Cairns and Hinterland Hospital and Health Service€¦ · Nature and scope of the services The...

13 October 2016 | Final

Budget build analysis

Cairns and HinterlandHospital and HealthService


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Chris Parkes

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PartnerT 07 3011 3333

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Cairns and Hinterland Hospital and Health Service: Budget build analysis | of 43


Contents1. Dashboard and budget build process overview 5

2. Budgeted revenue 11

3. Budgeted costs 19

4. Organisational sustainability plan 27

5. Additional deficit reduction initiatives 31

6. Budget build principles and recommendations 33

7. Appendices 40



Dashboard

Current 2016/17budgeted deficit

($80.5m)

More on page 7

This is the current 2016/17budgeted deficit based onthe latest availableinformation received fromCHHHS management.Deficit is based onbudgeted revenue of$820.0m and costs of$900.5m and assumes noaction taken byManagement in respect ofthe OrganisationalSustainability Plan.

Estimated 2016/17OrganisationalSustainability Plansavings (risk adjusted)

$17.7mMore on page 27

An organisationsalsustainability plancommenced in June 2016 toidentify savings across anumber of initiatives, to berealised in 2016/17.These savings initiativeshave been estimated at$22.3m and risk adjusted to$17.7m. These are notincluded in the currentbudget.

Additional 2016/17deficit reductioninitiatives

$11.4m-$13.6mMore on page 31

To further reduce thebudgeted deficit, a numberof additional initiatives havebeen identified, with thepotential to reduce thebudgeted deficit by between$11.4m - $13.6m in2016/17.

Dashboard1 Executive summary 5 Additional deficit reduction initiatives2 Budgeted revenue 6 Budget build process and recommendations3 Budgeted costs 7 Appendices4 Organisational sustainability plan



Budget build process overview

Cost budget preparation OrganisationalSustainability plan

Developing cost budget► Commenced Jan 2016► Bottom up basis► Used in-house

budget tool► Led by CHHHS Finance,

with input from all CHHHSdivisions

Identifying efficiencysavings► Commenced Jun 2016► Target savings identified

across initiatives► Led by CHHHS Health

Innovation and ProjectsOffice (“HIPO”)

► Supported by EY► Falls outside budget analysis

Cost budget analysis

Sense check andvalidation of cost budget► Commenced Jul 2016► Review of draft cost

budget to understandvariances fromprior year

► Led by CE, CFO, COO

1 2 3

Revenue budgetformulation

Deficit reduction

Growth assumptionsand revenue forecast► Commenced Aug 2016► Based on 2016/17 Service

Agreement. In additionManagement have identifiedgrowth opportunities inactivity, own sourcerevenue and additionalDepartment of Healthfunding

► Led by CHHHS Finance

Options identifiedand preliminary costingsestimated► Commenced Aug 2016► Identified by

Management► Led by CE, CFO, COO

4 5

Set out below is a summary of the key phases adopted by Management as part of the 2016/17 budget build process.

► EY’s role in relation to the budget build processwas as follows:

► Analyse the drivers of the variance between2015/16 actual operating deficit and 2016/17budgeted operating deficit.

► Understand the key assumptions adopted inrelation to budgeting labour and non labourexpenses in 2016/17.

► Analyse various savings plans proposed byManagement.

► Provide observations and recommendations onchanges to Management’s 2016/17 budget buildprocess.

► EY did not analyse the capital expenditure budgetfor which $3.1m of minor capital funding has beenallocated.




Executive summary

Item Findings Supplementary financial analysis Page

2016/17 budgeteddeficit of $80.5m

► Budgeted deficit has been based on a bottom up cost buildbudgeting process.

► The 2015/16 actual deficit included two items shown asadjustments:► $31.8m non recurring and fully funded project costs in relation

to the implementation of the Digital Hospital project.► $13.4m of non-recurrent funding provided by the Department of

Health. Removing this non-recurrent funding results in anadjusted operating deficit in 2015/16 of $33.4m.

► Cost increases are the primary driver of the $80.5m budget deficitin 2016/17, which is $47.1m higher than the adjusted 2015/16deficit and $60.5m higher than the 2015/16 actual deficit.

► The analysis in this report is based on 2015/16 actual resultspresented in CHHHS management accounts. A reconciliationbetween the operating deficit per management accounts and theCHHHS’ 2015/16 audited financial statements is shown inAppendix A.

p. 9

2016/17 budgetedrevenue of $820.0m

► Base funding received from the Department of Health of $772.9mas per the Service Agreement dated July 2016.

► CHHHS is budgeting for $47.1m additional revenue over the levelagreed with the Department of Health and outlined in the ServiceAgreement, particularly in the area of own source revenue (“OSR”).

► OSR in addition to the Service Agreement has been budgeted byeach division within CHHHS. Total OSR budgeted in 2016/17 of$108.3m is 8.7% higher than the total OSR received in 2015/16.

► Included in the OSR amount is an additional $17.5m relating to anexpected increase in funding for the full year cost of the newHepatitis C drugs program introduced in 2015/16 (noting that thereis an associated cost and the overall effect is cost neutral).

► CHHHS forward estimates of $777.9m included in the ServiceDelivery Statement (“SDS”) include an additional $5.0m revenuewhich is included in the “Additional to Service Agreement” columnin the adjacent table.

p. 11

Currency: A$mActual

2015/16 Adjustments2015/16

AdjustedBudget2016/17

Revenue 835.3 (45.2) 790.1 820.0Labour expenses (588.6) 17.7 (570.9) (621.4)Operating expenses (229.4) 14.1 (215.3) (240.4)Depreciation and amortisation (37.3) - (37.3) (38.7)Total costs (855.3) 31.8 (823.5) (900.5)Operating surplus (deficit) (20.0) (13.4) (33.4) (80.5)Deficit varianceAdjusted 2015/16 to budget 2016/17 (47.1)Actual 2015/16 to budget 2016/17 (60.5)


Currency: A$mPer ServiceAgreement

Additional toService Agreement Budget 2016/17

ABF funding 494.8 10.2 505.0Own source revenue 79.6 28.7 108.3Block funding 84.8 - 84.8Department of Health funding 113.7 8.2 121.9Total revenue 772.9 47.1 820.0



Executive summary

Item Findings Supplementary financial analysis Page

Budgeted costs of$900.5m

► Costs are budgeted to increase from $855.3m in2015/16 to $900.5m in 2016/17.

► The increase of $45.2m (5.3%) from 2015/16actuals to 2016/17 budget is due predominantly tothe full year impact of new services introduced in2015/16 ($26.7m), Digital Hospital 2016/17 runningcosts ($6.8m), Hepatitis C program ($17.5m) andEnterprise Bargaining increases ($16.4m), offsetby non-recurring Digital Hospital project costsincurred in 2015/16 ($31.8m).

► We note CHHHS disclosed 2015/16 costs of$859.2m in their 2015/16 annual report, a varianceof $3.9m to the costs provided for our analysis dueto capital works funding.

p. 19

Organisationalsustainability plan

► CHHHS management identified initiatives topartially address the budgeted deficit positionthrough the establishment of an OrganisationalSustainability Plan (“OSP”) which wasimplemented in July 2016.

► Benefits from the OSP are not factored into the$80.5m budgeted deficit.

► These savings initiatives have been estimated to reduce the2016/17 deficit by a risk adjusted amount of $17.7m.

► As at the end of August 2016, CHHHS have calculated $2.6m ofsavings realised under the OSP.

p. 27

2015/16 v 2016/17 cost baseSource: Management information & EY analysis


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2016/17 Key budget assumptions and comparison to 2015/16 actuals

Labour expenses► 2016/17 labour expenses are based on the

following key assumptions:

► An increase in average employees across alldivisions of 321 FTE from 2015/16 to 2016/17(as measured in units of Queensland Health FullTime Equivalent (“QH FTE”).

