Guest editorial Monday 21 May 2012: Analysing a dozen key changes to Monitor’s long-term financial model

James Wilson, managing director of Assista Consultancy, assesses Monitor’s changes to the long-term financial model (LTFM) for providers, with the new Version 4.0

Overview
Deloitte originally built the LTFM, but the later versions have been revised by Monitor internally.

Before we look at the major changes to version 4.0, it’s worth noting that they aim to lock down the model within one month of starting the assessment process, in order that there’s consistency between Monitor’s assessment and the report of the independent accountants.

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Changes from previous version
1. The biggest change is that there is now just one model for all organisation types.  There’s now some buttons on the cover sheet which let you choose which one is applicable to your Trust, and on the face of it this seems like a sensible development, although we haven’t had a chance to stress-test this yet.

2. There is one new option, ‘user defined’, but Monitor thinks it unlikely that many Trusts will use it.  The one example they mentioned is the Isle of Wight, where the PCT and provider Trust are merging.  The user defined model is based on the ambulance model, simply because it has the most cells.  You also need to contact modelqueries@monitor-nhsft.gov.uk before using ‘user defined’.

3. As you go through the model, there’s a couple of new sheets and they both seem to be very sensible additions - but they should act as a red alert to any aspirant FTs out there as to the issues Monitor are going to focus on when they come and assess you. You have been warned.

4. KPIs and activity both now get their own tabs. In our experience, far too many Trusts leave activity and particularly KPIs as an afterthought. It’s worth remembering that if you forecast your activity forwards at HRG level, Monitor can’t drill under your figures. This will create far less pain during the assessment process.  Ideally this should be done in two passes – once for demographic changes, and then for service developments.

5. Similarly, in our experience KPIs get thrown together at the last minute, with little thought for the story that they actually tell. Hold other colleagues, especially in Information and HR, to account for the figures with which they provide you.

It’s also worth noting that Monitor doesn’t hold standard definitions for KPIs. They will use these figures to get an insight into the standard of your management reporting.

6. Monitor like to use O_KPI to understand what is happening to Trusts operationally.

7. Another new sheet is ‘significant investments’. Clearly, this is a response to the more complex environment in which Trusts now find themselves. The main thinking behind this sheet were the many TCS transactions which have occurred over the last few years, but you only have to use it if transaction size is bigger than 25%.

8. The service developments now get their own total sheet, which again is a good move. It would have been nice to see this with the effect of inflation, but it’s definitely a step forwards.

Monitor have made the point that you should note any cost pressures in your service developments - so that you don’t get hit twice when they run their own sensitivities.

9. The historical balance sheet has now moved back to a one tab input, as per earlier versions of the LTFM, which makes input and checking slightly easier. This is due to there no longer being a mix of UK GAAP and IFRS figures in the historical years.

There’s also a new box to change the retained earnings figure, which gives a bit more flexibility.  If the balance sheet doesn’t balance, then this is usually due to errors in cash – particularly in the shift from monthly to annual working capital.

10. The forecast balance sheet has some changes around donated assets, mainly driven by Monitor’s recent experience of assessing Peter Pan-endowed Great Ormond Street Hospital for FT status.

11. I_PFI now includes specific lines for accruing and releasing lifecycle costs.

12. Lastly, there’s now a risk ratings adjustments sheet to take into account any technical changes.

Other messages
• Monitor have stressed that Trusts must carry out self-review of their model – high level, analytical work.

• The next planned model release will be in early 2013, but Monitor are hoping that they may not have to release it if this model stands up in forthcoming assessments.

Assista analysis
Monitor have made some sensible changes here, but remember to try and pick up the clues on what they are going to focus on when they come and assess your Trust, particularly around activity and KPIs.

James Wilson is managing director of Assista (www.assista.co.uk).