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Annual Audit Letter Kirklees PCT Audit 2010/11


Contents Key messages..............................................................................................................................................................2 Audit opinion and financial statements...................................................................................................................2 Value for money .....................................................................................................................................................2 Current and future challenges ...................................................................................................................................3 Financial statements and statement on internal control .........................................................................................5 Overall conclusion from the audit ...........................................................................................................................5 Significant weaknesses in internal control..............................................................................................................5 Value for money...........................................................................................................................................................6 Payment by results – data assurance framework ...................................................................................................9 Closing remarks ........................................................................................................................................................13 Appendix 1 - Fees......................................................................................................................................................14 Appendix 2 - Glossary...............................................................................................................................................15 Traffic light explanation Red Amber Green

Audit Commission

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Key messages This report summarises the findings from my 2010/11 audit. My audit comprises two elements: â–  â– 

the audit of your financial statements; and my assessment of your arrangements to achieve value for money in your use of resources.

I have included only significant recommendations in this report. The PCT has accepted these recommendations. Key audit risk

Our findings

Value for money

Unqualified audit opinion Proper arrangements to secure value for money

Audit opinion and financial statements I issued an audit report including an unqualified opinion on the financial statements on 9 June 2011. The quality of the working papers supporting the accounts was generally good. The PCT remained within its resource and cash limits in 2010/11, again demonstrating good financial management despite the more challenging financial position

I issued an unqualified conclusion stating that the PCT had adequate arrangements to secure economy, efficiency and effectiveness in the use of resources. This conclusion includes my consideration of two criteria, specified by the Audit Commission, related to your arrangements for securing financial resilience, and challenging how the PCT secures economy, efficiency and effectiveness. My work found your arrangements in both these areas to be satisfactory, based on my understanding that the PCT has not committed to provide any further financial support to Mid Yorkshire Hospitals Trust (MYHT), beyond that reflected in the financial plans that the PCT submitted to the Strategic Health Authority (SHA) in May 2011.

As I reported in my Annual Governance Report on 8 June, a number of non material amendments were made to the draft accounts before I issued my opinion, and there were also 3 non material unadjusted errors.

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Current and future challenges Looking ahead the PCT faces a number of significant challenges in meeting the health needs of the population of Kirklees whilst maintaining its focus on financial resilience and efficiency. Meeting these challenges will be difficult given the unprecedented organisational changes the PCT has to manage. Strong and focused leadership is required at both cluster and PCT level to ensure robust and deliverable plans are in place and operational to tackle the totality of the current and emerging change agenda.

Economic downturn and pressure on the public sector

Reduced levels of growth in revenue allocations make the financial outlook difficult. The presence of a financially challenged provider trust within the health economy potentially adds to the financial risks. The PCT has strong arrangements for financial management, as demonstrated by the delivery of its QIPP target in 2010/11, and a good track record of delivering its control total which it was again able to achieve in 2010/11. It is essential that the financial position continues to be tightly monitored and controlled through the more challenging times ahead.

Pressures in health economies

One of the PCT’s main providers, Mid Yorkshire Hospital Trust (MYHT), faces a significant challenge in achieving a balanced financial position in 2011/12. The trust has a sizeable cost reduction programme in place, but it seems likely on current indications that this will be insufficient to bridge the gap. Whilst the PCT has signalled its willingness to work constructively with the trust as it seeks to address this challenge, it is my understanding that the PCT has not committed to provide any further financial support to MYHT beyond that reflected in the financial plans that the PCT submitted to the SHA in May 2011.

Preparing for Clinical Commissioning Groups

The Health and Social Care Bill sets out a number of proposed changes in the NHS including the creation of clinical commissioning groups and the abolition of PCTs from April 2013. The PCT has established arrangements for two GP commissioning consortia in Kirklees and these arrangements will need to be revisited in light of the government's plans to create clinical commissioning groups.

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Establishing the PCT Cluster

The scale of these changes means that inevitably demands on management will be extreme and management capacity will be stretched. In order to strengthen management resilience the PCT is now part of the Calderdale, Kirklees, and Wakefield cluster of PCTs. A cluster team of executive directors is now in place, and arrangements for governance, financial and performance management across the cluster are being developed.

Transforming Community Services

During the course of 2010/11 the PCT successfully laid the foundations for the formal establishment of a social enterprise, Locala Community Partnership, from the 30th September 2011. Much remains to be done in the coming months, and a transition plan, with focused work streams, overseen by a Programme Board is in place which it is hoped will enable the necessary changes to take place. Capacity to manage the workload remains a risk and should be closely monitored.

