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1 Introduction

Reference cost information is based on work undertaken in the year (activity) and how much this activity has cost (expenditure). It is the same information that is used in summary form to produce the statutory annual final accounts.

As the activity provided by Primary Care Trusts (PCTs) and the plus part of Personal Medical Services (PMS) contracts has been commissioned by Primary Care Groups (PCGs) and Health Authorities, service agreements will be in place, and these will have been monitored throughout the year. It is therefore important that the information systems that monitor activity and expenditure through the year are as comprehensive as possible. This is relevant for the internal management of these services as well as providing the necessary information to the NHS Executive and the Regional offices.

Whatever financial systems are used, the information is often brought together in a financial ledger and activity can be recorded in various systems generally referred to as Patient Administration Systems. It is important that activity and costs associated with PCTs and PMS plus is kept discrete from that of PCGs and individual practices.

2 Annual Accounts

Each year, NHS organisations have a statutory requirement to submit annual accounts for the preceding year. The full requirements for the final accounts submission can be found in the Manual of Accounts.

One of the returns that compose the final accounts splits expenditure across the services/specialties provided. This is known as Trust Financial Return 2 (TFR2) and this split is important for reference costs.

3 Reference Costs

Every year, guidance is issued on the range of services that are included in the reference costs collection in the following June. In the autumn of 2000 therefore, final details of the information requirements for the 2001 collection, covering the 2000/01 financial year, were issued. As expenditure and activity are already collected for internal management purposes, very little additional data is expected to be collected, if the initial systems are comprehensive. The data will need to be analysed in a different way however.

The framework to be used in the allocation and apportionment of costs for this mandatory collection can be found in the NHS Costing Manual. The costing of services goes through four levels and this guide helps you through the stages for the first time. It does not replace the NHS Costing Manual and care should be taken that all the steps and issues detailed in the Manual and the annual guidance are covered.

4 Process

As producing reference costs information requirements requires more than just financial knowledge, many NHS organisations form a multi-disciplinary project team to oversee the process. As a minimum this should include a clinician, a nurse, a finance officer and a therapist (e.g. physiotherapist). The composition will be dependent of the range of services provided by each organisation but it should not be too large, nor should it try to include representatives from every service, even though these services may form part of the collection.

Reference costs are always retrospective and include all costs. Although the starting point is the TFR2, this does not include all the costs that need to be included in reference costs. Adjustments therefore have to be undertaken to ensure all costs e.g. interest and other aspects of capital are included.

Care and attention should be given at all stages to ensure that the information produced is as accurate as possible. The figures should be reconciled at each stage before moving onto the next, to ensure that no costs or activity are 'lost' along the way. The figures submitted are included in the national reference costs database and can be accessed by all NHS organisations. In addition, a National Schedule of Reference Costs (NSRC) is produced and published. This contains summary and national average cost information. The performance of individual NHS organisations is compared to these national figures and individual index scores are published in a National Reference Costs Index. (NRCI).

It is important to identify a strict timetable to ensure that the work is carried out to meet the submission deadline usually, 30th June. Extensions to this are rarely given and only in exceptional circumstances. A failure to submit by this deadline is recorded as non-compliance and reported at ministerial level.

5 Where do we start?

The starting point comes from:

activity information on all services

The key is to make sure all activity is accurately recorded during the year and that all income and expenditure is recorded in the financial ledger. The total activity and the total expenditure should be the same as that used in the final accounts returns.

The quantum of costs for reference costs is identified as:

This gives the costs to NHS providers of providing NHS services for NHS patients. This is the basis of reference costs, and these are the costs that will have been borne by commissioners in their service agreements. Income from service agreements is not part of the exercise. This gets us to Level I as detailed in the NHS Costing Manual.

6 What comes next?

The next stage is to split these costs across the services and specialties provided. Until reference costs are comprehensive and cover all services, some of the services provided will be included in the collection, whilst some are excluded. The full range can be found in the annual guidance.

