Board Induction Session 3 – Funding and accountability - 30 September 2021

Good evening everyone or good afternoon.

Welcome to the third in this series of orientation sessions for health service board directors and public hospital board directors.

As we start the meeting today, I'd like to acknowledge the traditional custodians of the lands on which we are gathered across Victoria. I'm on the land of the Wurundjeri people and I pay my respects to elders past, present and emerging and to any Aboriginal Elders who are here today.

Tonight's session is on funding and accountability and we have 3 speakers and I'll introduce them to you shortly.

These sessions are primarily for people who've just started in their role as a director on a public health entity in Victoria, but we have plenty of people joining us who are more experienced directors and it's great to have you all here.

A couple of things in terms of housekeeping, just to let you know that the slides are circulated after the meeting. So you don't need to be furiously taking notes. A webinar recording of this session will be posted and sent and distributed to you all after a week or so after the meeting, and also that the slide packs and webinars for the previous two sessions, the first one or an introduction to the health system and the second one on the legal obligations of directors. Both of those webinars are now available if you would like to go back and check them.

And we have a Q&A function and we encourage anyone of you to post questions as we go along and also to indicate by voting for the question, putting your thumbs up if a particular question is of interest to you.

Our three presenters today are Piotr Jakubicki, who is the Principal Budget Advisor in the State wide Programs in the Budget and Performance Support Branch in the Department of Health. Jennifer Williams, who is a very experienced board chair and is currently the Chair of Northern Health and a director at Barwon Health and the Chair of the Council of the Health Service Board Chairs. And David Anderson, who's a director of both Ballarat Health and the Eye and Ear Hospital. And I haven't introduced myself I'm Joe Flynn. I'm the chair of the Boards Ministerial Advisory Committee advising the Health minister on appointments for health service boards and I'm currently on the boards of both Ambulance Victoria and Forensicare and was previously the chair of Eastern Health, so we hope these sessions are useful to you.

There's a lot of content, but as I said the slides will be available to you and can act as a resource and linked to the information that you will have already had in your orientations at your various health services and also in the board directors toolkit.

So just to remind you, slides and webinars available afterwards, and please put your questions up as you go, so I'd now like to introduce our first speaker from the Department of Health on Funding Commissioning and Accountability over to you, Piotr.

You're on mute.

First glitch overcome.

Hello everyone, thank you Joanne for that for that introduction and welcome to all of you who are new directors on the various health service boards. My name is Piotr Jakubicki and as Joanne pointed out the Principle Budget Advisor in the Hospital Budgets and Funding Unit. My role is predominantly focused on supporting delivery of hospital budgets, facilitating financial management of the sector and financial data analysis.

This presentation today will go over the department's budget cycle at a high level and how it relates to the funding of your health services. I hope to give you a bit of an insight into funding, which is how budgets are prepared. The key commissioning documents you need to be aware of as directors, and also the annual performance management process which supports the accountability throughout the year. Next slide please.

And this is a fairly busy slide, but as busy as it is, it really represents the annual budget cycle and I'll walk you through all the boxes through it again at a higher level. But just to give you context of where hospital boards, and you as directors, will feed into it going forward. Our cycle commences usually with the top green box called budget bids, and not going into detail, as you can see, this is where we prepare bids for the Department of Treasury and Finance for endorsement around growth and future funding requirements. That normally takes place around November and December, and after that's finished we then commence building preliminary allocations from around February based on quantitative data such as activity throughput, emergency presentations, elective surgery work, etc. and other qualitative information that we get from conversations with your executive groups in each hospital.

This work is then supplemented by the state budget which is published in May and COVID-19 has bit a bit of a dent on that over the last few years. But the budget outcome, then leads to the development of what we call modelled budgets, and which lead into what are called policy and funding guidelines, will talk more about this later. But these documents incorporate some of the funding outcomes that are negotiated with your health services and they will form part of the Statement of Priorities (SOP) that are agreed between your board chair and the Health Minister. But more on that later. Next slide, please Jo. Can I have the next slide please Justine

Okay there, so it's like they're like, sorry I missed it, I was looking at the wrong place. Thank you. Okay. So in the in the preceding slide I showed you the in this in this cycle. I talked about model budgets and Statement of Priorities and these two boxes were marked in blue because really a couple of things here, they represents the first in a series of significant engagement with your health services. Through negotiations and discussions with your executives, but also the representative formalization of the process.

What we call model budgets are effectively. Just bear with me for a second. What we called model budgets are documents that are released following state budget announcements. This is a detailed document and it covers indexation, growth funding and commissioning of new services as well as EBA changes that apply to your and other health services. I just want to also mention that model budgets are focused on recurrent funding and commissioning of new services rather than capital funding which is done by other parts of the department.

Model budgets are essential for you, for your health service, as they are used by you to complete your internal budgets and from that base, establish your Statement of Priorities going forward.

And I think what I've already mentioned, but we do see, we are very much focused on the quantitative data, after just impatient separations, ED activity and elective surgeries to develop that funding and with negotiations with your health services. So it's very much dependent on the activity information provided by hospitals, and that I've built into the various activity systems.

And the second component on that slide relates to the policy funding guidelines and these are now the formal documents that represents, system wide terms and conditions for all hospitals that are funded through Statements of Priorities. And again, the policy funding guidelines set out the expectations, policies and performance reporting requirements, that you must comply with throughout the year. Next slide please Justine.

