed costs budget is exactly the same of the fixed budget model.

• Conversely the variable costs are those directly associated with activity. These are the costs that will change as a result of one more or less bed day of activity:

  • Staff

    • Bedside nursing staff

  • Supplies

    • Pharmacy

    • Blood and blood products

    • Disposables

    • Sterile supplies

    • Administrative supplies

    • Catering supplies

  • Investigation

    • Laboratory

    • Radiology

  • Support services

    • Operating theatre

    • Professions allied to medicine

    • Chaplaincy

    • Mortuary services

The trading account generates an income that is directly related to patient activity and expenditure is managed according to this income.

• Because the fixed budget devolved to ICU is a fraction of the total expenditure, each user department is given a budget from which they can purchase their ICU service.

• Advantages

  • Referring departments have a budget for their use of ICU, shifting the financial responsibility for referral to the referrer.

  • The financial risk of longer stay patients or increased activity following, for instance, a new consultant appointment is moved to the source of such activity rather than the ICU.

  • Financial management is focused on balancing income and expenditure rather than simply containing expenditure.

  • In larger trusts where close liaison between cost centres may be difficult interaction is made more explicit. Developments in all interacting cost centres are forced to take account of the implications for ICU.

  • Central to a well-run trading account is accurate and timely activity monitoring. Clearly the overall financial risk to the trust does not disappear but it makes explicit the requirement to think through at a proper strategic level the impact and cost of ICU services.

• Disadvantages

  • Referring departments are exposed to financial risks of increased ICU activity that may not be budgeted. A single long stay patient could wipe out a user’s budget.

  • The matching of ICU availability to demand may be contrary to trust objectives.

  • The need to track activity accurately increases bureaucracy.

  • [1] Referrers may view the ICU as unfairly protected from the need to manage expenditure as income increases with activity.

• Where the ICU accepts direct referrals from outside the trust it can purchase activity from itself against any commissioning model that sets a specialty line for critical care. All users are thus treated equitably.

Managing the budget

• Although the trading account model allows the critical care unit to increase its income according to demand that leaves a reduction in resource somewhere else in the healthcare system. This may be appropriate if the priorities of the healthcare system can tolerate that reduction and wider use of trading accounts is one way of matching resource consumption to whole system priorities. A simple example may be the choice between two equally effective antibiotics: one is expensive to purchase but does not require laboratory measurement of levels, while the other is cheap but does require laboratory levels. Using the trading account model the first antibiotic may be the best choice.

• The fixed budget model leaves expenditure control as the only way of managing the budget. If the budget was based on system-wide priorities this would not matter, although there is little scope for accommodation of changing priorities. Furthermore, using the antibiotic example from above most would select the second antibiotic since the costs of the laboratory measurements come out of another department’s budget.

• It is clear that resource limitation in the healthcare system as a whole must be matched by a reduction in expenditure. This can be achieved by increased efficiency (reduced cost per patient treated) or by reducing demand. For the critical care unit reducing demand is unlikely to be achievable but reducing access has a similar effect on the budget. Increasing efficiency is difficult as technological advance (in this context technology includes pharmaceuticals) will, in the majority of cases, increase costs.

• Some technological developments may be cost beneficial but the cost is borne by the ICU and the benefit is reaped in another budget. Since there is little scope for horizontal movement of funds in public finance it may be difficult to procure the technology despite its benefit to the healthcare system as a whole. It is hoped that the National Institute for Clinical Excellence will focus on system wide benefits to allow such procurement.

• Staff costs make up the major part of all critical care expenditure such that the most effective way of reducing expenditure is to reduce staff costs. This approach is often taken when beds are closed to limit access, although it is least effective in small units where a closed bed may not allow a reduction in staff numbers as a higher proportion of the total is considered as a fixed cost.

• Increased efficiency can be achieved by reducing the average numbers of nurses per patient, recognising that one to one nursing is not a standard in most other Western societies. Alternatively, efficiency in terms of cost per patient may be achieved by reducing the numbers of skilled nurses per patient and replacing them with unskilled (and therefore cheaper) assistants.

