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.LONGER-TERM REFORMS
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.Funding level
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.Workforce empowerment
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.TECHNICAL REFORMS
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.Natural disasters
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.