OK, so once we've formalized the policy funding guidelines. You know, this obviously takes quite some time. All hospitals become engaged with our executives, and negotiate the Statement of Priorities, which is the formal documents that I mentioned. This document has four parts are divided into strategic goals and priorities of your health service and the government of the day. The key performance targets for delivery by each hospital. They contain details of the funding that we will provide you to deliver those services, and also contain information on recall policies that is where we reserve the right to take money back from health services for underperformance throughout the year. And work on Statements of Priorities commences as early as May with a significant amount of effort going on well into quarter one of the new financial year and sometimes into October. Now, as I said, SOPs represent the annual accountability agreements and are required to be publicly released by November the first of each year.

And just the final point on SOPs. They establish the really the baseline for performance assessment. Which is done in conjunction with the Performance Management Framework and monthly reports through the monitor. And I'm on our if I'm going too fast. Forgive me, but there is a lot of information in that and thanks Justine for putting up the next slide, that's fine. You can run the next slide already and which we will get to. But the monitor is a very detailed document, which sets at all the KPIs and all the reporting requirements, and it's used in monthly or quarterly meetings with your health service executives throughout the year. As you can see from that slide, and it is set into a balanced scorecard approach, to assess performance ,and you will notice from that really the key feature of this slide is that it's focused on best care and well being of Victorians and with financial management in the bottom left hand quadrant and all the other metrics about quality, safety and patient care and outcomes, are really the priority for the department. We use this monitor report with health services, in health service meetings on a monthly basis, and grouping these KPIs, allows a scorecard to be developed, that's used in those in discussions, and ultimately what it tries to create is an environment of transparency, without surprises, at performance meetings, because everyone’s aware by that stage, and knows what will be discussed.

One final point I’d like to make before I conclude my presentation is that hospitals are required to meet with the department as I said at least as a quarterly. Through the outcomes against metrics and where there are issues in performance, then meetings can be monthly, to ensure that more rapid or mediation is provided.

And that's the that's the last of my slides. Without bombarding you too much. So thank you. Any questions?

Thanks very much Piotr, we will you deal with questions at the end of the session so anyone who has some questions arising out of what Piotr says, please start to put them in the question room, but our next speaker is Jennifer Williams, Jennifer as I said, is currently the Chair of Northern Health. She's both an experienced board director and has experience with the health system and broader CEO. So welcome to you Jennifer, over to you. Jennifer is not going to be using any slides.

Thank you Jo, and congratulations for those of you that have been newly appointed to your boards and I hope you enjoy it. It I certainly a very challenging time to be a member of a health service board. A lot of the fundamentals on finance sort of go out the window a little bit, because we're being grant funded for so much because of the covid impact. But my discussion to you today, is really about as a board director and as someone as a member of the Finance Committee. What are the sorts of things you should be looking for, and this is a much easier journey for those of you that have had a history in health, than those of you that are brand new to health, you might have a strong financial background in the commercial world, but learning all of the intricacies of the very complicated funding system in health, is quite a challenge, and I find it normally does take a new board director around about 12 months before they feel, they've got a bit of a feel, for the finances.

So there are 13 points that I just wanted to make here.

Each of them I'll touch on briefly. The first one is in relation to cash, “Cash is king”. You've heard that term. Always keep an eye for cash, and I would encourage you to make sure that you CFOs are giving you, for every single finance committee meeting, that you've got a 12 month projection of the cash. Because if you run out of cash you are in deep trouble. It was my first lesson as a Chief Executive Officer back in 1997, at the Austin where I found out paying the fruiterer any his bills and I discovered that we were out of cash. Had to borrow $5 million to trade our way out of that. These days we don't tend to get loans from the department. We tend to get grants to help us bulk up our cash again. There are a number of indicators to look at for cash, including the Adjusted Current Asset Ratio (ACR) of which there's a target of 0.7 certainly a number of the health services, never get to that 0.7, but it is really important that you try and preserve cash and keep an eye on your cash. Available cash days, of course is another one that you do need to identify difference between restricted and quarantine cash and cash that is actually available, to meet your obligations within the organization.

The second matter I was going to raise was just budgeting. I mean each year you will get a proposal from your Chief Executives and your CFO's on coming forward, and you will need to identify whether the sorts of assumptions in that budget, are going to be realistic or if they are too high risk to be able to achieve that budget. Often when you start the financial year, we have a big gap trying to fill in each of our health services, and you'll need to find budget initiatives, to try and manage your costs down or manage your revenue up. But there's a lot of questioning that can go to management, in terms of what assumptions are they've used for things like wages, the EBA assumptions, what are you assuming about private patient revenue, what are your assumptions about use of agency, which is a higher cost, usually a high cost method of engaging staff.

The next thing is just about capital. Capital is very challenging in the public hospital system. None of us ever have enough capital to do what we want to do, whether that be the major billion dollar redevelopment or whether it be a refurbishment. And we also need to self fund a smaller amount of capital, so typically I would encourage you to try and aim for a surplus budget, rather than simply a break even budget. So that you can reserve some money for capital projects. But certainly I have seen boards where I've been a delegate for the Minister. Where they have spent cash that they don't really have. Because they've had some years of let's say, capital grants that they were cash flowed. They spend the money on internal capital needs and then they don't get any more capital grants for future infrastructure, and they don't have the cash and they've spent the cash on capital projects that they actually did not have that cash for. So, really keep an eye on that again, and don't spend cash that you don't have. But do try, and preserve a small amount of your operating surplus for cash to meet some of those things, and many of the health services would be in the position where things like our IT expenditure, the Electronic Medical Records (EMR's) have been partially funded by the government and we've had to partially fund that, by finding cash within our capital within our own health services, to fund the electronic medical record projects.