Quality, Innovation, Productivity, and Prevention (QIPP)

Further reductions in running costs will be required in 2011/12, along with a ÂŁ13.3m QIPP programme of cost reductions and efficiencies, if the PCT is again to meet its financial targets. The changes in NHS structures and the current financial situation affecting both the NHS and local government will present a considerable challenge for the PCT to make the transformational changes required to achieve future required QIPP savings. Existing governance arrangements over the QIPP programme are robust, and these arrangements will remain in place for the time being although the cluster and clinical commissioning groups will need to be included in QIPP governance to an increasing extent. The newly created Finance, Strategy, Performance and Risk Committee, which brings together executive directors, non executive directors, and clinicians has a key role in ensuring that delivery of QIPP continues to be closely monitored and challenged during 2011/12 and beyond.

Recommendation R1 Provide strong and focused leadership via cluster and PCT Boards to ensure robust delivery plans are in place to tackle the totality of the current and emerging change agenda.

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Financial statements and statement on internal control The PCT’s financial statements and Statement on Internal Control are an important means by which the PCT accounts for its stewardship of public funds. Overall conclusion from the audit I issued an unqualified opinion on the PCT's accounts on 9 June 2011, in advance of the Department of Health's deadline of 10 June. In my opinion: ■ the accounts gave a true and fair view of the PCT's financial affairs and of its net operating costs for the year; and ■ in all material respects the expenditure and income had been applied in accordance with the relevant authorities. Before giving my opinion I reported to those charged with governance, in this case the Audit Committee, on the issues arising from the 2010/11 audit. A detailed report was presented to the Audit Committee on the 8 June and only the key issues are summarised here The draft accounts were of good quality. The Director of Finance adjusted the draft accounts to reflect a number of matters which arose during the audit. None of these adjustments was material, and none impacted upon the bottom line. I reported three errors in respect of which the Director of Finance declined to amend the accounts on the grounds that the items were not material. Those charged with governance agreed with the Director of Finance's judgement and this was reflected in the Letter of Representation. The quality of the working papers supporting the accounts was generally good and the finance team provided timely support and assistance during the audit.

Significant weaknesses in internal control I identified no significant weakness in your internal control arrangements. I am satisfied that the PCT's statement on internal control met the requirements specified by the Department of Health and was not misleading or inconsistent with other information I am aware of from my audit of the financial statements.

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Value for money I considered whether the PCT is managing and using its money, time and people to deliver value for money. I assessed your performance against the criteria specified by the Audit Commission and have reported the outcome as the value for money (VFM) conclusion. I assess your arrangements to secure economy, efficiency and effectiveness in your use of resources against two criteria specified by the Audit Commission. My overall conclusion is that the PCT has proper arrangements to secure, economy, efficiency and effectiveness in its use of resources. My conclusion on each of the two areas is set out below.

Value for money criteria and key messages Criterion

Key messages

1. Financial resilience

Arrangements to deliver the QIPP programme

The organisation has proper arrangements in place to secure financial resilience.

I reviewed your arrangements to deliver your QIPP programme and required management cost reductions. The first phase of this review focused on your arrangements for delivering the £14.9m 2010/11 QIPP programme. I found that strong governance and monitoring arrangements had been put in place. The PCT was able to deliver the programme in total although some £4.5m of non recurrent mitigating actions were required to compensate for slippage in some areas.

Focus for 2010/11: The organisation has robust systems and processes to manage effectively financial risks and opportunities, and to secure a stable financial position that enables it to continue to operate for the foreseeable future.

The second phase reviewed the PCT's progress in developing the QIPP programme for 2011/12 and beyond. The QIPP programme for 2011/12 is sized at £13.3m. Board members, clinicians, and PCT managers have been fully engaged in developing the programme. The £13.3m has been allocated across the programme areas and projects have been identified sufficient to deliver the required savings and efficiencies. It is important that the PCT now moves rapidly from the planning to the delivery phase to maximise the likelihood that the required savings will be delivered within planned timescales. Delivery of the programme in 2011/12 will be a significant challenge given its scale and the fact that realising savings from, for example, secondary care may prove difficult. Existing governance

