Income Generation in the NHS - National Audit Office · 2018. 11. 15. · cost to purchasers....

NATIONAL AUDIT OFFICE

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

Income Generation in the NHS

ORDERED BY THE HOUSE OF COMMONS TO BE PRINTED 23 APRIL 1993

LONDON : HMSO 605 f7.40 NET

INCOME GENERATION IN THE NHS

This report has been prepared under Section 6 of the National Audit Act 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn Comptroller and Auditor General

National Audit Office 29 March 1993

The Comptroller and Auditor General is the head of the National Audit Office employing some 800 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.


Contents

Introduction

Progress in developing the initiative

Financial management

Sharing of experience

General conclusions

Appendices

1. Units Visited by the National Audit Office

2. Income Generation in Scotland

3. Income Generation in Wales

4. Income Generation in Other Sectors in UK and Overseas

5. Setting prices for Income Generation Schemes

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INCOME GENERATlON IN THE NHS


Report

Introduction 1 The National Health Service (NHS) is the largest employer in Europe and provides a comprehensive service to United Kingdom residents within a total budget of C.29 billion. To support the medical care services, the NHS operates a wide variety of facilities, including laundries, catering, incineration and cleaning and has an extensive estate. Where there is temporary excess capacity in these support services, or medical services, the NHS may provide services on a commercial basis to earn extra income for healthcare under the income generation initiative.

Aims and objectives

2 The 1988 Health and Medicines Act allowed the NHS, for the first time, to generate income for improving healthcare through selling certain services, providing there was no significant disadvantage to the NHS or its patients. To develop this opportunity the Department of Health launched the income generation initiative in 1988 to encourage the NHS to raise additional money for healthcare, and to help improve the commercial awareness and expertise of managers. The aims of the initiative are to:

. generate additional income to improve health care;

. stimulate attitudinal change among managers towards a consumer- centred, cost-conscious and responsive approach; and

. enhance the image of the NHS as being more professional, aware and responsive at local and national level.

3 The Department anticipated that health authorities would develop a portfolio of income generation schemes which achieved a balance between commercial risk and income generated. They considered that the best opportunities included:

. sale of clinical support services (for example, pathology];

l sale of expertise;

. sale of spare capacity (for example in laundries and catering);

. provision of additional facilities for patients (for example, choice of menus, personal televisions);

. leasing of space (for example retail developments and car parking);

. development of surplus land;

. sale of waste and surplus products; and

. sale of ideas and inventions.

4 The Department set a target of generating a net income of El71 million over the four years 1988-89 to 1991-92 (El1 million, f25 million, E60 million and +Z75 million respectively). All units and authorities within the NHS were to consider implementing income generation schemes and develop

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their own approaches to the initiative. Regional health authorities should offer advice and guidance on schemes and monitor progress by districts.

5 The Department told the National Audit Office that schemes should use surplus capacity, and that projects should not be undertaken where public funds would need to be invested. Schemes should be consistent with the goals of the NHS, and NHS managers should not divert their attention towards income generation if it would harm the management of healthcare services. Schemes should minimise the financial risks to the NHS, and must conform to fair trading legislation. The Department required the NHS to recover at least the additional cost of operating schemes.

6 Following the passage of the Health and Medicines Act 1988, the Department established a small Income Generation Unit to determine policy, provide advice and guidance on opportunities available, and to monitor income generated. The Unit issued detailed guidance to the NHS on operating and accounting for schemes, and maintained a directory of income generation contacts in the NHS and in prospective private sector partners. They also provided ad hoc advice to units on request. The Unit was disbanded in January 1992, as the Department considered that the initiative was well enough embedded in the NHS to ensure its continuing development. The Income Generation Unit cost some f270,OOO to run in 1990-91.

7 The income generation initiative should be viewed in the wider context of the NHS reforms. The newly created internal market means that trusts and other providers will need to r&c all of their income through contracts with health care purchasers. They therefore have a strong incentive to seek ways of improving the quality of their services to patients and of reducing the cost to purchasers. Raising additional revenue through income generation, where this is the best way of using management and other resources, may contribute to this end. As an increasing number of units become self- governing trusts the role of regional and district health authorities in developing and monitoring income generation schemes will diminish.

NAO examination

8 Against this background, the National Audit Office examined progress made

by the NHS in developing income generation schemes, in particular:

. how the NHS identified and appraised income generation opportunities and the extent of progress towards meeting targets and expectations:

. the extent to which individual schemes were recovering their costs, and the financial monitoring and control over schemes: and

. whether the Department and the NHS have ensured that the Service shares good practice and expertise in income generation.

9 The detailed examination concentrated upon England, although overviews of progress in Scotland and Wales were obtained for comparative purposes. The examination excluded income received from the treatment of private patients which is subject to separate management and monitoring systems.

10 To obtain information on income generation, the National Audit Office surveyed a total of 65 hospitals, community units and ambulance services.

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The survey included a random selection of large acute hospitals, which generate much of the total income. The National Audit Office with support from Touche Ross Management Consultants examined in greater detail progress in developing income generation schemes at 21 units and authorities (Appendix l), sent questionnaires to the divisions of the NHS Supplies Authority and sought the views of representative bodies in the health field. The National Audit Office and Touche Ross reviewed practice overseas and in other sectors in the United Kingdom.

Progress in developing the initiative

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Ranges of schemes

The NHS has developed a wide variety of income generation schemes, ranging from the types suggested by the Department to innovative projects such as assisting with the development of an ambulance service for the Barcelona Olympics, and the equipping and management of a new hospital for Saudi Arabia. These schemes vary considerably between units, depending on their location and the services they provide, but can broadly be divided into three types-provision of additional services to patients, provision of facilities for staff and visitors, and the sale of services to companies and other non-NHS bodies (Table 1).

Table 1: Summary of types of income generation schemes Services to Patients

Sale of baby clothes Additional menu choice

Private TVNideo entertainment Baby photography

Services to Staff and Visitors

Staff restaurant (visitors)

Laundry/dry cleaning Newsagents

Florists

Nursery products

Pharmacy

Financial services

Services to the Private Sector

Health screening far employers Laundry/dry cleaning Occupational health

Fitness testing

Pathology

Incineration

Vehicle servicing Training

Catering for functions

Supplies to nursing homes

Property leasing Printino

Source: NAO

;;iQple illustrates the wide variety of income generation schemes pursued, and the three main types of customer

12 The National Audit Office examination suggested that major acute hospitals, which have large numbers of staff, patients and visitors and substantial grounds and support services, have the potential to develop a wide range of schemes, providing there is no significant disadvantage to the NHS or NHS patients. Most acute hospitals operated some schemes, the most common being retail outlets, advertising and sponsorship, leasing of buildings or land and car park charges (Figure 1). The South Devon Healthcare Trust provides an example of the many successful schemes which have been introduced.