The next thing I was going to raise was just sustainability measures. I mentioned before typically when a budget will come to you as the board. There will be a gap. There's productivity savings you haven't been able to get, the growth that you wanted in the funding. And there will be an ask for you to try and manage costs down, and you'll need to have management develop a series of sustainability measures, that will need to be regularly reported on, and I would suggest that you risk rate them, as to the achievability of each of those sustainability measures. It might be, for example, reducing agency use, from 7 per cent to 3 per cent which will produce, let’s say a $3 million saving, compared with the previous years. So that will need regular monitoring. But risk adjusting them I think is very useful, so that you can determine, there can be some that you might only aim to achieve 50 per cent of the expected savings of some of those initiatives.

The next thing which I've found some finance committees and boards don't give quite enough attention to, is monitoring your capital program. So not your operating result, but your capital programs. So you might well have some major projects, that are being run by the Victorian Building Authority, or they might be managed by your own staff. But I would suggest you need regular reporting on the finances and the timelines, for completion of each of the stages of all of your capital projects. And monitor that, as you do your other finances, because you are of course accountable for the financial outcome of these capital projects, that need some scrutiny.

The 6th area I just wanted to touch on was revenue. Now revenue, is quite difficult to understand if you've not been in the world of health, and in the world of activity based funding, going from WEIS to NWAU in this next year, making it that little bit more complicated for you all. You do need to get a basic understanding of how that funding system works though, because in any business that you're on the board, you need to understand how the revenue works. So that you can control the revenue, and know which bits of revenue are at risk, which ones you can book. And one of those big assumptions in your budget build will be, are you going to aim for 100 per cent of your activity Target your WEIS or NWAU target, or are you going to try and aim for 102 or 104 per cent, where you will get partial funding for that additional activity. There is a cap on the funding you get so you can't do 115 per cent of your activity target, and get funded for the whole 115 per cent but there is marginal funding available, over that 100 per cent so you've got to make a determination. If you're going to go under your WEIS target, or slightly over you WEIS target, and that's a very important consideration, and you could have several per cent of your total budget swinging on that.

The next one I was going to mention is just a year end forecast. This is very challenging for management to give you a year end forecast. Particularly when you've just heard from the department, that sometimes it's not until November that the SOP is finalized, and you'll be able to lock in some of your targets. But you really need to try and get a year end forecast every single month, and that can be a best case, worst case, most likely case. To try and determine what are the factors that are going to move you from a worst case year end result, to a best case. What are the issues that are still hanging, that you still negotiating with the department. But I would encourage you to look for that year end forecast, as hard as it is to do that particularly, in the first six months of the year.

The next point I just wanted to make was about the responsibility of directors for finance. And you've probably heard this many times over. As a director, you're responsible for the finances. Even if you're not a chartered accountant or feel it is one of your core skills, you do need to take responsibility to understand your finances, well enough, that you have a reasonable understanding of how you're traveling, and being able to ask the questions. Obviously the dumb questions are often the smartest ones, that can come forward. About ‘why is that moving backwards shouldn't be that going in the other direction’, or questions of that effect. But I just would very much, encourage you to all, take an interest, and don't say I'll leave that to you, Joe Blow over there, to ask those questions because that's really not my forte.

And the other thing which I found really useful, is that you will have quite a long list of things that you're still discussing with the department that are unresolved. So now, I like to see a list of the unresolved issues, and to know whether you think there are they are going to be resolved, favourably or unfavourably, with the department. So, you know what, how much money going in the balance, and you'll be able to tick them off as some of them get locked in. And then some you'll you'll have to write off and say, ok, we've not been successful in getting that growth elective surgeries funding or that increase for EBA payments, or whatever the issue is. But get every single finance meeting or board meeting, a list of the issues that you're still negotiating with the department.

The tenth point I was going to make is about hollow logs, and CFOs love this term, but they tend not to like it, but every CFO will have some hollow logs. So, ask the question. Ok, what are the hollow logs. Because there are certain treatments of different costs and different revenues, that they can book or non book. And as a director, I would encourage you all to try and get maximum transparency out of your finance team. And ask, ok, what are the hollow logs? You know, have you used them all, or what are you carrying over into the new financial year, that’s going to help us in that first few months. So ask that question, and try and get a hold of how much is at risk there, and how much comfort you might have.

The next point I was just going to make about delegations, and sometimes we get between Chairs. ‘What're your delegations?’. ‘How much have you got for your CFO?’, etc. It is good to benchmark your delegations with other comparable health services, whether it be a small rural, or a major regional, or a metro one, and just make sure that you've got about the right delegations for CFO's and executive directors and be really careful to consider what are the matters that should be resolved for the board only. That you're not going to delegate. So have a good think about that, and have that really clear in your delegations, about what he's not delegatable to anyone except the full board. I have found that often management will get enticed into something, and you get a creeping commitment. And that's why I mentioned this in delegations. You might think, ok, they've started a trial there, but the full year cost of that is like $3 million dollars. So, what's your exit strategy here? If you trial it, and then you don't get funding for it to continue. So the delegation, needs to say ok, if you're going to embark on something, you need to be really clear, about what the estimated cost is, that so that it will fit within your existing delegations.

Just a couple more points, I've had many board directors and I'm sure some of you have seen this. They are fixated about FTE. They grill management over and over and over about FTE and they want trend information, they want average cost per FTE. They want graphs on nursing and medical and support staff etc, etc, etc. It is really important, 70 to 80 per cent of our cost base is salary, so yes, you do need some really good reporting on FTE. You need to know whether FTE is being approved. Whether you've got caps on FTEs. Whether you've got freezing on staff recruitment. But I just would caution, don't overdo it because I do find some boards can spend too much time, just really trying to drill into FTE. It is quite difficult to get a good hold on FTE though, because you've got part time, full time, you've got sessional staff, etc, so cleansing your data can be quite difficult.

