Michael Gousmett has been investigating the intricacies of district health board financial accounts for 15 years, so it’s no surprise when he reaches across his desk and grabs the document he says gave rise to so-called capital charges.
“Where is it? Here we go,” says the independent researcher from Rangiora, just north of Christchurch, who’s an adjunct fellow at University of Canterbury’s School of Humanities and Creative Arts.
The document, penned by Treasury officials, is entitled “Government Management Brief to the Incoming Government 1987, Volume I” – a precursor to the market-oriented health reforms of the 1990s.
Dr Gousmett, who has a PhD in philosophy, reads a particular passage: “It would be preferable to show the cost of using assets as depreciation over the life of the assets, and to recognise the opportunity cost of the funds used to purchase them.”
It’s from that last bit, the opportunity cost, the capital charge concept emerged, he says.
As Gousmett explains it, if a new hospital is built with public funds, because those millions of dollars aren’t being applied elsewhere, the DHB is essentially taxed on the net value of its assets. (In 2019, then Health Minister David Clark’s take was DHBs were required to pay back 6 percent of the cost of any Government capital investment. The rate has now dropped to 5 percent. The capital charge “is intended to provide DHBs with the incentive to invest and manage capital assets wisely”, Clark said.)
The concept shot to national prominence last year during Canterbury DHB’s crisis in which seven of its executive team, including chief executive David Meates, resigned because of huge pressure from the board, and Crown monitor Lester Levy, to cut its deficit.
However, Gousmett maintains the capital charge is a nonsense – a charge on something already paid for by taxpayers. A tax on a tax. Plus, at a rate of 5 percent it’s 20 times the Reserve Bank’s official cash rate of 0.25 percent. “Where can you get 5 percent on your money today?”
The capital charge is important context for potential changes to health system funding, as new Health Minister Andrew Little directs the response to Heather Simpson’s review. The review suggested, among other things, DHBs be roughly halved from 20, and a new agency with the working name Health NZ be established, alongside a new Māori Health Authority.
Simpson’s report mentioned capital charges. Following a major hospital redevelopment, the charges, when combined with depreciation requirements, can force DHBs into deficit, the report said. It noted some boards were diverting “lumpy” depreciation expenses, meant to be squirreled away for future upgrades, to operating expenditure. Simpson didn’t suggest any concrete changes but said Health NZ could manage the financial volatility with a “balanced solution”.
“The system they work in is completely broken.”
– Robin Gauld
Don’t be distracted by dry talk of accounting principles; the dollars are important. Given DHBs are primarily funded by population-based funding – a formula based on population and demographic factors such as age, sex, ethnicity and social deprivation – every dollar spent on something else, like building repairs and maintenance, is less money for health services and supplies.
Professor Robin Gauld, the director of University of Otago’s Centre for Health Systems and Technology, says healthcare is full of dedicated, caring medical professionals, managers, and leaders whose work needs to be acknowledged and respected. “But the system they work in is completely broken.”
You could say the health system itself is showing signs of sickness, including the financial stress of DHBs, only one of which made a surplus in 2019. (“Deficit” is shorthand for underfunding, Gauld told Newsroom last year.)
That same year, a report by the Association of Salaried Medical Specialists warned of a tipping point in public hospitals, which were “increasingly unsafe”. It painted a picture of over-capacity hospitals, and stressed, over-worked staff.
Bricks and mortar are also crumbling. Last year’s national stocktake of hospital buildings put the 10-year rebuild or repair bill at $14 billion.
Patients are slipping through the cracks and charity hospitals have sprung up to meet the need in Christchurch and Auckland, with another being built in Invercargill. By November 2018, after 11 years of operation, Christchurch’s charity hospital, which provides free elective day surgery, outpatient clinics, dentistry and counselling, had clocked up more than 18,000 patient visits.
OECD data shows New Zealand’s per-capita health spending is just under the average for developed countries, behind countries like the United States, Canada, Australia and the United Kingdom.