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Medway Health Authority have established a Commercial Services Unit to develop their income generation activities. They operate six schemes. including laundry and sterile supplies, which generate a total net income of f131.000 in 1992-93. The unit has secured 855750 registration for its linen Service and its transpoll distribution.

Photographs reproduced with the kind permission 01 Medway He Authority.

Northumbria Ambulance Trust have used spare capacity in their vehicle department to provide servicing to private and commercial customers.

Photograph reproduced with the kind permission of Northumbria Ambulance Trust.

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Figure 1: Proportion of gross income received by acute units, generated by different schemes

Laundry services 19% \

of building or Ian 20%

d

Pharmacy p&ducts 8%

Incineration -‘.&s”‘” *erv,ces

4%

Sourcfx Nafional Aedit Offim numfinnnaire .sm-wv ~..~..~ ~~..~..~........ --.-..- ..__ __._,

The Figure shows that the greater proportion of gross income is generated from the lease of buildinas or land. sale of laundry services and car park charges

South Devon Healthcare Trust South Devon Healthcare Trust, based in Torquay, expect to generate over E200,OOO net income from schemes in 1992-93. Around half of this income will be generated from the use of surplus laundry capacity to clean linen for hotels in the area. Other major schemes include car park charges (~ZO,OOO net income), sale of drugs manufactured on site to private outlets (C20,000) and the sale of plants and garden equipment (gl4,000). Other schemes include a shop in the entrance area, sale of meals and snacks to visitors, and the sale of building and equipment maintenance services.

13 Ambulance services have significant income generation potential directly related to transport, communication and vehicle maintenance. An illustration is provided by the Northumbria Ambulance Trust. The opportunities for community units and other services, such as long-term geriatric or psychiatric care, are likely to be rather more limited, as they have fewer visitors and less plant and equipment.

Northumbria Ambulance Trust Northumbria Ambulance Trust employs a Marketing Director to consider how the service can be promoted to yield the maximum income. The Trust has successfully developed a number of income generation schemes which include: the provision of vehicle and paramedical support at sporting events; radio paging and telecommunication services for doctors and others; vehicle maintenance; and first aid and life support training. In the financial year 1991-92 these schemes generated additional net income of E318,000, which is being used to improve the service provided to patients. Each scheme is related to the Trust’s core business.

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14 Income is also being generated by family health services authorities, which sell training and other services to general practitioners and by the NHS Supplies Authority which sold EL? million worth of supplies to the private sector (mainly nursing homes) in 1991-92.

Total income generated

15 Despite the wide range of schemes developed, the initiative has not yet generated the levels of income expected by the Department. In the absence of detailed returns from regions, the Department have estimated income generation for 1989-90, 1990-91 and 1991-92 at E27 million, c50 million and E25 million respectively. The estimates for 1989-90 and 1990-91 were built up from returns prepared by the regions and are not final outturn figures. For 1991-92 the estimate is based upon firmer information from the National Audit Office survey.

16 The National Audit Office consider that the Department have over estimated income generation for 1989-90 and 1990-91 for two main reasons:

. two-thirds of the NHS organisations surveyed by the National Audit Office provided figures for gross income generated, rather than net income. Gross figures significantly overstate actual surpluses from schemes -net income was on average around 25 per cent of gross income in a third of the organisations surveyed; and

. income generation from family health services authorities was also overstated because the Department did not ask the authorities to separate income generation from other income in the financial returns.

17 The National Audit Office consider that the NHS Management Executive need more reliable and up-to-date information to obtain an accurate overview of the progress of the initiative. To this end the Management Executive have reviewed the data requirements NHS trusts need to provide to the Management Executive and the new simpler returns will produce more reliable and up-to-date information.

Variation between regions and Units

18 Income varies significantly between regions, reflecting local circumstances and the priority attached to developing income generation schemes. In 1989-90, the Department estimated that net income generated within regions ranged from ~C650,000 in East Anglia Region to f5.5 million in West Midlands. The Income Generation Unit analysed the income generated by regions in 1989-90 and concluded, on the basis of income generated as a proportion of budget, that only seven of the 14 authorities had taken positive and active steps to pursue income generation opportunities. They considered that three other regions had performed acceptably, whilst the remaining four regions had shown little commitment to the initiative. Within each region, the amounts generated by district health authorities varied significantly. Evidence from the National Audit Office survey and visits shows that income generated also varies between NHS organisations (Table 2).

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Table 2 : Income generation at units visited by the National Audit Office Table 2 : Income generation at units visited by the National Audit Office Unit Unit 1991-92 Budget 1991-92 Budget Income Generation Income Generation

fOO0 fOO0 GE.5 GWSS Net Net fOO0 fOO0 EOOO EOOO

Northumbria Ambulance Trust 12,000 884 318 South Devon Healthcare Trust 76,000 851 148 Medway Health Authority 50,000 700 131 Darlington Memorial Hospital 35,000 279 551) Trafford Hospital 50,000 69 39ilJ West Suffolk Hospital 36,000 160 301’)

Source: NAO Note (I): Net income estimated by the units. Estimate may not take account ofall relevant costs.

The table shows a wide range in the amounts of income generated by the units visited.

Management of schemes

19 To identify the reasons why some NHS organisations had generated more income than others, the National Audit Office analysed the approach to selecting and managing income generation schemes in a number of NHS units. These approaches are summarised in Table 3.

Table 3 : A summary of the different approaches taken by units to selecting and managing income generation schemes Unit Designated

Net Senior Stated Market Business Regular Reports Income Manager Policy Research Plans to Management

Northumbria Ambulance Trust f318.000 Yes Yes Yes Yes Yes South Devon Healthcare Trust E148.000 Yes Yes Yes Yes Yes Medwav Health Authoritv f131.000 Yes Yns Yea VPC Yea Darlingian Memo&Hospital f 55.0001’) Yes Yes Yes NO NO Trafford Hospital f 39.000(‘) Yes NO NO NO NO West Suffolk Hospital f 30,000 No Yes No NO NO

Source: NAO NoWlJ: These amounts are estimated bv the units. Estimates mav not take account of all relevant costs.

The table shows a strong correlation between good management control and higher levels of net income generation.