Now, the final point I was just going to make, really is for directors generally, not just in relation to finance, but that relates to your style of inquiry, as a director. And you've probably all been on a committee or a board where the style of questioning, to the finance team or the chief executive can be very aggressive. And it's got that sort of distrustful overtone, and you get management the hackles on their backs rise, and they can be very defensive, because they feel they're being attacked by management. Now, you don't want to be the cheer squad, as the board. But you do want to be respectful and ask questions of inquiry, that are very professional, and show a level of trust with management. But you have an obligation to fulfill your duties, to both monitor, the performance of the organization, but also hold management accountable. So, I just would really have you reflect on your style of enquiry to ensure that you get the best from your management team and the most transparency from your management team, will come. If they feel that they've got a respectful relationship with the board, who respects their own professionalism and honesty, and how they report to the board.

So that ends my 13 points, it is actually Jo, so I hope there were a few take home points for some directors there for the future. Thank you and back to you, Jo.

Thanks very much Jennifer. Lots of very practical points there, which we can explore, but we'll hold the questions and comments till the end, just to remind everybody that there's a question and answer function, and to encourage you to put up some questions, or to vote for questions that you're particularly interested in the answers to. Our third and final speaker is David Anderson, who's a board member at the Royal Eye and Ear and also at Ballarat Health Service. Over to you, David.

Thank you Jo, and thank you Jennifer.

I think you can probably tick off the list of 13, that Jennifer had in my list, I think you'll get to about 10, and I certainly don't disagree with the other three. It's more remission than a different point of view. I guess I just wanted to divide my talk into probably four or five key areas. I want to briefly cover the legislative framework that finance committees, or the finance of health services operates within. I want to briefly talk about what to focus on, as a board regarding finances, and that's where you can check off that we've got the same list of 13. I want to briefly talk about how Covid has changed the financial monitoring and the budget preparation, because it's it really is quite different. And then of course my final take home points were around the operating result and cash being king.

So, if I just start with the boring stuff, but I think it's necessary. The legislative framework comes from the Health Services Act. The Health Services Act establishes all the health services, and the hospitals and the MPS’s throughout the state. But, there's also the state legislation, there's the Financial Management Act. And the Financial Management Act, also spawns the Standing Directions of the Minister for Finance. And the Standing Directions really spell out the governance requirements, the audit requirements, and also the reporting requirements. So, at the end of the financial year, when you as a board or as an audit committee, are required to sign off on a number of attestations, they come from the standing directions from the Minister for Finance.

And in brief, they require that directors need to act in a financially responsible manner. Exercise care with public funds and assets. Comply with the legislation and the standing directions, and demonstrate due diligence. So, in terms of the requirements. It's generally common sense, but there's a lot of detail below that, and if I can just add the DoH Directors Toolkit. Actually, spells out the financial governance, really well, in terms of the Standing Directions, but also the departments, I call them the financial artifacts. So if you do need to fall back on, a toolkit just to remember what the key issues are, the DOH Directors Toolkit is actually a really good core document.

I want to briefly repeat what Jennifer said, just around boards and committees so under the financial legislation, it's the board that's responsible for financial stewardship. And the operation of a finance committee, or audit and Risk Committee, to give some more detail and allow a more comprehensive examination, is a way of working. But, in fact it's the whole board and the individual directors, comprising the board that remain accountable.

And that goes back to the practical advice that Jennifer had, it means that each individual board member, should ask questions. And that's questions of management, but also members of the Finance Committee. And be satisfied about the response, and also to resist the temptation to nominate the finance expert on the board.

And I guess the other point to is, if the board feels that it doesn't have the expertise. It's often, it's reasonable to consider, to co-opting some expertise on to the committee. And I've seen that occur, even at metropolitan health services for the Audit Committee or where there's a major capital project underway, and that can actually enhance, the skill base of the Committee. So that's the responsibility.

I then go to what should we focus on. And, obviously the reports need to be regular. They need to be on a consistent basis, and the data should be robust. The worst thing is trying to work out how you're going, what actions you need to take, to bring your budget into balance, if you don't trust the data. So, it is really key, to make sure that the data is robust, and challenge the team, on the data, and the reporting being robust. It also requires that key questions are answered, about significant changes to numbers or variances to budgets, and there may well be good reasons, why the financial results have changed, but you you'd be expecting an explanation, around that. And, I guess the real red flags are, when issues when issues emerge without warning. And, when there's a preferred action, or set of actions, not being proposed. So, and I guess the other point is when, we're looking at financial risks, and how to bridge the gaps in budget, we've got to be careful that we consider factors that are within, the health services control, as well as those outside. Often at the first cut, management will tell us about what the departments doing, what's going on in the sector, that they can't control. But there's a number of factors that they can control. And, it's important that in our discussion of finances, we always cover those things that we can control, as well as those that we have less control on. And, it's also, I think, important to recognize that we have a range of health services, were not all the best health service, in every aspect of service in the state. So, look for better practice, from similar health services, whether it be practices in theatre, workforce, agency, revenue, private patients, contracting, supply.

And the other point is, link finances to the operations, and the staff parameters of the organization. Finances aren't different from the rest of the organization, so as Jennifer said, activity is important, if activity is falling behind, budget falling behind where we expected it to be. Find out why that is, and you may actually, by asking those processes, you'll actually get a good sense of, you know are there some staff weaknesses? Are there some recruitments? Are there other issues that need to be addressed? And, similarly, staffing costs are 75 per cent of total costs. So, if there are issues around staff numbers, staff over time, Workcover, sick leave. They will show in the finances, but they're also important to the overall wellbeing of the health service.