An OECD overview of this country’s health policy two years earlier highlighted concerning health inequities, in which people – particularly those in lower socio-economic categories, Māori and Pasifika – denied treatment in the public system, can’t afford to pay for it privately, leading to unmet need.
Simpson’s report said our health system is under “serious stress”. Recommended improvements include hospitals and GPs working more closely, and an acceleration of our plodding take-up of digital technology.
Patients just want timely access to high-quality services, Gauld says, but they’ve been let down appallingly by the public healthcare system. “It’s an absolute shambles.”
“If you’ve got something like gallstones, in some parts of country you might get them removed in the public sector. In other parts of the country there is absolutely no way on Earth that’s ever going to happen.”
– Dr Robin Gauld
DHBs were created in 2001 after a failed experiment – resulting in avoidable patient deaths and financial deficits – under regional health authorities and Crown health enterprises.
Have we reached a similar point with DHBs?
Newsroom’s recent reporting highlighted the harm caused by the Southern DHB’s colonoscopy service, which failed to accept some referrals from specialists who assessed patients with symptoms of bowel cancer. That has led to at least one premature death, specialists told case auditors. There could be others.
According to Gousmett, the independent researcher, the combined raw deficits of DHBs ballooned to $1.16 billion in 2019, compared to $66 million in 2015.
Minister Little has a big job ahead.
Beyond the health system’s structural problems – “currently we have 20 DHBs that, effectively, are silos” – Gauld says the inequity highlighted by the OECD is a huge problem, and one not adequately addressed by the Simpson review, in his view. It creates a dual healthcare system, he says, with access restricted, in some cases, to those who can afford insurance or procedures at private hospitals.
A terrible quirk is the private system is heavily supported by the taxpayer, he says, creating a double inequity.
“There’s public funding that supports the private system. The private system then gives access to the better-off. And the worse-off get worse access in the public system as a result.”
Every day, Gauld says, people in pain, or experiencing some kind of suffering, go to their GP for help. They might see their doctor several times – paying each time, taking time off work, waiting for their appointment – before they are referred for specialist treatment. Then there’s not any interaction until the hospital makes contact.
The experience will vary up and down country, and by condition, but often free treatment is denied.
“If you’ve got something like gallstones [painful and jaundice-causing hardened deposits in the gall bladder], in some parts of country you might get them removed in the public sector,” Gauld says. “In other parts of the country there is absolutely no way on Earth that’s ever going to happen.
“So you’re just going to suffer. You’ll be given morphine by the public hospital to take whenever you get a gallstone attack, and they’ll keep sending you away with morphine.”
Tonsils are another case of a healthcare postcode lottery. In some areas, treatment will be offered, Gauld says, while elsewhere the patient will be given painkillers and sent on their way.
That is, unless they can afford private treatment – “to be treated by the very same specialists who you can’t see in the public sector”.
Healthcare’s absurdities are perhaps most easily seen when comparing the sector to, say, taking a flight.
Gauld describes the health “passenger” arriving at the “airport”, having obtained a piece of paper giving them the right to be there. Their bags are put to one side. Eventually, they’re told to stand beside the plane because it’s going to fly today. Only when they’re there will they be told if they’ve got a seat.
(The narrative could be stretched further, with those in business class already aboard the plane, having paid to secure their seat.)
“We would not spend $5 million on an experiment to reduce DHBs, which commentators agree will likely fail. ”
– Dr Shane Reti
Something Gauld’s been mulling recently is an analogy involving the education system.
He imagines an ophthalmologist – an eye doctor – contacting the high school because their daughter is being bullied. She’s falling behind academically and her attendance is patchy.
A school administrator responds, saying the teacher is busy and an appointment isn’t possible for eight months, because their daughter isn’t a high priority.
If they have the means, however, they could meet the teacher privately, down the road, the following week. But they would have to hand over a big chunk of their income. For the ophthalmologist, who earns $1 million a year, a relative figure would be in the hundreds of thousands of dollars.