► Most clinical positions are 100% backfilled andlocum costs are built on a case by case basis.

► $16.4m increase relating to enterprisebargaining escalation funded through the2016/17 Service Agreement.

Operating expenses► 2016/17 operating expenses (non-labour) are

based on the following key assumptions:

► 2016/17 operating expenses were obtained byextrapolating the first 8 months of 2015/16actuals adjusted for material one offoccurrences, part year services and escalationfactors.

► Electricity costs will increase by 12% from2015/16 to 2016/17.

► A general inflation factor of 2.5%.

Depreciation and amortisation► 2016/17 depreciation and amortisation are based

on the following key assumptions:

► Depreciation expense is calculated both on thecurrent asset base and to reflect new assetscommissioned.

► Amortisation is charged in respect of software.

► Depreciation and amortisation is fully fundedthrough Department of Health funding.

Revenue► 2016/17 revenue is based on the following key

assumptions:

► Base funding received from the Department ofHealth (“DoH”) of $772.9m as per the ServiceAgreement dated July 2016.

► Additional $47.1m revenue budgeted overService Agreement funding, whichpredominantly relates to own source revenueand growth funding.

► Budgeted activity levels in 2016/17 are 100,102National Weighted Activity Units (“NWAU”).Activity in 2015/16 was 101,806 NWAU; due toNWAU rebasing these are not directlycomparable.

► $31.8m received in 2015/16 will not be recurringin 2016/17 since this was project funding to startup the Digital Hospital initiative.

2015/16 Actual deficit v 2016/17 budget deficit

Source: Management information

Notes to table(a) Revenue adjustments includes $31.8m for one off Digital Hospital implementation funding and $13.4m non-recurrent funding. Digital Hospitalfunding is offset by $17.7m in labour and $14.1m in operating expenses relating to the implementation project costs.

1

2 3 4


Currency: A$mActual

2015/16 Adjustments (a)2015/16





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Deficit bridge – 2015/16 to 2016/17Source: Management information

2015/16 to 2016/17 deficit reconciliation► The bridge on the left shows factors contributing to the increase from the

$20.0m deficit recorded by the CHHHS in 2015/16 to the budgeted $80.5mdeficit in 2016/17.

► Impacts to revenues and costs have been grouped in the followingcategories to explain the $60.5m increase in the deficit position:

Non recurrent revenue of $13.4m was received from the DoH in 2015/16.

Revenue adjustments of $4.8m, of which $4.0m relates to a reduction inEfficient Growth Funding from 2015/16 based on growth assumptionsadopted in the 2016/17 budget.

New services introduced part way through 2015/16 costed at a full 12months in 2016/17 increased the budgeted cost base by $26.7m. For furtheranalysis of this increase refer to the ‘Budgeted costs’ section of this report.

New services budgeted to be introduced in 2016/17 increased the budgetedcosts from 2015/16 to 2016/17 by $5.5m. For further analysis of thisincrease refer to the ‘Budgeted costs’ section of this report.

$6.8m of costs in relation to Digital Hospital are budgeted to be incurred in2016/17. Costs incurred for implementing the Digital Hospital program werefunded in 2015/16.

Other ($3.3m) represents cost increases across multiple cost centres thatincrease the 2016/17 budgeted deficit position.

Deficit reconciliation

1

2

3

4

5

6

1

3 45 6

2


► The classification above is provided as an indicative analysis only. We note thefollowing:

► Classification of costs and revenues changed from 2015/16 to 2016/17 limitingthe comparability of the year on year analysis.

► The CHHHS revenue allocation model does not allocate revenue to specificactivities and associated cost centres meaning that full year cost impacts ofnew services and 2016/17 new services categories do not consider additionalrevenue generated by these services.

Cost impacts

Revenue impacts



Budgeted revenue

2

In this section Page

Reconciliation to Service Agreement 12

Revenue by source 13

Key revenue assumptions 17

Planned activity levels 18



Revenue is predominantly determined by purchased activity levels, withfunding allocations outlined in the Service Agreement

CHHHS budgeted revenue sources in 2016/17► As CHHHS is an organisation that is primarily funded through State and

Commonwealth contracted funding, our work focused on understandingthe nature of the contractual funding and key revenue assumptionsadopted by Management.

► CHHHS funding allocations are outlined in the Queensland Governmentdocument Cairns and Hinterland Hospital and Health Services ServiceAgreement 2016/2017 – 2018//2019 (“Service Agreement”).

Funding sources, CHHHS budget 2016/17


Notes to table(a) Revenue per SDS is disclosed as $777.9m which reflects a $5.0m revenue increase in CHHHS forward estimates compared to theService Agreement. This amount is included in the Additional to Service Agreement column.


Currency: A$mPer ServiceAgreement

Additional toService Agreement Total

ABF funding 494.8 10.2 505.0Own source revenue 79.6 28.7 108.3Block funding 84.8 - 84.8Department of Health funding 113.7 8.2 121.9

Total revenue (a) 772.9 47.1 820.0



CHHHS is budgeting to receive an additional $47.1m of revenue in additionto revenue outlined in the Service Agreement

Key sources of funding for CHHHS comprise:1. Activity based funding (“ABF”)

Per Service Agreement

► ABF outlined in the Service Agreement includes both State andCommonwealth funding to cover the provision of Inpatient, Critical Care,Emergency Department, Mental Health and Outpatient services.

► In 2016/17 Oral Health and Breastscreen services also transferred to ABF.

► ABF is provided for activity (i.e. delivery of health services) measured inunits of Weighted Activity Units (“WAU”) delivered up to the level specifiedin the Service Agreement.

Additional to the Service Agreement

► Services delivered over the level of National Weighted Activity Unit(“NWAU”) specified in the Service Agreement attract Commonwealthfunding referred to as Efficient Growth Funding.

► Efficient Growth Funding is paid per NWAU delivered over target. It is paidat $2,140.05 per NWAU, calculated as 45% of the State WAU price of$4,755.66.

► The 2016/17 budget includes Efficient Growth Funding of $10.2m inrespect of:

► Services delivered representing 3,972 NWAU in 2016/17, valued at$8.5m (based on 45% of the WAU price).

► $1.7m in relation to services delivered in 2015/16 that exceeded the2015/16 year end accrual for Efficient Growth Funding.

► Refer to page 18 for further consideration of planned activity levels.





Currency: A$m NotesPer ServiceAgreement


ABF funding 1 494.8 10.2 505.0Own source revenue 2 79.6 28.7 108.3Block funding 3 84.8 - 84.8Department of Health funding 4 113.7 8.2 121.9

Total revenue (a) 772.9 47.1 820.0



CHHHS is budgeting to receive an additional $47.1m of revenue in additionto revenue outlined in the Service Agreement

Key sources of funding for CHHHS comprise:2. Own source revenue (“OSR”)

OSR is derived from services to privately funded patients including fundingthrough private health insurance and the Medicare Benefits Schedule(“MBS”).

► OSR included in the Service Agreement is $79.6m.

Additional to the Service Agreement

► OSR in addition to the Service Agreement has been budgeted by eachdivision. The total OSR budgeted in 2016/17 of $108.3m is 8.7% morethan the total OSR received in 2015/16 of $99.8m.

► Included in the 2016/17 budgeted OSR is an additional $17.5m relating toan expected increase in Pharmaceutical Benefits Scheme (“PBS”) funding.This is driven by the full year effect of Hepatitis C drugs available throughPBS from part way through 2015/16. Note that this increase is offset byincreased costs and is cost neutral.

► CHHHS prepared its OSR estimate on a bottom up basis by division whichhas made it difficult to classify the balance of the additional OSR, but it islikely that this is spread across a number of categories including grantsand private health insurance.