And one of the other points is, often in finance committees. We get very caught up in the month to month, and the answer is very much, what happened this month? Why did it happen this month? And, we expect an answer within $5000 dollars. At some stage, we actually need the Finance Committee to talk about longer term trends, projects that will take a little bit longer to deal with, and have got a greater degree of risk, and that discussion actually lifts, the sights of the finance team and the management team. And, it also helps generate a bit more trust, I think, between the Finance Committee and management.

I want to briefly talk about Covid, because Covid's affected the last two financial years. And, clearly it's affecting this year, and the budget preparation for this year. And, it's affected the standard artifacts, so the Statement of Priorities, the model budget, the policy funding guidelines, they're not there, or they are late, or the WEIS rules and the recall rules are different or changed during the year. And, it's really important that, then, its sort of, that's one, it's recognized, and that there's some honest discussion between, again management and the board on, what's included as part of Covid and what's part of non-Covid operations, and that the basis for reporting is really clear, and the potential change in the rules from DoH. And, I guess not only is it hard because the rules aren't as they normally are. The numbers are actually, eye watering, from I've been out of out of being a CFO for three years and the numbers are eye watering, and it actually takes a lot of trust and a deep breath, to be sure that even within those parameters, we still are engaged with the department, we know on what basis we've prepared our budget, and our and our monitoring reports. And, that we're open about why it's happening. And, it also means that the finance team, who might be very used to saying, we won't prepare a budget until the Statement of Priorities comes out, actually has to be a bit more proactive, and say we'll build a budget on what we think is coming, down the track, and will be very open about what's coming down the track.

The last area I want to talk to briefly is about audit, and that covers both internal audit and external audit. It's important that audit reports and findings, are reviewed and addressed. And, the follow up actions are clear, they've got a good time frame, and their monitored and it's also important to utilize the in camera sessions of the board with internal and external auditors, probably at a minimum of twice a year, but could well be more than that. The internal auditors and external auditors have got good experience with other health services, and you get a very good sense, of how your health service is running as opposed to other health services.

The last point is VAGO does prepare other performance reports, IBAC prepares reports on you know, fraud and other issues that are going on, or have gone on in the sector, and they're important for the board to understand, be aware of, and also for senior management to be aware of.

So, the third focus is I think I'll run through quite quickly, is avoid a crisis. Health services typically manage very tight financial positions. That's the way funding models and generate, there's always more patient demand than can be funded, and there's always more improvement opportunities, than can actually be used. So, recognize that it's a tight sector and history does record, regular, but infrequent financial crises. And it's often, because issues come up, in an unforeseen way, if there is a difficult financial position, but the causes are known, the actions are being planned through, and the departments is aware, is much less a crisis. Then one that comes up unexpected, and as I've noted, a crisis reflects poorly on the board governance, and the reputation of the health service. And of course, the last two points are around the underlying operating result, and uncommitted cash. And there's probably, not a lot to say. Beyond what Jennifer said, that the operating result is really important, but it's not just the operating result for this month and next month, it's the operating result six to 12 months out. Are revenues declining, are one off grants are ending, are staff increasing that, perhaps don't need to increase, or where the project funding ends soon. And if they're not dealt with, you'll end with an unexplained deficit, and that can occur quite quickly.

In terms of Cash. Cash is King, and one of the areas is that the health service may hold cash, for capital projects, and at the end of that project, you're not holding that cash, and that generates a crisis. It's really important, in terms of cash, that the cash is projected out to the end of the year, and I would say three years out. That requires a lot of assumptions, to be dealt with, and those assumptions are often quite revealing, but it does keep a focus on future cash, future capital, where the funding for that capital will come from, and what commitments there might be, with outside bodies. Because, again if they're not dealt with, and not forthcoming, it does precipitate the crisis.

So, if I go to the last page and the summary. The nature of health service funding is that the financial position is precarious. Boards should openly assess the financial position, with management, and the available options. Finance Committee’s provide the detailed discussion, but all members of the board need to contribute. Consider actions within the control of the health service, as well as those outside. Discuss the financial issues in an open and constructive way. Monitor the operating position and cash, not for this month and next month, but also a couple of years out. And, when in doubt, the Director's Handbook, is a good source of information on financial management. So I wish you well on your journey. And I think you'll need every month, of your three year term to be fully proficient around cash, and around financial management. But I'd implore you to ask questions from day one. Thank you Joanna.

Thanks very much. Thanks very much David, so now we're coming to questions, and we've got quite a number of questions so, thank you to those who put them up. I'm going to group the questions and allocate them between our speakers. So, our first questions are two questions for Piotr, the first one is about why it takes until it does for the SOPs, and surely it could be done earlier? That question has had a lot of votes in favour of it. Then, I'm going to come to Jennifer and talk about how does a health service cope, given, and David's already referred to this, given that the SOP, you know, what can you, and can't you do? Before you finalize the SOP in terms of the board aquitting its financial responsibilities and budgeting. But Piotr, that question and a question, about a simple explanation for what the NWAU is?

So Joanna, which question am I answering now, the one on SOPs or both?

Both one after the other. Thanks

The first question, I think from Victor is very valid and we actually aim Victor, to have SOPs reviewed earlier than first of November. November is just the is just the set date, that's in the policy documents and I and I think as David also alluded, don't rely on just on the subdocuments to set your budget. You can set your expenditure budget and estimate your revenue that will be coming in. But we also work with all health services throughout the year. I mean ultimately the SOP sign date is a line in the sand. A lot of it happens beforehand, and even now, although this year probably a bad example, we've been communicating with all health service around their growth, what they get, their indexation rates. So, I completely take you on board, and I and I smiled when you put that question up, Victor, because we aim for that earlier. We know that the delays cause you problems, but I think as David also alluded, you can certainly do a lot of your internal budget development ahead of the SOP being finalized and done and so therefore don't wait for it. But, yes we do aim to do it earlier.

