There is a compelling case for reforming the way New Zealand’s district health boards (DHBs) are funded starting with two relatively low cost technical measures. DHBs are important because they are responsible for both community and hospital healthcare – both their planning and funding. Consequently around three-quarters of government health spending goes to DHBs.
While the Heather Simpson review of the health and disability system touched on funding it was not a feature of its final report. Providing that it doesn’t fall down the Simpson trapdoor of massively overhauling health system structures thereby distracting its focus from what really matters, the Government should give funding reform immediate and high priority.
There are longer-term funding reforms which the Government needs to pursue. One is the level of funding and another is workforce empowerment. Both are briefly discussed below. Other examples not discussed include incentivising clinically developed and led health pathways between community and hospital care, pioneered by Canterbury DHB, which can significant reduce costs by bending the curve of acute patient demand on hospitals and, by better locality planning, help address external social determinants of health which drive much of health demand and cost.
There is no doubt that the health system is underfunded. The cumulative effects of the previous National-led government of ‘light austerity’ over its nine years in office had a severe impact on the systems, particularly workforce capacity and infrastructure.
It was not until the third budget of the previous Labour led coalition government that health funding significantly improved in real terms. But one good increase following two mediocre years fall well short of addressing eight previous years of ‘light austerity.’
The difficulty is that we don’t have an empirical basis for determining how much governments should be funding DHBs. All we have to go on is historical data. This leads onto the second longer-term reform –empowering the workforce, especially health professionals.
Back in 2009 the DHBs and the Association of Salaried Medical Specialists jointly agreed that by investing in the medical specialist workforce in order to create sufficient capacity for specialists to have time to include, as part of their routine duties and responsibilities, involvement in a wide range of system improvements that would have significantly improved DHBs financial performance. But an initially interested Minister of Health Tony Ryall got cold feet leading the DHBs to renege on the agreement. This was a lost opportunity but it did highlight the potential of empowerment.
Empowering DHBs wider health professional workforce by increasing both capacity and focus would improve the quality and accessibility of healthcare, DHB financial performance, and provide a more informed basis for determining what the level of funding for DHBs should be. But this requires both political will and time.
There are, however, more immediate technical reforms that could be undertaken to improve DHB funding. This is in the context that DHBs overall are financially competent and responsible despite both successive National and Labour led governments blaming them for increasing deficits largely due to factors beyond the control of DHBs.
Ironically the DHB singled out for most attack for its financial performance by the Ministry of Health (Canterbury) has for several years been recognised by the Audit Office as one of the best financially performing DHBs. But this didn’t stop the Ministry from using Crown Monitor Lester Levy, a new politically appointed board Chair, and Ernst & Young Consulting to undertake a hatchet job on CDHB’s senior management team: https://democracyproject.nz/2021/02/09/ian-powell-when-business-consultants-are-commissioned-for-hatchet-jobs/.
The ability of the 20 DHBs to ensure technical efficiency when under severe financial pressure is instructive. The Productivity Commission reviewed this for the period 2011-18 and noted that:
The results show that the majority of New Zealand DHBs performed exceptionally well in short-run relative to the equilibrium level of technical efficiency in the sector. The findings of this study disclose the fact that New Zealand DHBs suffer from significant long-run technical inefficiencies due to high adjustment costs resulting from capacity constraints and lack of adequate clinical infrastructure.
When considering the funding of DHBs there is a temptation to give the Population Based Funding formula (PBF) a serve. PBF funds the annual operational expenses of DHBs. It is based on Census population data that is then adjusted by qualifiers such as tertiary services, rurality and ethnicity. While the criteria might need some minor adjustment it is a good system that is often let down by lack of transparency over its application and unreliable Census data.
But PBF is ill-suited for funding natural disasters. Following the devastating Christchurch earthquake in 2012, CDHB commissioned the Martin Jenkins consultancy to advise on how best to fund the recovery. Martin Jenkins advised that PBF was not designed to fund the necessary operational recovery created by the devastation.
Consequently, rather than through debt management, it recommended that it be taken out of PBF and a new specially designed methodology be developed in recognition of the extreme circumstances. CDHB endorsed this recommendation but then Health Minister Ryall rejected it opting for debt management instead.
This proved to be a fatal decision. Had Ryall accepted this advice then, because of its overall good operational financial performance, most likely CDHB would never have had incurred the deficits that its senior management team was subsequently and viciously scapegoated for.
Ironically Canterbury University facing a similar situation as CDHB received a different government response. Tertiary Education Minister Stephen Joyce agreed that the standard formula for funding universities was ill-suited and agreed that a new specially designed formula should be developed.
Looking ahead the lesson to be taken from this experience is that funding responses to natural disasters should not be by debt management through annual operational expenses. Work needs to be undertaken on how best to avoid this through specifically designed and targeted funding methodologies in anticipation of future natural disasters including pandemics as or more deadly than Covid-19.
Major capital works
Major capital works (hospital rebuilds and facilities) is a big contributor to DHB deficits through depreciation and capital charges being paid out of operational expenses. Good work initiated by former Health Minister David Clark has identified that many public hospitals and facilities are in a poor state. Much expensive construction is therefore required.
The Government sets an annual capital charge on major capital works funding which is now 5% (until recently it was 6%) around five times more than current interest rates. DHBs undertaking approved major capital works have to pay this punitive and unnecessary charge from their annual operational expenses as well as having added the accounting impact of depreciation. No less than the Auditor-General has concluded that there is no convincing justification for the capital charge.
To put it simply, those DHBs undertaking hospital construction have much greater annual operational costs than those that don’t and therefor greater deficits. Canterbury has gone through hell because of this. Other DHBs like Southern, Nelson Marlborough and Northland (and others behind them) will follow unless there is a rethink.
We need a different way of funding major capital works, including national risk pooling, that doesn’t impact on operational expenses and therefore debt beginning by getting rid of the corrosive capital charge.
Technical reforms doable
Reforming the funding of DHBs by ensuring that the cost of national disasters and major capital works aren’t funded out of annual operational expenses and therefore driving deficits that DHBs then get judged by is doable. There are complexities but primarily it is a technical exercise. Reforming the PBF to make it cover such huge less frequent variables would be more complex.
Doing nothing would mean that the country’s national health system leadership, political and bureaucratic, is in a very poor state.