20 Northumbria Ambulance Trust, Medway Health Authority and South Devon Healthcare Trust had invested varying amounts of management time in appraising income generation opportunities, including identifying surplus capacity. They had specifically attempted to identify those schemes which offered the highest net incomes and minimum risk. Their appraisal included:

. assessment of the potential size and nature of the market;

. considering whether commercial partners were needed to provide expertise, capital or other input;

. identifying the competition to determine whether the schemes could attract customers;

. considering whether additional expertise should be bought-in [eg salesperson);

. producing profit forecasts and business plans for the selected schemes;

. producing castings and undertaking market research to help in setting prices; and

. producing marketing material for the selected schemes.

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21 In these three units, a manager was designated with responsibility for running each project (generally the relevant manager - for example, the laundry manager operated a laundry scheme). The project manager reported directly to a manager with responsibility for income generation, who regularly monitored financial progress and quality.

22 All three had drawn up detailed business plans for their major schemes, including statements of the aims and financial objectives of the schemes, and detailed cash flow forecasts. They had concentrated on schemes which were directly related to their core business and offered high potential profits. The business plans represented a firm basis for implementing the schemes, and for monitoring progress against targets.

23 There is rather less formal planning at the other three units. At Darlington Memorial Hospital, one senior manager was responsible for the oversight of the main income generation schemes. At the time of the National Audit Office visit, the hospital had not prepared business plans or cash flow forecasts for their main schemes. Trafford Hospital had appointed a senior manager to oversee schemes. They had reviewed their income generation activities in 1992, and had decided to concentrate on two main areas - health screening and catering. They had not produced business plans or cash flow forecasts for these areas, or for the small schemes which they were operating.

Marketing and implementation

24 Schemes need to be marketed and developed in a way that is sensitive to patients and to the broader aims of the NHS. An example of a scheme which did not live up to expectations was the North West Thames Regional Health Authority Visa card scheme.

The Health Service VISA card

\Torth West Thames Regional Health Authority developed a partnership with Girobank to launch the VISA “affinity card” in 1989. The card was offered to Health Authority staff (approximately 80,000) and the general public living in the North-West Thames area. Special benefits were offered to cardholders-for example, no annual fee and preferential interest rates.

For every El00 spent through the VISA card, Girobank donated 20~ to 3Op to the Region, with the final amount determined by the turnover figure of each cardholder. A donation of El was also to be made for every new card issued after 10,000; E2 after 30,000 and f3 after 50,000.

Responsibility for promoting the card to staff was given by the Region to 36 personnel across the Districts in the Region. Marketing literature and advice was provided by the Region. However, the marketing effort was insufficient and after 15 months of operation, only 300 health service VISA cards had been issued, and around fXl,OOO generated for the NHS.

At this stage the bank decided to withdraw the scheme as not viable. The Authority considered that poor marketing had contributed to its failure. Other organisations such as the Royal College of Nursing have successfully introduced VISA schemes which have generated income.

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25 Prior to deciding Lo implement schemes, most hospitals and Authorities had sought the views of their staff so that schemes could be designed to meet their needs and concerns. They had also consulted community health councils and other interested parties. Some schemes needed sensitive handling. For example, charging for car parking aroused opposition in some cases from staff and visitors, and senior management of some units had decided not to pursue it. However, in the units visited by National Audit Office which did charge for car parking, such schemes were thought to have produced specific non-cash benefits. The income generated had been used to pay for increased security. At one London hospital situated near a tube station charges had deterred parking by people not using the hospital, thus releasing spaces to visitors and staff. Trafford Hospital provides an illustration of the issues involved.

Car parking

I’rafford Hospital, located in the outskirts of Manchester, was suffering From random car thefts from its car park (two a week on average) and vandalism to staff and visitors’ cars. To fund the necessary improvements in security, the hospital introduced from June 1992 car parking charges ,f El per week for staff, and 40 pence per day for visitors. Separate car ?arks were dedicated for staff and visitors, so that spaces were always wailable for visitors. The car parks were patrolled by a security guard for 12 hours every day and monitored through security cameras for the :emainder of the day.

The scheme was put to the staff, and over three quarters approved of the proposals. The introduction of charges was publicised to the general public, stressing the increased security. The expected costs and income iom the scheme in its first year were:

:ost: Installation of barriers, and display machines, video cameras, lighting and signposting Security patrols

Ell,OOO E22,OOO

E33,OOO

[ncome: 100,000 visitors @ 40 pence per day 250 staff permits @El per week

E40,OOO E12,500

E52,500

The hospital intend to use any net profit from the scheme to upgrade roadways within the grounds.

L

26 In some cases, to encourage the development of schemes, the departments which have generated the income have been allowed to retain a proportion of the funds to spend on equipment. Ancillary staff have been rewarded with additional bonus payments where productivity increased above agreed levels.

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West Suftolk Hospital have developed an attractive caieteria and shopping area in their entrance foyer for use by staff, patients and visitors.

Photographs reproduced with the kind permission of West Suffolk Hospital Trust.

Photographs taken by Nik Bartrum

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Quality of service

27 As well as generating income, schemes can offer improvements in the quality of service (for example, the upgrading of laundries to provide better and quicker results) and in the hospital environment (for example, the siting of a high quality caf6 and retail outlets in the entrance of a hospital]. Specific examples are provided by the South Devon Healthcare Trust’s laundry scheme and by the shop at Darlington Memorial Hospital.

Improvements in quality of service

South Devon Healthcare Trust had spare capacity in their laundry. To generate income, they decided to market this spare capacity to hotels in the vicinity. They prepared detailed castings, and based their prices on these. To market the scheme they employed a full-time salesman, who has secured major contracts. The scheme produced E289,OOO gross (B~,ooo

net) in 1991-92.

The unit believe that the scheme has not only generated significant income, but has also improved the quality of service to the NHS. The improvements include better turn-around times for laundry, more regular deliveries and better presentation of the end product.

Improvements in the hospital environment

Darlington Memorial Hospital have an attractive general retail shop situated near the main entrance to the hospital. The shop is managed and run by a private company under a leasehold agreement with the hospital. In return for the use of the outlet, the company pays an agreed percentage of the value of the sales for the year to the hospital. For 1991-92 the shop yielded a net income to the hospital of B4,OOO. In addition to the good level of income, the shop provides an attractive environment and a useful service to patients, staff and visitors.

Sponsorship

28 Sponsorship can be a useful source of additional income for the NHS. This often involves the provision of equipment or materials by the commercial sector. The name of the sponsor is generally attached to the donated item. An example is provided by Durham Ambulance Service’s sponsored paramedic car.

