Reference: 20170153
11 July 2017
Thank you for your Official Information Act request, received on 24 April 2017. You requested the following:
“Copies of all papers, memos, updates, briefings, advice, reports sent to the Ministry of Health or the Minister of Health’s office or the Minister of Finance’s office where Canterbury District Health Board or Capital and Coast District Health Board are mentioned for a paragraph or more since October 2016”
On 10 May I transferred part of your request to the Ministry of Health. On 18 May I extended the deadline for responding to your request by 40 working days.
Information Being Released
Please find enclosed the following documents:
Item Date Document Description Decision
1. 14 October 2016 Meeting with Minister Coleman regarding Canterbury DHB
One attachment is included ‘Re: Meeting on 28 September Release in part regarding Canterbury DHB’. The second attachment ‘CDHB Analysis’ is provided with ‘Update on Canterbury DHB Financial Management below’. 2. 28 October 2016 Aide Memoire: Canterbury DHB Release in part Financial Review 3. 28 October 2016 FW: Updated SEC paper Release in part
4. 4 November 2016 Briefing for State Sector Reform Release in part and Expenditure Control Committee Wednesday, 9 November 2016
5. 10 November Aide Memoire: Follow up on Release in part 2016 Canterbury DHB Financial Review 6. 21 February 2017 2015/16 Asset Performance Release in part Reporting 7. 27 February 2017 Treasury Report: DHB Financial Release in part Performance to 30 June 2016 8. 4 April 2017 Update on Canterbury DHB Release in part Financial Management
Three attachments are included • Canterbury DHB Treasury Analysis • PwC Review Forecast • Letter from Acting Chair to Treasury
I have decided to release the relevant parts of the documents listed above, subject to information being withheld under one or more of the following sections of the Official Information Act, as applicable:
• Personal contact details of officials, under section 9(2)(a) – to protect the privacy of natural persons, including deceased people.
• Advice still under consideration, section 9(2)(f)(iv) – to maintain the current constitutional conventions protecting the confidentiality of advice tendered by Ministers and officials.
• Names and contact details of junior officials and certain sensitive advice, under section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions.
• Officials’ work phone numbers under 9(2)(k) - to prevent the disclosure of official information for improper gain or improper advantage. Phone numbers are withheld as we have recently been advised about calls for malicious or inappropriate purposes, such as phishing, scams or unsolicited advertising. Information Publicly Available
The following information is also covered by your request and is or will soon be publicly available on the Treasury website:
Item Date Document Description Website Address 9. 13 February 2017 Aide Memoire: Additional Information for Hon Steven Joyce 10. 9 March 2017 Ministerial Engagement on Health To be released in July as part of Budget Package and Mental the Budget 17 proactive release Health 11. 10 March 2017 Aide Memoire: Additional Information on the Health Capital
2
Investment Pool 12. 5 May 2017 Report by the Treasury: District http://www.treasury.govt.nz/public Health Board Financial ations/informationreleases/health/ Performance to 2016 and 2017 dhb-performance/dhb- Plans performance-feb17.pdf
Accordingly, I have refused your request for the documents listed in the above table under section 18(d) of the Official Information Act – the information requested is or will soon be publicly available.
Some relevant information has been removed from documents listed in the above table and should continue to be withheld under the Official Information Act, on the grounds described in the documents.
In making my decision, I have considered the public interest considerations in section 9(1) of the Official Information Act.
Please note that this letter (with your personal details removed) and enclosed documents may be published on the Treasury website.
This reply addresses the information you requested. You have the right to ask the Ombudsman to investigate and review my decision.
Yours sincerely
Ben McBride Manager, Health
3
Information for Release OIA 20170153
1. Meeting with Minister Coleman regarding Canterbury DHB 1 2. Aide Memoire Canterbury DHB Financial Review 11 3. FW Updated SEC paper 13 4. Briefing for State Sector Reform and Expenditure Control Committee Wednesday, 15 9 November 2016 5. Aide Memoire Follow up on Canterbury DHB Financial Review 20 6. 2015.16 Asset Performance Reporting 22 7. Treasury Report DHB Financial Performance to 30 June 2016 25 8. Update on Canterbury DHB Financial Management 29
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Treasury Report: Meeting with Minister Coleman regarding Canterbury DHB
Date: 14 October 2016 Report No: T2016/1972 File Number: CM-1-3-28-17
Action Sought
Action Sought Deadline Minister of Finance Read this report prior to meeting 4:30PM, 17 October with Minister Coleman on 17 (Hon Bill English) October
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact Davin Hall Senior Analyst s9(2)(k) s9(2)(a)
Ben McBride Manager, Health
Actions for the Minister’s Office Staff (if required) s
Return the signed report to Treasury.
Note any feedback on the quality of the report
Enclosure: Yes: Meeting regarding Canterbury DHB (Treasury:3589537v1)
CDHB analysis (Treasury:3592710)
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Treasury Report: Meeting with Minister Coleman regarding Canterbury DHB
Executive Summary
You will be meeting with Minister Coleman on 17 October 2016 at 4:30 pm to discuss issues related to Canterbury District Health Board (DHB).
We understand the key issues that Minister Coleman wishes to discuss are:
• the draft PWC report on the financial sustainability of Canterbury DHB and the appropriate savings targets for the DHB arising from the findings of the report,
• the extent to which the DHB’s annual deficit will be funded and whether this should be through revenue or equity, and
• capital pressures on the Canterbury DHB Hospitals’ Redevelopment and Earthquake Repair Programme.
Recently, Phil O’Reilly (formerly CE of Business New Zealand) has written to Andrew Kibblewhite regarding challenges facing Canterbury DHB. A copy a memo reflecting Treasury’s perspective on the issues raised is attached for reference.
Recommended Action
We recommend that you:
a note that the report on stage 2 of the PWC review of Canterbury DHB’s financial sustainability is nearing completion
b note that the current draft indicates that the DHB faces significant deficits prior to the bulk of capital related costs coming on line in FY 18/19 following the completion of major works at Christchurch Hospital
c note that, once the PWC report is finalized and Canterbury DHB has had an opportunity to review and comment on the report, officials will provide advice on an appropriate savings target for the DHB
d note that advice on deficit support for DHBs is anticipated later this month, which will inform decisions related to provision of deficit support for Canterbury DHB
T2016/1972 : Meeting with Minister Coleman regarding Canterbury DHB Page 2
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e note that further advice on capital pressures in Canterbury is anticipated by the end of 2016, and
f discuss the appointment of the Canterbury DHB Chair and appointed members with the Minister of Health and additional support the Ministry of Health can provide to the new Board
Agree/Disagree
Ben McBride Manager, Health
Hon Bill English Minister of Finance
T2016/1972 : Meeting with Minister Coleman regarding Canterbury DHB Page 3
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Treasury Report: Meeting with Minister Coleman regarding Canterbury DHB
Purpose of Report
1. This report provides background and Treasury views on the issues we understand Minister Coleman wishes to discuss with you at your meeting on 17 October.
PWC Report
2. PWC has been engaged by the Ministry of Health to review the financial sustainability of Canterbury DHB. Stage one of the review was completed in late 2015 (T2015/2960 refers) and a report outlining the findings of stage two of the review is nearing completion. The stage 2 report is focused on the forecast deficit for the DHB over the next 10 years and options for returning the DHB to a break even position.
3. The report shows that Canterbury DHB is on track to run significant deficits over the next 3 years in the lead up to the opening of the Acute Services Building at Christchurch Hospital, after which capital related operating costs will markedly increase, driving deeper deficits. The report will provide potential savings tracks required to return the DHB to a break-even position over 5 to 10 years. A core assumption in the financial projections presented in report is that there will not be significant additional capital investment beyond the Hospitals’ Redevelopments and the DHB’s earthquake repair programme over the next 10 years.
4. Treasury has reviewed and provided comments on earlier drafts of the report over the past month, which has prompted revisions by PWC to better reflect changes to the DHB’s financial forecasts since the stage 2 report was commissioned (e.g., reduction in the capital charge rate to 7%, the financing of Burwood Hospital) and an alternative future funding projection (the base case projection assumes extremely conservative funding path for DHBs over the next decade). Additional revisions will be required to reflect the reduction in the Crown discount rate to 6% announced on 13 October given the subsequent impact on the capital charge rate.
