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					NHS Executive

NHS Finance Manual

1 Revenue resource allocation
Contents Centrally funded initiatives & services and special allocations (CFISSA). ................... 1 Modernisation Fund ............................................................................................... 2 Education and Training and Research and Development ....................................... 2 Special Allocations ................................................................................................. 3 Statutory Bodies ..................................................................................................... 3 Other initiatives and services ................................................................................. 3 Health authority allocations ........................................................................................... 4 Review of resource allocation ................................................................................ 4 Current arrangements ............................................................................................. 4 Elements of resource allocation.............................................................................. 5 The weighted capitation formula ............................................................................ 6 Baselines ...................................................................................................................... 10 Distance from target ..................................................................................................... 11 Pace of change ............................................................................................................. 11

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This chapter gives an overview of revenue resource allocation. It describes briefly how the main elements are determined and allocated. Revenue allocations to health authorities for 2000/01 were made in December 1999. More details on 2000/01 health authority allocations can be found in the 2000/01 Health Authority Revenue Cash Limits Exposition Book (2000). An extract of this can be found on the internet at: 

1.2

http://www.doh.gov.uk/allocations/2000-2001/

1.3

Within the total sum available for hospital and community health services (HCHS) revenue and discretionary family health services (general practice prescribing and discretionary general medical services) judgements are made on priorities. There has to be a careful balance between investing in important areas (such as education and training and research & development (R&D), and the Government’s agenda for modernisation) and funding health authorities.

Centrally funded initiatives & services and special allocations (CFISSA).
1.4 CFISSA is the name given to the HCHS central budget programme. Each year Ministers agree the strategic aims and process to be followed in setting budgets

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within the CFISSA programme. This takes into account work being undertaken on the 3-year Spending Reviews with HM Treasury. The programme funds activities in the following areas:     

Modernisation Fund (MF); Education & Training and R&D; Special Allocations; Statutory Bodies; and Other initiatives and services

Modernisation Fund 1.5 This funds the Government’s modernisation agenda for the NHS. It contains funding directed at:    

Reducing waiting lists; Improving mental health services; Developing Primary Care services (eg HAZ’s, NHS Direct); Investing in IM&T

Education and Training and Research and Development 1.6 There are 3 budgets in support of education and training and one in support of Research and Development (R&D): 

NMET: Non-medical Education and Training. Funds the education and training of nurses, midwives, some professions allied to medicine and scientists and technicians;



MADEL: Medical and Dental Education. Provides funding to enable the NHS to secure the continuous supply of appropriately trained doctors;



SIFT: Service Increment for Teaching. This funding meets the additional service costs of supporting undergraduate medical and dental education;
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 1.7

R&D: funds the NHS research & development programme.

Since 1999/2000 increases to NMET and MADEL are funded from the MF.

Special Allocations 1.8 These fund specific services allocated to health authorities either by reference to a weighted capitation formula or another method specific to that allocation. There are 4 special allocations which support:     1.9

HIV/AIDS treatment and care; HIV prevention; Out of Hours; Drug Misuse Services.

Since 1999/2000 increases to Out of Hours and Drug Misuse are funded from the MF.

Statutory Bodies 1.10 Statutory Bodies include such organisations as the   

Prescription Pricing Authority; National Blood Authority; and Dental Practice Board.

1.11 Each body is funded directly by the NHS Executive or the wider Department of Health acting for the Secretary of State. Other initiatives and services 1.12 These cover a wide range of activities from which the generality of health authorities benefit. About 100 budgets are funded in this area. Some of the budgets pay for patient activity through a central contract with NHS Trusts.

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Others pay for services on behalf of all health authorities (eg the purchase of vaccines) and support special initiatives. These budgets fall within the following areas of activity:    

Demand led services; Centrally purchased services; Developmental activity; Policy support; Technical and IM&T.

Health authority allocations
Review of resource allocation 1.13 On 10 November 1998 a wide ranging review of the formula used to make allocations to health authorities and Primary Care Groups/Trusts was announced. The aim is to produce a fairer means of allocating resources. 1.14 There is now a freeze on further changes to the existing formula to maximise stability and certainty for health authorities and Primary Care Groups while allowing this wide ranging review to take place. Other than for routine data changes, the freeze will last until at least 2001/02. 1.15 The review of the formula is being carried out under the auspices of the Advisory Committee on Resource Allocation (ACRA). 1.16 Further information on the review can be found at: 

http://www.doh.gov.uk/allocations/review/

Current arrangements 1.17 The rest of this section describes the current arrangements for revenue resource allocation.

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1.18 In 1998 the White Paper The new NHS proposed unifying the three funding streams:   

hospital and community health services (HCHS); discretionary general medical services (GMSCL) (GP practice infrastructure, ie practice staff wages, premises and equipment etc); general practice prescribing (drug costs of prescriptions dispensed (not dispensing fees)).

