Cost-cutting demands at the Canterbury DHB are compared to asking Air NZ to maintain its flight schedule while shedding thousands of jobs. David Williams reports
Two former Canterbury health bosses have spoken publicly for the first time since leaving in a rush of recent resignations, blaming hard-headed officials and an unsupportive board for their departure.
Seven of the Canterbury District Health Board’s (DHB) 11-strong executive team, including chief executive David Meates, have resigned from in an unprecedented blood-letting at the top. They leave amid relentless pressure – from the Health Ministry, Crown monitor Lester Levy, and the board, led by former High Court judge Sir John Hansen – to cut costs.
The crisis has divided board members, and sparked staff protests and an open letter from senior doctors. Last week, hundreds of people formed an honour guard for Meates, showing the respect staff have for their former boss. In the community, people are asking how this happened, and whether it threatens Canterbury’s internationally respected health system.
Ex-chief financial officer Justine White, and colleague Carolyn Gullery, the former planning, funding and decision support executive director, have quit after nine years and 13 years at the health board, respectively. On Monday, White starts her new job, as Auckland DHB’s chief financial officer, while Gullery is in the United Kingdom, working as a specialist health adviser on improvements to the National Health Service.
Both blame the adversarial attitude of the board, and the Health Ministry’s inflexibility, as reasons for quitting. “We couldn’t make a difference anymore,” Gullery says.
White says previous boards would listen, work with the leadership team, and try to understand the background. The attitude of the Hansen-led board, guided by Levy, is to say it understands but remain steadfast in its stated outcome, she says.
“If you’re asking for the impossible, which is to strip more than $90 million out without dropping any services and without dropping any staff, you’re kidding,” she says. “It’s like saying to the executives of Air New Zealand, can you drop your staff by 3000 but, by the way, fly everywhere that you’ve ever flown, on exactly the same schedule.”
Gullery says her resignation was about integrity. “It was getting to the point where we were stuck between an unreasonable request and our clinical teams.”
DHB execs were struggling to get “people” to understand the issues faced in Canterbury, she says. For years, the DHB has battled with Health Ministry officials over the imposition of business-as-usual financial strictures, despite the devastating effects of the 2010 and 2011 earthquakes. Cost savings were also being demanded despite a new $525 million acute services building, known as Hagley, opening more than two years behind schedule, leaving health workers in tired, inefficient and costly-to-maintain buildings.
“None of us enjoy being in deficit, but it’s a constructed deficit driven by depreciation, capital charge and delays to Hagley,” Gullery says. She and White spoke to Newsroom last Friday, the 10-year anniversary of the first big quake to hit the province.
“The underpinning issue of all of this has always been, 10 years ago and in the subsequent months, Canterbury faced the biggest natural disaster that New Zealand has ever faced,” Gullery says. “In fact, it’s the only national disaster on record. And for some reason nobody could get their head around the fact that that might actually make things a little bit different for Canterbury.”
It hasn’t been a pleasant experience, Gullery says, while adding: “Both Justine and I are more concerned about the people we leave behind.”
Hansen respectfully declined to comment. In late August, the DHB chair cancelled a scheduled interview with Newsroom and, at the time, the DHB said he was unavailable for an interview for the foreseeable future.
Despite multiple requests over two days, the Health Ministry refused to provide comments from a named spokesperson. Its anonymised statement can be found at the bottom of this story.
The pace of return to a financial breakeven seems to be the straw that broke the camel’s back – or inflamed the executive exodus, if you like.
A Canterbury DHB operating review, done jointly with the ministry, made recommendations about cost savings. There was apparent agreement about how to get back to financial sustainability, before depreciation and capital charge, White says. Under that plan, it would have taken four years to get to financial zero – two years after Hagley opened.
“All of a sudden, for no discernible reason – in fact, we have never really been told – that plan went from being acceptable to unacceptable,” White says. Last year, Minister Clark rejected the DHB’s annual plan. (He also rejected the plans of Waikato and Counties Manakau DHBs.)