On the second question, can we have a simple explanation of the funding model NWAU. The simple answer is, it's a very complex model, but it really is very much like the previous case, mix model. What's effectively happened is that it is, NWAU is the old WEIS. Now from our perspective we have to comply with the national model. This is not something which departments have chosen to go up on its own. The NWAU is part of the national funding model and we are now in line of all the other jurisdictions in reporting back to the Commonwealth on expenditure using those national weighted activity units. One thing I’ll comment on quickly, for all of the new board directors, we have given an undertaking to all health services that the base funding for 2021 is guaranteed, and only the growth funding will be, flowed out using what we call VEP, new term I apologize, and that is Victorian Edition Price. So we are trying to keep it as simple as possible, but I must say this is quite complex, but happy to provide some more information, or refer people to the department programs that have been developing the NWAU model and the VEP field. Thank you.

Thanks Piotr. Jennifer, I'm going to come to you with a compound set of questions. So, first for your comment on the timing of SOPs and what that means in practical terms for a health service. And how do you manage in advance of your SOP. And, secondly, a just a quick comment from you and I do know that you have a background understanding of NWAUs and add health service level and at board level what sort of practical difference do you think the change to NWAUs will make. And then, the third one I'm going to ask you about, is the personal accountability, which is a question that always comes up in these forums, about to what degree a director will be individually held liable for a service running into financial difficulty, and what impact does insolvent mean in our context. So over to you.

Yeah ok, thanks Jo, yes, just to add to that first group of questions about the SOPs. It really is important that the board does approve, what I would call a draft budget well in advance, because the SOP is never finalized before October/November, and there are a lot of assumptions that are going to be pretty close to accurate when you do that. Things like your FTE, your activity target, your indexation assumptions, the EBA outcomes tend to be known even though they're not always 100 per cent funding. And obviously, I would encourage you to make conservative assumptions in your draft budget, and then revise once you get finalized figures from the department. The department, though, will be giving health services an indication about whether something is likely to be funded or not. So, if you're putting in a very ambitious bid for growth funding, they will be telling you look, that really is very unrealistic. You'll be getting some feedback as you build that draft budget, so it is important. The other important reason, it's important to have a draft budget, is you need to start those savings initiatives very early on from 1 July, because if you wait till October/November, you've got five to six months of the year already gone, where you have not started to on those various initiatives. So that's the other reason it's really important, and that budget needs to be drilled down, and pushed onto the managers, so that they've got certainty. They know what they're working is. The Head of Radiology, the Ward Manager of your Medical Ward. They know what their budget is. You can't have the organization rudderless for five or so months, not knowing what they're spending is. So, I think there is quite a lot you can do. And then hopefully, the budget will be revised upwards, when you get finalization of some of those are some of those issues, that you're debating with the department.

I'm just in relation to NWAU. Yeah, I'm the Deputy Chair of the Independent Hospital Pricing Authority and am very familiar with NWAUs. And, Victoria has been the outlier with really the only state that hasn't moved to NWAUs so. I'm very delighted that at long last Victoria is moving to the national system, there is going to be a transition period though. So that it's not going to be a massive change immediately, and the change isn't that radical anyway. There will also be a Victorian price. So, it's not like Victoria has always been prided on being the most efficient, so we've had the lowest Weis price or the lowest NWAU price of all of the states because we introduced case mix activity based funding, very early on in 1993, so we have driven efficiency in the Victorian system, much longer than some of the other states. Sadly, I think Victoria a has been overtaken in many of these initiatives, even though we're a leader for many, many years. But there is an average price that the Independent Hospital Pricing Authority does set. But the Victorian Government will not fund Victoria to that average national price. There will be a Victorian price that is funded, and as I understand, the impact on different health services, the ones that have most to lose or the specialist ones. So, your Alfreds and your Royal Melbournes and your Austins', because they've got a lot of fixed grants for things like lung transplant, heart transplant, for burns unit, and things like that. So, there will be a need for redistribution of budget and the department will phase that in over a couple of years.

The last issue you mentioned about our personal accountability, and when are you insolvent. When you're in, I suppose what is the first comment I would make? The first comment is that the department will give you a letter of it comfort, so you can sign off on your results, so in terms of you becoming insolvent and having administrators sent in, you're not going to be insolvent from that point of view, but if you have poor financial performance over many quarters, and over a year, the Minister is likely to appoint a delegate to assist you managing your finances or other issues. But in this case you will finances, and that, of course is meant to help the board manage, through a period of financial semi insolvency if you like. But it's not a position you should aim to be, obviously as a board director, you want to be seen as a responsible financial manager. So you should not manage your health services, say you are helpless, you've done everything you can, you have to overspend there's nothing more you can do, and you're going to run a deficit budget. That is what you don't want your management team, and you don't want the board, to become helpless and do that. And, imply sort of go belly up on it. There's always something more you can do. It does get more difficult every year, and management teams do get tired, of continuing to press for, how can you get more efficiencies, and it does get harder and harder. But, there are always more things you can do, when you're looking at benchmarking, and looking at initiatives, that other health services have used, and CFO's and CEO's do generally share that, so I would always reject that view that there's nothing more that you can do. There is always something that you can do ,but that the insolvency issue does tend to happen with the cash, and I did cover that and David did in part too. That typically I've seen it happened where people spend beyond their means. That's obviously, you're running multiple years of deficit budget, you are spending cash that you don't have, you've had cash that you've been given temporarily, to fund capital projects, and then that cash has to then be outlaid to that capital project, you've already spent it on a new CT or something in the radiology department, and you then don't have the cash. So that is the situation you need to avoid. Which is why a number of us have stressed the importance of really looking at your cash situation very regularly, and David suggested a three year cash forecast, I talked about at least a 12 month. But I would agree with David’s point on that one. Back to you, Jo.