(“It’s like a person who’s on $45,000 a year being told it’s going to be $10,000 to get your gallstones removed, or twenty-five-grand to get your hip joint done.”)
A few extra teaching sessions with their daughter will cost more, but there are no guarantees of success. What could be arranged, however, is for the teacher could spend an entire day with her – “about the time to do a hip joint”.
Gauld says: “I can’t imagine the education system working like that. I cannot see the public accepting an education system that works that way, and yet we’ve got a healthcare system that we’ve come to just tolerate working in that way.”
You can almost hear him shaking his head. “The older I get the more upset I’m getting about it.”
Rolling up his sleeves
Minister Little says via email: “By the end of the year I expect that Government will have made decisions about the overall structure of the new health system, and begin the process to implement this.
Before last year’s election, Stephen McKernan, EY’s head of government and public sector practice and a former director-general of health, was appointed to lead the health transition unit.
In an election debate in Christchurch, National Party leader Judith Collins said it was “pretty obvious” DHBs needed more money and government may have to excuse DHB debt.
National’s health spokesman Dr Shane Reti says via email a discussion about funding health should cover outputs and outcomes, and an expectation that services are efficient and effective. “National would reintroduce health targets, both clinical and fiscal.”
“Accountability agreements” would be sought from DHB chairs, Reti says, “setting clear expectations for them to live within their means”.
(Last year, Chris Hipkins told Newsroom: “The Government doesn’t accept that DHB deficits are inevitable and I’ve made it clear to DHB chairs they must have a credible plan to return to financial sustainability.”
Parliamentary questions reveal Little hasn’t seen a business case for a reduction in DHBs, and the initial budget for McKernan’s transition unit is $5 million.
Reti: “We would not spend $5 million on an experiment to reduce DHBs, which commentators agree will likely fail.
National does agree, however, with the Simpson report’s contention the population-based funding formula should be better weighted – “according to need and relevant ethnicity weightings”, the report says.
University of Otago’s Robin Gauld, meanwhile, has low expectations of the looming health reforms.
“The expectation should by high because I think there is an opportunity to really shift the foundations of the health system, but I don’t think the Government’s going to take that opportunity.”
Historically, that’s not what governments have done, he laments.
“The way in which you and I interact with the healthcare system, it’s … from the dark ages, and it’s not going to change until you start to have a different conversation than the one we’re having at the moment, which is around the hospital being run in the same way it’s always been run, and then primary care being run by GPs in private practice, and they just don’t interact.”
– Dr Robin Gauld
If Simpson’s recommendations are followed it’ll lead to a reinforcement of the current DHB system, Gauld says – a series of regions that are different from each other, albeit with hospitals working more closely with primary healthcare providers. What he would have preferred is a national chain of public hospitals run by a group of managers – “not CEOs but just general managers”.
“So you might have 10 or 15 of them who work as a team, and they report centrally, maybe to an overarching CEO of the public hospital system. But their job is to work as a team and to be consistent in everything that they do.”
Funding should be taken off the DHBs and given to a clinical alliance, Gauld says, with some services taken out of hospitals and put into the community. “So you’ve got your hospital specialists, GPs, nurses, ambulatory services, iwi, Pasifika, mental health services, and so forth, sitting around table, making clinically led decisions about what services should be provided where.”
Patients would be at the centre of the revised system, Gauld says. Isn’t that the whole point of healthcare? Not right now, he says – the health system is letting us down, badly.
“The way in which you and I interact with the healthcare system, it’s … from the dark ages, and it’s not going to change until you start to have a different conversation than the one we’re having at the moment, which is around the hospital being run in the same way it’s always been run, and then primary care being run by GPs in private practice, and they just don’t interact.”
Back to the capital charge
Ministry of Health chief financial officer Fergus Welsh says via email DHBs are required to pay, every six months, a capital charge on the Crown’s capital (equity) investment in them. The charge, which also applies to operational surpluses, sits at 5 percent per annum.