1.19 Since April 1999 health authorities and Primary Care Groups have been funded through a single unified allocation. 1.20 Health authorities receive unified allocations to commission healthcare services for their populations. It is for health authorities, in partnership with NHS Trusts, Primary Care Groups, local authorities and local stakeholders to determine how best to use their funds to meet national and local priorities for improving health and modernising services. 1.21 The underlying principle of resource allocation in the NHS is equity. This principle was adopted by the Resource Allocation Working Party (1976) who expressed this as “equal opportunity of access to healthcare for people at equal risk”. 1.22 We therefore allocate funding to health authorities on the basis of the relative needs of their populations. A weighted capitation formula is used to determine each health authority's target fair share of available resources, to enable them to commission similar levels of health services for populations in similar need. However, the weighted capitation formula is used to set targets, which then inform allocations. The formula does not determine allocations. Actual allocations reflect decisions on the speed at which health authorities are brought nearer to target through the distribution of extra funds.

Elements of resource allocation 1.23 The following four elements are used to set health authority actual allocations: 

weighted capitation targets - set according to the national weighted capitation formula which calculates health authorities’ fair shares of available resources based on the age distribution of the

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population, additional need and the unavoidable variations in the cost of providing services; 

recurrent baselines - represent the actual current allocation which health authorities receive. For each allocation year the recurrent baseline is the previous year's actual allocation, plus any adjustments made within the financial year;



distance from target (DFT) - this is the difference between bullet point 1 and 2 above. If 1is greater than 2, a health authority is said to be under target. If 1is smaller than 2, a health authority is said to be over target;



pace of change - this is the speed at which health authorities are moved closer to their weighted capitation targets. The pace of change is decided annually by Ministers for health authorities and by health authorities for Primary Care Groups.

The weighted capitation formula 1.24 The current formula has the following three components:   

hospital and community health services (HCHS); general medical services cash limited (GMSCL); prescribing.

1.25 The three components of the formula are used separately to weight each health authority’s "crude" population according to their relative need (age and additional need) for healthcare and the unavoidable geographical differences in the cost of providing healthcare (market forces factor). Population 1.26 The most important determinant of need for health services is the size of the population. From April 1999:

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1.27 Health authorities are responsible for their resident population, plus all patients registered with GPs who form part of PCGs for which the health authority are responsible but who are resident elsewhere; minus residents who are registered with GPs who form part of PCGs responsible to another health authority. 1.28 Primary Care Groups are responsible for all patients registered with GPs in practices forming the PCG, plus any residents within the agreed geographical boundaries of the PCG who are not registered with a GP. Age related need 1.29 The age weighting reflects the variations in the need for healthcare arising from the age structure of the local population. HCHS 1.30 The average per capita resource use for each of eight age groups, and the costs of activity for the various programmes of expenditure are calculated. The national average expenditure per head for each age band is calculated and the local population is then weighted accordingly. GMSCL 1.31 The Morbidity Statistics from General Practice - 4th National Study (MSGP4) are used to generate a weighting for each age band, based on the average number of consultations that each age band made within the study year. The average consultation time and the proportion of home visits by age group are also taken into account. The weights for each age group are combined to produce seven age weights. Prescribing 1.32 The population is adjusted for both age and sex. This is based on analysis of total prescription cost data of 120 English practices over a one year period. The age/sex weights derived from this analysis and a separate weighting for temporary residents are described as Age, Sex, Temporary Resident Originated Prescribing Units (ASTRO-PUs). Additional need 1.33 The additional need weighting is used to reflect differences in relative need, over and above those accounted for by age.

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HCHS 1.34 The additional needs weighting takes the form of four indices of need for different services: acute; psychiatric; community psychiatric; and nonpsychiatric community. Each index is made up of various health indicators and socio-economic variables. 1.35 Each HCHS programme is put into one of the four categories and three year averages of the latest available national expenditure shares for the categories are then used to determine the weightings for the overall needs adjustment. GMSCL 1.36 The Standard Illness Ratio under 75 raised to the power of 0.25 is used to weight for additional need. Prescribing 1.37 For 1999/2000 allocations, a new additional need index was introduced. It contains the following variables:     Cost 1.38 The cost weightings take account of the fact that the cost of providing healthcare is not the same everywhere. HCHS 1.39 Indices are constructed which reflect the cost of: staff; medical and dental London weighting; non pay; and land, buildings and equipment. These separate indices are combined into a single market forces factor (MFF) index, using national average expenditure weights. There is also an emergency ambulance cost adjustment (EACA) to reflect the geographical variation in costs of delivering emergency ambulance services.

residents in households aged 16 and over (no upper limit) who are economically inactive due to permanent sickness; dependant persons in households with no carer; students; 0-1 year old babies.