Thanks Jennifer. You're also on notice that people would like your 13 points on a slide. If you would provide them, I'll take that as a yes. Thank you. David, some questions now for you. The question again about board reliance on the finance committee. Your thoughts? There's a comment there about the board, or at least some members of the board wanting to interact directly with the CFO and perhaps the health service where that's not being endorsed by the CEO. And also about oversight of capital projects so that's a triple header.

The finance committee. The role of the CFO at board level and oversight of capital projects.

Thanks Jo, so I guess in terms of talking to the CFO at board level. I guess, at every board I've been on, probably every health service I've been on, there's been quite a discussion around whether the whole executive, should come to the board, or whether it should only be the CEO. So, and I've probably been brought up that the whole executive team should be at board meetings, and I think in my experience that's beneficial. In terms of the CFO coming to the Board. I'm sort of wondering what's under that question. Is it that the reporting and the data is not considered robust. Is it that there's not an open discussion around the budget, and the actions to bring the budget into balance, and to get activity into target. Or is it that variances aren't well described, and sort of actions followed on. And if it's any of those questions. I think the first step would be to say to the CEO that that's, you know, I’ve got concerns in those four areas and they need to be addressed. So, I'd probably go down that track first before saying, would it be useful for the CFO to actually come and answer those questions. But I think you'd be asking the questions of the CEO that seem to be underlying that. Probably happy to have a Jennifer’s call as a chair rather than that.

The second one is around monitoring of capital projects. Again I think. We could all do that, no the. boards that I've been on, could probably do that better. Partly it's tricky because major redevelopments are often the responsibility, and managed by the Department of Health and possibly committees involving both Department of Health and Department of Treasury. But in terms of smaller capital projects that are the responsibility of the health service. I think it is really important to understand what's been set aside in the capital budget? What's been committed? What's been spent? And how are we going in the spending? There's no doubt that over the last 12 months a lot of capital projects have actually been slowed down. And a lot of capital projects and capital funding, automatically rolls from one year to the next, when often it's actually, no longer required, or it's been, circumstances have changed. So, I think having a particular agenda item, in both the finance report, in the finance meeting, about capital is well worthwhile. Thanks Joe.

Thanks David. So, Jennifer, I'm coming to you in a minute with a couple more questions about finance committees and the relationship with the board. It's interesting, though, the comment that David made about, who actually attends the board meeting, and you will find that there's some variation in practice, and quite strong feelings about in addition to the CEO. Do any other members of the Executive Team attend the board meeting regularly, and there are arguments that can be made in all circumstances, so it's something for the Board and CEO to work out together in a reasonably frank conversation. I've certainly worked in boards where the CEO and one other member of the team sometimes the COO, sometimes the CFO are always at the board meetings, and the other executives come and go, depending on the matters in hand and for their regular reports to the board. But it's a balance, and it's a balance about what other responsibilities people have got. I think one of the questions for a board always is, are we adding value ,or are we actually just creating burdens for an executive team whether in terms of times, commitment of their time, or generation of reports which may or may not be necessary, if not to say a board shouldn't be fully informed but particularly in crisis times like these, we have to question ourselves about how much value we're adding. So, I want to come back to Jennifer. There is a question about what sort of a chair you need for your finance committee. Is it somebody who's a good chair or a financial expert, and there's a question about financial reporting and budgeting functions about, whether you need a management accountant or a financial accountant. How do you go about setting up your finance committee, Jennifer? And what skills do you think are most important?

Ok, thanks Jo. So just on your first one, I would tend to agree with you about who attends board meetings, so I agree with you that CEO, I would always say at least one other executive, either the CFO or the COO, depending on how you're structured. I think it's always good to have. It's not just succession planning, but it's about keeping everybody honest, and having full exposure of another executive to the board. So, I do favour that, but as you said there. There are different styles that Chief Executives and Boards have, and I've certainly been on boards where the full executive come, the argument being that the Chief Executives can say to the Executive, the board made me do it, you tried to convince them otherwise, but the board made me do it. And actually, that's not what happened in the board meeting at all. But if you've got executives there, they can hear directly what the boards views are of something, and it's always a much more nuanced than it might be portrayed later to the executive team. When they get debriefed about what happened at a board meeting, so I think both models can work well, but you can't have too many of those executives, making a big contribution because you've got nine board members, and if you've got eight executives around the table, it's going to take up too much time, and I think the other reason not to have a lot of executives there is that you can get drawn into operational detail, by having a lot of executives there, and you've got to try and keep that board working at that governance level. So that's just something I think for the chair in particular to be aware of and for the Chief Executive to make sure that if executives are asked questions during the board meeting, they don't drill down into too much detail and get the board essentially trying to run the operation of the organization.