5. s9(2)(g)(i)
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Deficit Funding Support for Canterbury DHB
s9(2)(g)(i) 6.
7. Consistent with the Operating Policy Framework for DHBs and Minister’s stated expectations, the Treasury does not support automatically funding deficits which should be funded in the first instance from the DHB’s balance sheet. It is not clear at this juncture the extent to which the current year deficit for Canterbury DHB will reflect a cash shortfall that cannot be managed without deficit support funding.
8. s9(2)(g)(i)
Capital Pressures
9. There are pressures on both the Hospitals’ redevelopment project (led by the Hospitals Redevelopment Partnership Group) and the Canterbury DHB Earthquake repair programme that, if funded, will compound the financial difficulties facing the DHB in future. The PWC report projections do not anticipate any additional capital injections beyond that currently agreed.
10. When the main contract for the Christchurch Hospital Acute Services Building (ASB) was signed, it was signalled that two wards would need to be shelled and bridge links between buildings eliminated from the ASB to maintain sufficient contingency in the project unless additional cost savings could be found. These cost savings have not been found and the Ministry is preparing advice on the cost of reinstate the wards and bridge links.
11. s9(2)(g)(i)
12. s9(2)(f)(iv) and s9(2)(g)(i)
13. s9(2)(g)(i)
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14. s9(2)(f)(iv) and s9(2)(g)(i)
15. Once the Parkside indicative business case is complete, officials will provide further advice on capital pressures in Canterbury.
Phil O’Reilly Memo
16. In September, Phil O’Reilly sent a memo to Andrew Kibblewhite highlighting issues raised by Canterbury DHB about the capital charge, population-based funding and the Hospitals’ Redevelopment Partnership Group. Treasury is working with DPMC to help prepare a response in line with briefing materials we prepared for them (attached for your reference).
Longer term Strategy for Canterbury DHB
17. To date the approach to Canterbury is best characterized as a strategy of containment focused on the major capital works with tactical interventions designed to maintain budget and scope control and minimize delivery risk. While we have supported this approach, its effectiveness will be tested in the deliberations around Parkside, given the current dynamic with the DHB’s clinical leadership. With the proposed release of the Canterbury DHB ICR rating by the end of 2016, the challenges the centre has working with the DHB will enter the public domain.
18. s9(2)(g)(i)
19. The PWC report can be used as a basis for briefing the incoming Board on the financial challenges facing the DHB. But this should be supported by the Ministry with additional analysis that directly responds to the claims made by the DHB about its funding. Our high level analysis on Canterbury’s funding, which is attached, shows that there is no evidence that Canterbury is underfunded for the population it serves. Its share of national population-based funding has tracked down since the earthquake, reflecting its declining share of older New Zealanders (the rest of the country is ageing faster). The Ministry should be able to expand the analysis, including non-financial performance and comparisons with other DHBs.
T2016/1972 : Meeting with Minister Coleman regarding Canterbury DHB Page 6
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IN-CONFIDENCE
Date: 27 September 2016 CM-1-3-28-17
To: Andrew Kibblewhite
Cc. Peter Hughes, Gabriel Makhlouf
From: Ben McBride, Manager Health, The Treasury
Re: Meeting on 28 September regarding Canterbury DHB
In advance of our meeting on 28 September, this paper provides additional context and comments on the 12 September memo from Phil O’Reilly (the “Memo”) regarding Canterbury District Health Board (CDHB), an update on ongoing work related to the issues raised in the Memo, and views on the constraints and challenges in dealing with CDHB.
Phil O’Reilly Memo
The Memo raises three main concerns that reiterates positions taken by CDHB in a variety of forums over the past several years – capital charge, under funding and the role of Hospitals Redevelopment Partnership Group (the “Partnership Group”).
Capital Charges on Insurance Moneys
Capital charge payable by CDHB will increase as insurance proceeds are drawn down in line with expenditure on earthquake repairs or more significant capital works. The memo suggests that this is because the insurance money is being treated, inappropriately, as new investment rather than replacement investment. This is not correct.
The capital charge is calculated based on net assets. Therefore, an insurance payment that simply compensates for the impairment of existing assets will not impact on the capital charge. To the extent that an impairment exceeds the insurance proceeds, net assets (and the capital charge) will fall, subject to any injection of new equity by the Crown.
As an exceptional measure for CDHB, Ministers agreed that insurance proceeds would
be transferred temporarily to the Crown following the earthquake, and that they would not attract the capital charge until they were released back to the DHB in line with expenditure. A similar concession was provided for CDHB’s contribution to the hospitals’ redevelopment. Together, these measures provided temporary capital charge savings for CDHB of approximately $90M before the assets return to the DHB’s balance sheet. As funds are returned to CDHB and its net assets increase, this temporary relief is withdrawn and the capital charge returns to its usual level. This does not mean CDHB has been unfairly treated, or that the insurance proceeds are
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being treated as new expenditure. There may be some value on the Ministry of Health more clearly articulating the net asset and capital charge position of CDHB over the last decade or so, to provide an agreed set of facts as the basis for any further discussions on this point.
Substantial injections of new capital by the Crown, supplementing the insurance payment, mean that the quality and value of CDHB’s total net assets will be materially higher following the rebuild than before the earthquake. This will increase its capital costs, and does raise questions about affordability. This has nothing to do with the treatment of the insurance proceeds and is not unique to CDHB. Similar issues have faced other DHBs following major rebuilds, including in Wellington (Capital & Coast DHB). We are working jointly with the Ministry of Health on options to improve the affordability of major hospital builds (including, but not limited to CDHB), as discussed below.
The Memo notes that neither Canterbury University nor Lincoln University faced similar issues with charges on their insurance proceeds. This is true. The capital charge regime does not apply to Tertiary Education Institutions.
Canterbury’s Funding Proportion
It is difficult to respond to the points raised by Mr O’Reilly about funding because his Memo does not provide any analysis to support the statement that CDHB receives less funding than its population (size and characteristics) would imply.
The population-based funding formula (PBFF) is an allocation mechanism that uses population estimates from Statistics NZ figures. Those numbers were re-based following the 2013 census, and are updated by Statistics NZ every year. It is not clear what alternative population estimates have been used to determine that CDHB is underfunded. As far as we know, there are no robust alternatives available.
The funding formula was most recently reviewed in 2015. s9(2)(g)(i)
The Memo makes the point that university funding for Canterbury and Lincoln were kept stable throughout the period following the earthquake. In the health sector, the funding formula is implemented in such a way that every DHB receives at least a minimum funding increase every year, even if its population declines.
Core PBFF funding for CDHB has increased each year since the earthquake. Additional one off funding injections have also been provided in most years, including $16 million in FY16. Having a target outcome of removing deficit funding is not appropriate as it would give CDHB a blank cheque to increase its expenditure irrespective of its budget constraint.
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The Capital Works Programme
The Partnership Group that is leading the redevelopment of Burwood and Christchurch Hospitals, includes the Chair of CDHB among its four members with ex officio representation for the Chief Executive. Similar to the role of Otakaro, the Partnership Group, with the Ministry of Health, is the delivery agent for the facilities on behalf of the Crown, which are then transferred to the DHB upon completion.
The Partnership Group model is currently also deployed for the West Coast DHB (Grey Hospital) and the Southern DHB (Dunedin Hospital) and is reflected in the New Zealand Health Strategy as the future model for major builds. This approach allows for the development of central capability and capacity in the planning, design, procurement and delivery of major builds to support DHBs with the delivery of projects that are once- in-a-generation undertakings for the DHB involved. It responds to concerns that the institutional knowledge developed in these projects is lost once builds are complete which costs the public sector to access when the next major build occurs.
In the Canterbury DHB context, the Partnership Group has also been tasked with delivery of a number of related projects and oversight of the DHB’s earthquake repair programme. The Partnership Group has an essential role in assuring adherence to agreed budgets and managing scope-creep. This has forced them to make challenging trade-offs to stay within budget, which has been challenging for the DHB.
Related Work
There are two pieces of work we have underway with the Ministry of Health that have a direct bearing on the issues raised in the Memo: 1. advice to the Ministers of Finance and Health on the second stage of the CDHB Financial Review by PWC 2. advice on the affordability of major hospital builds.
1. The PWC review, which is being finalized, points to a significant deficit prior to the bulk of the financial impact of the hospitals’ redevelopment (mainly capital charge and depreciation) hitting the DHB. This is based on a financial model that does not contemplate any significant new capital expenditure beyond the agreed redevelopment projects and the earthquake repair programme.
PWC identifies a number of options for reducing the deficit, including tighter financial management of key cost categories, reducing depreciation rates, reviewing the pace and scale of the DHB’s facilities programme, and looking at alternative options (i.e., leasing, outsourcing) for certain facilities.
s9(2)(g)(i)
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s9(2)(g)(i)
Constraints and Challenges
There are a number of significant challenges that arise in the working relationship between CDHB and the centre, which have necessitated a series of interventions over the past four years, with the Partnership Group at the forefront. As reflected in the DHB’s zero score for the system performance element of its upcoming Investor Confidence Rating (ICR), the DHB continues to fall short in compliance with system rules and expectations.
The Ministry of Health’s approach to the CDHB is best characterised as a strategy of containment focused on the major capital works with tactical interventions designed to maintain budget and scope control and minimize delivery risk with key aspects of the rebuild. Treasury has supported this intervention approach, as have Ministers, s9(2)(g)(i)
Appointed Board members have not been able (or willing) to get the management team and clinicians to adopt adequate management disciplines, leaving the responsibility for holding the line with the partnership group and the Ministry. The learned behaviour at the DHB is not to make significant trade offs, but rather to use public pressure and media channels to back Ministers into a corner. s9(2)(g)(i)
s9(2)(g)(i)
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Reference: T2016/2072 CM-1-3-28-17
Date: 28 October 2016
To: Minister of Finance (Hon Bill English)
Associate Minister of Finance (Hon Steven Joyce)
Associate Minister of Finance (Hon Paula Bennett)
Deadline: 31 October 2016, 10:30 a.m.
Aide Memoire: Canterbury DHB Financial Review
The Minister of Health may seek your agreement to table a late paper for SEC on 2 November in relation to the Canterbury district health board (DHB) Financial Review (“the PWC review”). The most recent draft of the paper shared with the Treasury seeks s9(2)(f)(iv) in deficit support funding over two years as a pre-commitment against the Budget 2017 capital allowance.
The Treasury does not consider the paper to be ready for submission and does not support the funding request. We have provided alternative recommendations should the paper proceed.
The PWC review has not been finalized – the Cabinet paper is premised on revisions to the findings in the PWC review which to our knowledge have not yet been finalized. We have not had an opportunity to review the detailed financials underpinning the funding request and understand, at the time of writing, that the numbers are still moving.
Consultation with Canterbury DHB has been rushed – the DHB was given just over a day to turn-around feedback on the PWC review findings. While they have provided extensive comments, the hurried process provides a legitimate line of grievance for the DHB irrespective of the merits of their arguments.
There is no effective counter-narrative to the positions taken by Canterbury DHB – While comments from Canterbury DHB on the review are reflected in the paper, the paper does not present a fact-based rebuttal of their arguments, particularly in relation to the challenges presented by the DHB to the population-based funding allocation system. Our high level analysis indicates that there is no evidence that Canterbury DHB is underfunded for the population it serves. Population-based funding has continued to increase each year. The fact that its share of national population-based funding has tracked down since the earthquake mainly reflects its declining share of
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older New Zealanders: the rest of the country is aging faster, and older people have much higher health costs on average.
Canterbury DHB does not require deficit support – in April 2015, the Ministers of Finance and Health agreed to a series of measures to improve the transparency of Vote Health. As part of those arrangements, it was agreed that deficit support would only be provided in the event of a cash deficit which could not be funded by drawing down funds from the balance sheet. This rule applies to all DHBs and is now written into the operating policy framework. Canterbury DHB is not projecting a cash deficit in either the current or the next financial year. It is projecting an accounting deficit, due to depreciation costs. There is no need for the Crown to fund this.
A Budget 2017 pre-commitment is not required to provide Canterbury DHB deficit support – there is sufficient funding appropriated within the Vote Health baseline and tagged contingencies for the s9(2)(f)(iv) sought in the current fiscal year if a decision is taken to provide support. Many of the pressures on the risk pool identified in the paper do not align with agreed approach to draw downs on the risk pool (T2016/935 refers) and there is significant funding available within the health capital envelope. While accessing the health capital envelope for this expenditure may result in an increased bid in Budget 17 for health capital, this would allow decisions on health funding to be weighed against other government priorities through the Budget process.
More funding will not change behaviours – a similar containment strategy of tactical injections of additional funding in response to Canterbury DHB demands has been employed by the centre for a number of years. This rewards lax financial control and brinksmanship in the annual planning cycle, encouraging such behaviour.
s9(2)(g)(i)
Davin Hall, Senior Analyst, Health,s9(2)(k) Ben McBride, Manager, Health, Health, s9(2)(k)
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From: Davin Hall [TSY] Sent: Friday, 28 October 2016 8:20:51 AM To: David Kidson s9(2)(g)(i) Cc: Ben McBride [TSY] Subject: FW: Updated SEC paper Attachments: SEC Paper v.2.docx Importance: High
[SEEMAIL][SENSITIVE]
Hi David/s9(2)(g)(i)
I’ve reviewed the attached draft CAB paper and the funding request has increased by $7M (15%) since the last draft. I challenged Sam on this and it appears the feedback from Canterbury is forcing a revision of the PWC report. While it is positive that they have engaged with Canterbury’s feedback in this regard, the consultation was very rushed and the Ministry needs to have a response for the other issues that were raised. Regardless of whether we would agree with the merits of their arguments, further engagement with Canterbury is likely required and would not be unreasonable. As of 9 this morning, the revision to the PWC report is not complete and Sam is not sure when it will be finalized.
While we had not seen the “final” version of the full report that was sent to Canterbury, we did have visibility of the numbers (the movements to that point were driven by system level changes to assumptions) and were comfortable we understood how they got there. With this latest shift in the numbers we have no visibility or confidence in what is underlying the financial request in the CAB paper.
The theme of the CAB paper has also changed to focus more on in-year pressures in Vote Health and the inability to manage pressures without having to seek more capital in Budget 17 if the health capital envelope is tapped for Canterbury (which to us seems a reasonable trade off).
Since we are unable to substantiate the numbers that are being proposed in the revised CAB paper, we would strongly recommend that the paper be pulled from the SEC Agenda on Wednesday.
I’ll send an AM over this afternoon to inform the pre-CAB discussion on Monday.
Regards, Davin
Davin Hall | Senior Analyst | The Treasury s9(2)(k) [email protected]
CONFIDENTIALITY NOTICE The information in this email is confidential to the Treasury, intended only for the addressee(s), and may also be legally privileged. If you are not an intended addressee: a. please immediately delete this email and notify the Treasury by return email or telephone (64 4 472 2733); b. any use, dissemination or copying of this email is strictly prohibited and may be unlawful.
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From: [email protected] [mailto:[email protected]] Sent: Thursday, 27 October 2016 4:37 p.m. To: Davin Hall [TSY]
Hello
Please find attached an updated draft of the SEC paper for next week. We have been asked by our Minister today to change the emphasis from an update on the PwC review and subsequent actions, to focus on Vote health pressures and associated impact on options to respond to the PwC financial review of CDHB. You will see that much of the content remains similar to previous but the PwC report content is significantly slimmed down. We have also included a summary of the CDHB comments on the report.
The Tsy comment has been included the same as previously including additions from Davin today.
The draft has also been sent to our Minister's office tonight for review. Given that this paper is in a fluid state, Davin and I have agreed to talk first thing in the morning to see if there are any more significant changes from our office to inform the Tsy comment.
Will keep you posted.
Thanks Sam
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Treasury Report: Briefing for State Sector Reform and Expenditure Control Committee – Wednesday, 9 November 2016
Date: 4 November 2016 Report No: T2016/2144 File Number: MS-5-2-SEC
Action Sought Action Sought Deadline Minister of Finance Read prior to SEC meeting 8.30am, Wednesday, 9 November 2016 (Hon Bill English) Associate Minister of Finance Read prior to SEC meeting 8.30am, Wednesday, 9 November 2016 (Hon Steven Joyce) Associate Minister of Finance Read prior to SEC meeting 8.30am, Wednesday, 9 November 2016 (Hon Paula Bennett)
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact Avril Gillan Graduate Analyst, Justice & s9(2)(k) N/A Security (mob) Kamlesh Patel Team Leader, Budget N/A Coordination, Fiscal & State (mob) Sector Management
Actions for the Minister’s Office Staff (if required)
Return the signed report to Treasury.
Note any feedback on the quality of the report
Enclosure: No
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Treasury Report: Briefing for State Sector Reform and Expenditure Control Committee – Wednesday, 9 November 2016
Executive Summary
We are aware of three items on the State Sector Reform and Expenditure Control Committee agenda for Wednesday 9 November 2016. The table below identifies any relevant fiscal impacts and provides Treasury’s recommendations on one of these. The remaining papers, for which Treasury has no substantive briefing, are summarised below the table.
Title Pg Recommend Fiscal Implications ($m GST excl.) Treasury Comment 16/17 17/18 18/19 19/20 Out years Investor Confidence 4 Support Operating Results of the second Rating: Results from tranche of a Cabinet- Tranche Two No fiscal implications approved programme Capital to focus on and improve investment No fiscal implications performance across the State services Deleted - Not Relevant to Request
T2016/2144 T2016/2144 : Briefing for State Sector Reform and Expenditure Control Committee Wednesday, 9 November 2016Page 2
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Recommended Action
We recommend that you read this report prior to the State Sector Reform and Expenditure Control Committee meeting at 8.30am on Wednesday, 9 November 2016.
Kamlesh Patel Team Leader, Budget Coordination, Fiscal & State Sector Management
Hon Bill English Minister of Finance
Hon Steven Joyce Associate Minister of Finance
Hon Paula Bennett Associate Minister of Finance
T2016/2144 T2016/2144 : Briefing for State Sector Reform and Expenditure Control Committee Wednesday, 9 November 2016Page 3
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Investor Confidence Rating: Results from Tranche One
Responsible Person: Ricky Utting, Investment Management & Asset Performance, s9(2)(k)
First Contact Person: Kerry Hollingsworth, Investment Management & Asset Performance, s9(2)(k)
Purpose
1. This paper covers the results from the second tranche of Investment Confidence Ratings (ICRs) which assessed five District Health Boards (DHBs): Of these, Counties- Manukau attained an ‘A’ rating; Auckland, Canterbury and Waitemata attained ‘B’ ratings; and Northland attained a ‘C’ rating. 2. The paper invites Cabinet to approve the ICR ratings for these DHBs and directs officials to report back to Joint Ministers with recommendations that would improve investment performance across the DHB network. 3. For expediency purposes, the paper also seeks authority from Cabinet to allow Investment Ministers to release the Government’s second annual report on Government investment and assets when it becomes available.
Comment
4. This is the second in a series of reports to Cabinet on the results of a tranche of ICR assessments. Cabinet approved the first tranche of results for six agencies in April 2016. The third and fourth tranches are underway. These cover 13 further investment- intensive agencies (including a further 3 DHBs) and the results are due to be reported to Cabinet in March and September 2017 respectively. 5. At the outset of this tranche the Treasury anticipated that the ICR results for selected DHBs would be more mixed than what we saw in Tranche One. However the results for this tranche are similar to those in Tranche One – there is a spread of ratings from A to C. Apart from the three scheduled ICRs in the first half of 2017 there are no current plans to conduct ICR assessments for the remaining 12 DHBs (due to their small asset base or investment profile). 6. The individual DHB results show that each DHB has a range of strengths. In particular, Counties-Manukau has all round strengths in investment management, and its long term investment plan is an exemplar amongst the 11 plans assessed to date, alongside that of Defence. 7. Canterbury DHB’s capability and performance generally matches that of its peers. The paper highlights the imperative for that DHB to improve its compliance with sector requirements across both CDHB-led investments and those led by the Ministry of Health. Canterbury DHB disputes the basis for the corporate centre’s assessment of their system performance so this aspect of the ICR may attract public comment when the results are published at a time to be determined by Investment Ministers. 8. The DHBs have embraced this exercise in a constructive way at all levels. The chairman of the Board of the largest DHB remarked that the ICR had changed the quality of conversation at Board level and professionalised these aspects of the DHBs business. 9. The DHBs were motivated to engage with the Treasury for various reasons: some saw the ICR as a means of independent validation of their capability and performance; others were attracted by the prospect of some expansion of decision rights for new investments (given that the main thresholds have been in place since 2000).
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10. The exercise reinforced the Treasury view that the investment management settings in the DHB sector need an overhaul to bring them in line with the Health Strategy and Government policy set out in Cabinet Office circular CO(15)5. Some of the ICT settings in particular are slowing local or regional investments and adding costs to decision making processes. 11. The Treasury will work with the Ministry of Health and DHB personnel to develop recommendations for joint Ministers by 31 March 2017 on leveraging the ICR into improvements to the current investment management regime in the DHB sector. Treasury Recommendation
12. We recommend that you support the recommendations in this paper.
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Reference: T2016/2185 CM-1-3-28-17
Date: 10 November 2016
To: Minister of Finance (Hon Bill English)
Deadline: None (if any)
Aide Memoire: Follow up on Canterbury DHB Financial Review
In response to your comments on the draft SEC paper: Vote Health 2016/17 Funding Pressures and Canterbury DHB Financial Review, we have met with Ministry of Health (“the Ministry”) representatives to discuss the issues you raised: 1) the plan for handling the release of the PWC Report, and 2) closing the gap between officials on deficit funding.
Plan for PWC Report Release
The Ministry is seeking to release the report subsequent to a Cabinet decision on the draft paper and a decision on deficit funding. There are also changes being proposed to three of the four government appointees on the Canterbury DHB Board, which we understand will be considered by the Appointment and Honours Committee on 14 November.
In our opinion, the apparent strategy of appointing new government appointees on the Board to support the existing Chair improve the governance of the DHB is unlikely to change the behaviour of the DHB Chief Executive and management:
• The current Chair has not, in our view, been effective in this role to date. • Governance issues that have been relayed to us, such as management tabling papers at board meetings without effective oversight by the Chair (e.g., that the DHB is underfunded for mental health services when the allocation decision sits with the Board under the capitated funding model), should have been addressed. • s9(2)(g)(i)
• The DHB management does not accept the 0/5 score on their ICR system performance and in our view are unlikely to modify behaviours in response. The Chair recently led a delegation to Treasury to lobby for changes to the ICR Cabinet paper.
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s9(2)(g)(i)
Davin Hall, Senior Analyst, Health and ACC,s9(2)(k) Ben McBride, Manager, Health and ACC, s9(2)(k)
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Treasury Report: 2015/16 Asset Performance Reporting
Date: 21 February 2017 Report No: T2016/2307 File Number: ST-4-8-5
Action Sought
Action Sought Deadline
Minister of Finance Note that the Treasury has completed its analysis of the None (Hon Steven Joyce) asset performance measures provided by the 24 investment-intensive agencies for the 2015/16 financial year
Note the information provided in this report and the overall conclusion that the quality of asset performance reporting is not yet at the level that demonstrates agencies understand the relationship between the performance of their assets and their cost to serve
Note that the Treasury intends to work with a range of agencies during 2017 to lift the quality of annual asset performance reporting and to report back to Government Investment Ministers in November 2017 on asset performance of investment-intensive agencies Associate Minister of Finance Note the contents of this report None (Hon Simon Bridges) Associate Minister of Finance Note the contents of this report None (Hon Amy Adams) Minister of Internal Affairs Note the contents of this report None (Hon Peter Dunne)
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact
Geoff Shaw Senior Advisor, Investment s9(2)(k) s9(2)(a) Performance, Investment Management and Asset Performance Ricky Utting Manager, Investment Management and Asset Performance
Pages 2-13 not covered by your request
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Summary of the submitted asset performance information for 2015/16:
FY15/16 FY15/16 FY15/16 % 2015/16 Asset Agency Measures Targets Targets Targets Portfolios Provided Set Met Met Deleted - Not Relevant to Request
Capital Coast DHB 3 11 0 0 0% Canterbury DHB 3 23 21 19 83% Deleted - Not Relevant to Request
Deleted - Not Relevant to Request
Some agencies did not submit 2015/16 targets for reported measures as they did not have any approved measures in place for 2015/16. They instead submitted targets for 2016/17. The agencies stated they had assessed how the asset portfolios performed in 2015/16 against the proposed measures before formally setting targets for 2016/17.
7 . No public targets were set for 2015/16. ACC advised that it has detailed asset performance measures for 2015/16 that were not approved by the Board. T2016/2307 : 2015.16 Asset Performance Reporting Page 14
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Agency specific commentary
The commentary below for each agency is on exception basis and compares agency information versus expectations.
Deleted - Not Relevant to Request
Capital & Coast District Health Board (CCDHB) CCDHB presented five property, five ICT, and three clinical equipment asset performance measures. The measures are of good quality. No targets or actuals were provided. The targets for 2016/17 have been agreed by management prior to the beginning of the reporting period.
Canterbury District Health Board (CDHB) CDHB provided 23 measures and 21 targets across three asset portfolios (property, ICT, and clinical). 61% of the measures were focused on utilisation of the assets. Of the 21 measures that had targets, only thirteen actuals were reported, of which nine meet the specified targets. ICT had one actual result for the five targets at the time of submission. Treasury will be following up with CDHB to review the missing results.
Deleted - Not Relevant to Request
Pages 16 and 17 not covered by your request T2016/2307 : 2015.16 Asset Performance Reporting Page 15
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Treasury Report: DHB Financial Performance to 30 June 2016
Date: 27 February 2017 Report No: T2017/280 File Number: SH-1-6
Action Sought
Action Sought Deadline Minister of Finance Refer report including the Annex to None. the Minister of Health. Agree for the (Hon Steven Joyce) Treasury to publicly release the Annex. Associate Minister of Finance None. For information. None. (Hon Simon Bridges) Associate Minister of Finance None. For information. None. (Hon Amy Adams)
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact s9(2)(k) Hew Norris Senior Analyst N/A (mob) Ben McBride Manager, Health s9(2)(a)
Actions for the Minister’s Office Staff (if required)
Return the signed report to Treasury. Refer this report (including the Annex) to the Minister of Health.
Note any feedback on the quality of the report
Enclosure: Yes: Annex A: Overview of DHB performance
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Treasury Report: DHB Financial Performance to 30 June 2016
Purpose of Report
1. This report provides an update on DHBs’ financial performance ahead of the next budget cycle. It also includes other information, including some you have requested, on:
• DHB productivity.
• Government health funding levels over time. We look specifically at concerns raised by the Association of Salaried Medical Specialists and Council of Trade Unions (CTU). Further information you requested on the CTU’s cost pressure model will be provided shortly.
• Demographic variations between the population each DHB serves.
• Ongoing debate around the balance between DHB provider-arm (hospital) and primary care funding.
• The composition of the New Zealand health workforce.
2. You may wish to forward this report (including Annex A) to the Minister of Health and agree for Annex A to be publicly released by the Treasury.
Performance of District Health Boards
Our analysis of the sector informs our financial and policy advice
3. Treasury analyses DHB performance using a set of financial and non-financial indicators. Our analysis helps to inform our budget advice, DHB risk assessments, advice on annual reports, and view on the sector’s strategic direction. We document our analysis in reports to provide it in a consistent and transparent way. This is the third year we have provided a report, following earlier documents in 2014 and 2016.
4. We have split our analysis in two this year to provide part of it, our financial performance and productivity indicators (Annex A), earlier to help inform consideration of Budget 17. A second document, on our non-financial (health service performance) indicators, will be provided later in the year when data is available.
After several years of DHB spending restraint, there are signs of financial pressure
5. Our financial performance metrics indicate that some DHBs’ financial position remained weak in 2016 with a number continuing to report net deficits and having weakening balance sheets (lower levels of liquid assets). Provider-arm (hospital) personnel costs were a key cost driver. Several DHBs have experienced difficulty meeting planned capital investment and/or repairs and maintenance levels, and requirements for additional Crown support for large projects will continue.
6. In aggregate, DHBs’ external provider (for example primary and community care) funding has decreased as a percentage of total DHB expenditure over the last five years. DHB plans for 2016/17 and out-years include an increased percentage of T2017/280 : DHB Financial Performance to 30 June 2016 Page 2
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funding for external providers although experience with past plans indicates this may not occur in actual results.
7. Eight months into the year, Canterbury’s annual plan has just been provisionally agreed with the Ministry of Health (subject to Ministerial approval) and Capital & Coast’s remains under discussion. This timing reflects difficulty reaching agreement around these DHBs’ relatively high planned net deficit levels.
8. In response to your request for DHB productivity information, we have brought forward this part of our DHB analysis and included it in Annex A. Hospital outputs have increased over time and productivity levels (costs per case weighted discharge) have been reasonably stable at an aggregate level. Variability in productivity between DHBs suggests that there may be room for improvement.
There is public value in proactively releasing the DHB performance report in Annex A
9. Our previous (2016) DHB performance analysis was leaked to the press after DHB CEs asked for it to be circulated due to the absence of similar comparative information by the Ministry of Health. Its release formed part of public debate around whether DHBs’ funding levels are adequate to provide a sufficient level of patient services. We think there is additional contextual information that would help to provide a more balanced debate on funding, particularly in relation to the adequacy of health sector funding growth. Accordingly, we recommend proactively releasing our current DHB performance report (Annex A).
10. Many of our indicators are “tin-openers” that identify areas where further investigation would be beneficial rather than a source of firm conclusions on sector performance. Our work is intended to complement more detailed monitoring undertaken by the Ministry of Health, which has primary oversight of the sector and a greater focus on tracking performance in-year.
11. In our view, the Ministry of Health needs to be pushed harder to develop and implement a framework for understanding and managing health sector performance. These are among the most important implementation actions of the New Zealand Health Strategy (action 14 is implementing an outcomes focused monitoring framework and action 15 is implementing a performance management system), but we are not aware of any progress to date despite communicating our strong interest.
12. There is also considerable interest from the sector. Recently, Treasury and Ministry of Health staff were invited to join a lead group of DHB COOs and CFOs to take a broader look at DHB system performance. The group is sponsored by a DHB CE and reports to the national DHB CEs. The programme’s vision is to “to develop a whole of system view of District Health Boards’ (DHBs’) effectiveness, efficiency and productivity, enabling DHBs to measure benefits and make adjustments for improved health outcomes.” This work is clearly very strongly aligned to the Health Strategy’s implementation actions referred to above. s9(2)(f)(iv) and s9(2)(g)(i)
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Recommended Action
We recommend that you:
a refer a copy of this report, and Annex A, to the Minister of Health
Refer/not referred Minister of Finance
b agree for the Treasury to publicly release Annex A to this report given strong interest from the DHB sector for comparative information on performance, and
Agree/disagree Minister of Finance
c consider the following talking points for your ongoing discussions with Minister Coleman around Budget 17: • What are you doing to improve Heath’s financial performance and sustainability including its response to increased demand from forecast demographic changes?
• What actions are you taking to further develop New Zealand’s health system monitoring framework to help achieve improved service quality, productivity and outcomes for patients?
• What actions are you taking in response to workforce management issues including an aging workforce and geographical misalignment between primary care providers and some higher-needs patients?
• What are you doing in response to sector concerns that DHBs’ external provider expenditure has been falling as a percentage of total expenditure?
• What actions are you taking in response to concerns, such as those raised by the Office of the Auditor General, around the sustainability of DHBs’ asset base?
Ben McBride Manager, Health
Steven Joyce Minister of Finance
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Treasury Report: Update on Canterbury DHB Financial Management
Date: 19 April 2017 Report No: T2017/901 File Number: CM-1-3-28-0-3-16
Action Sought
Action Sought Deadline Minister of Finance Discuss this report with Treasury None officials (Hon Steven Joyce) Agree to meet the Minister of Health to discuss Canterbury DHB. Refer this report to the Minister of Health.
Contact for Telephone Discussion (if required)
Name Position Telephone 1st Contact Hew Norris Senior Analyst s9(2)(k) N/A (mob) Ben McBride Manager, Health s9(2)(a)
Actions for the Minister’s Office Staff (if required)
Return the signed report to Treasury. Refer this report to the Minister of Health.
Note any feedback on the quality of the report
Enclosure: Yes: Annex A: Canterbury DHB: Treasury Analysis (October 2016) Annex B: PwC Review Forecast Annex C: Letter from Acting Chair Canterbury DHB to Treasury
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Treasury Report: Update on CDHB Financial Management
Executive Summary
The Canterbury DHB (CDHB) Annual Plan for 2016/17 was recently approved by Ministers. It projects a significant deficit of $38.5 million in the current financial year, with similar deficits in out-years. The DHB’s draft plan for 2017/18 signals a marked deterioration in its expected financial performance, with a planned deficit of s9(2)(f)(iv) next year. These current and projected deficits arise before the DHB faces the main depreciation and capital charge impacts of the rebuild.
A recent financial review undertaken by PricewaterhouseCoopers (PwC) indicated that the DHB should be able to achieve a breakeven position with improved financial management. The impact of the hospital rebuild presents capital affordability challenges, but these are manageable provided the DHB takes steps to strengthen its financial performance and contain its capital expenditure. The CDHB management team has shown little sign of being willing to respond to the situation and Board governance has been and remains ineffective.
Standing back and looking at where we have come from, the future suggests two likely paths. s9(2)(g)(i)
Recommended Action
We recommend that you:
a note that in our assessment the actions that the centre has taken to support Canterbury DHB towards a sustainable funding path have not been successful and are unlikely to be, s9(2)(g)(i)
b in the first instance, discuss this report with Treasury officials
c agree to meet the Minister of Health to discuss the most appropriate strategy to improve Canterbury DHB’s financial position and management, and
Agree/disagree Minister of Finance
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d refer this report to the Minister of Health.
Refer/not referred Minister of Finance
Ben McBride Manager, Health
Steven Joyce Minister of Finance
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Purpose of Report
1. This paper puts recent developments in the Canterbury District Health Board (CDHB) in the context of its underlying financial situation, the hospital rebuild, and the approach of the DHB and the centre to managing them. The behaviour we have seen from the DHB over the last six months, and the centre’s unsuccessful attempts to respond, has narrowed the options available to the Government to move the DHB toward a more sustainable footing.
CDHB’s financial situation
CDHB’s financial situation has deteriorated and will worsen significantly once the impact of the rebuild is felt
2. CDHB has been unable to control its expenditure and has had problems with operating deficits dating back to at least 2008/09, well before the 2010-11 earthquakes. Over the last three financial years, it has reported deficits of $18 million (2014/15, funded via equity), $16.5 million (2015/16, offset through an additional one-off revenue increase) and $38.5 million (current year forecast, not funded). Its draft annual plan for the next financial year signals an expected deficit of s9(2)(f)(iv) although we expect that this amount will reduce following discussions with the Ministry of Health).
3. In future, the Hospitals Redevelopment Project and the Earthquake Repair Programme will put further pressure on CDHB’s financial position through additional capital charges and depreciation. The final size of rebuild related pressures is a significant risk for the DHB with the potential for cost overruns requiring additional capital injections. The hospital redevelopment was planned before the earthquakes and every DHB faces these challenges periodically. The Earthquake Repair Programme (ERP) is managed by CDHB; it faces challenging prioritisation decisions to manage within its commitment to Ministers that no additional Crown capital would be sought when its new outpatients building was approved.
4. Our assessment is that CDHB is not underfunded by the Ministry of Health’s population based funding formula (PBFF). The DHB’s per capita funding is slightly less than the national average because its population has relatively fewer disadvantaged people and has also been ageing more slowly than other parts of New Zealand (disadvantaged and older people have a higher weighting in the PBFF due to greater health service need). Funding after the earthquake was initially inflated due to forecast population numbers that turned out to higher than its actual population; unwinding this has also contributed to the relatively slow year-on-year funding growth which appears to be contributing to the DHB’s concerns. More information on the DHB’s funding and performance is contained in Annex A, based on analysis undertaken in October last year.
5. Nevertheless, CDHB has consistently maintained that it is disadvantaged by the PBFF, and has regularly challenged the StatsNZ data collection that underlies it. Other DHBs can, and do, make similar arguments for a greater share of PBFF funding – based on high concentrations of socio-economic deprivation levels, or rural and dispersed populations, for example – but are generally supportive of the PBFF approach overall. The PBFF has played an essential role as an allocative mechanism for health sector funding since 2003/04. It was most recently updated in 2015 following a review overseen by a Technical Advisory Group with members from the Ministry of Health, DHBs and Treasury.
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The Centre’s Strategy to Assist CDHB to Date
6. The centre’s strategy to assist CDHB has been led by the Ministry of Health and supported by Treasury. To date it has involved:
a Committing a range of additional financial support since the earthquakes including over $500 million in new Crown capital, approximately $106 million of deficit funding (additional revenue and equity) and $76 million in temporary relief from capital charge payments on funds held by the Crown. These amounts are in addition to the $331 million increase in population based funding over the last eight years. The latest major contribution was a $20 million package of initiatives to increase mental health support announced in March 2016.
b Forming the Hospital Redevelopment Partnership Group (HRPG) to govern the Hospital Redevelopment Project. The HRPG was given this role due to concerns about CDHB’s capability and capacity to deliver the hospitals in line with Government expectations. A partnership model has also been used for major hospital developments in Greymouth and Dunedin.
c Engaging PwC to review CDHB’s financial position and work with the DHB to improve it.
d Financial targets for the DHB to achieve break even over three years set by the Minister of Health before Christmas, based on the PwC review.
e Seeking to improve governance through new Board appointments.
The PwC financial review highlighted the need for the DHB to strengthen financial management to prepare for managing out-year rebuild costs
7. The Ministry contracted PwC to review the DHB’s financial performance and help develop a plan to improve its financial sustainability. Figure 1 shows the PwC review’s forecast of CDHB’s position assuming historical trends continue (that is, not incorporating a new plan to improve the DHB’s position) and moderate revenue growth; further details are provided in Annex B. The review reported three key things:
a CDHB is currently cash solvent and does not require an immediate injection of Crown equity. It is forecast to have a rising closing cash position until 2018/19 (see the green line in figure 1). From 2019/20 onwards, the combination of increased capital charges with a structural operating deficit is expected to result in a worsening cash position, with negative cash from 2020/21. Increased depreciation expenses similarly impact the bottom line.
b The DHB should be able to achieve a break even position with improved financial management. CDHB’s net deficits are currently non-cash and reasonably small as a percentage of revenue. As mentioned above, the DHB’s most recent 2015/16 net deficit (of $16.5 million or 1% of revenue) was offset by a $16 million one-off revenue increase (we have not shown this offset in chart 1). Its net results before and after capital charges and depreciation are shown by the orange lines in figure 1.
c It is important for CDHB to strengthen its financial position in the short term, and contain capital expenditure, to position the DHB to manage out-year rebuild costs. The out-year costs arise as the DHB takes possession of new capital assets: Burwood in 2016/17 and ASB in 2018/19. While these costs do present a financial management challenge for the DHB, they are not insurmountable and are not the cause of its recent operating deficits. Certainly, managing the current
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impact of Burwood is a reasonable expectation given the extent to which this build was DHB funded. The impact of ASB, which has been mainly funded through new capital injections, will be more challenging. s9(2)(g)(i)
Financial targets set by the Minister of Health
8. The PwC review proposed that the DHB could improve its financial management and performance by:
a tightening its operating cost management (in areas such as personnel, aged residential care and clinical supplies) by 0.8% of revenue year-on-year for two years and 0.4% thereafter,
b reducing its depreciation rate,
c looking at financing options such as selling and leasing back some of its facilities, and
d reviewing its capital investment plans including resizing, delaying or dropping some projects.
9. The necessary operating cost savings were considered to be achievable by the Ministry of Health and similar to, or less than, what other DHBs have achieved in the past, for example Counties Manukau. The Minister of Health wrote to the DHB in December outlining Ministers’ expectations that its financial management should be improved without compromising patient services. The Minister indicated that the DHB’s 2016/17 annual plan should include reduced deficits, with a surplus in 2018/19 (table 1 refers).
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Table 1: CDHB net surplus / (deficit) expectations, $ millions
2016/17 2017/18 2018/19
Deficit track stipulated by the Minister of Health (38.5) (17.0) 7.0
CDHB’s 2016/17 plan (38.5) (35.0) (33.0)
CDHB’s 2017/18 plan s9(2)(f)(iv)
The CDHB response to improving its financial management
CDHB has shown little genuine willingness to engage with the PwC review
10. Following the Minister of Health’s December letter, the DHB slightly improved its 2016/17 net deficit plan from $42.0 million to the expected level of $38.5 million noted in table 1. However, management has continued to re-litigate the PwC review’s findings and the need for the DHB to control expenditure, looking instead for additional funding to top up its PBFF allocation. The DHB’s 2016/17 annual plan includes out- year deficits that are well above the level specified by the Minister of Health. The first draft of the DHB’s 2017/18 plan includes an even larger forecast deficit of s9(2)(f)(iv) for the next financial year.
11. As a result, CDHB’s 2016/17 Annual Plan was only approved for one year by Ministers. The Ministry’s strategy is to address the DHB’s out year deficits through its next (2017/18) plan. While this approach is pragmatic as the first draft of the DHB’s 2017/18 plan has already been received, it only delays the point at which CDHB’s higher planned net deficits need to be addressed. Governance changes have proved ineffective at improving the situation
12. Experience has shown that the Board is either completely aligned with management or has struggled to exert influence. The appointment of new Board members following the recent elections has not improved the situation. The Acting Chair following the departure of Murray Cleverley, Sir Mark Solomon, has not proved effective. He has sent three letters to the Director General of Health (copied to Central Agency Chief Executives) in little over a month, and has now also written to Central Agency CEs themselves (Annex C provides a copy of the letter to the Treasury CE). These letters re-litigate decisions made by Ministers (such as those relating to the HRPG), incorrectly assert that the Minister of Health has agreed with him a course of action, and concern issues that are either the Board’s responsibility or not directly relevant to the DHB’s financial position. The letters also include requests for officials to participate in a working group with the DHB to address them. (These letters are similar to the letter lobbyist Phil O’Reilly sent Andrew Kibblewhite on behalf of the DHB last year).
13. The letters indicate that the acting chair has either not familiarised himself with previous Cabinet decisions or chosen the management line to re-litigate or ignore them. It does not appear that he has undertaken any analysis to form his own views. The other appointed members appear to have exerted little influence. The Board has not made any progress in implementing the PwC review.
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Developing a new response to improving CDHB’s financial sustainability
s9(2)(g)(i)
The CDHB situation highlights weaknesses in the functioning of the system that need to be addressed
18. One of the problems that this experience has highlighted is the absence of an analytical response from the Ministry of Health that could support a counter narrative to the concerns raised by the DHB through the media and other channels. This includes lack of analysis:
a comparing CDHB’s funding to the rest of the country, in a similar but more substantial way to our high level analysis contained in Annex A
b that provides an objective basis for understanding how the DHB’s overall financial and non-financial performance compares with other DHBs. This is largely due to the absence of a national DHB outcome and performance framework (although this is one of the implementation actions from the NZ Health Strategy that has yet to be developed)
c on how Canterbury’s mental health service needs compare to other parts of the country. We recognise that there is likely to be mental health service need associated with the earthquake but SIU analysis shows that people in distress in Canterbury are more likely to receive care than elsewhere in the country. We do not know how the mental health needs of Canterbury compare with other parts of the country that also have significant issues such as Northland.
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19. In the absence of an analytical response to CDHB issues, the centre has responded reactively, and in a limited way.
20. Governance is a weak lever to effect change. While Ministers appoint DHB chairs and up to three additional members, that may not be sufficient to exert a meaningful influence on DHB decision-making, particularly once financial management problems have emerged and difficult decisions and/or management changes are needed. Weak DHB governance was an issue highlighted by Sue Suckling’s Capability and Capacity review of 2015. Most DHB CEs do not have fixed term limits and can be in the role for a very long period of time (the current CDHB CE was appointed in 2008).
21. Once the ASB is complete, CDHB faces capital affordability issues that would arise for many DHBs following a large hospital rebuild. s9(2)(g)(i)
22. Given the complex and significant issues current facing CDHB, we recommend that you discuss these with the Minister of Health. You may want to meet with Treasury officials first.
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Annex A: Canterbury DHB: Treasury Analysis (October 2016)
This note sets out some basic facts about Canterbury DHB (CDHB), focusing mainly on demographics and funding, and some simple service and performance metrics. All references to years are to financial years. Figures for 2017 are forecasts (also 2016 for demographics).
(1) Population size and characteristics
The population served by CDHB shrank somewhat following the earthquake (by about 1.5% between 2010 and 2012). It has since increased at a faster rate than the national population (by 9.0% compared to 7.3% between 2012 and 2017). It remains slightly smaller as a percentage of the national population than it was before the earthquake. (Figure 1 refers).
Canterbury has relatively few Māori and Pasifika (figure 2). Its population is somewhat older than the national average – and is older now than it was before the earthquake – but the difference has reduced. This is basically because the proportion of people aged 75 or over did not really increase in Canterbury after the earthquake until 2015, whereas it kept on rising elsewhere (figure 3).
Figure 1. Population size, Canterbury 600 12.0%
500 11.8%
400 11.6%
300 11.4% '000s people %, NZ total (rhs) 200 11.2%
100 11.0%
- 10.8% 2010 2011 2012 2013 2014 2015 2016 2017
Figure 2. Māori and Pasifika as a percentage of total population (2015) 60%
50%
40%
30%
Pacific 20% Maori
10%
0% Auckland Bay ofPlenty Canterbury & Coast Cap. M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson Marlb. Northland Cant. South Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
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Figure 3. Percentage of the population aged 75+ 7.0%
6.5%
6.0% Canterbury All NZ 5.5%
5.0% 2010 2011 2012 2013 2014 2015 2016 2017
(2) Funding
Most health funding is provided to DHBs under the population-based funding formula (PBFF). This is an allocation tool, not a method for determining absolute funding requirements. The formula divides the pool of available funding based on the size and characteristics of DHBs’ respective populations. Every DHB receives at least a minimum funding increase, even if its population is static or declining. Funding increases associated with sudden (upward) fluctuations in population size may be phased in over a number a years.1
Both PBFF funding and total revenue have continued to increase for Canterbury since the earthquake (figure 4). Note that total revenue was skewed in 2013 by one-off items associated with the rebuild. Between 2010 and 2017, Canterbury’s total PBFF funding increased by 20.4% (from $1.07 billion to $1.28 billion), compared to a national increase of 24.5%.
Figure 4. CDHB revenue ($m) 2,000 1,800 1,600 1,400 1,200 1,000 Other 800 PBFF 600 400 200 - 2010 2011 2012 2013 2014 2015 2016 2017
PBFF funding is based on forecast population for the coming year. This means that, at the margins, some DHBs will be under- or over-funded for their actual population in any given year. There is no wash up at year end: this would involve clawing back funding from DHBs as well as making up shortfalls. Such discrepancies do not accumulate over time, since the allocation for the following year is based on the updated forecasts (subject to the minima and maxima). In recent years, the forecasts have generally overestimated Canterbury’s share of the total NZ population, with a bias towards overfunding (figure 5).
1 In other words, there is also a maximum annual funding increase, but a DHB will eventually reach its ‘true’ level of population-based funding. T2017/901 : Update on Canterbury DHB Financial Management Page 11
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Figure 5. Canterbury’s share of NZ population: forecasts vs actuals 12.0%
11.8%
11.6% Revised estimate 11.4% Forecast used for PBFF 11.2%
11.0% 2010 2011 2012 2013 2014 2015 2016 2017
The PBFF does not allocate funding on a crude per capita basis. Demographic groups with higher average health costs (or needs) are weighted more heavily in the PBFF. So, for example, per capita funding is higher for older people, poorer people, Maori and Pasifika. The demographic characteristics of its population mean that Canterbury receives slightly less PBFF funding on a crude per capita basis than the per capita rate for New Zealand as a whole.
Canterbury’s crude per capita PBFF funding increased after the earthquake, relative to national per capita funding, rising from 96% to 99% of the national rate between 2010 and 2012. Since then, Canterbury’s crude per capita rate has risen more slowly than the national rate (and in some years has declined). As a result, Canterbury now gets about 94% of the crude per capita rate for New Zealand. (Figure 6 refers.)
These trends seem to be explained mainly by two factors. First, as noted above, there was a lag in adjusting PBFF funding to reflect Canterbury’s relative population decline, inflating per capita funding initially. Second, Canterbury’s population overall has become younger relative to the rest of the country: older people have higher health costs, on average, so are weighted more heavily in the funding formula. (Figure 7 refers.)
Figure 6. Per capita PBFF funding 2,500 100% 99% 2,000 98% 97% 1,500 96% Canterbury ($) 95% All NZ ($) 1,000 94% Canterbury, % all NZ (rhs) 500 93% 92% - 91% 2010 2011 2012 2013 2014 2015 2016 2017
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Figure 7. Canterbury’s population and PBFF funding shares 13.5%
13.0%
12.5%
12.0% Share of total population
11.5% Share of 75+ population
11.0% Share of PBFF funding
10.5%
10.0% 2010 2011 2012 2013 2014 2015 2016 2017
(3) Service and performance metrics
This section discusses some simple metrics that tell us something about how Canterbury balances hospital and non-hospital services, the effectiveness of its primary and community care, the overall quality of its care for older people, and the efficiency of its hospital services. Canterbury scores well or reasonably well against most of these metrics. It is not an outlier.
(a) Balance between hospital and non-hospital services
DHBs perform the dual function of operating the district hospital and contracting for, and funding, non-hospital services from external providers. Under a capitated funding model this should, in principle, create an incentive for DHBs to shift services into primary and community settings, and to fund non-hospital interventions that prevent conditions escalating to an acute level, where this is cost effective. On the other hand, it may be expedient for them in the short term to prioritise the funding needs of their own provider arm.
Canterbury’s level of external (non-hospital) expenditure is about average (figure 8). This indicates that a reasonable level of priority is given to non-hospital services, given that this is a large tertiary centre. In common with many other DHBs, Canterbury has reduced the proportion of expenditure devoted to non-hospital services in recent years (figure 9). This may be partly a response to fiscal constraints. It may also reflect the changing age-profile of its population (aged residential and home-based care both count as external expenditure).
Figure 8: External expenditure as a percentage of total expenditure in 2015 50%
40%
30%
20%
10%
0% Auckland BayPlenty of Canterbury Coast & Cap M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson Marlb Northland Cant. South Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
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Figure 9: Change in external expenditure as a proportion of total expenditure (ppt) 4% 3% 2% 1% 0% -1% -2% Five year change (2010 to 2015) -3% -4% One year change (2014 to 2015) -5% -6% Auckland BayPlenty of Canterbury Coast & Cap M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson Marlb Northland South Cant. Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
One way of understanding Canterbury’s service model for older people is to look at the number of aged residential care bed days. This tells us how much the DHB relies on residential services rather than community-based care for its older population. Canterbury has a relatively high rate of aged-residential care bed days for the size of its older population, although the difference with the national rate has been reducing (figure 10).
Figure 10. Aged residential bed days, per 1,000 people aged 75+ 55
50
45 Canterbury 40 All NZ 35
30 2010 2011 2012 2013 2014 2015
(b) Effectiveness of primary and community care
Ambulatory sensitive hospitalisations (ASH) are acute hospital admissions that could have been avoided through interventions delivered in non-hospital settings. Thus, ASH rates are typically used as a proxy for the accessibility and quality of primary and community care. Canterbury’s ASH rates are about average for adults and below (better than) average for children (figure 11).
ASH rates are influenced by deprivation rates and ethnicity. This is reflected in the high rates for Counties Manukau, Hutt, Lakes, Northland and Whanganui, all of which have pockets of high deprivation and relatively large Māori and Pasifika populations. So it is important to look at the extent to which ASH rates have changed over time to assess how effectively the DHB is controlling avoidable hospitalisations. Rates in Canterbury remained fairly stable over the period 2005 to 2015, indicating consistent performance.
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Figure 11. Ambulatory sensitive hospitalisation (ASH) rates, 2015 12
10
8 Thousands 6
4 Child
2 Adult
0 Auckland BayPlenty of Canterbury Coast & Cap. M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson Marlb. Northland South Cant. Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
(c) Quality of care for older people
Looking at the number of hospital bed days occupied by older people (75+) serves as a proxy for the combined effectiveness of primary, acute and long-stay care for this population.2 Canterbury scores well against this measure relative to most other DHBs (figure 12).
Figure 12. Occupied bed days for older people 2,000
1,500
1,000
500
0 Auckland BOP Canterbury Coast Cap. M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson M. Northland Cant. South Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
(d) Hospital efficiency
Looking at the average length of hospital stays provides a measure of hospital efficiency. Longer hospital stays tend to reduce patient wellbeing and increase the cost of care. Average length of stay can be reduced by measures such as advances in treatment technologies, more effective drugs, and improved community and follow-up care, and more effective hospital administration. Figure 13 compares the actual average length of stay with the length of stay that would be predicted based on case mix. Canterbury’s average length of stay was lower than expected, in common with a number of other DHBs.
2 Specifically, this measure looks at the number of bed days, per 1,000 population, for older people (75 or over) admitted to hospital as an acute admission two or more times per year. T2017/901 : Update on Canterbury DHB Financial Management Page 15
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Figure 13. Average length of stay: excess days 0.40 0.30 0.20 0.10 0.00 -0.10 2013 -0.20 2014 -0.30 -0.40 2015 -0.50 -0.60 Auckland BOP Canterbury Coast Cap. M. Counties Bay Hawkes Hutt Lakes MidCentral Nelson M. Northland South Cant. Southern Tairawhiti Taranaki Waikato Wairarapa Waitemata West Coast Whanganui
Another way to understand hospital efficiency is to look at case weighted discharges (CWDs), which provide a standardised measure of the volume of activity (assigning greater weight to more complex procedures). Per capita case weighted discharges provide a measure of provider-arm activity (throughput). Canterbury’s rate of growth is similar to the national rate. At a national level, the overall volume of CWDs increased by around 14% between 2009 and 2015 (7% on a per capita basis). Canterbury’s rate of CWD growth has been similar to the national rate over this period, with 12% growth in overall volumes (7% on a per capita basis).
Figure 14. Growth of case weighted discharges, total and per capita 116 114 112 110 108 CDHB, total 106 All NZ, total 104 CDHB, per capita 102 All NZ, per capita Index: 2009 = = 100 2009 Index: 100 98 96 2010 2011 2012 2013 2014 2015 2016 2017
Looking at CWD volumes tells us about throughput rather than productivity. There are various ways of measuring productivity using CWD output: per FTE, per dollar spent, or per total cost of production (expenditure on medical and nursing personnel, clinical supplies, interest, depreciation and capital charge). Any measure will provide an incomplete and imperfect picture of productivity: we will not capture non-hospital activity or non-surgical activity within hospitals; and we are not able to exclude inputs that relate to non-CWD activity. It also tells us nothing about the quality of outcomes. Nevertheless, it is probably the best currently available measure of productivity in the New Zealand health sector. Using the measure of CWDs per total cost of production, Canterbury has been around the middle of the pack in each of the last seven years. In 2015, it ranked thirteenth of nineteen DHBs.3
3 We exclude West Coast from this analysis because of its particular service model. T2017/901 : Update on Canterbury DHB Financial Management Page 16
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Annex B: PwC Review Forecast
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Annex C: Letter from Acting Chair CDHB to Treasury
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