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Criterion

Key messages arrangements over the QIPP programme are robust, and these arrangements will remain in place for the time being although the cluster and GP commissioning consortia will need to be played into QIPP governance to an increasing extent going forward. The newly created Finance, Strategy, Performance and Risk Committee, which brings together executive directors, non executive directors, and clinicians has a key role in ensuring that delivery of QIPP continues to be closely monitored and challenged during 2011/12 and beyond. Medium term financial planning The PCT's medium term financial plan has been reviewed and updated to reflect the requirements of the operating framework. The plan forecasts delivery of a surplus each year, however there are risks. Achieving the £8.3m control total in 2011/12 depends upon delivering the £13.3m QIPP programme, which the PCT recognises may be difficult to deliver in full, and there are further risks relating to activity assumptions and continuing care. There is some flexibility within the plan to meet these risks, and the PCT is exploring opportunities via the cluster and GP consortia to identify new QIPP ideas. MYHT faces a significant challenge in achieving a balanced financial position in 2011/12. The trust has a sizeable cost reduction programme in place, but it seems likely on current indications that this will be insufficient to bridge the gap. Whilst the PCT has signalled its willingness to work constructively with the trust as it seeks to address this challenge, it is my understanding that the PCT has not committed to provide any further financial support to Mid Yorkshire Hospitals, beyond that reflected in the financial plans that the PCT submitted to the SHA in May 2011.

2. Securing economy efficiency and effectiveness The organisation has proper arrangements for challenging how it secures economy, efficiency and effectiveness. Focus for 2010/11: The organisation is prioritising its resources within tighter budgets, for example by achieving Audit Commission

QIPP As noted above, the PCT developed and delivered a QIPP programme of some £14.9m in 2010/11 and has plans in place to deliver £13.3m of QIPP savings in 2011/12. Savings and efficiencies have been delivered across a range of areas including long term conditions, prescribing, and primary care although in some areas, notably planned care, expected savings have been slower to materialise. The PCT has made use of benchmarking data to ensure planned savings are realistic. A continual process of review throughout the year ensures schemes which are not delivering are replaced by new, more robust QIPP projects where appropriate.

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Criterion

Key messages

cost reductions and by improving efficiency and productivity.

Managing the separation of the PCT's provider functions I have kept the PCT's progress towards the divestment of its provider functions in accordance with 'transforming community services' under continual review. I am satisfied that the PCT has taken appropriate steps to mitigate the risks that this process presents to the financial management and governance of the PCT and our VFM conclusion. During the course of 2010/11 the PCT successfully laid the foundations for the formal establishment of a social enterprise, Locala Community Partnership, from the 30th September 2011. In order to progress towards a social enterprise model an extended process of staff consultation was required, along with rigorous legal and financial assessment. This necessarily delayed the commencement of transition and means much remains to be done in the coming months, for example: work around pensions, IT, estates and setting up a separate financial systems. A transition plan, with focused work streams, overseen by a Programme Board is in place which it is hoped will enable the necessary changes to take place during the next 3 months. Capacity to manage the workload remains a risk and should be closely monitored. I will continue to monitor progress during the transition period. Follow up I followed up recommendations in my 2009/10 use of resources report and am satisfied that sufficient progress had been made and that there were no outstanding matters relevant to my VFM conclusion.

Recommendation R2 The PCT and cluster boards should: â–  Maintain strong strategic level ownership of the QIPP process to ensure required savings and efficiencies are delivered to the required timescales â– 

Closely monitor delivery of the budget and medium term financial to ensure all significant financial risks are appropriately addressed.

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Payment by results – data assurance framework In 2010/11, we reviewed the quality of costing information by reviewing reference cost submissions at all acute trusts. We also carried out clinical coding and outpatient reviews at the trusts which were the poorest performers in 2008/09. We reviewed the accuracy of clinical coding at 20 independent sector hospitals which provide NHS care. For the first time we considered whether the arrangements PCT commissioners put in place to stop poor quality data being used for Payment By Results (PbR) contracting are appropriate. The key findings were as follows: ■ We rated the PCT's arrangements for securing good quality data from its providers at level '3' (performing strongly). ■ We found the 2009/10 reference cost submissions at both Calderdale & Huddersfield Foundation Trust (CHFT) and MYHT were materially accurate. ■ We found inpatient and outpatient coding quality at MYHT had improved at HRG level compared with 2009/10 and was now better than the national averages. We discussed and agreed reports with the host commissioning PCT, which shares reports with other significant commissioning PCTs. Local reports for your providers are also available for download on the PbR assurance portal and we publish all results from the audits on the Audit Commission website. Implementation of recommendations should be followed up at contract monitoring meetings with providers. The PCT should also regularly use the PbR National Benchmarker to identify more issues with provider data and performance. Reference costs For the first time the framework included a review of reference cost submissions at all acute trusts in 2010/11. Reference costs are the average cost to the NHS of providing a defined service in a given financial year. They are important because they provide the NHS with key data to calculate and develop the national tariff; produce Programme Budgeting data; assess various NHS productivity analysis for example the Office of National Statistics public healthcare output; and calculate the weighted capitation formula used to inform PCT allocations.