Uhm, so your second question about the chair of finance and what type of membership and skills do you need? I do think that there's a preference for a financially either qualified or experienced director, being the Chair of the Finance Committee is important, because they do most of the heavy lifting when your chair these committees. So I don't think it works as well, if you've got someone who can just chair a good finance subcommittee, I think it does help because often the CFO might, want to clear a few things, and have off session discussions with the chair of that subcommittee, about what should come, and when it should come, and how it should be presented etc. Certainly at Barwon Health where I'm a director, we have had an issue on our Audit Committee where we've not had a Chartered Accountant on the board, and so we have had to co-op a Chartered Accountant as an independent member of that Audit Committee. Now, David Anderson mentioned that as an option, that has worked very well, it's not as good as having a financial person from your board, because if you're not on the board meeting, you don't know a lot of the other stuff going on. So, if you're an independent member coming in just for a Finance Committee or an Audit Committee. You don't know a whole lot of other stuff, and the back story on things coming, to that committee, so it's not ideal, but it can work if you do have a period of time where you've been unable to get a finance person on your board. My preference is always to have two strong finance people out of my nine people on the board, so that you've always got someone, if someone is going to go off in two years, you've got someone else. And if you lose one, you get another finance person on, and I feel the same way about quality people, that in a two good quality people, and two would finance on your board at any point in time. But other than that qualification, of having financial people on it and people will tend to self select, if they feel confident. But the boards that I'm on also allow any director to attend any board subcommittee meeting to help them skill them up. And that is something that has been taken up quite frequently by board directors and sometimes they would just sit and listen to the whole committee meeting. They don't make a contribution but they really value being part of that more in depth conversation and of course the advantage of our Board Subcommittee is that you get a new window, into the organization because you've got the financial controller there. You might have budget managers. You'll have the clinical managers coming and presenting about how is the surgical budget traveling, and things like that. So, you get a deeper look into the organization, and not just that limited window through the CFO or the CEO's view. So that is important to have multiple executives from the finance and the clinical teams. That attend either all or part of those finance subcommittees. Back to you, Jo.

Thanks very much Jennifer. We won't be able to put any more questions up, so don't anybody add to the question list. We've got a couple just to finish up with, and I'm going to pass a couple. First of all to David Anderson. One is a question about whether you should have an independent person as chair of your Audit and Risk Committee, or have a board member as chair. What your thoughts about that David, and also about maintaining a separate account for Covid accounting and how in your experience, that's being managed.

Thanks Joe, so in terms of the first one the Chair of the Audit Committee, I think the Chair of the Audit Committee we should be one of the board members, and I'd have to check whether that's actually a requirement, under the Standing Directions. I might just check that, but my strong preference would be for chair of the Audit committee to be a member of the board, for the reasons that Jennifer raised that you have, he have a wider understanding about what's going on in the board, and in the other aspects of the board. The second one was, forgive me. I've forgotten that.

David, it was about Covid cost centers.

Thanks so most health services need to actually make a claim from the department, for costs that are considered to be part of Covid. And as I understand it, there's quite a set of requirements and details around that, both from the department and from Treasury. So I think it's already been done. In that the Covid, costs are being separated out, so that claims can be made through to the department, and I just think it's really useful to feed that through to the board, so that there can be that clear division between Covid and non Covid. And I guess there's also the other point, is that at some stage Covid funding will finish. And we'll actually have to go back to a world where there isn't this sort of separate Covid funding, and at the end of year result isn't balanced up by the department. And it's really important to actually identify, that we know that there is a little bit of discipline in terms of additional costs, and additional staff, to match the covid requirements, not to other parts of the organization.

Thanks very much, thanks David. I'll just thank you for those comments. We will just go to Piotr to comment from the department's point of view about dealing with Covid accounting and keep keeping track of Covid expenses. And then I'll just make a couple of comments to close, so to you, Piotr.

Thank you Joanna. So David, to whoever asked the question on Covid costs, thank you. That's a very relevant question. We have been working with the sector, since last four, over the last four months since last year, and then I'm going to set up a range of cost centers which are well known to your CFO's, and also we partner with KPMG, who does a lot of the collection cleaning of the Covid data, that's being recorded. So, in those specific Covid cost centers, that is used by us, to report to Treasury, and also then to seek funding from Treasury for your Covid costs so. I think it's an excellent question to ask. And yes, all Covid costs should be maintained separately, and all health services have been briefed on this, well and truly, for the last four months. We're actually in the fifth quarter of doing this, so Covid cost management and reporting should be no surprise to any CFO's of any health service across the state. Thank you.

Thank you very much. I'd like to thank each of our speakers.

Piotr Jakubicki from the department, Jennifer Williams and David Anderson. I think we've had some very practical insights into the responsibilities of board directors. Whether you are the finance expert on the board, or whether you're a board director whose primary expertise is somewhere else, that we all have responsibility for ensuring that we understand the finances, and that we're keeping our health service operating within the parameters that it's expected, but I think there's a couple of really important take out lessons. One is, that there are plenty of people, whether they're board directors, department people, or experienced CEOs, and CFO's, who are very willing to help, to talk through a problem, too who have experience which they're very willing to share. So, we'd certainly encourage you to reach out. Because any crisis can be dealt with, if it's anticipated. If it's known. If you understand what's happening, and if you raise concerns early both with the department, and sometimes it's necessary to do that with the Minister.

And the second thing to say is that, Jennifer said that she'd like to have two finance people and two quality people on the board. I think we're all quality people. She was referring to people with specific expertise in clinical governance and quality and safety, but I think, I just want to acknowledge that this is a very challenging time, to be involved in health, whether it's directly as somebody delivering services, or whether it's somebody who's role and responsibility is in governance in health services, where we are already in and coming into a very challenging period, and so I think, good clear communication, recognition of the stress that people are under, boards adopting an appropriate tone of enquiry, providing an offering, support to our executive teams and supporting each other are really important. So I'd like to just acknowledge the work that everybody does in health services and again, thank our speakers. Remind you that the webinar and the slides including a slide of Jennifer’s points, will be available after this session and thank you all for participating and wish you all the best. Thank you.