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GMSCL 1.40 Indices are constructed which reflect the cost of: staff; land; buildings; and equipment. These indices are combined into an integrated MFF by applying the relevant national proportion of total expenditure. Prescribing 1.41 The prescribing component has no MFF. Calculation of targets 1.42 Weighted capitation targets are not fixed in time, but are recalculated annually to determine each health authority’s relative share of overall resources. Changes to targets are normally the result of:   

routine updating to take advantage of the latest available data, eg population figures; boundary changes; changes to the formula.

1.43 Weighted capitation targets inform the allocations process, they do not directly set allocations. Changes in targets do not lead to immediate and corresponding changes in actual allocations. 1.44 The weighted capitation formula is used to calculate relative population shares. It does not determine a cash value. Once the weighted populations have been calculated these are converted into cash targets, based on the total available cash. 1.45 Weighted populations are calculated for each adjustment in each component of the formula. A weighted population is then worked out for each component. The components are then combined, proportional to the national expenditure on each component for the latest available year, to create a unified weighted population. 1.46 Finally the two supplements (see below) for: 

rough sleepers, and

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

people who have difficulties with the English language,

are added as cash adjustments to targets. Rough Sleepers Adjustment 1.47 The number of rough sleepers, based on the 1991 Census count, scaled up to the Shelter estimate of rough sleepers, in an health authority is weighted by the per capita cost for rough sleepers. The costings are based on work carried out for the Thames health authorities based on a number of acute admissions made for the homeless. Health authority targets are adjusted to reflect their expected costs of treating rough sleepers. English Language Difficulties Adjustment 1.48 By multiplying the national average costs of interpretation, advocacy and translation (IAT) by the estimates of the number of people experiencing language difficulties in each health authority, it is possible to determine the total predicted costs of IAT provision for health authorities. Health authority targets are adjusted to reflect their expected costs of IAT. Primary Care Groups 1.49 The formula used to set targets for Primary Care Groups is essentially that used for health authorities. However, local flexibility is allowed in a number of areas. The most significant difference is that health authorities have been allowed local flexibility to decide whether to introduce their own adjustment for Primary Care Groups to reflect the extra cost of prescribing to nursing homes. 1.50 A more detailed description of the formula can be found in the book: Resource Allocation: Weighted Capitation Formulas. This is available from the NHS Response line (tel: 0541 555 455). It is also on the internet at: 

http://www.doh.gov.uk/allocations/1999-2000/

Baselines
1.51 Continuity and stability of funding is needed to allow health authorities to plan ahead and to enter into long term agreements with providers. The allocation made to each health authority is intended to fund services and activities which will continue from year to year. Changes in funding between years is therefore incremental using the previous year’s allocation as a starting point. This is called the baseline. Every health authority therefore has a baseline. This

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comprises last year’s allocation plus or minus any recurrent adjustments made in-year. 1.52 As with weighted capitation targets, baselines can change from year to year. The main reasons why baselines change are:  

boundary changes; changes in the activities which are funded from the allocation for the resident population.

Distance from target
1.53 The distance from target (DFT) measures the difference between a health authority’s target and baseline. If the target is greater than the baseline the health authority is said to be under target; if the target is less than the baseline the health authority is said to be over target. The DFT is usually expressed in both monetary and percentage terms. The table below shows two examples.

HA 1 (under target) HA 2 (over target)

Target (£) 100 90

Baseline (£) 95 100

DFT (£) -5 10

DFT (%) -5 11.11

1.54 DFTs are recalculated annually to reflect any changes in targets and baselines. Two DFTs are produced:  

an initial DFT reflecting changes to baselines and targets but before the distribution of extra resources; a final DFT to reflect the position of health authorities following the distribution of extra resources.

Pace of change
1.55 Annual decisions are taken about how best to deploy available resources, including the distribution of extra resources to health authorities in their allocations. Pace of change policy varies from year to year to take account of a

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number of factors, eg the overall level of resources available, the range of distances from target etc. In practice, Ministers have opted for a process of levelling up whereby under target health authorities are brought closer to target by the distribution of extra resources. In theory money could be taken away from over target health authorities and redistributed between under target health authorities. 1.56 The key decision in pace of change policy is how extra resources should be deployed between:   across the board increases (called “the floor”), to maintain continuity and stability in the service; and differential distribution to bring under target health authorities nearer to equity as represented by their weighted capitation targets.

Contacts
Centrally funded initiatives: Mr Gary Guzder FPB-RAFT3 NHS Executive Room 3N34D Quarry House Quarry Hill Leeds LS2 7UE Telephone : 0113 254 5332 E-Mail : gary.guzder@doh.gsi.gov.uk Revenue resource allocations: Mr Terry Morgan FPB-RAFT1 NHS Executive Room 3N34D Quarry House Quarry Hill Leeds LS2 7UE Telephone : 0113 254 5326 E-mail : terry.morgan@doh.gsi.gov.uk

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