The following month, Clark appointed Levy as Crown monitor. At the end of last year, Clark replaced Canterbury DHB chair John Wood and deputy Sir (Tā) Mark Solomon with appointees Hansen and deputy chair Gabrielle Huria.
The financial screws, already tight, were about to get tighter.
The executive team pitched to its board a 30-month return to balance the books. No, it was told firmly, deficits have to disappear within two years.
Leaked minutes from a behind-closed-doors Canterbury health board meeting in July show the tension over the figures. They also confirm the two-year directive came from Health Minister Chris Hipkins.
In an emailed statement, Hipkins says the Government has provided substantial increases in operational funding to all DHBs, including an increase of $980-million-a-year, or $3.92 billion over four years, in the last Budget.
“Canterbury DHB has received a significant portion of this uplift. As we lift funding for DHBs we have the clear expectation that they set out a clear path back to financial sustainability – we don’t accept that deficits are inevitable.”
However, Hipkins appears to have cooled on the seemingly inflexible two-year target. “We don’t expect every DHB to break even straight away after years of underfunding, but it’s important they demonstrate they are making progress toward this goal and they do so without cutting services.”
With the opening of Hagley, the country’s most expensive hospital building, in November, Canterbury should be celebrating. Instead, it’s in turmoil, and there’s a global search underway for a new chief executive. It’s unclear what, if anything, will change under a new minister, of whatever stripe.
‘You literally cannot do this’
At Canterbury DHB’s July meeting, management characterised a Health Ministry demand for a $90 million deficit within 12 months as “unobtainable”. They questioned the ministry’s figures used to determine it was achievable.
White, the then finance boss, said the ministry’s spreadsheet showed a net deficit was $109 million – a $19 million discrepancy. It also didn’t factor in negotiated, and legally binding, pay increases to staff, or contractually agreed increases for the likes of rest homes, general practitioners, and pharmacies.
(“We said this just doesn’t make sense,” White tells Newsroom. “You literally cannot do this.”)
Levy, a former chair of the Waitematā, Auckland and Counties Manukau DHBs, said at the meeting reconciliation of the ministry’s figures was a discussion about a point of view. “It is management’s responsibility to determine whether they support the plan, and it is unlikely that the plan will get supported through unless it is around $90 million,” Levy said, according to the meeting minutes. “Far too much emphasis is being placed on the reconciliation.”
Gullery explained to board members having Hagley open for two years was crucial to cost savings in the original detailed business case – which was written by consulting firm PWC and signed off by Cabinet. Once the building is open it won’t have to hire 10-to-12 surgical theatres a day in private hospitals. But until Hagley opened, those $25-million-odd outsourcing costs each year, would have to be found from elsewhere.
(Hagley was meant to open in July 2018, but will only take its first patients in November. That’s ironic because the ministry created the Hospital Redevelopment Partnership Group to manage the project because, essentially, it didn’t trust the DHB to do the job.)
“If you sack us all, which does look like the agenda … these problems will not go away.” – Sue Nightingale
The underlying figures have changed markedly.
Gullery told the meeting depreciation was listed in the 2012 business case at $52 million, and now it’s $85 million. Capital charge, meanwhile, levied at 6 percent of Government capital investments, has gone from the budgeted $27 million to $50 million. That’s an unplanned, additional cost of $46 million.
Later in the meeting, Levy said the DHB’s operating model was too costly, and staff’s suggested $145 million deficit wouldn’t be “anywhere near acceptable”. “With all due respect, he did not view the plan as a credible one and did not believe the underlying plan had sufficient mechanics to actually show that it could be done,” the minutes state. He also accused staff of providing critical papers too late and with insufficient detail.
Sue Nightingale, the departing chief medical officer, stood up to Levy. Staff were working 15-hour-days to complete papers on cost savings, and it was making them sick, she said.
“The current adversarial atmosphere is killing us – it is killing our clinical engagement with our staff, and it is killing our collective working with EMT (executive management team),” the minutes said. “Dr Nightingale added that if you sack us all, which does look like the agenda, as you are trying to make us do something impossible, these problems will not go away.”