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The objectives of the audits were to form a view on the data quality and therefore accuracy of the 2009/10 reference cost submission, and identify issues and areas where action can improve the quality of reference cost submission data. The review did not review in detail the accuracy of all reference cost data. The work at CHFT took place in March and April 2011. The work at MYHT was undertaken by the appointed auditors for that Trust, Grant Thornton. Both audits found that the Trust's reference cost quantum in 2009/10 were materially accurate. The arrangements to support the submission of the reference costs return were considered under four specific areas. Table 1 below sets out the findings against the four areas assessed: Table 1: Assessment of reference cost data quality arrangements Area assessed

What we were looking for

Findings - CHFT

Findings - MYHT

Engagement

There is senior level engagement in and support for the data quality of reference costing data.

Performing well

Adequate performance

Activity reporting

There are arrangements to support recording all relevant activity right at final submission.

Adequate performance

Performing well

Approach to costing

There are arrangements to ensure a robust approach to costing. The organisation’s IT systems provide adequate functionality and controls to ensure the production of robust activity and costing information.

Performing well

Performing well

Adequate performance

Adequate performance

Data capture systems

Source: Audit Commission Action plans to further enhance the arrangements were agreed with both trusts at the conclusion of the audits. PCT arrangements The objective of this review is to obtain assurance that the quality of data that underpins PbR contracts is good and the arrangements that are in place to support this are appropriate. We reviewed the PCT's arrangements against five characteristics and judged that, overall, the PCT is performing well. Table 2 below sets out our judgement against each of the individual characteristics.

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Table 2:

PCT PBR arrangements: Judgements against each characteristic

Characteristic

Judgement

1. There is accountability for improving poor provider data quality and this is supported by clear policies and procedures

Performing well

2. There is agreement about the quality of data that must be supplied to PCTs by providers

Performing adequately

3. Engagement with GPs to promote understanding of data quality and its impact on finances.

Performing well

4. Provider data is cleaned, validated and benchmarked then shared effectively within the PCT.

Performing well

5. Procedures to follow up PbR queries and audit recommendations at providers that impact on data quality.

Performing adequately.

Source: Audit Commission

Inpatient data reviews at higher risk trusts An independent, targeted external clinical coding audit on admitted patient care activity at MYHT was carried out in September 2010 using data from 1 April to 30 June 2010. It also followed up recommendations from the audit completed in previous years. The error rate measured using Healthcare Resource Groups (HRGs) had improved since the previous audit. The HRG error rate at the Trust was 7.7 per cent. This is an improvement on 2009/10 when the Trust’s HRG error rate was 16.3 per cent and better than the national average of findings from 2009/10 of 9.1 per cent. The Trust had improved its coding arrangements and this contributed to the improvement in the HRG error rates. The net financial value of the HRG errors is that, based on the sample tested, the Trust is undercharging its commissioners by £4,632 or 1.2 per cent from an audit sample of £373,987. However, the basis on which samples are selected means that the results cannot be extrapolated to indicate a statistically robust overall error rate or to calculate any overall amounts due because of overcharging or undercharging for work.