• Non-staff costs may be controlled by formulating agreed policies for admission and treatment taking into account real cost benefits where alternative treatments are associated with differing costs. This approach can most obviously be applied to formularies for drug choice and stock lists for disposables. Use of a high cost technology rather than a cheaper one for an equivalent benefit represents, in economic terms, a lost opportunity.

• Costs of critical care vary between units and are, in part, dependent on the organization of the unit. An open unit may have little in the way of treatment or admission policies with little control of expenditure. A closed unit will usually have well developed policies and uniformity of treatment leading to better expenditure control.

• Since the fixed cost element is not related to patient activity a large ICU will have lower average costs than a small ICU. This is because treatment of a larger number of patients means the fixed costs represent a smaller proportion of the total. Thus a larger unit is more efficient than a smaller unit in economic terms. Similarly, the purchase of revenue items (up to £5000 per item allowed in NHS financial rules) in a larger unit will be associated with a lower proportional increment in costs than in a smaller unit.

• The factors affecting budget management decisions are many and varied. Critical care medicine has struggled to demonstrate its effectiveness and, without doing so, will not achieve adequate funding to meet the demand. Resource movement from other parts of the healthcare system will only become possible where benefits of critical care medicine can be proved worthy of releasing that resource. In the meantime budget management is focused on increasing efficiency. The principles of ‘Comprehensive Critical Care’, particularly relating to outreach care, may help manage demand. Without these principles of rationalisation the reduction of supply (rationing) becomes the only viable method of containing costs within limited resources.

PRICING AND CONTRACTING

Definition of prices

• The link between costs and prices is fundamental to the contractual process. The ‘NHS Costing for Contracting Manual’ sets principles for NHS pricing.

• Prices should be based on cost with no intention to make a profit.

• Prices should be based on a costing process that recovers all costs associated with a given level of activity so that total anticipated costs divided by total anticipated activity gives the unit price.

• There should be no planned or deliberate cross subsidisation of costs, i.e. prices should not be reduced in one area and subsidised by increases in another.

• Applied literally this means that all costs are apportioned on a logical basis across all recoverable activities.

• Costs may be defined as:

  • direct i.e. directly attributable to a contract activity, e.g. critical care nursing

  • indirect i.e. apportionable on the basis of a recognisable activity statistic, e.g. critical care use of physiotherapy

  • overhead i.e. more difficult to apportion and not related to patient activity, e.g. corporate management costs, building maintenance

• An alternative way of analysing costs would be:

  • variable i.e. moving up and down with volumes of activity, e.g. bedside critical care nursing costs. Variable costs will include some direct costs and should include indirect costs as defined above.

  • fixed i.e. not moving with activity, e.g. non-bed side nursing costs, medical staff costs. Fixed costs will include some direct costs and all overhead costs as defined above.

• For any given size of facility and activity categorising costs as in 5.1.6 or 5.1.7 above will produce identical totals. However, where activity changes the latter analysis will reflect the changes more accurately in the contracting process.

Contracts

• A contract (known as a Service Level Agreement – SLA) generally contains arrangements to vary the amount paid in accordance with the variation of activity from the contract baseline.

• As an example, lets say a critical care unit was negotiating one contract which had been set at the level of activity that occurred in the previous year, e.g. 1500 bed days. If the unit of activity was priced at £2000 per bed day (the total cost of providing the service) the income from this contract would be £3 million. If the occupancy to provide 1500 bed days was 68% (a six bedded critical care unit) and this occupancy increased to 80% there would be an additional 252 bed days with associated costs. Costs would not however rise at the full rate of £2000 per day since, for instance, building costs and medical costs (fixed costs) would not rise. However, bedside nursing costs and costs of drugs, consumables, blood etc. would all increase. This is generally covered in contracts by having a marginal (variable) cost clause for variations from target activity. For example, if the marginal costs clause was 50% then the hospital would receive £252,000 (252 days x £2000 x 50%) for the additional activity outlined above.

• In setting a marginal price it should be noted that the variable cost element of additional activity may be higher than the variable cost element used for the contract. Additional nurses, for example, are often sourced from agencies at costs significantly greater than those of permanent staff on the payroll. The contract would need to take account of the short term effect of these additional costs.