Meates said the 30-month breakeven plan was credible.
Late in the meeting, Levy said he “did not mean to be incredibly tough” and was just trying to do his job of providing independent advice to the Crown and working with the chair, chief executive and others. “Everyone is working under difficult circumstance and that is understood.”
For all that pressure, the criticism and browbeating, last month the board signed off a $56.9 million cost-savings plan, and a projected deficit of $145 million in 2020/21. Breakeven, before depreciation and capital charge, would happen the following year. The plan has been submitted to the minister.
Services on the chopping block
The consequences of the planned cuts – labelled irresponsible and dangerous by the Public Services Association union – are becoming plain.
Canterbury is hiring fewer graduate nurses, part of a $16.5 million plunge in nursing care spending. Stuff reported another $10.5 million might be saved by axing 200 administrative staff. A new emergency care unit for children won’t be staffed, RNZ reports.
Gullery says an operating policy framework dictates what services DHBs have to provide. There are unavoidable outsourced services like aged residential care, pharmaceuticals, general practice doctors. A DHB must also provide direct services, like emergency departments and elective surgery. In the latter “provider arm”, between 75 and 80 percent of costs are personnel, governed by national agreements.
Efficiencies are possible, Gullery says, but Canterbury DHB already compares well to the rest of the country for operating efficiency. It has already saved millions of dollars by bringing food and laundry services in-house. “We’re left with a very small edge that we can change, and we’ve been doing that over a number of years anyway.”
Some items on the cost-savings list are services Canterbury doesn’t technically need to provide, Gullery says, “but they contribute to our ability to keep people out of the hospital”.
Home-based support will be constrained, Gullery says, as will be the acute demand service – “that’s what keeps 32,000 people out of hospital each year”.
“We didn’t propose cutting it because that would be completely futile, because we’d just end up with those people in hospital. But we did put in a plan to constrain its expenditure.”
Surely, then, a natural consequence of the cost-savings drive is hospitalisation rates at Canterbury – among the best in the country – will rise?
“That’s absolutely the risk,” White says. “Some of the services that we have on that plan, on that list, are services that are there because that’s the value they add.”
That’s also why balancing the books needs to be phased, Gullery says. “Because to get the kind of numbers they’re talking about, then we’d have to cut that stuff entirely – we couldn’t do it.”
Behind the dire financials
Canterbury’s deficit is dire, the biggest of any DHB. In the last financial year, it was provisionally $176 million in the red.
However, there are kernels of good news. The year-end figure was $4.6 million better than budgeted. If it wasn’t for $17.1 million of Covid-19 costs, its operating result would have been $3.6 million in the black. Plus, the Health Ministry forced the DHB to treat money from quake-related insurance payouts as if it was from government coffers, attracting an extra $11.8 million in “capital charge”.
(The ministry maintains a key driver of DHB deficits is “cost growth through workforce growth, managing facilities and clinical supplies and other inflation costs, in particular wages”.)
An accounting explanation is due here, because of the quirks of health funding.
DHBs gets all-in, population-based funding from the Ministry of Health. Out of that they pay for health services, but also depreciation – setting aside money to replace buildings or expensive equipment – and a capital charge, basically a tax on assets levied by the government for financial rigor.
As explained in 2000 by Labour’s then Health Minister Annette King: “The objective of the capital charge is to enable DHBs to appropriately recognise the cost of capital in their investment and financing decisions.”
That’s dandy in normal, steady times, but after an earthquake there are big capital costs for repairs, upgrades and, eventually, new buildings. (Actually, the acute services building and a $215 million revamp of Burwood Hospital, in the city’s east, were planned pre-quake. Canterbury’s request, last year, for a $438 million new facility to replace its dilapidated hospital was rejected by the Capital Investment Committee and Health Ministry, in favour of a $150 million tower, panned by clinical staff as inadequate.)
