Long Term Financial Model User Guide - improvement.nhs.uk

1 Long Term Financial Model User Guide To be read in conjunction with LTFM Model issued by NHS Improvement August 2018 We support providers to give patients safe, high quality, compassionate care within local health systems that are financially sustainable. 1 | NHS Improvement LTFM User Guide : August 2018 Contents 1. Introduction .. 2 2. Objectives and High-Level Overview .. 3 3. Scope and terms of use .. 4 4. Model structure .. 7 5. Getting started .. 9 6. Key outputs .. 13 7. Sensitivities .. 14 8. Model cover sheets .. 15 9. Input worksheets .. 21 10. Memo worksheets .. 42 11. Sensitivity .. 48 12. Output worksheets .. 51 Appendices .. 55 2 | NHS Improvement LTFM User Guide : August 2018 1. Introduction To help perform its statutory duties, NHS Improvement maintains and uses Financial models for the purposes of assessing new Foundation Trust applications and significant transactions undertaken by NHS providers, and templates consolidating Financial information across local healthcare systems.

2 NHS Improvement s Long Term Financial Model (LTFM) is used to collect, analyse and sensitise provider Financial forecasts as part of a risk assessment process. It has been in use since 2004 by NHS Improvement (previously Monitor) to risk rate and assess Foundation Trust applicants and transactions between NHS providers. The Model was redesigned and rebuilt in 2018 and issued for use by the sector. This document provides guidance on the methodology and workings of NHS Improvement s Long Term Financial Model (LTFM) used either: As part of the foundation trust application process in determining Financial viability. For further information on these requirements, refer to the Guide for Applicants1, For use in a risk review of transactions (primarily mergers and acquisitions) undertaken by NHS trusts and foundation trusts. For simplicity, the Model assumes acquisition of one (or more) provider by another NHS provider.

3 For further information on these requirements, refer to the Transactions Guidance2, or To assess and appraise New Care Models (NCMs) as defined under the Integrated Support and Assurance Process (ISAP). For Further information on these requirements, refer to the Transactions Guidance2 or the ISAP guidance3. 1 2 3 3 | NHS Improvement LTFM User Guide : August 2018 2. Objectives and High-Level Overview The one single Model can be tailored to suit any existing NHS provider trust type ( Acute, Mental Health, Community, Specialist providers) and used for any of the three assurance processes defined above. The overall objective of the Model is to provide a set of fully integrated Financial statements (income and expenditure, balance sheet and cash flow) based on key drivers and assumptions underpinning the trust s Financial projections. For trusts with major Private Finance Initiatives (PFIs) or other major investments opening in future years (such as New Care Models), there may be a need to incorporate projections and assumptions over a nine-year period; the Model has been constructed to allow for this where necessary.

4 Please check with if you are unsure how many years your Model requires. When being used for review of a trust entering into a transaction with another trust, the Model is based on merger accounting whereby transactions are assumed to take place on 1 April of the outturn year. Dates in the Model must be set so that the outturn year is the year in which the merger occurs. Please see section for worked examples on Model dates. The outputs are automatically generated using user input data and are consistent with NHSI s assessment process. Users retain the functionality to run high level sensitivity and scenario analyses. However, we expect the LTFM to be submitted to NHSI excluding any additional scenario analysis performed by the Trust. These inputs should be removed using the Clear all inputs from sensitivities macro on the Completion_Checklist sheet.

5 4 | NHS Improvement LTFM User Guide : August 2018 3. Scope and terms of use The Model has capacity to: Accommodate multiple providers (up to 8) Triangulate finance, workforce and activity data Accommodate NHSI policies SOF finance metrics Align with NHSI standardised Financial outputs Provide visibility of new forms of income, NCM payment mechanisms and contract arrangements Provide visibility of stranded costs ( PFI) as a result of reconfiguration Model incremental impact of the NCM contract changes Provide comparison between BAU and do something scenarios for counterfactual analysis Provide a flexible time period: 3 years historic, the current/out-turn year and up to 9 future years Apply sensitivities to facilitate scenario analysis Model Limitations Prior to using the LTFM please ensure you have read and understood the terms of use, limitations and disclaimer section on the cover of the LTFM.