Total revenue (a) 772.9 47.1 820.0



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Own source revenue – 2015/16 to 2016/17Source: Management information

Own source revenue (“OSR”) continued2015/16 to 2016/17 OSR movements

► OSR increased $8.5m from 2015/16 actuals to 2016/17 budget drivenpredominantly by the following movements:

► $17.0m increase in reimbursements from the PBS predominantly due to anadditional $17.5m for budgeted Hepatitis C reimbursements offset by a net$0.5m movement in other PBS reimbursements.

► $5.6m reduction in other patient services due to expenses recharged tothe Torres and Cape Hospital and Health Service in 2015/16 not beingbudgeted in 2016/17 (with a corresponding decrease in the cost base). Weunderstand that this does not reflect a reduction in services, as the costsare expected to be incurred in 2016/17 and will continue to be recharged.This will be cost neutral to the budgeted 2016/17 deficit position.

► The ‘Other OSR movements’ reduction of $2.9m relates to a netmovement in non recurrent funding received in 2015/16 not budgeted in2016/17, offset partially by new funding in 2016/17.

► The above explains the key OSR movements from 2015/16 to the 2016/17budget.

Organisational Sustainability Plan savings

► The Organisational Sustainability Plan considers additional revenue thathas not been budgeted. Additional revenue of $3.6m (risk adjusted) istargeted to be received in 2016/17 based on a review of the conversion ofpublic patients to private patients and additional income from internationalpatients. Refer to the ‘Organisational Sustainability Plan’ section of thisreport on page 27 for more information.

OSR is budgeted to increase in 2016/17 by $8.5m due to increased HepatitisC funding partially offset by 2015/16 recharging of inter-HHS expenses and2015/16 one off revenue items not budgeted in 2016/17

1 23 4

1

2

3

4




Block funding of $84.8m relates to activity not covered under the ABFmodel and Department of Health funding of $121.9m relates to the fundingof various other health service activities and requirements

3. Block funding

Block funding (both State and Commonwealth) covers teaching training andresearch, community mental health services and hospitals which would not beviable under the ABF funding model.


► Block funding included in the Service Agreement comprises:

► Block funded hospitals ($40.3m)

► Community mental health services ($24.7m)

► Teaching, training and research ($19.8m).

4. Department of Health funding


► Department of Health funding covers items not covered by the NationalHealth Reform Agreement (an agreement entered into by all states,territories and the Commonwealth in relation to Australia’s health system)including Prevention, Promotion and Protection, and depreciation.

Additional to Service Agreement

The table on the left shows funding that CHHHS has budgeted to be receivedas additional Department of Health funding (not included in the ServiceAgreement). We note that further additional funding may be provided during2016/17 that has not yet been confirmed.

Department of Health funding additional to Service Agreement


Notes to table(a) We note that additional funding may be provided during 2016/17 that CHHHS has not yet budgeted for, and at the date ofour report a net increase of $0.3m has been identified and not budgeted.





Currency: A$m 2016/17State / Hepatitis B program 0.3State / ATSIB Cultural Capability Framework 0.2State / Regional Public Health oversight of the North Queensland Aboriginal and TorresStrait Islander Sexually Transmissible Infections Action Plan 2016-2021 0.9State / Rapid Response Targeted Community Screening 0.5State / PREp program 1.0State / Clinical Prioritisation Criteria (CPC) 0.5State / Mental Health Indigenous Liaison Officer 0.1State / Backlog incentive funds 1.0Commonwealth / Rheumatic Heart Funding 0.9Commonwealth / Mosquito control 1.0Commonwealth / Dengue fever 0.3Commonwealth / North Queensland STI Action Plan 0.7Commonwealth / Increased dental activity 0.9Total 8.2




Total revenue (a) 772.9 47.1 820.0



Revenue assumptions adopted by CHHHS

Supporting information► Management have provided the following information in support of the

principal revenue assumption regarding NWAU delivered over ServiceAgreement purchased activity levels:

► Actual growth funding earned in 2015/16 was $14.0m of which $1.7mwas under-accrued in 2015/16 so will be recognised in 2016/17.

Other considerations► Factors which rendered a 2015/16 vs 2016/17 direct comparison of

funding by division or cost centre impractical included:

► The allocation of revenue was performed on different bases in 2015/16and 2016/17, with 2016/17 being the first year in which CHHHSallocated revenue according to purchased (as opposed to delivered)activity.

► Rebasing of WAU in 2016/17, with health care activities earningdifferent levels of WAU compared to 2015/16.

► CHHHS’ cost structure and chart of accounts is not structured on thesame basis as the measures of activity. Any one activity may bedelivered across multiple different cost centres and divisions, as thepatient progresses through treatment. This makes it impractical toevaluate metrics related to WAU generated (such as cost per WAU)across different services.

► See overleaf for an outline of planned activity levels for 2016/17.

Revenue assumptionsManagement have made the following assumptions in developing the 2016/17revenue budget:

► $8.5m Efficient Growth Funding is received in relation to delivery of 3,972NWAU over target.

► Revenue relating to long stay patients at period end is not accrued(although recognition of this is contemplated in 2016/17 under the deficitreduction initiatives).

► Enterprise Bargaining wage increases are fully funded.




The 2016/17 budgeted deficit of $80.5m is based on activity levels that are4.1% above the NWAU target of 96,130

Planned activity levels – 2016/17 (continued)4. Noting that the service capacity of CHHHS expanded during 2015/16 with

the opening of new wards and extension of services, CHHHS has targetedfor the delivery of an additional 1,776 WAU in the deficit reductioninitiatives, equivalent to an additional $3.8m funding over budgeted growthlevels.

5. Generation of revenue is contingent upon the revenue generating activitybeing correctly recorded. CHHHS has identified some revenue ‘leakage’arising through services delivered but not recorded appropriately. TheOrganisational Sustainability Plan identifies this and plans for an additional1,402 WAU to be claimed in respect of budgeted activity levels, throughimproved recording of activity.

6. Historically, and in line with HHS custom, CHHHS has recognised WAU(and the associated revenue) upon discharge of a patient. For long staypatients this can result in the revenue falling into a different financial yearand Service Agreement period to the one in which the servicespredominantly were delivered. This one off adjustment is to align aproportion of revenue recognised in 2016/17 with a proportion of costs asthey are incurred. As the activity associated with this will not be knownuntil later, Management have estimated it based on historic levels of workin progress. Management have identified this as a deficit reductioninitiative that does not form part of the budget.

Composition of total budgeted activity levels – 2016/17


Planned activity levels – 2016/171. As discussed on page 13, activity levels that CHHHS is contracted to

deliver in 2016/17 are outlined in the Service Agreement. The ServiceAgreement measures activity according to Queensland Weighted AverageUnits (“QWAU”). The QWAU in the Service Agreement of 125,266 isequivalent to 98,022 NWAU. The Service Agreement outlined that in2016/17 CHHHS will start to earn Efficient Growth Funding when theorganisation has delivered activity equivalent to 98,022 NWAU (subject tocertain other criteria).

2. After the Service Agreement was published, an amendment to NWAUtargets has been agreed with DoH which revises the point at whichEfficient Growth Funding will be earned as being once CHHHS hasdelivered 96,130 NWAU.

3. Budgeted growth over the Service Agreement, equivalent to $8.5m in2016/17, is funded at 45% of the WAU price of $4755.66 per WAU andrepresents 4.1% growth over target. Total WAU delivered in 2015/16 was8.6% growth over target 2015/16 WAU.


Units: NWAU Notes 2016/172016/17 NWAU per Service Agreement 1 98,0222016/17 NWAU window adjustment 2 (1,892)Revised NWAU target 96,130Budgeted growth over Service Agreement 3 3,972Subtotal budgeted NWAU 100,102NWAU associated with 2016/17 growth revenue adjustment (refer page 32) 4 1,776Subtotal including deficit reduction initiatives 101,878WAU generating additional revenue through improved coding (reduced revenue leakage) 5 1,402Deficit reduction initiative to recognise WIP at Jun 2016 6 2,103Total 2016/17 activity level adjusted for growth, WIP and reduced leakage 105,382



Budgeted costs

3


2016/17 budgeted costs 20

Labour analysis 21

Operating expenses analysis 23

2015/16 to 2016/17 cost bridge 24



Costs are budgeted to increase by $45.2m in 2016/17 from actual costsin 2015/16

CHHHS budgeted cost sources in 2016/17► This section considers CHHHS’s budgeted cost base in 2016/17. Budgeted

costs were built using a “bottom-up” approach by each of the seven divisionsof CHHHS (refer to “Definitions and Abbreviations” on page 42 for a summaryof the divisions).

► Labour costs include all employee and external labour costs inclusive ofoncosts, allowances, leave entitlements, contractors and other miscellaneousemployee related expenses.

► Operating expenses represent all non-labour related expense categories.

► Pursuant to the Service Agreement CHHHS depreciation and amortisationexpense is calculated both on the current asset base and to reflect newassets commissioned, and is funded by an equivalent revenue receipt(included within Department of Health funding).

2015/16 actual deficit v 2016/17 budget deficit

Source: Management information & EY analysis

Currency: A$mActual

2015/16 Adjustments2015/16






The movement in labour costs from 2015/16 to 2016/17 is driven by abudgeted increase in headcount and an increase pursuant to EnterpriseBargaining Agreements

► The budget tool requires labour to be captured on a position by position basisand has limited reporting functionality. As a result it was difficult to establish ageneral set of assumptions that had been applied to labour costs. Due todifferent divisions adopting different assumptions around the level of backfill,and different methodologies for tasks such as recording locums, Managementengaged in further analysis of the labour cost base:

► CHHHS operates over 700 cost centres and a review of movements inlabour costs from 2015/16 actuals to 2016/17 budget by cost centre wasused to identify smaller cost movements.

► Management, supported by Business Analysts who had built the budget,actively engaged in reviewing labour movements by cost centre. Animportant element of the budget setting process was the involvement ofdivisional management from other divisions in all reviews, to draw on inter-divisional knowledge, and provide peer review.

Management’s approach to recording FTEs

► The FTEs presented in the table on the left have been extracted from theCHHHS Enterprise Reporting system, DSS.

► The actual and budgeted FTE numbers presented represent QH FTE, ameasure of workforce activity. QH FTE data includes full time equivalents forexternal staff and employee overtime contributing to the total labour costsreported in the CHHHS expenses.

► FTEs as measured by QH FTE differs from Minimum Obligatory HumanResource Information (“MOHRI”) stated in the Queensland Health ServiceDelivery Statement (“SDS”). MOHRI is an alternative workforce measure andexcludes external staff and employee overtime and some elements of leave.

► As at September 2016 CHHHS had an actual MOHRI FTE figure of 4,790. TheMOHRI target as at 30 June 2017 is 4,554.

► Management attributes the year on year increase in average QH FTEs to theincrease in services.

Management’s approach to budgeting labour► Labour comprised 69% of CHHHS’ cost base in 2015/16.

► Included in the labour cost by category table above is the budgeted cost of bothQueensland Health employees and external labour (locums and temporarycontractors etc.)

► At the time of our engagement (July 2016), divisional budgets had already beencreated in the budget tool with different divisions adopting different approaches;thus our approach centred on understanding the key assumptions andreferencing the CHHHS primary control documents:

► CHHHS Finance pre-populated the budget tool with occupied positions asrecorded in the CHHHS Positions Occupied (“PosOcc”) report. This reportidentifies c 5,200 approved positions (as at Aug 2016) and the budget toolrecords each individual position, including details such as salary,commencement date of position (where applicable) and backfill assumptions.

► While we noted some inaccuracies in the PosOcc report (primarily related toestablished positions i.e. approved positions), the benefit of labour costs beingprepopulated by CHHHS Finance provided consistency in the upload to theCHHHS budget tool.

► Each division reported and analysed its average full time equivalent (“FTE”)movements between 2015/16 actual FTEs and 2016/17 budgeted FTEs, and itsaverage salary per employee, by employee category.

► Information provided for the purposes of our analysis of labour did not allocatebudgeted year on year increases of $16.4m driven by Enterprise Bargaining(“EB”) agreements across labour categories. We note this allocation has nowbeen performed but has not formed part of our analysis.

FTE and total labour costs – 2015/16 actual v 2016/17 budget



2015/16 actual 2016/17 budget VarianceAverage QH FTE 4,989 5,310 321Total labour costs (A$m) 588.6 621.4 32.8



Key drivers of the budgeted increase in labour costs are summarised in theadjacent table and bridge:

► FTE increases are budgeted across all labour categories in 2016/17. Notableincrease in FTEs by category are:

► Nursing FTEs are forecast to increase by 8.0% and incorporate the minimumnurse-to-patient ratios that were introduced in Queensland in July 2016 andfull year impacts of new services introduced.

► Medical and Health Practitioner FTEs are forecast to increase by 11.9% and7.6% respectively reflecting the full year impacts of new services introducedin 2015/16 and a low vacancy rate relative to 2015/16 actuals.

► The unallocated maternity leave expense represents an estimated budget formaternity leave that was allocated to labour categories as incurred in 2015/16.

► The adjacent bridge shows the movement in total labour expenses from2015/16 to 2016/17 attributable to FTE increases, EB increases and a change inthe employee mix incorporating all internal labour, overtime, contractors, otheremployee related expenses and leave entitlements:

► $36.6m increase relates to budgeted average FTE growth of 6.4% (321FTEs) driven predominantly by the Nursing, Medical and Health Practitionercategories discussed above.

► $16.4m increase reflecting budgeted escalation in labour costs driven byEnterprise Bargaining agreements. The information provided for our analysisdid not allocate EB escalation across labour categories; we understandCHHHS Management have now allocated this.

► $20.2m decrease due to a budgeted reduction in the use of external labour.

► Limitations existed in the analysis of FTEs and external labour movements.Through discussions with divisions it was identified that there wereinconsistencies in the budgeting of locums distorting the labour mix analysis.

Labour movement 2015/16 v 2016/17Source: Management information & EY analysis

Labour by category 2015/16 v 2016/17


The movement in labour costs from 2015/16 to 2016/17 is driven by abudgeted increase in headcount and an increase pursuant to EnterpriseBargaining Agreements

588.6

36.6

16.4 (20.2)

621.4

550560570580590600610620630640650

2015

/16lab

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EBinc

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Note to table(a) Included in the labour cost by category table above is the budgeted cost of both Queensland Health employees and externallabour (locums and temporary contractors etc.


Currency: A$m 2015/16 ($) 2016/17 ($) 2015/16 Average FTE2016/17

Average FTENursing 240.3 243.9 2,250 2,430Medical 145.4 152.2 589 659Admin and other 71.4 71.2 812 826Health Practitioners 70.3 71.7 592 637Operational 50.7 52.3 746 758Total by category 578.1 591.3 4,989 5,310Unallocated EB increase - 16.4Unallocated maternity leave expense - 2.3Total labour costs including unallocated EBincrease

578.1 610.0

Other Employee Related Expenses 5.2 4.9Workcover Premiums 5.3 6.5Total labour costs 588.6 621.4



Operating expenses are budgeted to increase 4.8% on 2015/16 actuals

Operating expenses► Operating expenses were budgeted based on the first 8 months of actual

costs from 2015/16 extrapolated to reflect a full year. To accurately budget forthe 2016/17 operating expenses, divisions made adjustments for estimates ofone off expenses incurred in 2015/16, impacts of new and full year servicesand adjustments for escalation increases.

► Operating expenses had a net increase of $11.0m in 2016/17 drivenpredominantly by the following material movements:

► $2.9m reduction in computer expenses relating to non-recurring DigitalHospital expenditure.

► $9.5m reduction in consultancies expense relating to consultants used inthe implementation phase of the Digital Hospital initiative.

► $17.5m increase in drugs driven by the increase in Hepatitis C costsbudgeted in 2016/17. The budgeted revenue assumes this cost will bereimbursed in full.

► $1.1m increase in electricity expenses due to a 12% increase in budgetedelectricity costs which is materially consistent with terms agreed with theprovider for 2016/17.

► $2.2m increase in other expenses relating to a number of account codesacross the CHHHS.

► $1.8m increase in repairs and maintenance expense partly driven bymaintenance contracts required in 2016/17 for new equipment that was stillunder warranty in 2015/16.

► A CPI escalation factor applied to all operating cost categories (other thanelectricity).

2015/16 v 2016/17 operating expenses



Currency: A$m 2015/16 2016/17 $ Variance % VarianceBlood And Clotting 2.4 2.4 - - %Building Services 1.5 1.6 0.1 6.7%Catering And Domestic Expenses 12.1 12.6 0.5 4.1%Clinical Supplies 29.5 30.7 1.2 4.1%Communications Expense 9.1 9.1 - - %Computers Expense 8.0 5.2 (2.8) (35.0%)Consultancies Expense 9.5 - (9.5) (100.0% )Drugs 43.4 60.9 17.5 40.3%Electricity And Other Energy Expense 8.8 9.8 1.0 11.4%Employment Agency Fees 2.3 2.1 (0.2) (8.7% )Non Capitalised Asset Related Expenses 1.7 1.2 (0.5) (29.4%)Operating Leases 5.2 5.4 0.2 3.8%Other Expenses 5.1 7.3 2.2 43.1%Other Motor Vehicle Expenses 0.6 0.6 - - %Other Supplies And Services 20.9 19.8 (1.1) (5.3% )Outsourced Service Delivery 18.3 18.6 0.3 1.6%Pathology Charges 14.7 15.4 0.7 4.8%Prosthetics 6.7 6.9 0.2 3.0%Repairs And Maintenance 15.2 17.0 1.8 11.8%Travel Expenses 14.1 13.4 (0.7) (5.0% )Water Supply Expenses 0.3 0.4 0.1 33.3%Total operating expenses 229.4 240.4 11.0 4.8%



855.3

26.7 5.5 (31.8)

6.8

16.4

17.5 4.1 900.5

800

820

840

860

880

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The full year impact of services introduced in 2015/16 is the primary driverof the budgeted cost increase in 2016/17

2016/17 costs► Costs are budgeted to increase from $855.3m in 2015/16 to $900.5m in 2016/17.

► The increase of $45.2m from 2015/16 actuals to 2016/17 budget is due to full yearimpacts of 2015/16, new services in 2016/17, Hepatitis C increase and EB andescalation increases offset by non-recurring Digital Hospital costs. This analysis isbased on 2015/16 actuals as provided to us for our analysis. We note minorvariances between this and the costs published in CHHHS’ 2015/16 annualreport.

► The other category comprises of adjustments identified by divisions that do notalign to any of the categories presented as well as unexplained and unreconcileddifferences arising from limitations of the budgeting controls and processes.

Cost base bridging process► In order to understand the increase in the budgeted cost base from 2015/16 to

2016/17, each division performed analysis to bridge their 2015/16 actual results totheir 2016/17 divisional budget as split by the cost categories presented in the chartabove.

► There were a number of limitations that were uncovered from this process including:

► Material year on year unexplained movements in labour and non-labour expensecategories

► Different methods for costing labour and non-labour expenses

► Inconsistencies in the application of CPI

► Inconsistencies in interdivisional movements from 2015/16 to 2016/17.

► Where possible, classification of cost movements into each of the above costcategories has been estimated using information from the budget tool (CHHHS’ in-house tool for developing its budget) and general ledger but remain subject to thelimitations noted above.

2015/16 v 2016/17 cost baseSource: Management information & EY analysis

1 2 3

45

6 7

The following section shows an increase in the 2016/17 cost base of CHHHS from 2015/16 highlighting the key areas which contributed to a $45.2m increase in budgetedcosts.


► Note that allocation of Enterprise Bargaining increases and other minorallocations were processed by CHHHS in October 2016 after providing us withinformation for our analysis, and the cost bridge does not reflect these changes.



The full year impact of services introduced in 2015/16 is the primary driverof the budgeted cost increase in 2016/17

Full year impact of 2015/16 new services► New services introduced part way through 2015/16 costed at a full 12 months

of 2016/17 increased the budgeted cost base by $26.7m.

► The following new services in 2015/16 had a material full year impact in2016/17:

► Perioperative services ($7.0m) – Relates to additional theatre capacity andincrease in surgical services.

► Non ABF facilities ($2.3m) – Management advised there was an increasein medical staff at Mossman and Tully.

► Medical Imaging and PET Scanner ($4.5m) – Increase in costs to run thePET (Positron emission tomography) scanner and increasing theoperating hours of medical imaging services to 24 hours a day, seven daysa week.

► SIFT ($1.3m) - Full year impact of SIFT (Senior Intervention for Triage)model in Emergency Department introduced in December 2015.

► Paediatrics and Adolescent wards ($2.6m) – Full year impact of new wardintroduced in 2015/16.

► Patient flow unit ($2.5m) – Increase due to extension of opening hours inthe transit lounge (extended hours and weekends), Scheduled Care Unitand Health Pathways.

► Intensive care unit ($5.5m) – Additional beds in ICU ward

► Catering, security, cleaning and other ($1.0m) - Increase in costs tosupport growth in services and to meet new catering guidelines.

► We note that the services discussed above relate only to new services in2015/16 and do not incorporate other services which contributed to theadjusted $33.4m deficit in 2015/16.

► Other services contributing to the deficit in both 2015/16 and 2016/17 includeadditional beds in interim care and general medical wards, increased hours to24/7 in the Catheter Laboratory, additional Junior Doctors and increaseddialysis services.

1 2

3

4

2016/17 new services► New services budgeted to be introduced in 2016/17 increased the budgeted

costs from 2015/16 to 2016/17 by $5.5m. Key amounts include:

► Tropical Public Health Unit ($2.1m) – including zika virus management.

► Commonwealth funding underspends ($1.2m) – several programs wereunderspent in 2015/16 and this is not budgeted for 2016/17.

► Oral Health ($0.6m) – an underspend in 2015/16 is not budgeted in 2016/17.

Digital Hospital (a)

► The Digital Hospital initiative, to transition CHHHS towards a higher level ofelectronic record-keeping enabling online record access among other benefits,went live in 2015/16. The movements in this category reflect non-recurrentcosts incurred in 2015/16, not included in the cost base of CHHHS in 2016/17.

► Actual Digital Hospital implementation costs incurred in 2015/16 totalled $31.8mwhich were fully funded by the Department of Health.

Digital Hospital (b)

► Costs in relation to Digital Hospital in 2016/17 separately identified by CHHHStotalled $6.8m and comprised of:

► A business as usual (“BAU”) case for 18.0 FTEs to deliver the corefunctionality of the initiative.

► Additional labour costs in relation to the medical records and scanning team($1.9m).

► 6.5 FTE’s in relation to FirstNet (a part of Digital Hospital) ($0.9m).

► Digital Hospital levies budgeted to be charged to CHHHS by eHealthQueensland ($1.0m).

► Digital Hospital levies for 2016/17 had not been finalised as at 30 September2016 and the above is an estimate.

► Management have advised that to the extent that Digital Hospital processesbecome more efficient in 2016/17, some temporary resources associated withthe initiative may no longer be required. This is not included in the 2016/17budget.




The costs of Hepatitis C drugs increased the 2016/17 budgeted cost baseby $17.5m however had no effect on the CHHHS budgeted deficit as it is afully funded initiative.

Enterprise Bargaining escalation

► Enterprise Bargaining wage escalations are funded by the Department ofHealth. The estimated year on year impact of Enterprise Bargaining increaseson 2015/16 costs currently factored into the budget is $16.4m.

Hepatitis C

► Hepatitis C drugs costs are budgeted to increase by $17.5m, which is offsetby an equivalent budgeted revenue amount received through PBS.

► Hepatitis C costs were $7.2m in 2015/16 and budgeted at $24.7m in 2016/17.

Non labour escalation and other

► Escalation factors have been applied to non labour costs to reflect CPI andother known price movements. Other sundry cost movements are alsoincluded.

7

6

5




Organisational sustainability plan

4


Initiatives 28

Long term plan for operational sustainability 30



The Organisational Sustainability Plan initiatives focus on both revenueoptimisation and cost containment

CHHHS Management identified initiatives to partially address the budgeted deficit position through the establishment of an OSP which commenced implementation inJuly 2016. The purpose of the OSP was to prioritise initiatives to enhance the sustainability of CHHHS’s health service delivery and endeavour to meet the health needsof the community and patients, now and into the future. The initiatives to improve sustainability were:

Note to table

(a) CHHHS management have calculated the risk adjusted savings by applying a rating score to each initiative from 0-100% based on the level of confidence to achieve the full year savings target.

Organisational Sustainability Plan: Summary of Initiatives

Stream Stream Name Objective 2016/17 Risk AdjustedSavings1 ($’000)

1 Revenue Optimisation This includes all initiatives aimed at increasing the revenue generated byCHHHS through own source revenue and improved clinical coding. 6,640

2 Workforce This includes workforce establishment, rostering, overtime and contractmanagement. 6,297

3 Service Delivery This includes a variety of initiatives to improve efficiencies in services deliveredby CHHHS. Different areas include telehealth, pharmacy and medical imaging. 2,633

4 Business expenditureThis includes a variety of different initiatives to reduce waste including improvingstationary controls and raising awareness on the use of electronic equipment forviewing material in lieu of printing.

1,819

5 Procurement This includes reviewing contractual agreements and identifying procurementsavings across different services. 315

Total 17,704




Management estimates the Organisational Sustainability Plan projecthas delivered $2.6m in savings by 31 August 2016 and on a risk adjustedbasis will deliver $17.7m by Jun 2016

The purpose of the OSP was to deliver a range of initiatives that supported CHHHS in achieving an improved financial operating position for 2016/17. The OSP wasdetermined to be the strategic priority for CHHHS with executive management sponsors appointed for each initiative.

Management performed an evaluation of each initiative and have developed full year savings targets and phased these across the financial year as follows. These havebeen risk adjusted to reflect the level of confidence in achieving the target.

As at the end of August 2016, CHHHS have calculated $2.6m of savings realised under the OSP, which is higher than the cumulative savings target to August 2016 of$1.162m (risk adjusted). Annualising the savings realised to date results in a total annual saving of $15.6m.

Month Jul 2016 Aug 2016 Sep 2016 Oct 2016 Nov 2016 Dec 2016 Jan 2017 Feb 2017 Mar 2017 Apr 2017 May 2017 Jun 2017

Savings target ($‘000) 691 741 786 2,087 2,087 2,087 2,087 2,112 2,112 2,112 2,697 2,697

Cumulative total ofsavings target ($’000) 691 1,432 2,218 4,305 6,392 8,479 10,566 12,678 14,790 16,902 19,599 22,296

Risk adjusted savings($’000) 561 601 637 1,633 1,633 1,633 1,633 1,653 1,653 1,726 2,172 2,172

Cumulative total of riskadjusted savings ($’000) 561 1,162 1,799 3,432 5,065 6,698 8,331 9,984 11,637 13,363 15,535 17,707




Organisational Sustainability Plan – A long term plan for OperationalStability

CHHHS has experienced significant change in the last three years with a major re development of physical infrastructure, implementation of the new Cairns Digital Hospitalprogram, adjustment in resource models and models of care to meet the demands of a growing population across the health service.

CHHHS should commence a structured operational stability program that will support the organisation to achieve a medium-to-long term sustained position of improvement.This should be considered against an enterprise risk management framework that will help the CHHHS board and management make effective decisions for the long termsustainability of the organisation. As such the organisation needs to satisfy itself and its stakeholders that it has appropriate governance arrangements in place, supportedthrough risk enabled strategic and operational processes with appropriate risk monitoring.

The OSP program needs to be complemented by a broader program of work to support the organisation to achieve a sustainable long-term position. EY recommends thefollowing approach in establishing a long term plan for a system configuration which delivers operational sustainability:

► Revisit the CHHHS master plan for health services for its region with a view to optimising the system around demand, performance, quality, access and capacity.

► Agree the criteria for assessing the appropriate options for the provision of health services, ensuring the assessment is clinically led, data driven and transparent.

► Establish an appropriate governance structure with clinical and technical working groups to drive local ownership, accountability and results.

The immediate steps that EY would typically recommend for an organisation under fiscal pressure would include:

Phase Steps Description

1 Establish system impact of existing initiativesThis includes activity, acuity, volume, utilisation, net cost to serve, bed occupancy and clinical risk.Consideration of system wide and/or local implications. In addition all aspects of patient safety andquality, value, patient experience, leadership and governance and access.

2 Seek appropriate levels of approval to progress‘workable’ initiatives for adoption

Develop long list of delivery options relating to improvement initiatives and service configuration.Review each initiative against pre determined criteria to assess clinical and operational acceptance forfuture delivery. Criteria would include but would not be restricted to the following: quality of care, patientaccess, financial, future service sustainability, workforce sustainability including teaching and training,alignment with appropriate legislation and system leadership directives actively supported by staff,community and others. Feasibility in terms of difficulty to implement and levels of necessary disruptionfor patient, staff and community. Agree future initiatives and configuration options based on agreedcriteria.

3 Develop and roll out implementations plans asapproved – with consultation as required

Establish and communicate an engagement plan and a plan for building organisational capability forsustainable improvement.

4 Review KPIs on a quarterly basisConsider and report on organisational impact of actual against planned performance against keymeasures. Make transparent opportunities with evidence to make appropriate decisions about theactions which may include stronger governance, more agile capability and innovation.

5Maintain continuous improvement program, identifyingadditional initiatives using preliminary and updatedservice planning and implementation experience

Continually monitor the operational stability schemes identifying further investment and dis-investmentopportunities.




Additional deficit reduction initiatives

5


Additional deficit reduction initiatives 32



► Noting that the efficiency benefits from the Organisational Sustainability Plan were inadequate to addressthe budget deficit, CHHHS Management identified and considered other alternatives.

► Initiatives were categorised into priority categories for further assessment including the essentialconsideration of patient safety / clinical impact.

► The top priority category of initiatives that could impact on the 2016/17 financial position are summarisedbelow. Any financial benefit from these initiatives is not incorporated into the 2016/17 budget at the dateof this report.

Key assumptions adopted by Management in preparingthese benefit estimates include:

► Budgeted revenue is unaffected by the initiativesdesigned to reduce the cost base.

► Costs to implement initiatives have not been factoredinto Management’s analysis to date.

► Where the benefit is presented as a number (insteadof a range) this is not indicative of a higher level ofcertainty. All savings are estimates only, with a highdegree of uncertainty, that require further in depthconsideration before a decision is taken as to whetherto proceed with the initiative.

Description Nature of initiative Timeframe toimplement Full year benefit 2016/17 benefit

2016/17 WIP accrual adjustment Increase revenue Immediately $4.0m - $5.0m $4.0m - $5.0m

2016/17 growth revenue adjustment Increase revenue Immediately $3.8m $3.8m

Activity levels realigned overChristmas and Easter period Service scheduling 0 – 3 months $1.6m - $2.8m $1.6m - $2.8m

Procurement savings Improvedpurchasing 0 – 3 months $8.7m - $11.8m $2.0m

TOTAL $18.1m - $23.4m $11.4m - $13.6m

Notes

1. Full year benefit represents Management’s estimate of full year benefits arising from incrementalincreased revenues and / or reduced costs.