Durham Ambulance Service have sought sponsorship from local companies. As a result of their efforts, a local garage has donated a car to the service for use as a paramedic car. The car carries the name and logo of the garage. The sponsorship has enabled the service to use the money that would have been spent on the paramedic car to purchase new equipment for the main Accident and Emergency fleet.


Additional potential for income generation

29 Whilst some hospitals and Authorities have done well in implementing a wide range of schemes, a National Audit Office analysis suggests that there is significant further potential for income generation. An examination by the National Audit Office and Touche Ross at Darlington Memorial Hospital and Trafford Hospital indicated that these hospitals could generate further annual net income (after taking account of all costs, including management and administrative time) of E196,OOO and E33,OOO respectively. The cost of management consultant time to identify these opportunities was insignificant in relation to the potential income. The management effort needed to develop the schemes was also very small bearing in mind the likely income, and the management of some larger schemes could be contracted out to the commercial sector where the NHS did not have the time or the requisite experience (Table 4).

Table 4: Additional income generation potential at Units visited by the National Audit Office

DarlinQtan Memorial Hospital fOO0

Trafford Hospital

fOO0

Current Net Incomet’)

Additional Schemes: Commercial Sponsorship Existing Intellectual Property Car Parking Laundry Other Small Schemes

55 39

20-60

;a 1 o-45 o-1 9

168 IO-30 3-30

Additional potential 196-216 33-l 54 Total potential 251-271 72-193

Soome: NAO Note (1): Net income estimated by the units; the estimates may not take account ofall relevant costs.

The Table shows that each unit has the potential to generate significant additional income.

30 The additional schemes were based on existing services and represented a balance between developing current income generation schemes and making use of surplus capacity in other services. The likely net incomes for the units varied according to local circumstances and to the competition in the area.

31 A further example of the potential for income generation is provided by a hospital which did not operate any schemes. They were interested in developing schemes but needed information on what other units had done. On visiting the hospital, the National Audit Office and Touche Ross identified schemes which could yield up to E69,OOO net income per year if implemented.

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Potential for income generation

The main additional scheme identified was for waste incineration. The hospital has an incinerator which has been decommissioned because it does not meet current emission standards. There was no alternative local provision of incineration and the hospital and other users such as the police and other hospitals needed to transport their waste some 25 miles for incineration. If the hospital obtained a commercial partner to refurbish and operate the incinerator, Touche Ross estimate that a net annual income of up to E~O,OOO could be achieved from the incineration of waste for other local users. There would be additional savings to the hospital, as transport costs and staff time involved in transporting waste could be significantly reduced.

Other possible schemes were the sale of existing intellectual property (up to E4,000), letting vacant accommodation on site (up to ElO,OOO), and external cleaning contracts [up to E5,OOO).

The hospital operated a garden centre which provided plants to the hospital grounds, but also ran a commercial operation which sold goods direct to the public. Local management did not regard this as an income generation scheme. The costs and income from the commercial activities were not separately identified, although local management estimated that existing costs exceeded income by up to g25,OOO a year. To ensure that income is maximised the National Audit Office suggested that a business plan be prepared and financial performance monitored on a regular basis.

32 The further potential for income generation is also illustrated by the fact that 51 of the 65 units surveyed by the National Audit Office thought that they could generate higher levels of income. There may, of course, be valid reasons why potential income is not realised not least of which is the question of prioritising management time. For example, the principal factors perceived by NHS organisations as limiting the achievement of potential were lack of management time, higher priority accorded to other management issues, shortage of capital for investment and a need for further advice and information. Management resources in particular are at a premium at a time when the NHS reforms are introducing major changes and call for significant management effort.

33 Hospitals had sought to overcome problems encountered in various ways:

l Time: Not all schemes require the same proportion of management effort and some units have consciously selected projects which require very little management time. South Devon Healthcare Trust generated net income of g148,OOO in 1991-92 with an input of less than five per cent of one manager’s time. Management of some major schemes could be contracted out (for example, shopping malls), and some schemes are large enough to finance the cost of the extra staff needed to manage them;

l Capital:. Some have sought capital from private sector partners to develop commercial opportunities. Typically, the partner has leased land or buildings from the unit and paid a set sum for each year. The partner also carried the risk of operating the scheme. Examples include shopping malls and major incinerator developments: and

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INCOME GENERATlON IN THE NHS

. Advice and guidance: Advice and guidance are available if units actively seek them. The Department have issued a certain amount of guidance, and there is considerable expertise within the National Health Service which can be drawn upon through effective networking.

Conclusions

34 Opportunities for income generation vary, depending upon such factors as location of the unit and the nature and extent of spare capacity. However, the full potential of the income generation initiative has yet to be realised. There are pitfalls for the unwary and, if the potential is to be fully developed, units need to take account of the management practices which have contributed to the successful development of existing schemes. These practices include:

. ensuring that one manager with appropriate authority oversees income generation activities:

. taking into account the views of staff, patients and other interested parties when developing schemes;

. recognising the quality benefits which can accrue from schemes;

. evaluating the risks of implementing schemes and seeking to minimise them;

. giving priority to those schemes which offer the highest potential return with a minimum of risk and management input;

. undertaking market research to ensure the viability of schemes and actively marketing them to all potential customers; and

. preparing business plans for schemes which clearly identify targets and cash flow projections.

35 NHS organisations which pursue schemes without regard to these factors run the risk that management and other resources will be invested in activities which do not contribute significantly to either quality or income improvements.

Financial Management

36 Hospitals and Authorities need to assess the likely costs and profits of schemes under consideration. Once they have been implemented, schemes should be monitored to ensure that they are generating the expected levels of income. The National Audit Office examined how NHS organisations costed and priced their income generation activities, and how they exercised financial control over schemes.

Costing of schemes

37 The Department define an income generation scheme as one which seeks to provide a level of income which exceeds total costs or, at the very least, provides an income contribution over and above the direct unit cost involved. The aim is to generate a profit, not simply income. NHS organisations therefore need to know all the costs of each scheme.

38 The types of costs which make up full costs are shown in Table 5. These include an apportionment of administrative costs, an allowance for management time (at senior and junior levels) and overheads such as electricity, telephones and administrative support. The value of assets should also be reflected and relevant capital charges, such as depreciation on equipment used and a return on the capital invested, should be considered. The Department have issued guidance on the costing of

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39

schemes. Units also need to recognise the hidden costs of operation. For instance, if surplus laundry capacity is marketed so that the laundry works at full capacity, maintenance costs are likely to increase, and machine life reduce.