The services included can be district nursing, pathology (if blood tests are provided), dermatology (outpatient appointments, outpatient and day case procedures etc). Each organisation will need to identify the relevant services. All costs are reported on the reconciliation statement and these are split between services included and excluded. Getting this stage right at this point can save work later if it is discovered that an element of costs e.g. costs of reorganisation are identified.

Having identified the services, activity and costs need to be allocated to these services. Costs and activity need to be matched to the services that generate them and no cross subsidisation is allowed. Depending on the sophistication of the systems used this stage and the next stage may be combined.

As part of the separation of costs, a number of indirect costs and overheads will need to be allocated and apportioned to the services. Direct costs should always be directly attributed to services, within the general ledger wherever possible. This forms Level 2.

Appendix 3 in the NHS Costing Manual, gives clear guidance on how a range of costs e.g. laundry, catering, equipment maintenance should be treated. No variation from this approach is expected, and it should be noted that these costs could be audited.

7 Point of Delivery

The high-level control totals established at Level 2 are now analysed between the different points of delivery e.g. day cases, outpatients, direct access, community services. This may involve some further disaggregation of costs. The amount of work involved at this stage will be determined by the approach undertaken to the allocation and apportionment of costs at level 2.

The point of delivery control totals should be reconciled to those of Level 2 t o ensure that all costs are accounted for, and to provide the information for further analysis at Level 4.

Activity data should also be analysed. It is important to identify the number of clients seen, attendances etc. that happened rather than booked appointments etc. Reference costs are concerned with what actually happened in the year, and so costs associated with Did Not Attends and abortive journeys should be treated as an overhead as laid down in the NHS Costing Manual. At the end of the process, all those involved should have a clear understanding of the various sources of data and the quality of the data.

8 Level 4 - Detailed Analysis

The detail required at Level 4 will be determined by the services themselves. For district nursing for example this will be clients seen and average number of contacts per client, whilst for ophthalmology outpatients it will be number of outpatient attendances reported at Healthcare Resource Group (HRG) level. The NHS Costing Manual gives guidance on clinical and resource profiles and specific chapters are devoted to the costing of community and outpatient services.

Once the overall fully absorbed expenditure total for the service being costed has been established, this needs to be divided up between the main resource conditions required for that service (or resource pools as they are officially known). E.g. district nursing, specialist nursing, health visiting, physiotherapy, diagnostics etc. The direct and indirect costs should be fairly straightforward but some overhead apportionment may need to be undertaken. It is important that only costs associated with the care provided under PMS plus or services provided as the PCT need to be included. It is also important to keep an eye on materiality and ask if further refining will add to the impact on individual costs, or is the change so minor that further refinement cannot be justified?

If clinical/care profiles are required (they are usually needed for HRGs), the project team should identify the most suitable person to fill them in. This is often more than one person. By looking carefully at the services provided and the care given, these care profiles can be completed on an ongoing basis and should be done at the end of the year. These profiles can also be used as teaching tools and are useful for clinical audit purposes as a template or benchmark against which actual delivery can be compared. They are therefore not just part of a year end process.

When these care profiles have been completed, they should be compared with other sources of information collected for accuracy/reasonableness e.g. a sample check of timesheets/logs of district nurses. When costs are attached to these care profiles, the total cost of care is tested by calculating the costs of these profiles by the actual activity undertaken. If the profiles and costs are prepared accurately, these will compare favourably with the control totals established.

This reasonableness check is important as there is a tendency for people completing the care profiles to either under or over estimate the time it takes to perform certain tasks and to record what they should do/test/order rather than what they actually do.

9 Final Stages

After completing this work, some residual activity and costs may result. These should be dealt with using the standard approach detailed in the NHS Costing Manual and the costing guidance. Time should be allotted for input of activity and cost information into the standard return software issued by the NHS Executive. This contains validations and all data should be run through the validation process prior to submission. If invalidated data is submitted, it will be rejected and returned by the NHS Executive.

10 Key Points

The information submitted through this collection acts as one of a series of measures of the effectiveness of NHS providers. Multi-disciplinary working enhances the quality of the data, and this aids its successful completion within tight timescales.

As a basic checklist the following points should be remembered: