Security Classification: In-Confidence

Database number: 20170647 Security classification: In-Confidence File number: AD62-14-2017 Action required by: Routine District Health Board Sector Financial Performance for year to date 31 March 2017

To: Hon Dr Jonathan Coleman, Minister of Health

1. Purpose To advise the Minister:  the year to date financial results of the District Health Board (DHB) sector as at 31 March 2017

 the actions the Ministry of Health (the Ministry) is undertaking to address financial issues with DHBs’ whose results are unfavourable.

2. Key points 1. DHB financial results for the year to date 31 March 2017 show a sector wide unfavourable variance to budget of $34 million for the first nine months of the financial year.

2. Seven DHBs achieved a breakeven (under $0.2 million unfavourable to budget) or better result to budget at 31 March 2017.

3. In the previous year, as at 31 March 2016 eleven DHBs had results that were unfavourable to budget and the sector result was $60 million unfavourable to budget.

4. The sector’s unfavourable variance to budget of $34 million is made up of unfavourable variances including total personnel costs, outsourced services costs and clinical supplies costs offset by favourable variances for revenue, infrastructure costs and payments to other providers.

5. Capital & Coast DHB annual plan is still being reviewed by Treasury, but we are expecting this review to be completed shortly and advice sent to the joint Ministers.

6. The sector year end result forecast as at 31 March 2017 was a $90 million deficit being $31 million unfavourable to the targeted budgeted year end result of $59 million deficit.

7. The Ministry continues to closely monitor DHBs with unfavourable financial results and/or unfavourable trends and is working with them to improve financial performance. The Ministry met with Lakes, Tairawhiti, Hutt Valley, MidCentral and Waikato DHBs in April 2017.

Contacts: Sam Kunowski, Group Manager, System Outcomes, Service Commissioning 021 681 902

David Atkin, Manager, Monitoring, System Outcomes, Service Commissioning 027 475 3652 Database number: 20170647 Security classification: In-Confidence

8. The Director, Service Commissioning has contacted the Chairs and Chief Executives of the DHBs with the most adverse financial performance and/or issues with elective performance to request improvements prior to year end.

9. Overall year to date average accrued FTEs were 478 below budget.

10. Capital expenditure for the year to date was $146 million below budgeted levels with actual expenditure of $464 million against budgeted expenditure of $610 million.

Recommendations The Ministry recommends that you: a) Refer this report to the Minister of Finance for his information Yes / No b) Note the Health Report and associated schedules are copied to the Treasury (State Sector Performance Branch), DHB Chairs and DHB Chief Executives c) Note the detailed schedules associated with this report are copied to DHB Chief Financial Officers who utilise the information to analyse their performance and benchmark their DHB against the sector d) Note the Health Report and associated schedules are published on the Ministry of Health website.

Jill Lane Minister’s signature Director Service Commissioning Date:

of 7 Database number: 20170647 Security classification: In-Confidence

District Health Board Sector Financial Performance for year to date 31 March 2017

Table 1 Full Year to Date Previous Year Year to % Actual Budget Variance Date Variance Actual Budget1 $M $M $M $M $M

TOTAL REVENUE 11,585 11,579 6 0.0% 11,150 15,452

Personnel Costs (4,382) (4,392) 10 0.2% (4,223) (5,887) Outsourced Personnel Costs (154) (94) (60) (63.5%) (129) (125) Total Personnel Costs (4,536) (4,486) (50) (1.1%) (4,352) (6,013) Outsourced Services (345) (331) (15) (4.5%) (325) (443) Clinical Supplies (1,027) (998) (29) (2.9%) (1,006) (1,349) Infrastructure/Other Supplies (1,055) (1,060) 5 0.5% (1,011) (1,409) Total Operating Costs (6,963) (6,875) (88) (1.3%) (6,694) (9,214)

Personal Health (3,162) (3,172) 10 0.3% (3,060) (4,235) Mental Health (326) (349) 22 6.4% (329) (465) Public Health (22) (22) (0) (2.2%) (19) (29) Disability Support Services (1,125) (1,140) 16 1.4% (1,077) (1,521) Maori Health (34) (35) 1 2.8% (32) (47) Total Payments to Other Providers (4,669) (4,718) 48 1.0% (4,517) (6,296)

TOTAL EXPENDITURE (11,633) (11,593) (40) (0.3%) (11,211) (15,510) NET RESULT (48) (13) (34) (258.2%) (61) (59) Average Accrued FTEs year to date 62,366 62,844 478 0.8% 60,985 62,959

1. Table 1 above shows that the sector’s unfavourable variance to budget of $34 million is made up of unfavourable variances including total personnel costs, outsourced services costs and clinical supplies costs offset by favourable variances for revenue, infrastructure costs and payments to other providers.

2. The unfavourable variance in total personnel costs of $50 million ($36 million unfavourable in February 2017) was driven by seventeen DHBs having unfavourable variances for total personnel costs with the following two DHBs having the largest variances: Table 2 DHB Variance Mar Variance Feb Change Auckland ($8.4M) ($7.2M) -$1.2M Waikato ($14.2M) ($14.1M) -$0.1M

3. Auckland DHB reported personnel costs were higher than budget mainly driven by Bureau Nursing costs being higher than budgeted. Waikato DHB reported that the unfavourable total personnel

1 The budgeted year-end result of $59 million deficit noted above is a preliminary one subject to the approval of Capital & Coast DHB Annual Plan.

costs were mainly driven by nursing budgeted vacancy savings not being achieved and nursing annual leave movement running unfavourable, higher than planned use of locums within medical personnel to cover vacancies and higher than planned use of contractors.

4. Clinical supplies costs were unfavourable to budget by $29 million ($19 million unfavourable in February 2017). Eighteen DHBs are unfavourable to budget with the following three DHBs having the largest variances: Table 3 DHB Variance Mar Variance Feb Change Auckland ($7.4M) ($4.4M) -$3.0M Hawke’s Bay ($4.7M) ($4.0M) -$0.7M Waitemata ($4.0M) ($3.1M) -$0.9M

5. Auckland DHB reported the unfavourable clinical supplies costs were mainly driven by high transplant activity with high drug and consumables costs, cardiology and cardiothoracic patients with high blood costs and target savings not being achieved. Hawke’s Bay and Waitemata DHBs’ reported its unfavourable clinical supplies costs were driven in part by unmet savings.

6. Seven DHBs achieved a breakeven (under $0.2 million unfavourable to budget) or better result to budget at 31 March 2017. Table 4 Unfavourable Target Year To Date /favourable to Variance 2016/17 Budgeted Forecast YE Result budget - Mar change in Plan Result result as at DHB 2016/17 2017 Mar 2017 Approved 2016/17 Mar 2017

Auckland DHB $5.386M ($6.446M) ($0.165M) Yes $4.500M $3.302M Bay of Plenty DHB $0.021M ($0.575M) ($0.130M) Yes $3.100M Breakeven Canterbury DHB ($32.677M) ($8.823M) ($3.466M) Yes ($38.500M) ($45.227M) Capital & Coast DHB ($15.345M) $1.077M $1.305M No ($28.000M) ($28.000M) Counties Manukau DHB $5.755M $0.072M ($0.140M) Yes $4.500M $4.514M Hawke’s Bay DHB $0.286M ($1.782M) ($0.603M) Yes $4.500M $4.500M Hutt Valley DHB ($3.186M) ($1.181M) ($1.007M) Yes ($2.500M) ($3.575M) Lakes DHB ($2.122M) ($2.860M) ($0.969M) Yes $1.654M ($1.959M) MidCentral DHB $0.578M ($1.035M) $0.034M Yes $1.488M $2.000M Nelson Marlborough DHB $2.491M ($0.550M) ($0.209M) Yes $4.030M $3.200M Northland DHB ($0.384M) ($0.869M) ($0.816M) Yes $2.000M ($0.753M) South Canterbury DHB $0.524M ($0.677M) ($0.584M) Yes $1.655M $0.440M Southern DHB ($12.299M) $1.621M ($0.232M) Yes ($22.000M) ($21.954M) Tairawhiti DHB ($3.646M) ($4.715M) ($1.248M) Yes $0.866M ($4.725M) Taranaki DHB $0.026M $0.490M ($0.360M) Yes ($2.000M) ($2.000M) Waikato DHB $4.391M ($7.095M) ($2.442M) Yes $4.500M Breakeven Wairarapa DHB ($2.181M) ($0.951M) ($0.379M) Yes ($1.500M) ($2.326M) Waitemata DHB $5.231M $0.090M $0.003M Yes $4.500M $4.664M West Coast DHB ($0.472M) ($0.161M) ($0.072M) Yes ($0.544M) ($0.718M) Whanganui DHB ($0.051M) $0.007M $0.046M Yes ($1.000M) ($1.316M) Total ($47.673M) ($34.363M) ($10.714M) ($58.760M) ($89.932M)

Key: DHB on target DHB displays possible issues DHB report negative results

Note: Capital & Coast DHB’s annual plan is still subject to approval.

Monitoring Intervention Framework (MIF) activities with DHBs 7. Auckland DHB – The DHB is currently $6.4 million unfavourable to budget mainly due to revenue being lower than budget due to lower than planned elective activity and lower than budget interest income. The DHB continues to work with the other Northern Region DHBs on the IDF pricing issue. The Ministry has contacted the DHB to reiterate expectations on returning to budget.

8. Northland DHB - The DHB is currently $0.9 million unfavourable to budget mainly due to acute hospital activity greater than budgeted, weekend operating and outsourcing to meet elective targets and the large growth in medical oncology volumes. The DHB's year end result forecast deteriorated in the month by $0.8 million from a breakeven to a deficit of $0.8 million. The Ministry will be discussing their financial performance and deteriorating year end result with the DHB in May 2017.

9. Bay of Plenty DHB – The DHB is currently $0.6 million unfavourable to budget mainly due to acute demand being higher than planned and planned savings not being achieved. The DHB’s year end result forecast was initially reported as deteriorating in the month by $0.6 million from breakeven to a deficit of $0.6 million, however the DHB has since reversed this. The DHB is confident of achieving a breakeven result for the year but has identified some risks around national projects implementation and the impact of the recent adverse weather event (Cyclone Debbie) that affected the region. The DHB will keep the Ministry appraised of any likely impacts on the year end result caused by Cyclone Debbie.

10. Lakes DHB - The DHB is currently $2.9 million unfavourable to budget mainly due to high use of medical locums and outsourced services to meet elective targets. The DHB's year end result forecast deteriorated in the month by $0.7 million from a $1.3 million deficit to a deficit of $2.0 million. The Ministry met (telecon) with the DHB on 26 April 2017 and discussed their financial performance and deteriorating year end result. The DHB advised that they are actively managing their costs over the last financial quarter but noted that there was risk that their year end result may deteriorate further. The Ministry is currently reviewing the DHB’s MIF status.

11. Tairawhiti DHB - The DHB is currently $4.7 million unfavourable to budget mainly due to nursing personnel costs and outsourced medical personnel costs being higher than budget. The DHB's year end result forecast deteriorated in the month by $0.7 million from a $4.0 million deficit to a deficit of $4.7 million. The Ministry met (telecon) with the DHB on 20 April 2017 and discussed their financial performance and the deteriorating year end result. The DHB is confident that they can deliver a result broadly in line with their current forecast provided that there are no unforeseen issues. The Ministry is currently reviewing the DHB’s MIF status.

12. Waikato DHB - The DHB is currently $7.1 million unfavourable to budget due to a variety of reasons related to nursing costs being unfavourable to budget. The Ministry met (telecon) with the DHB on 27 April 2017 and discussed their financial performance. The DHB is confident that they can deliver a breakeven result but noted that there was risk that their year end result may deteriorate further if issues arise around additional costs to achieve elective targets.

13. Hawke’s Bay DHB - The DHB is currently $1.8 million unfavourable to budget mainly due to events of previous months including RMO strikes and ongoing gastroenteritis outbreak costs. The DHB has recently introduced a cost control programme to allow them to get closer to their original budgeted result.

14. Hutt Valley DHB - The DHB is currently $1.2 million unfavourable to budget mainly due to outsourced nursing to cover vacancies in mental health, outsourced medical to cover SMO vacancies in mental health and surgical and higher than budgeted IDF out flows. The DHB's year

end result forecast deteriorated in the month by $0.4 million from a $3.2 million deficit to a deficit of $3.6 million. The Ministry met with the DHB on 7 April 2017 and discussed their financial performance and the deteriorating year end result. The DHB is confident that they can achieve their current year end result and that they are striving, with the encouragement of the Ministry, to achieve a better result.

15. MidCentral DHB - The DHB is currently $1.0 million unfavourable to budget mainly due to higher than budgeted personnel costs, with medical staffing costs in particular driving expenditure beyond budget especially in the areas of Mental Health and Women’s Health. The DHB has been in line with budget for the past two months and its year end result forecast has improved by $2.0 million from breakeven to a $2.0 million surplus after their revenue banking was approved. The Ministry met with the DHB on 26 April 2017 and encouraged them to further improve to their financial performance and deliver a result better than their current forecast result. The Ministry will continue to monitor the DHB’s financial performance closely prior to reviewing the DHB's MIF status.

16. Wairarapa DHB - The DHB is currently $1.0 million unfavourable to budget mainly due to additional locums to cover medical vacancies and leave, additional orthopaedic work and mental health bed nights unfavourable due to a spikes in September 2016, October 2016, January 2017 and March 2017. The DHB's year end result forecast deteriorated in the month by $0.3 million from a deficit of $2.0 million to a deficit of $2.3 million. The Ministry will be meeting with the DHB in May 2017 to discuss their financial performance and deteriorating year end result.

17. Canterbury DHB – The DHB’s 2016/17 Annual Plan was recently approved by Ministers. The DHB is currently $8.8 million unfavourable to budget mainly due to the RMO industrial action in January 2017, the costs associated with the Kaikoura earthquakes and higher than budgeted mental health costs. The DHB's year end result forecast deteriorated in the month by $2.8 million from a deficit of $42.5 million to a deficit of $45.3 million. We are continuing to correspond with the DHB regarding implementation of the PwC review.

18. Nelson Marlborough DHB - The DHB is currently $0.5 million unfavourable to budget mainly due to higher than budget outsourced optometrist costs and Home Support- IBT spend above budget.

19. South Canterbury DHB - The DHB is currently $0.7 million unfavourable to budget mainly due to higher than budgeted hospital pharmaceuticals, implants & prostheses, DSS Home Support-IBT spend above budget and increased IDF outflows in relation to high cost patients to Canterbury and Capital & Coast DHBs. The DHB's year end result forecast deteriorated in the month by $0.4 million from a surplus of $0.8 million to a surplus of $0.4 million.

Year-end result forecast 20. As at 31 March 2017 the DHBs as a sector are forecasting a year-end deficit result of $90 million. The following DHBs with unfavourable forecasts; Auckland, Northland, Bay of Plenty, Lakes, Tairawhiti, Waikato, Hutt Valley, Wairarapa, Whanganui, Nelson Marlborough and South Canterbury are being addressed as part of the normal monitoring processes. Canterbury DHB is being engaged as part of the PwC review process.

Full time equivalents (FTEs) - Overall year to date average accrued FTEs were 597 below budget

21. All categories of personnel were favourable to budget, apart from Nursing personnel which was unfavourable to budget, as follows: Medical personnel (198 FTEs), Nursing personnel (284 FTEs unfavourable), Allied Health personnel (297 FTEs), Support personnel (66 FTEs) and Management /Administration (201 FTEs).

Capital expenditure for the year to date was $146 million below budgeted levels with actual expenditure of $464 million against budgeted expenditure of $610million

22. Historically the sector has tended to be below budgeted capital expenditure levels driven by delays in project commencement.