Table 5: Cost elements of income generation Additional (Direct) costs All schemes should seek, as a minimum, to recover additional costs. These may include:

Extra staff Overtime or bonus payments Increased maintenance and depreciation Additional consumables/utilities

Management time to set up and run the scheme Transport Administration (for example for billing clients) Insurance Additional equipment

Fixed (Indirect) costs

1 Variable costs which may increase tin direct proportion to the level t of activity t

I 1 Semi-variable costs which may vary 1 but not in direct proportion to the 1 level of activity. t

It may also be appropriate to reflect the value of assets employed and to include a proportion of overall unit costs so that the full cost of the activity can be recovered:

Depreciation/interest on capital I Fixed costs, which need to be taken Administrative overheads I account 01 to reflect full costs.

Source: NAO

To recover either full 01 variable costs units need to consider the elements identified in this table.

Of the six organisations visited by the National Audit Office which were running schemes, the three generating the highest net incomes had undertaken detailed castings for all of their main schemes, but only South Devon Healthcare Trust had included all relevant costs (Table 6). The other two had omitted capital charges and some indirect administrative costs. The remaining units had not prepared castings and did not know the full costs of schenies.

Table 6: Costs included in Units’ costing calculations

Direct Costs:

Northumbria Ambulance Trust

s Devon Healthcare Trust

Medway Darlington Trafford West Suffolk Health Memorial Hospital Hospital Authority Hospital

Staff costs Materials Expenses Capital Charges

Overheads:

Staff costs Materials Expenses Capital Charges lllSUl&VX

Net Income Generated

; / /

/ + ;

f318,OOO f148,OOO fi31,OOO

+ + + +

+ + + + +

f55.0001’)

+ + ; + / + +

+ / + + : + + + +

f39,000(‘) f30,OOO

Source: NAO Key: /cost is included where relevant in cost calculations

+ cost is excluded, although cost incurred. Note (1) Net income estimated by the units; estimate may not take account of a// relevant costs.

The figure shows that one of the six units had included all relevant costs in their calculations of prices. TWO units had not undertaken castings for their schemes.

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Pricing of schemes

40 For schemes operated by third parties, such as shops, hospitals and Authorities can ensure that they maximise their income by seeking tenders from potential operators. For projects run by the NHS, units need to consider the appropriate basis for pricing. The Department require commercial activities to be priced fairly but competitively to maximise returns without legitimate complaint from competitors. Authorities are expected to abide by the provisions of the Fair Trading Act 1977 and the Competition Act 1980. Prices should be based on the costs of the service provided and should take account of prevailing market prices where a comparison can be made - for example, for laundries.

41 The Department recognise that it is not always appropriate to set charges which cover full costs. Some costs are an unavoidable part of the main business of an organisation. They are, in effect, fixed and do not vary simply because spare capacity is used to generate income. As long as the additional or variable costs incurred by the scheme are recovered, the additional income will provide a valuable contribution to unit funds. However, a major objective should be, where possible to set prices at a level which maximises net income.

42 In practice, different NHS organisations set prices for similar services at different levels. Meals for hospital visitors provide an example.

Meals for hospital visitors

Four of the hospitals examined by the National Audit Office ran restaurants and snack bars which were open to staff and visitors to the units. Each operated a two-tier system of prices for the food served.

Staff costs were subsidised and staff paid 60 per cent of the assessed full cost of the meals, and the hospital 40 per cent. In three units visitors were typically charged around 20 per cent extra. Thus for an item whose estimated full cost was fl, staff would pay 60 pence, and visitors 72 pence. In all three cases, the restaurants had a significant number of customers who were not visiting patients at the hospital, but who lived or worked nearby. The net result was that while the hospitals recovered the additional food costs of meals, they partially subsidised the full cost of the meal provided to these visitors. South Devon Healthcare Trust recovered the full cost of meals from visitors.

43 The National Audit Office found that the three organisations which had prepared business plans and had carried out castings for their schemes had also conducted market research to determine the prices charged by competitors. They could therefore decide whether these schemes were viable. Prices had been set in accordance with a stated policy, and generally included a profit margin.

44 The remaining organisations had also generally carried out some market research, and had set their prices to compete with private sector counterparts. The pricing approaches adopted included a standard mark-up, for example when selling supplies, and setting prices simply to undercut the competition. However, they could not be sure that the schemes were

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INCOMEGENERATIONINTHENHS

making a net profit, as they had not identified either their fixed or variable costs.

45 Income generation schemes can yield significant additional finance for the NHS. Hospitals and Authorities should therefore seek to implement schemes where they represent the best use of management time and other resources and can be run without detriment to the NHS. To ensure that all schemes secure a good level of return, NHS organisations should:

l look imaginatively at the opportunities available for income generation;

. identify the full cost of operating schemes;

. ensure that all relevant items are included in such costs, including management time, and capital charges where appropriate;

. regularly review schemes which only seek to recover marginal costs to ensure that there is no better use for spare capacity; and

. follow the principles set by the Treasury for cost recovery (summarised in Appendix 5).

Financial monitoring and control of schemes

46 If the NHS is to maximise its opportunities and income it needs good financial information and financial controls. The quality of the management information varied considerably between the organisations visited by the National Audit Office. The three units which had carried out detailed castings also prepared regular financial statements for their schemes. There were regular reporting arrangements to senior management, usually on a monthly basis. The accounts prepared included comparisons with budgets and were sufficiently detailed to allow problems to be identified and corrective action taken if necessary.

47 The units which had prepared detailed castings could identify and apportion relevant costs to each scheme. In each case, the units had identified income generation receipts and payments separately on their accounting ledger, so that information could easily be extracted.

48 The remaining three units did not prepare regular returns to senior management and income generation had often been included in general ledger headings. This meant that the progress of schemes could not properly be monitored. The units could not therefore demonstrate that they were recovering the costs of their schemes.

49 To ensure that all income and expenditure is accounted for, units need to exercise good financial control over their income generation schemes. The National Audit Office found, however, that financial control over some schemes was poor.

50 Some units had credited income for small schemes to expenditure codes, thus artificially reducing the expenditure levels on the relevant ledger codes. As income was not separately identifiable, unit senior management could not exercise satisfactory oversight. At one unit, lack of control had resulted in income of some E2,OOO a year not being received for the rental of advertising space since 1989.

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Sale of NHS supplies

51 Medical and other supplies used by the National Health Service are purchased and distributed through the NHS Supplies Authority. Until April 1992 the supplies function fell within regional health authority responsibilities, and there were consequently 14 supplies authorities reflecting regional boundaries. The Supplies Authority now operates through six divisions within England. The Authority may generate income through selling supplies to the private sector (for example, nursing homes), and replies to the National Audit Office questionnaire showed that some E6.5 million worth of sales were made in 1991-92, yielding a net profit of ~900,000. The supplies sold ranged from medical goods (for example, incontinence pads) to consumables such as coffee and cleaning materials.