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Clinical coding accuracy measured using diagnosis and procedure coding had not improved, partly because the Trust was not following the March 2010 guidance on coding of co-morbidities in the audit sample period. The audit identified 19.5 per cent of diagnosis and procedure codes were incorrect – above the 11 per cent found nationally in 2009/10. At the conclusion of the review an action plan was agreed which committed the trust to a number of actions designed to further improve the quality of its documentation and aspects of its clinical coding procedures. Outpatient data reviews at higher risk trusts We undertook an audit of out-patient activity at Mid Yorkshire Hospitals NHS Trust in October 2010 based on outpatient data from July 2010. The audit was designed to test the quality of outpatient data in support of PbR. The previous review in 2008/9 found that the Trust's data quality arrangements were adequate in the areas of accountability, data entry, and IT systems. However the Trust did not have a data quality policy and so was scored as below minimum standards in the area of policies and procedures. The findings from our 2010/11 audit indicate that data quality arrangements have improved, such that the Trust now meets the minimum standards in all areas. Our data testing demonstrated good standards of outpatient data quality. The attendance error rate was 0.7 per cent, compared to 2.7 per cent in 2008/09. The Trust is performing better than the national average of 5.2 per cent. The net financial impact of the errors found was just £121 (1%) on a sample of £12002. At the conclusion of the review an action plan was agreed which committed the trust to a number of actions designed to further improve the quality of its outpatient clinical coding procedures. Payment by results in 2011/12 We will deliver a full programme of data assurance reviews in 2011/12. It will consist of the following. ■ A continuation of our work on assessing the adequacy of commissioners' arrangements for ensuring the accuracy of its providers' data. ■ Follow-up of all previous local work delivered by the assurance framework. ■ A national audit programme at all acute trusts reviewing the accuracy of coding and other data that feeds payments under PbR. ■ An updated PbR National Benchmarker providing more information and support to commissioners as well as providers.

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Closing remarks I have discussed and agreed this letter with the Chief Executive and the Director of Finance. I will present this letter at the Audit Committee in September 2011 and will provide copies to all board members thereafter. More detailed findings, conclusions and recommendations in the areas covered by our audit are included in the reports issued to the PCT during the year. Table 3: Reports issued during 2010/11

Report

Date issued

Audit fee letter 2010/11

March 2011

Audit plan 2010/11

January 2011

Annual governance report

8 June 2011

Opinion on financial statements

9 June 2011

Value for money conclusion

9 June 2011

Final accounts memorandum

July 2011

Annual audit letter

September 2011

The PCT has taken a positive and constructive approach to our audit. I wish to thank the PCT staff for their support and co-operation during the audit. Paul Lundy District Auditor September 2011

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Appendix 1 - Fees Actual

Proposed

Variance

Audit fee

200000

200000

0

Rebate (arising from change in approach to giving the VFM conclusion in 2010/11)

(4247)

0

(4247)

Payment by results

30138

33400

(3262)

Total audit fees

225891

233400

(7509)

Non-audit work

11400

11400

0

Total

237291

244800

(7509)

[NOTE: The reference cost element of the PBR Assurance Framework was commissioned and paid for directly by Calderdale and Huddersfield Foundation Trust, so the fee paid by Kirklees and Calderdale PCTs was adjusted accordingly].

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Appendix 2 - Glossary Statement on internal control Public bodies must provide assurance that they are appropriately managing and controlling their money, time and people. The Statement on Internal Control (SIC) is an important document for communicating these assurances to Parliament and citizens. The SIC is the means by which the Chief Executive Officer declares his or her approach to and responsibility for, risk management, internal control and corporate governance. It is also used to highlight weaknesses which exist in the internal control system within the organisation. It forms part of the Annual Report and Accounts. Audit opinion On completion of the audit of the financial statements, I must give my opinion on the financial statements, including: ■ whether they give a true and fair view of the financial position of the audited body and its spending and income for the year in question; and ■ whether they have been prepared properly, following the relevant accounting rules. If I agree that the financial statements give a true and fair view and that the spending and income was regular, I issue an unqualified opinion. I issue a qualified opinion if: ■ I find the statements do not give a true and fair view; or ■ I cannot confirm that the statements give a true and fair view; or ■ I find that some spending or income was irregular. Value for money conclusion The auditor’s conclusion on whether the audited body has put in place proper arrangements for securing economy, efficiency and effectiveness in its use of resources based on criteria specified by the Audit Commission. If I find that the audited body had adequate arrangements, I issue an unqualified conclusion. If I find that it did not, I issue a qualified conclusion.

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If you require a copy of this document in an alternative format or in a language other than English, please call: 0844 798 7070 © Audit Commission 2011. Design and production by the Audit Commission Publishing Team. Image copyright © Audit Commission.

The Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit Commission explains the respective responsibilities of auditors and of the audited body. Reports prepared by appointed auditors are addressed to non-executive directors, members or officers. They are prepared for the sole use of the audited body. Auditors accept no responsibility to: ■ any director/member or officer in their individual capacity; or ■ any third party.

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