2. 2016/17 benefit represents the portion of full year benefits that Management expects to be realised in2016/17 after taking into account Management’s estimated timeframe for realisation, but excludingimplementation costs and assuming timely implementation.

Management identified additional initiatives with the potential to reduce thebudgeted deficit by between $11.4m - $13.6m in 2016/17




Budget build process and recommendations

6


CHHHS budget build process 34

Budget phasing 36

Recommended improvements to budget controls and systems 37



Jan 2016 Feb 2016 Mar 2016 Apr 2016 May 2016 Jun 2016 Jul 2016 Aug 2016 Sep 2016

Stage 1 - Cost budget preparation

Budget principles agreed

Budget tool developed

Budget tool prepopulated

Stage 2 – Organisational Sustainability Plan

Initiatives identified

Delivery commenced

Stage 3 - Cost budget analysis

Analyse year on year variance

Provisional budget sign off

Stage 4 - Revenue budget formulation

Revenue assumptions reached

Stage 5 - Additional deficit reduction initiatives

Initiatives identified

Preliminary qualification of initiatives

Initiatives prioritised

CHHHS commenced the budget build process in January with selection ofmeasures to close the deficit gap extending into September 2016




Context► There was turnover in the CHHHS Management

team in 2015/16 resulting in a loss of corporateknowledge.

► Previous budgeting processes had beendeveloped in spreadsheets creating versioncontrol and accuracy issues.

► Lack of Management ownership of the 2015/16budget was seen as a contributory factor to thebudget deficit in 2015/16.

Budget stages of developmentStage 1 – Cost Budget Preparation: Jan – Apr 2016► A database budget tool application to manage cost

budgeting was created in-house to reducedependency on spreadsheets.

► Budget principles were authorised by the CHHHSBoard.

► CHHHS Finance prepopulated the budget toolwith data reflecting annualised balances derivedfrom Feb 2016 YTD actual costs.

► Consistent with the ‘bottom up’ methodology,responsibility for initial preparation of divisionalbudgets rested with divisional Management(supported by Business Analysts).

► CHHHS Finance provided staff involved in thebudget build process with a briefing givinginstructions and assumptions to be adopted in thebudget build process; a key assumption was thatbudgets should be prepared on a ‘bottom up’ basisassuming no changes in services provided.

Stage 2 – Development of OrganisationalSustainability Plan: Jun 2016► Management identified budget costs were higher

than funding and commenced planning theorganisational sustainability initiatives (seeSection 04). Financial benefits budgeted fromthese initiatives were not factored into the $80.5mbudget deficit.

Stage 3 – Cost Budget Analysis: Jul – Sep 2016► To understand the drivers of the growth in the cost

base from 2015/16 actual costs to 2016/17 budgetcosts, Management analysed movements intocategories including new services, 2016/17 fullyear impact of 2015/16 part year services andchanges driven by Digital Hospital andCommonwealth Funding. Variances between2015/16 actual costs and 2016/17 budget coststhat were unexplained by this process were furtherinvestigated.

► Through this high level iterative process,Management identified necessary budget changesthat were entered into the budget tool.

► Provisional budgets received Divisional sign off atthis point, with a cost base of $900.5m.

► Budget review meetings were led by acombination of the Chief Executive, CFO andCOO, with some other Executive team memberscontributing.

Stage 4 – Revenue Budget Formulation: Aug 2016► Management compiled the revenue budget

drawing on Service Agreement revenues andother funding sources.

► The revenue budget assumed a lower level ofservices would be delivered in 2016/17 than weredelivered in 2015/16.

Stage 5 – Additional deficit reduction initiatives: Aug -Sep 2016► Noting that the efficiency savings from the

Organisational Sustainability Plan wereinadequate to address the budget deficit,Management identified and considered otheralternatives.

► A number of initiatives were scoped for apreliminary qualification process to eliminateinitiatives that would not contribute to reducing thebudget deficit.

► Initiatives were categorised into priority categoriesfor further assessment including the essentialconsideration of patient safety / clinical impact.

► The top priority category of initiatives is included inSection 05 of this report. At the date of this report,the full qualification process to assess whether theinitiative satisfies patient safety / clinical impactand other priorities (e.g. redeployment of staff withno forced redundancies) has not yet beenperformed and none of the initiatives have beenenacted as at the date of this report.

CHHHS budget build process first developed the cost budget and thenindependently the revenue budget; the mismatch necessitated stepsto address the resultant deficit




The budget phasing shows a steady accumulation of the deficit duringthe year

Budget phasing► CHHHS Management finalised and implemented its methodology for phasing

the budget (i.e. deriving monthly budgets from the annual budget) in earlyOctober 2016 and our report does not consider a detailed analysis of thisphasing. At a high level we note the labour phasing appears to incorporate aweighting to recognise more public holidays in the second half of the year andincludes the effect of part year changes in labour and seasonal purchasing fornon labour.

► The top chart shows Management’s phasing of budget revenues and costs in2016/17. We note there is no noticeable impact due to seasonality based onthis phasing approach.

► The bottom chart reflects Management’s phasing assumptions to show howthe deficit accumulates in 2016/17. The lower line reflects the budgeted deficitand the higher line shows the reduced deficit that will eventuate if the riskadjusted savings of the OSP are achieved.


Revenue and costs phasing – 2016/17 budgetSource: Management information

0100200300400500600700800900

1,000

$Am

Costs Revenue

Deficit phasing excluding and including OSP savings – 2016/17Source: Management information

-90

-80

-70-60

-50

-40-30

-20

-10

0

$Am

Deficit (before OSP) Deficit (after OSP)



Set out below are our observations on financial controls and systems at CHHHS inthe context of the budget setting process.

CommendationWe commend Management on the following:

► Budget preparation commenced in Jan 2016, which under normalcircumstances would be in good time for completion pre Jun 2016.

► We observed a high level of engagement from Management and support staff informulating a meaningful budget to act as a financial plan for 2016/17. This wasfacilitated through Management’s decision to implement a bottom up budgetbuild, compared to the top down process that was adopted in 2015/16 of rollingover the previous budget.

► Issues from the prior year were addressed: the budget tool was developed in-house in response to budgeting issues experienced in the prior year budgetprocess.

► Access to the budget tool was controlled by CHHHS Finance who ran the2016/17 budget process.

► Budget principles were documented and considered at Board level at thecommencement of the budget setting process.

► CHHHS ran a consultative and transparent process to introduce a methodologyfor the allocation of revenue across divisions.

Improvement recommendationsWe noted and have discussed with Management our suggestions forimprovements to the budget setting process, and note that Management hadalready independently identified some of these findings.

SystemsLimitations in the budget tool evident in its first year of use include:

► No provision for sensitivity analysis: The budget tool is essentially a repositoryfor storage of budget data, not a tool that is useful as part of the decisionmaking process. We consider the ability to flex data and determine thesensitivity of outputs to various inputs to be an important part of the budgetsetting process.

► Time consuming data entry: Data is entered at a detailed level by cost centreand account code for non labour costs and by employee for labour costs. The2016/17 budget contains over 23,000 separate lines of data which assumingeach decision takes only 30 seconds will take over 26 man days of effort topopulate unless completed through a spreadsheet upload. Flowing budgetchanges through the budget tool can also be time consuming as multiple datainputs need to be updated.

► Lack of reporting: Data cannot be reviewed in context or in aggregate within thebudget tool as the tool does not have reporting functionality nor comparative(2015/16) data. Once the budget is close to final and is uploaded into DSS,reports are available; however, a principle of good budget setting is progressivereview during the budget setting process.