52 The National Health Service often obtains supplies from manufacturers at /

prices significantly below those charged to private sector companies. In 1991 the Department issued guidelines on the resale of goods to non-NHS organisations. These required NHS organisations to:

. obtain the consent of the supplier concerned when quantities of goods additional to normal requirements were purchased for the express purpose of resale;

. cover all direct and indirect management, accommodation and capital costs when trading goods so as to avoid subsidy from NHS funded resources;

. follow the principles and terms of fair trading and product liability legislation: and I

. avoid adversely affecting core NHS business and distorting the external market place. I

53 The National Audit Office found that four authorities had been reselling I goods with a total value of some ~&l million in 1991-92 without supplier consent. At least one hospital had also been reselling supplies without

I

consent.

54 Selling without supplier or manufacturer consent could represent unfair competition and could distort the market in certain goods. This would damage relationships with suppliers, possibly leading to higher prices to the National Health Service. In this context, the Department interpret trading at I less than 5 per cent of turnover as being peripheral to core business. / However, the Department do not monitor the level of trading and the National Audit Office found that one supply authority had exceeded this i figure during 1991-92. The Department said that they would expect the new NHS Supplies Authority to monitor the performance of its constituent divisions in this respect. i

Use of the income generated I

55 The National Audit Office found that NHS units used the income generated in a variety of ways. Some ensured that the additional money benefited staff, patients and visitors by earmarking the income for specific purposes, I for example the upgrading of equipment or facilities for the creation of a high quality cafeteria for visitors at West Suffolk Hospital. But some

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INCOMEGENERATIONINTHENHS

schemes, even where they were clearly yielding additional net income to the NHS, were not using these funds for identifiable extra health care, as envisaged in the aims of the initiative. At least one unit was using the income to help achieve efficiency savings targets.

56 For some directly managed units, health authorities were deducting the income generated from the units’ budgets, or had applied the income to reduce budget deficits. The income generated meant that the budget deficit could be reduced without reducing patient services.

Conclusions

57 Units need to cost schemes accurately and set appropriate price levels. As a minimum, these should cover the additional costs of an activity and should always be set to maximise income. Units also need to monitor schemes to ensure that they are yielding the expected additional income. To achieve this they should:

. regularly review actual income and expenditure against targets;

. ‘ensure that all relevant income and expenditure are included in such review;

. operate controls to ensure that all income due is collected; and

. where possible, use income to provide identifiable improvements in healthcare.

58 The NHS Supplies Authority and the Department should ensure that supplier agreement is obtained before the resale of goods by the Authority or units. They should also maintain an overview of the level and nature of reselling activity to ensure that it does not distort the supplies market.

Sharing of experience

59 When the Department established the Income Generation Unit, they intended NHS units to share the experience they had gained and the lessons they had learned, so that the whole service could benefit from experience. Some regional health authorities set up informal income generation groups to encourage the sharing of knowledge between units. However, staff at hospitals visited during the course of the examination told the National Audit Office that the absence of an authoritative source of information had caused them difficulties. Sixteen of the hospitals responding to the National Audit Office questionnaire identified a need for information on schemes operated successfully by other NHS units.

The Department’s role

60 The Income Generation Unit acted as a collector and disseminator of good practices, and offered information and advice to units. By the end of 1991 they had produced a range of guidance on developing schemes, including three guides to specific areas of opportunity. They also had four further guides in production when the unit was disbanded. These guides have not been issued to the NHS.

61 Comparison of the schemes actually operated by the NHS within the areas on which the Income Generation Unit published guidance shows that the Unit did not concentrate on the major schemes. The response to the

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National Audit Office survey indicated that the schemes on which guidance was provided accounted for less than one per cent of the total income generated. In contrast, the guides which were in production but not issued accounted for 34 per cent of activity (Table 7).

Table 7: Comparisons of income generation unit guides with actual activity at a Sample of acute units Income Generation Unit Guides

Published

Units Income Percentage Of Running Generated Total Income Schemes (f000) Generated

X-Ray and Pathology Financial Services

1

Hotel SenriceslTV Hire, additional menus :

5 0.1 3 0.1

20 0.3

Total

In Preparation Occupational Health/ Medical Screening Retailing Car Parking Catering

Total

28 0.5

4 75 1.2

30 833 13.9 19 1.044 17.4

6 113 1.9

2,065 34.4

So”rce: NAO surve”

The Table shows that the Income Generation Unit issued guidance on schemes which have not generated significant income. They did not complete guidance in some areas where the income level is much higher.

62 The Department have identified intellectual property rights (for example copyright over training materials, or patents for the development of medical apparatus) as an area which offers considerable potential as a source of income for the NHS. To make progress towards capitalising on the opportunities available, the Department have started to train some of their own staff in recognising opportunities. The National Audit Office examination found that the NHS had made little progress in this area, although two hospitals had sold training materials for around ~~,ooo.

The role of Regional Health Authorities

63 The approaches to income generation of the regional health authorities vary considerably. Three regions (North Western, Trent and North East Thames) are active in providing advice and support to units through internal consultancies. And North Western Region also issue a quarterly value for money newsletter which includes details of successful schemes. From mid 1992, this publication has been made available nationally. To assist the sharing of local experience and expertise, seven of the 14 regional health authorities have set up and supported regional income generation groups. The meetings are open to all units within the regions, and involve the discussion of problems and ideas for income generation. The remaining seven regions had no such forum.

Income generation in Scotland and Wales

64 The Scottish and Welsh Offices have taken differing approaches to income generation. In Scotland, a national group, containing representatives of health boards, produced an income generation action plan in 1987. They

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have continued to monitor the progress of each board and to encourage sharing of experiences. Total net income generated in Scotland in 1991-92 was estimated at E3 million (Appendix 2).

65 The Welsh Office have adopted a proactive approach similar to that of some English regions. Their value for money unit helps the NHS in Wales to develop schemes and provides consultancy services to units and health authorities. It has produced a number of reports providing guidance on specific opportunities and on general matters such as business planning. Total net income generated in Wales in 1991-92 was estimated at E2 million (Appendix 3).

Comparison with other sectors

66 The National Audit Office and Touche Ross Management Consultants reviewed income generation in other areas in the United Kingdom, and in health services overseas. In comparison with other sectors in the United Kingdom, the NHS is well advanced in developing schemes, although there is growing interest in income generation in other sectors. Examples include the auction of exclusive registration numbers by the Driver and Vehicle Licensing Authority and the coin club run by the Royal Mint.