• In practice, for critical care units (which have significant variable costs) identifying the variable costs properly and incorporating clauses in contracts (SLAs) that appropriately reimburse the department (and therefore prevent overspends) is actually much more important than identifying an absolutely accurate baseline price. It is also of fundamental importance that the definition of activity is understood by both the hospital and purchasing agency. This definition should be a suitable proxy for variable costs.

• Critical care is by its nature transacted both internally and externally. Internal transactions relate to the costs of a department’s use of critical care. This element is usually included in the prices for that department’s activities. Depending on the budget model (section 4) used in the hospital this element may be recharged to the user department with a trading account or apportioned to the critical care budget.

• External transactions are generally taken to mean costs associated with patients who are transferred from another hospital and return back to that hospital after treatment. These are identified as critical care activity in SLAs and the currency of the transaction is usually bed days or patient dependency scored bed days.

• It is important to recognise the cost differentials that exist between the two types of workload. External referrals are often more complex and, therefore, more expensive than internal referrals. There are also fewer of them. The marginal costs charged on to purchasers should recognise the difference between the two types of activity to ensure purchasers pay appropriately and avoid over-charging.

Specialist commissioning and Critical Care Networks

• The above has been written assuming that critical care is supplied as a service within the normal contractual (SLA) arrangements, probably to several or many purchasing agencies. At the time of writing, a debate is taking place as to whether these arrangements should be totally or partially changed so that one purchasing agency would take lead responsibility for purchasing critical care services over a wider area or region. Such an arrangement is called specialist commissioning and is considered appropriate where:

  • services are specialised and need to be carried out in a small number of units

  • services would benefit from a planned approach (either relating to rationalization or expansion)

  • small numbers of expensive referrals would benefit from a shared ‘risk pool’ of purchaser funding (similar to an insurance policy approach)

• All three of these criteria apply in some respect to critical care services and, in particular, to those transfers made between hospitals for more specialised care.

• The merger of health authorities into strategic agencies with purchasing managed by small primary care groups may prove to be a driver for specialist commissioning of critical care.

• Though the debate over how specialised commissioning will affect critical care continues, what is already clear is that its implementation will lead to a need for more sophisticated activity reporting and with it an even more transparent view of how costs vary with each activity.

• Running alongside specialist commissioning is the development of local Critical Care Networks. These have developed out of the NHS modernisation plan and the view that collaboration and mutual support between hospitals can reduce the effect that individual hospitals suffer as a result of peaks and troughs of activity. The networks also allow for co-operation on shared protocols, education and other common issues.

• It is probable that these networks will eventually grow to have a role in the contracting process. One view of the way contracting might work in the future is that a lead purchasing agency works with a Critical Care Network to purchase all the critical care activities within their local area.

CAPITAL ASSETS, EXPENDITURE AND ASSET ACCOUNTING

Capital assets and capital charges

• The ‘NHS Trust Capital Accounting Manual’ defines a capital asset as a tangible productive resource with an expected life in excess of one year. Capital assets usually require repair and maintenance and have a cost of £5000 or more (including VAT).

• Since its inception, the NHS has always received a separate funding stream for the purchase of assets. Until 1991 no revenue charges arose from assets purchased from capital funding, but from April 1991 revenue charging, reflecting use of capital assets, was introduced. These capital charges were designed to:

  • Increase awareness of the costs of using assets and provide incentives to use them efficiently

  • Ensure the costs of asset use were included in the calculation of contract prices

  • Promote the forward planning of asset replacement.

• Capital charges are relevant to all assets owned by NHS trusts except those that are either donated or have a zero (written down) book value. Assets typically are either land, buildings or equipment.

• Assets are brought into the balance sheet at their purchase cost which is subsequently revalued as a result of either periodic assessment (land and buildings) or annual indexation (equipment).

• Each asset is given an asset life and a calculation is made which results in a charge to the trust’s revenue account. For example, a ventilator costing £20,000 with a ten year life would be written down to a zero book value by 10 revenue account charges of £2000 over a 10 year period (assuming zero inflation). This charge to revenue is termed depreciation. All assets are depreciated in this way except land which is assumed to retain its value through time.