► Inability to accommodate seasonality or phasing: the budget tool only capturesannual costs for non labour expenses and while it captures employee start andfinish dates it does not accommodate seasonality in costs driven by factorssuch as public holidays. We understand that Management is investigating amodification to the budget tool to accommodate this.

► No capacity to manage cash flow or balance sheet positions: the budget tooldoes not allow budgeting for cash flow or balance sheet positions.

► We understand Management is seeking to extend the functionality of the budgettool to make it the source of approved labour positions, replacing current labourreporting which is considered inaccurate. As such, we understand that thelabour budget will be updated as approved positions in the organisation change.We envisage this could become confusing as the Board approved budget willpotentially be over-ridden during the year as new approved positions arecreated, and as a minimum will require implementation of strong versioncontrols.

► In the light of the above, we recommend the suitability of the budget tool for usein future budget cycles is assessed in consultation with users, with a view toincorporating modifications or identifying an alternative solution. Managementhave accepted the need to progress these recommendations.

Recommended improvements to budget controls and systems Dashboard1 Executive summary 5 Additional deficit reduction initiatives2 Budgeted revenue 6 Budget build process and recommendations3 Budgeted costs 7 Appendices4 Organisational sustainability plan



ProcessWe identified a number of limitations in the process adopted:

► Lack of a documented Operational Plan: A budget represents the financialoutcome of operational planning. The lack of a documented Operational Planhindered the organisation from co-ordinated and consistent budgeting, asdecisions on service levels in one division were not apparent to another divisionthat might be impacted. We recommend (and note that current Management aresupportive of) the development of an annual Operational Plan prior to nextyear’s budget setting process.

► A disconnect between budgeting for revenue and costs: Delays in allocatingrevenue across divisions resulted in detailed cost budgets being developedwhich were not supportable by the funding available. We recommend therevenue allocation is distributed early in future budget processes to providedivisions with visibility of their available funding. We understand Managementis supportive of this recommendation.

► Minimal use of cost drivers to determine the cost base: Adoption of operationalmetrics to determine certain budgeted costs (for example, cost per FTE)provides insight into areas where the budget may be inaccurate. The budgettool does not accommodate such metrics nor was this approach built into thebudget process.

► Lack of tested methodologies: Methodologies for uploading enterprisebargaining costs and phasing revenue and costs appeared to be developed latein the budget process and had not been resolved at the planning stage. Werecommend this is planned at the outset for the next budget process to ensurenecessary information is captured as part of the budget build.

Recommended improvements to budget controls and systems

Scope► An important part of budget setting is allowing an organisation to plan the year

ahead in the light of the year underway, including identifying opportunities toimprove performance. We note that Management chose to plan and tracklabour operational efficiency savings (such as through improved rosteringpractices) separately to the budget, through the Organisational SustainabilityPlan. We recommend these savings targets are incorporated into a budgetrevision to preserve the budget as the primary financial performance target.

► We consider the budget data captured by CHHHS to be to an extraordinarylevel of detail, using over 700 cost centres and over 1,000 accounts. Noting thatthe budget is primarily a financial planning and control tool, we recommendManagement consider whether budgeting to a less detailed level will improveaccuracy (by improving a ‘big picture’ overview) while still retaining the ability tohold Management accountable for performance against budget.

Phasing► The budget was initially phased without taking into account:

► Funding applicable for part year.

► Costs of services funded for part year only.

► Public holiday and penalty rate payment variations through the year(Queensland has four public holidays from Jul – Dec 2016 and eight fromJan – Jun 2017) which would be expected to increase labour costs in thesecond half of 2016/17.

► Benefits flowing through from the Organisational Sustainability Plan nor theAdditional Savings Schemes savings.

► We recommend that in future budgets, phasing information is captured at thetime of initially preparing the budget to improve the efficiency and accuracyof the budget setting process.




Recommended improvements to budget controls and systems

ReportingManagement have finalised the phasing of the budget which will allow the monthlyreporting of actual financial performance against budget. This would ordinarilyinclude:

► An analysis of variance of the actual month’s result to the monthly budget forthe purposes of reporting to the Chief Executive and Chief Finance Officer, toexplain key drivers of variances and clearly differentiating between timingvariances and cost or revenue amount variances.

► Preparation of a full year forecast in the light of year to date performance andknown future changes that will impact on year to date performance (e.g.sustained movements in activity levels, latest FTE numbers and locum usage).

► The adoption of a simple high level tool to capture and consolidate divisionalforecast updates while preserving version control.




Appendices

7


Management accounts to audited financial statements reconciliation 41

Definitions and abbreviations 42



Appendix A – Management accounts to audited financial statementsreconciliation


Management to audited financial statements reconciliation – 2015/16

Source: Management information and 2015/16 Cairns and Hinterland Hospital and Health Service Annual Report

Management to audited financial statements reconciliationThe table on the left presents the 2015/16 management accounts, as presented inthis report, to the audited financial statements as presented on page 58 of the2015/16 Cairns and Hinterland Hospital and Health Service Annual Report.

► A $3.9m adjustment for capital works exists between the management accountsand the audited financial statements.

► The audited financial statements includes labour costs of $1.4m and operatingexpenses of $2.5m in relation to capital works costs that are not included in themanagement accounts.

► These expenses are fully funded and the audited financial statements reflects$3.9m of Department of Health funding not included in the managementaccounts, resulting in a nil operating deficit movement.

Currency: A$m2015/16 Management

accounts2015/16 Audited

financial statements VarianceRevenue 835.3 839.2 3.9Labour expenses (588.6) (590.0) (1.4)Operating expenses (229.4) (231.9) (2.5)Depreciation and amortisation (37.3) (37.3) 0.0Total costs (855.3) (859.2) (3.9)Operating surplus (deficit) (20.0) (20.0) 0.0



Appendix B - Definitions and abbreviations

Abbreviations2015/16 Actual period 1 July 2015 to 30 June 20162016/17 Budgeted period 1 July 2016 to 30 June 2017ABF Activity Based FundingBAU Business as usualBudget tool The in-house database developed by CHHHS to manage

its budget build processCE Chief ExecutiveCET Clinical Education and TrainingCFO Chief Finance OfficerCHHHS Cairns and Hinterland Hospital and Health ServicesCOO Chief Operating OfficerDSS Decision Support System (Department of Health

Enterprise Reporting System used by CHHHS)Digital Hospital Transition to integrated electronic storage of medical

recordsDivision 1 Family Health and WellbeingDivision 2 Integrated MedicineDivision 3 Critical Care and PerioperativeDivision 4 Facilities ManagementDivision 5 Business Support ServicesDivision 6 Executive OfficeDivision 7 Corporate Accounting and ContingencyDoH Department of Health (Queensland Health)EB Enterprise BargainingEfficient GrowthFunding

Commonwealth funding of services delivered abovecontracted activity levels

FTE Full time equivalentHep C Hepatitis CHHS Hospital and Health Service

HIPO Health Innovation and Projects OfficeKPI Key Performance Indicatorm MillionsManagement CHHHS ManagementMBS Medicare Benefits ScheduleMOHRI Minimum Obligatory Human Resources InformationNWAU National Weighted Activity UnitsOSP Organisational Sustainability PlanOSR Own source revenuePBS Pharmaceutical Benefits SchemePosOcc Positions Occupied ReportQH FTE Queensland Health full time equivalentQWAU Queensland Weighted Activity UnitsSDS Service Delivery StatementService Agreement Cairns and Hinterland Hospital and Health Services

Service Agreement 2016/17 – 2018/19SIFT Senior Intervention for TriageWAU Weighted Activity UnitsWIP Work in progress – specifically relating to the recognition

of revenue equivalent to WAU earned in treatment of longstay patients

YTD Year to date


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