67 There appears to be little income generation in health services in countries other than the United States and Canada. In Canada, a 1985 study showed that around 90 per cent of large hospitals undertook large scale income generation projects and that between one per cent and two per cent of total revenue was contributed by income generation profits. Hospitals in both countries are more commercially-orientated than in the United Kingdom, largely as a result of the different funding systems, and have developed schemes which would perhaps not be suitable for the NHS, such as patented slimming programmes (Appendix 4).

Conclusion

68 The Department of Health intended that NHS organisations should share experience of income generation so that the NHS as a whole may benefit from developments. The National Audit Office recognise that NHS Trusts may be unwilling to share knowledge on income generation with other units likely to be competitors. However, many units expressed a willingness to assist others, particularly those at some distance from themselves. To ensure that expertise is shared where possible, the National Audit Office recommend that the NHS Management Executive should:

. promote the establishment of networks of Trusts willing to share their knowledge and expertise for the benefit of other units;

. consider designating one regional health authority as a focus for income generation enquiries; and

. complete and circulate the unfinished Income Generation Unit guidance on schemes.

The Department have now invited North Western Regional Health Authority to act as lead region for income generation and to assess the work needed to complete the good practice guidance and the benefit of circulating them.

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General conclusion

69 Although income generation is very small in relation to the overall NHS budget, many units have implemented successful schemes which deliver significant additional resources for health care and improve the quality of service or the hospital environment. However, the Department’s targets have not been met. This has probably been due in part to the need for managers to give first priority to the NHS reforms. However, these reforms will in themselves offer additional incentives for units in future to exploit income generation where it would represent a sensible use of their resoulTcs.

70 The National Audit Office consider that the NHS has significant potential to increase income generation, and that, in principle, the Department’s target of E75 million a year should be achieved. To help realise the opportunities, the National Audit Office conclude that:

The NHS Management Executive should:

. promote co-operation and sharing of good practice by the NHS, possibly through designating one Regional Health Authority with responsibility for income generation;

. maintain a broad and accurate overview of progress in income generation by the NHS; and

. ensure that the NHS Supplies Authority monitor the selling of supplies by their constituent divisions to ensure that activity complies with existing guidance.

The NHS should, where there is no disadvantage to the NHS or NHS patients:

. actively seek to develop schemes where this is a justifiable use of management time;

. focus their energies on the more productive opportunities;

. operate schemes on commercial lines by:

- identifying full costs;

- aiming to maximise income consistent with minimising risk; and

- monitoring financial progress on a regular basis.

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INCOME GENERATION ,N THE NHS

Appendix 1

Units surveyed by questionnaire

Barnsley District General Hospital Basingstoke District Hospital Bassetlaw Trust Brighton General Hospital Broadgreen Hospital, Liverpool Burnley General Hospital Cambridge Community Unit Canterbury Community Unit Chesterfield Royal Hospital Darlington Memorial Hospital Durham Ambulance Service East Cumbria Community Unit Friarage Hospital Northallerton Furness General Hospital Gloucester Royal Hospital Grantham & Kesteven General Hospital Ha&w Wood Orthopaedic, Notts Hexham General Hospital Hull Royal Infirmary James Paget Hospital, Yarmouth London Trust, Whitechapel Lynton Cottage Hospital, Devon Manor Hospital, Walsall Mayday, Croydon Mytton Oak (Shropshire] New Cross, Wolverhampton Newmarket General Hospital North Manchester General Hospital Northampton General Hospital Northern General, Sheffield Northumbria Ambulance Trust Northwick Park Hospital, Harrow Nottingham City Hospital Oxford City Eye Hospital Pilgrim Hospital, Boston Plymouth Community Service Poole Hospital, Dorset Queen Alexandra, Cosham Queen Elizabeth Hospital, Kings Lynn Rochford & Southend NHS Trust Royal Free Hospital Royal Manchester Children’s Hospital Royal Oldham Hospital Royal Surrey County Hospital Royal United Hospital, Bath Scarborough General Hospital Severalls Hospital, Colchester South Tees Acute Hospital South Warks Health Authority

Southampton University Hospital Southmead Hospital, Bristol St Bartholomew Hospital St Mary’s Hospital, Portsmouth Sunderland District General Hospital Taunton & Somerset Hospital Tewkesbury Hospital Torbay Hospital Trafford General Hospital Victoria Hospital, Blackpool Wessex Regional Blood Transfusion

Centre West Park Hospital, Epsom West Suffolk Hospital Wiltshire Ambulance Service Winchester Community Unit Yardley Green, Birmingham

Units Visited by the National Audit office

Addenbrookes Hospital, Cambridge Darlington Memorial Hospital Derbyshire Family Health Services

Authority Durham Ambulance Service Hillingdon Health Authority Medway Health Authority Mount Vernon Hospital North East Thames Regional Health

Authority Northern Regional Health Authority Northumbria Ambulance Trust North Western Regional Health

Authority Northwick Park Hospital, Harrow Oxford Regional Supplies Authority Roehampton General Hospital Severalls Hospital, Colchester Sheffield Family Health Services

Authority South Devon Healthcare Trust South East Regional Supplies Authority Trafford Hospital West Suffolk Hospital Yorkshire Regional Supplies Authority

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Appendix 2 Income generation in Scotland

1 Income generation activity in Scotland is monitored by the Scottish Office Home and Health Department. The Department estimated that the NHS in Scotland generated sume f3 million net income in 1991-92. They have set a target of around ~7 million (0.3 per cent of revenue allocated for 1992-93) but this is unlikely to be achieved.

2 The Department fund the Scottish Health Management Efficiency Group, which reports to the Chief Executive of the NHS in Scotland. The Group was established in 1985 to lead and co-ordinate a programme of efficiency studies of NHS activities. It draws its membership from the Department and from the NHS.

3 The Group undertook a survey in 1985 to establish the levels of income generation within the NHS in Scotland. They concluded that there was further potential for income generation and in 1987 issued an action plan for developing retail units and selling waste products. In 1989, the Group produced a further report which examined the opportunities available in two areas and how they could be developed:

. healthcare experts (for example providing medical staff for fund aided projects in the third world]; the Group estimated potential net income at f60,OOO a year; and

. health screening, occupational health and immunisation services, with a potential net income of +X20,000 a year.

4 The Group have also negotiated some schemes on a national basis, which they believe has resulted in higher income for the NHS than their individual boards could have achieved, for example, for advertising on health service stationery. They have also arranged insurance cover for income generation, which has resulted in lower premiums for health boards.