6 The Model limitations are outlined below; The Model is an integrated strategic planning tool and not a detailed budget setting tool. It requires information from the trust s own detailed income and activity/capacity-based modelling to form the basis of the income analysis. The Model is not designed for use with non-NHS providers and/or commissioners. NHS Improvement will consider any amendments which may need to be made to accommodate Integrated Care Organisations in future Model releases. The Model has a maximum forward time period of 9 years 5 | NHS Improvement LTFM User Guide : August 2018 Terms of use, limitations and disclaimer NHS Improvement does not give any warranty or any form of guarantee whatsoever in relation to the Model , including but not limited to whether the Model is free from errors or fit for purpose; In working with and using the tool, the user bears full and exclusive responsibility including (but not limited to) the Financial information submitted in the Model and the use of, and outputs from, the Model ; The user will update the Model , in line with Financial Model best practice.

7 In this regard, the user will perform, or have performed on its behalf, reviewing procedures to satisfy itself that the Model fulfils its requirements; The user, together with any relevant partners, is solely responsible for the appropriateness of any commercial, strategic or other decisions it takes following it takes following use of the Model ; The user agrees that it will not disclose to any third party any information of a confidential nature which is obtained by or which is made known to it as a result of the provision by NHSI of the Model ; and The user acknowledges that the Model remains the intellectual property of NHSI. Consequently, the user agrees that it will not disclose the Model to any third party without NHSI s written permission and will not use the Model for any purpose other than that intended by NHSI. Summary of Transaction Process and Model use NHSI is responsible for approval of significant transactions of and between NHS providers.

8 Where we classify a transaction as significant, foundation trusts must, in addition to the evidence requested for a material transaction, provide us with a greater degree of assurance regarding the risk of breaching their licence conditions, or for NHS trusts, the equivalent of these conditions. This will comprise a high-level review at the strategic options case (SOC) stage focusing on strategic rationale and identification of red flags, with the majority of the 6 | NHS Improvement LTFM User Guide : August 2018 detailed work undertaken at the full business case (FBC) stage. At the business case stage, trusts must prepare Financial plans in a suitable long-term Financial Model (LTFM) and should contact NHSI using to confirm the most suitable Model to use. The detailed review considers how the proposed transaction may affect the risk profile of the ongoing trust, or the new trust in the event of a merger.

9 For further information please refer to NHS Improvement s Transactions guidance4. 4 7 | NHS Improvement LTFM User Guide : August 2018 4. Model structure High level Model structure The Model is structured to capture a trust s baseline underlying as is business with any service/strategic developments layered on the top of this. Inputs for income and expenditure are entered in actual / nominal prices for historical and outturn years and in real prices ( net of inflation) for future years. Assumptions are input on an annual basis. Service developments/New Care Model contract elements are input separately using the sheets allocated, the Model will combine these (post service development) with the base input information (baseline) and inflation assumptions to deliver nominal aggregated outputs in the output sheets. The Model assumes that the baseline is the counterfactual position and that this would reconcile with the Trust s business case.

10 Service Developments are applied at a Trust level for assessments and New Care Models and at an aggregated Trust level for Mergers. Merger Service developments should include any merger synergies and any service developments not included in the baseline for individual Trusts. 8 | NHS Improvement LTFM User Guide : August 2018 Inflation assumptions are applied annually from the first forecast year and are assumed to occur evenly throughout the year. Each Trust can input organisational specific assumptions. The Model has been constructed in a modular fashion split into input or sensitivity sheets, (denoted by an I ), calculation sheets (denoted by a C ), and output sheets (denoted by an O ). Users should not attempt to insert extra rows or sheets in the Model . 9 | NHS Improvement LTFM User Guide : August 2018 5. Getting started When completing the Model use this guidance, and the i pop up boxes that show in the Model .