In mid-2019, the Government announced it would cover capital charges for DHBs of up to $18 million a year for new building projects. There was a big, sticky caveat, though – DHBs in deficit would be penalised. Last year, of course, that was every DHB but Lakes.
“What’s the point?” Rangiora researcher Gousmett asks. “The whole thing is bizarre.”
By his calculations, having gone through the annual reports of the 20 DHBs, deficits totalled $796 million in 2019. Without financial adjustments the figure was $1.16 billion. The DHBs with the biggest deficits were Auckland, Canterbury, Counties Manukau, and Waitematā.
DHBs’ capital charges that year totted up to $326 million, Gousmett says. That’s pretty close to the Health Ministry’s figure in its annual accounts of $334 million.
Gousmett names his bogeyman: “The major contributor to those deficits is, of course, the capital charge.”
Treasury says the capital charge applies to public service agencies, like Treasury itself, which paid $1.4 million last year, non-public service departments, like Police ($49.5 million), offices of Parliament, like Office of the Ombudsman ($406,000), as well as seven other Crown entities, such as NZ Trade and Enterprise ($2.4 million). According to Treasury’s latest annual report, the Government received $2.05 billion in capital charges in the last financial year. A further $305 million was paid to the Health Ministry by DHBs.
With that much money at stake, it would take a bold minister to scrap it. But consider this: why are health boards required to pay the charge, to be saddled with such financial strictures, but universities are not? Gousmett also complains about politicians setting aside $1 billion for capital spending on KiwiRail without batting an eyelid.
Little says KiwiRail as a state-owned enterprise is required to pay dividends (none were paid in 2020) and interest on capital provided. According to KiwiRail’s annual report, Crown equity funding in 2020 was $419 million, with capital grants from government entities (including councils) of $196 million.
Gousmett says population-based funding consistently underfunds some DHBs, while over-funding others. It’s just logic, then, that if a DHB is underfunded for its services, a deficit is inevitable – even before capital charges and depreciation.
The solution? Gousmett reckons health boards need to split their operational and property management arms. His analysis is Canterbury DHB’s “operating activities” – delivering healthcare services – since its inception have made a surplus, while investing and financing activities have made huge deficits.
Canterbury DHB has paid roughly $350 million in capital charges since its inception, he says. That could have paid for a lot of hip joint operations.
Here we go again
Health reforms are cyclical, it seems, with four structural transformations in this country since 1983.
With the latest ructions at its health board, Cantabrians could be forgiven for having a sense of déjà vu.
In 1985, the Canterbury Hospital Board (as it was known then) presented its annual report to a special meeting. As outlined in an article by Gousmett in the NZ Journal of Taxation Law and Policy in 2006, the chief executive’s report outlined the pressure it was under. If the demands on services were decreasing, the lower levels of revenue could be accommodated comparatively easily, the report said. “But unfortunately the converse applies.”
The board’s medical superintendent, a Dr Fairgray, referred to two bills being introduced to integrate health care services.
Twenty years later, Christchurch’s daily newspaper, The Press, reported 1000 patients in Canterbury would be cut from surgical waiting lists, unless their condition worsened. At a recent meeting of the hospital advisory committee, the DHB asked why surgeons met targets in the private sector, while falling behind in public contracts.
By 2006, 4000 Cantabrians needing hospital treatment had been bumped from surgical waiting lists and into GP care. Another 5000 patients were in active review.
Fast-forward to last year, and the cost-cutting crisis which divided Canterbury’s health board. Eventually a plan to slash the deficit by $57 million in this financial year was approved.
The plan would have slashed nursing care spending by $16.5 million, and axed 200 administrative jobs. But within months it had seemingly been scrapped, with Stuff reporting the acting CEO asked for an across-the-board cut of 4 percent from all departments.
New Canterbury DHB chief executive Peter Bramley, who starts on February 15, has a tough job.
So does Minister Little, who must try to ensure we’re not having the same conversations in another 20 years.