5 There are significant differences in income generation between the health boards in Scotland. This is partly due to the differing opportunities available, which are greater in urban areas than in more rural areas. The Group conducted a survey of income generation by health boards in 1992 and are currently analysing the results.

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lNCOME GENERATION IN THE NHS

Appendix 3 Income generation in Wales

1 Income generation activity in Wales in monitored by the Welsh Health Common Service Authority’s Value for Money Unit on behalf of the Welsh Office. They estimate that the NHS in Wales generated around E2 million net income in 19’3-92 (0.25 per cent of revenue budget).

2 The NHS Directorate of the Welsh Office have commissioned the Office’s Value for Money Unit to review the performance of health authorities in Wales and to help authorities make the most of their commercial opportunities. The Unit has adopted a proactive approach, and published an income generation strategy for the NHS in Wales in 1991. This included detailed guidance on appraising opportunities, preparing business plans and reviewing performance.

3 In addition, the Unit has established Welsh Health Development International which promotes the NHS Wales overseas for healthcare consultancy. Project areas include the less-developed countries of Africa, countries of Central and Eastern Europe, and the former Soviet Union, as well as Middle Eastern states. The Unit also encourages the commercial exploitation of innovation through its support programme. This includes market research, product evaluation and market analysis, together with guidance on Intellectual Property Rights [eg copyright, patenting).

4 The Unit provides consultancy support to Welsh health organisations to develop business management skills: help health authorities with specific schemes: undertake assignments which are best tackled on an all-Wales basis: and co-ordinate and disseminate information. The Unit has prepared a number of factsheets and reports on aspects of Income Generation. The reports include:

. a review of the opportunities for selling services overseas;

. the commercial exploitation of NHS innovation in Wales;

. risk management;

. memorandum trading accounts;

l financial services:

l fund raising and sponsorship;

. income generation for the ambulance service in Wales;

. occupational health:

l hotel services; and

. income generation for the pathology service in Wales.

5 The reports indicate the steps required to launch a scheme, and cover:

. estimating the market size and nature;

. identifying likely competition:

l providing examples of costs involved and calculation of prices;

. describing the planning required in terms of resources required;

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l providing a strengths, weaknesses, opportunities and threats analysis; and

. identifying the marketing requirements.

6 The Unit organise seminars on Income Generation to encourage the exchange of ideas and experience among managers, and offer training programmes.

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Appendix 4 Income generation in other sectors in the United Kingdom and overseas

1 The National Audit Office and Touche Ross Management Consultants reviewed income generation in non-health sectors in the United Kingdom and in health services overseas to determine whether there were any lessons which could be learned for the NHS.

Other sectors in the United Kingdom

2 The review concluded that, in comparison with progress made by Museums, Training and Enterprise Councils and the education sector in developing income generation schemes, the NHS has advanced further in developing income generation schemes.

3 Training and Enterprise Councils have been given a clear remit to generate income by the Department of Employment. To assist them in developing schemes, the Department have issued a guide to income generation. The main schemes operated by Councils include membership subscriptions from local companies and sponsorship.

4 Other public bodies have introduced schemes. These include the sale of produce from prison industries and farms, the auction of exclusive vehicle registrations by the Driver and Vehicle Licensing Centre, a coin club run by the Royal Mint and a weather consultancy run by the Meteorological Office.

5 Income generation is less well embedded in other sectors, with schemes generally being implemented only where a need for additional income is perceived. Examples include museum shops and catering facilities and rental of school classrooms “out of hours”. No overall information on income generated is available.

Health sector overseas

6 Few major income generation initiatives were identified in the health sector overseas other than in Canada and the United States of America. In these countries hospitals operate commercially and most raise money from activities other than the direct provision of healthcare. Around 90 per cent of large hospitals in Canada operate schemes and typically earn between one per cent and two per cent of their total revenue from income generation profits.

7 Some of the successful schemes operated in the countries included:

. cleaning services -Ottawa General Hospital operates a cleaning service for offices in the city. They were able to charge more than their commercial competitors because of the high quality of their service;

. dieting programmes-one hospital in Texas has marketed a potential weight loss programme in co-operation with a private sector scheme;

l petrol station-another Texas hospital operates its own petrol station, at which petrol is sold at a discount to staff: and

. environmental design-the same Texas hospital operates a company specialising in the design of buildings and office interiors. The company has annual sales of $19 million.

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Appendix 5 Setting of prices for income generation schemes

I Detailed guidance on the setting of fees and charges for Government activities is contained in the Treasury publication “The Fees and Charges Guide”. The Guide provides up to date information for Government bodies on charging policy, including determining the cost of a service and how the charge for the service should be related to cost. Fees and charges for services provided by NHS bodies should be determined in accordance with the Guide. The following in a brief summary of the Guide relevant to this report.

2 Bodies are required to assess the full cost of all services to be sold, irrespective of the charging policy to be adopted. The guidance states that charges should normally be set to recover the full cost of the service. Each service should have a financial objective, normally full cost recovery, and fees and charges made should be consistent with the objective.

3 There are four types of service [statutory, inter-departmental. intra-departmental and commercial). For low-risk commercial services where there may be competition from the private sector, Government bodies should achieve an average real rate of return on capital of at least eight per cent. There may however be circumstances where full cost is not an appropriate basis for setting fees and charges for commercial services sold to the wider public sector or the commercial sector and marginal or opportunity costing may be appropriate. Careful consideration of charging is needed in individual cases.

4 Where excess capacity exists which cannot easily be disposed of and has no other use, for example in hospital laundries, the guidance recognises that the opportunity cost of using the resource is limited to the cost of associated resources which do have alternative uses, such as staff and materials and any relevant capital equipment.

6 Where a service has excess capacity, there may be a case for charging less than the full cost of the service provided. However, the Guidance states that it may be necessary to stop the service where it does not break even in the longer term. Where there is spare capacity therefore, it may be appropriate to reduce capacity rather than to continue to operate services to the private sector at less than full cost.

6 Where bodies adopt marginal costing, they need to bear in mind the need for competition to be fair and also the presumption against expanding the public sector. In some circumstances therefore, it may be appropriate to relate charges to market prices generally. Bodies should ensure that any action which they take is consistent with any obligations they may have under Articles 65 and 86 of the Treaty of Rome [the competition rules). For small scale acitivites, such as shops which are associated with the body’s main activity, charges should be set to recover at least full costs, plus a profit where appropriate to help fund the core activity. This approach may be relevant to a wide range of the smaller scale income generation activities.

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Income Generation in the NHS - National Audit Office · 2018. 11. 15. · cost to purchasers....

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