• As the trust has to take account of all of its costs in contracting, the depreciation charge to revenue forms part of the calculation of prices used in SLAs. In turn this leads to income which is greater than expenditure and, theoretically, provides funds for future replacement purchases. This cash surplus, together with any received through an External Financing Limit (EFL – effectively an overdraft facility) allows the trust to formulate and deliver an annual capital spending plan (Programme).

• The key word above is theoretically. Theoretically there should be enough money to replace equipment (through depreciation) and buy new equipment (through the EFL). However, a number of factors tend to prevent this being the case. These are:

  • Revenue overspends eating into cash reserves

  • New developments exceeding the EFL allowance

  • Replacement equipment costing more than old equipment.

• This often leads to a bidding process followed by a prioritisation of bids against available funds. Often replacement equipment gets squeezed out leaving departments to manage as best they can.

Alternative funding of capital equipment

• There are three alternative routes to increase the availability of funding for capital purchases.

  • Increasing the EFL (or other earmarked funds) through a successful business plan application

  • Bids against trust funds

Increasing the External Finance Limit

• A bid to increase available EFL will need to be made with trust board approval and would usually involve a large sum of money – usually several hundred thousand pounds. The proposal would need to be of strategic significance and be subject to a business plan set out in a prescribed format following a detailed set of rules. So far as critical care is concerned this would only really be relevant where a new unit was being created or an old one completely refurbished.

• Increasingly bids are now possible against funding earmarked by the Department of Health or regional offices for critical care.

Trust funds

• Where hospitals have trust funds then equipment purchases may be possible from them. Each hospital will have its own arrangement. Funds are often left to critical care by grateful relatives and these are often restricted in use to improving the critical care environment.

Leasing

• The third alternative is increasingly common although leasing is usually a last resort and offers less good value than straight purchase. Leasing is a way of financing a purchase without using scarce capital funds, but from an accounting point of view it needs to be considered carefully. This is because accounting rules and the instruments of their compliance (the auditors) distinguish between two types of lease: the finance lease and the operational lease.

• The finance lease is regarded as a simple finance arrangement entered into in order to get something you otherwise would not be able to afford. In such an arrangement leasing charges are typically the total purchase costs plus finance charge with the ownership passing to the leasee from the leasor after the final payment has been made. From the auditor’s point of view such transactions are treated as capital purchases and are, therefore, charges against the EFL. They have to be accounted for as though they were purchased from capital funds. They, therefore, offer no advantage to the trust and should be avoided.

• An operational lease should be seen as a type of rental agreement. Key features of an operational lease are that ownership does not automatically pass to the leasee at the end of the lease. It is also required that the total paid over the life of the lease (after deducting sums for inflation and for the inherent finance charge) does not exceed 90% of the original purchase price. This is known as the 90% rule.

• In practice leasing companies and equipment suppliers seem very happy to offer compliant deals. However, it should be noted that there are two transactions from a procurement point of view: the purchase of the equipment (tender 1) and the choice of the best value lease (tender 2). Equipment suppliers often do not provide the most competitive prices for lease tenders. Advertisements for tender 1 should always include wording to make it clear that the intended purchase will be subject to an operational lease. Generally speaking, for best value to be obtained, a lease with the longest period that is also consistent with the 90% rule is most competitive. The life of a lease should reflect the expected life of the equipment, which is often nearer ten years than five, and leasing quotes should be obtained for a number of lease periods, e.g. five, seven and nine years. As specification and evaluation of leases is a technical area many trusts have employed specialist advisors to obtain best value and these advisors often identify options that are worth considering.

• Because it is like a rental agreement an operational lease payment is charged in full directly to the revenue account. Any lease deal needs provision to have been made in the revenue budget. Rolling forward equipment provision from lease to lease is, therefore, a lot less difficult than obtaining new equipment where the costs of the lease need to be provided in full. However, before re-leasing replacement equipment consideration should always be given to purchasing (or renting for an extended period) the old equipment from the leasing company. It may, after all, not need replacing!

Ref: Framework for financial management in intensive care, The Intensive Care Society