Ex-finance chief White says depreciation’s doubled since 2014, and the capital charge has gone sky high as well. “The minute you throw open the doors to a new building, then essentially you’ve got to find a 6 percent saving somewhere else to be able to pay a capital charge for it.”
$50m better off
Gullery says some North Island DHBs pay $50 million less depreciation a year than Canterbury. “So they have a similar population to us but they’ve got $50 million more to spend on that population. Is that fair?”
The earthquakes in 2010 and 2011 damaged more than 200 Canterbury health buildings, and repairs were needed to more than 14,000 rooms. The maximum claim the DHB could make on its insurance policy, held nationally, was $320 million.
How costly were the quakes? White: “We stopped counting the damage at $540-odd-million.”
After emergency repairs, Canterbury remitted $290 million of insurance money back to the ministry in 2014, and called on it every year since. Despite a request from the DHB, the ministry refuses to exempt the insurance funds, if used as equity funding, from the capital charge.
In a note to staff in his final week, outgoing chief executive Meates put earthquake-related depreciation costs at $35 million a year, earthquake or insurance related capital costs at $23 million a year, and transitional service costs and inefficiencies (like outsourcing surgery and having to over-staff sub-standard wards) of about $60 million annually because of delays to Hagley.
At the same time, Meates said Canterbury’s been short-changed with its population-based funding. (The ministry says the funding formula is fair and changes to population data are updated each year.)
Its national share has dropped from 11.1 percent in 2014/15 to 10.7 percent this financial year, despite the province’s population increasing from 515,000 people to 578,000 over that period. Its funding has risen 18.6 percent but other large DHBs enjoyed a 26.9 percent increase. That’s worth $60 million.
Tot all of that up, Meates says, and it’s about $180 million – the size of the deficit. The salt in the wound is the two-year delay to the opening of Hagley. “FACT: If Hagley, the Acute Services Building, had been delivered on time in 2018, we would be in a breakeven position now,” Meates’ August 31 note to staff said.
(Another weight in the DHB’s accounts is $66 million earmarked to clean up staff payments under the Holidays Act.)
In June, a nationwide stocktake revealed the poor state of the country’s hospitals – with a potential repair or rebuild bill of $14 billion over the next decade.
Two years ago, a report said Canterbury DHB was operating eight buildings deemed earthquake-prone, and occupied 14 buildings with structural weaknesses. Many of the problems are more fundamental.
Gullery: “If you think about Parkside or Riverside [towers at Christchurch Hospital], it doesn’t have enough toilets, there’s no such thing as an ensuite, you’ve got patients in six-bedded rooms and a lot of them are over the age of 78. And they’re frail and they’re unwell, and every time they need to go to the toilet, somebody needs to go with them. It just creates this huge burden in terms of staffing.
“The new hospital design we’ve got with Hagley, we’ve got ensuites so people are more able to support themselves, the nurses have got line of sight – they can actually see everybody who’s in a bed, which they can’t in our current facilities. All of these things just make it possible to run a more efficient, more effective and better hospital.”
However, because of the capital charge, a new building, like the planned $1.4 billion Dunedin Hospital, could send debt-ridden DHBs over the edge. “I don’t know how they’re going to afford it, frankly,” Gullery says of the Southern DHB.
Gullery and White agree it would be better to separate DHB funding for big capital projects, like buildings, and operating funding for health services, including big bits of kit, like MRI and X-ray machines. “We shouldn’t be trying to manage depreciation and capital charge and building-related costs out of the money that we have to run the business,” Gullery says.
Essentially, decisions on buildings are out of DHB hands, she says.
“We can’t decide when they’re going to be replaced, that’s a Government decision. We can’t decide how long we’re going to have to have them, that’s a Government decision. I think the whole thing gets muddied because we’re bringing two things together, whereas in fact if you want the system to become efficient, then let us focus on [health services] and take the other piece away.”
Treasury is reviewing capital charges. As an interim measure, then Health Minister David Clark announced last year the Government would directly fund capital charges on new buildings – but DHBs will be penalised for a deficit.
“So, we still end up carrying the load,” Gullery says.
It’s not just Canterbury under pressure to return to breakeven – all but one DHB is in deficit.
But Canterbury won’t get special treatment because of the quakes. (The ministry posits the quakes aren’t “the sole or main driver” of its deficit.) In fact, its pleas for help have been met by a series of reviews.
In his note to staff last month, Meates said: “In recent years, four external reviews of our finances have concluded that when compared with other DHBs we are operationally efficient.”
“There’s an amazing number of very passionate people who work all across the system. We’ve been privileged to be a part of that.” – Justine White
Some questions are too sensitive for Gullery and White.
They won’t say if they’re surprised this has happened under a Labour Government. There’s silence when they’re asked if it’s galling to watch the Government splash Covid-19 stimulus cash around the country, and spend wads of money around Christchurch on things like new sports stadiums, when they’re having to cut health services.
Gullery’s message to the people of Canterbury is the DHB is high performing, and it delivers high-quality services to its population which have improved over time. “What we’d really like to see is that the system keeps on working as a whole system, and that this particular moment in time doesn’t undo all of the good work that’s been done.”
Canterbury people should be proud of its health system, White says. “And I’d hate to see it dismantled. I’d hate to see it destroyed for what is effectively the paper-type deficit.
“How do you make sure that the people and the population get the service that they deserve and comparable to the rest of the country, that isn’t impacted and suffocated by the fact that we’ve had earthquakes which have had these financial outcomes?”
It seems appropriate we were speaking last Friday, 10 years to the day after the province’s first big quake. It has been through a lot since. Canterbury’s 10,000-odd DHB workers, and the 10,000 contracted workers in the community, have seen the province through the quakes, including the 2016 Kaikōura earthquake, the Port Hills fire, floods, last year’s terrorist attack, and, now, coronavirus.
“They do a fantastic job every day,” Gullery says. “That was what we saw our job was – to make sure that they could do their job.”
White adds: “There’s an amazing number of very passionate people who work all across the system. We’ve been privileged to be a part of that. It has been a fantastic experience working with some really capable people.”
FULL EMAILED STATEMENT FROM THE MINISTRY OF HEALTH
This should be attributed to a MoH spokesperson:
The Ministry works closely with all District Health Boards to regularly review their overall performance including service delivery, financial and operational performance and sustainability plans.
However, financial performance is only part of the overall performance of DHBs and outcomes of care being delivered to the local population. DHB financial performance has a range of drivers.
These include population continuing to grow and age, with more complex health needs, and an ability to provide more advanced medical care and treatments. Overall New Zealand’s health system has worked hard to keep up with these demands, and DHBs are working hard to ensure they have a path to financial sustainability which is attainable.
We are also continuing to work with Canterbury DHB to ensure their plan to get back to break-even is an acceptable one – we have been working with Canterbury DHB on this for many months and before the new board was appointed.
It is in everyone’s interests to ensure public healthcare services are delivered sustainability and equitably.
A key driver of DHB deficits is cost growth through workforce growth, managing facilities and clinical supplies and other inflation costs, in particular wages. There are also operational factors, including how well DHBs are realising opportunities for efficient and productive service models (in both hospital and community settings), and how they are managing workforce growth alongside activity growth. These drivers are common to all DHBs, including Canterbury DHB. High quality service delivery can exist alongside sound fiscal management and is the joint role for DHB Boards and DHB management teams.
Funding levels are also an important factor, and the Government has made steps to increase the levels of funding. The Population Based Funding Formula is used to fairly distribute the share of government funding amongst DHBs and changes to population data is updated each year. The Ministry has a standard approach to manage funding and any variations as this gives DHBs a level of certainty on future funding levels, enabling them to plan ahead to ensure they can continue to deliver sustainable high quality services to their local communities.
Canterbury DHB’s deficit position has also been impacted by capital infrastructure, with the redevelopment building works occurring over recent years. This is acknowledged, but is not the sole or main driver of the deficit position. The Minister’s Office has been advised of the Ministry’s view on this.