There are question marks over how much health funding will change in this year’s huge shake-up. David Williams reports

Red ink is pouring from the financial accounts of district health boards as they enter their death throes, the end of a 20-year experiment started and ended by the Labour Party.

The Government is putting faith in a new regime, led by the centralised Health NZ and a new Māori Health Authority. But industry figures and watchers say there are still question marks over health funding – and it’s not clear how Health Minister Andrew Little intends to answer them.

These changes are being imposed on a system under strain. Over-worked staff are fighting for pay increases just as the Omicron variant promises to place the most severe pressure on the country’s health facilities since the start of the Covid pandemic.

Canterbury health researcher Dr Michael Gousmett has crunched the DHB financial results for the last financial year, revealing 19 of the 20 DHBs – all except South Canterbury – are in “deficit”, for a total of $711 million.

The largest losses were Canterbury ($173 million), Auckland ($96 million), and Waitematā ($61 million).

“I’m really looking forward to seeing exactly how this is going to be treated from an accounting perspective,” Gousmett says. “How can you, after decades of deficits, all of a sudden turn around and, boomph, they’re gone? It just doesn’t make sense.”

Going back a step, how to treat the word “deficit”?

Sarah Dalton, executive director of the Association of Salaried Medical Specialists, says: “That $700 million is less of a deficit, and more of a signal of systemic underfunding.”

The vast bulk of DHB funding goes to paying people, whether in hospitals, pharmacies, GP clinics, or rest homes. The budgets are consequential: Canterbury DHB, for example, is a $2 billion “business”, and the South Island’s largest employer.

Last week, addressing the committee hearing submissions on the Pae Ora (Healthy Futures) Bill, Dalton told MPs: “While we are heartened by the aspirations represented in this legislation, we are painfully conscious of the workforce shortages that may limit or entirely prevent the success of the Māori Health Authority and Health NZ.

“We estimate that we need right now 1500 hospital specialists and 1400 GPs just to achieve per capita parity with Australia.”

In 2020, Auditor-General John Ryan said in a report to DHB chief executives that deficits had increased so much they were a “feature of the system”.

Dr Robin Gauld, a health systems expert at University of Otago, says of deficits: “They just put massive pressure on the DHBs – really, really unfortunate pressure on them. It’s just awful.”

An obvious sign of that pressure is the blood-letting in Canterbury, as executives left en masse because they feared deep and rapid budget cuts demanded by the Health Ministry, Crown monitor Lester Levy, and a board led by Sir John Hansen, would drastically reduce staff levels and services.

Canterbury’s financial position improved $71 million within a year, according to Gousmett.

David Green, Canterbury DHB’s acting chief financial officer, says the two main drivers of the 2020/21 improvement to a deficit of $177 million – slightly more than Gousmett’s figure – were a break-even position in Covid-related costs, and only setting aside $20 million for Holidays Act remediation payments compared to $65 million the previous year.

“Any changes to services or waiting lists in 20/21 has not been related to any reduction in our deficit,” Green says.

Are these “deficits” – a word painting a picture of inefficient hospitals wasting public money – real, or mainly down to accounting policies?

Newsroom has previously covered the controversial capital charge – an invented payment, currently 5 percent of the net value of assets. Capital charges in 2020/21 totalled $242 million, calculates Gousmett. (In an answer to a Parliamentary question, Minister Andrew Little put it at $248 million.)

In the unconvincing words of former minister David Clark, the charge gave DHBs an incentive to “invest and manage capital assets wisely”.

While good in theory, when a new hospital is built to meet health needs – as has been done recently in Canterbury – there’s a steep jump in capital charges and depreciation. This, according to the health review conducted by Heather Simpson, “can force DHBs into deficit”. Indeed, this was a central argument in the tussle over Canterbury DHB’s deficits.

Clark was so unconvinced by this system, in 2019 the Government provided additional funding to cover the charges on new capital investments, and ordered a review by Treasury.

On the revenue side, there are questions over the fairness and accuracy of the opaque population-based funding formula.

“That's going to have to shift somehow,” says Gauld, of University of Otago. Population-based funding has not worked for DHBs, he says. It’s been suggested the new regime use localities, smaller than current DHB areas, and funding be split into tiers and regional services.

“It's pretty messy, actually, from what I see.”

Health Minister Andrew Little says the new health operating model will be adequately supported. Photo: Lynn Grieveson

A health sector transition unit – part of the Department of Prime Minister and Cabinet – is considering the structure of the new health system.

Yet here we are, in February, just four months from the new system being implemented, and it’s not clear if deficits, capital charges, the punitive depreciation regime, and population-based funding will remain.

“They need to be addressed – and time is short,” Gauld says.

Last December, Finance Minister Grant Robertson said health would be a centrepiece of this year’s Budget, requiring significant investments.

“Managing rising health costs will be a major challenge in coming decades – we will ensure the new entities have a solid base for tackling that challenge.”

Health Minister Andrew Little tells Newsroom: “This Government is acutely aware of the funding challenges of the health sector and that is why it has increased its funding by 45 percent since the end of 2017.

“I am committed to ensuring that the new health system operating model is supported to achieve the health equity and other objectives we have set for it.”

The Simpson report reckoned Health NZ could manage changes to capital charge and depreciation. “The review believes a balanced solution could be found that avoids DHBs moving into deficit as a result of requiring a significant rebuild or new capacity, but still ensures that DHBs have enough capital for business-as-usual asset replacement.”

The National Party’s health spokesperson, Dr Shane Reti, says the population-based funding formula is a “blunt tool”, and needs to be improved. He’s less forthright about the capital charge, which he says is constantly under review and dependent on a range of economic and health circumstances.

Budget documents show the Government earmarked $485 million for the restructuring. Reti says that’s a poor use of health funding “for layers and layers of bureaucracy and no accountability for health outcomes”.

He notes the Regulatory Impact Statement for the Pae Ora Bill has a single redaction – the business case for the Maori Health Authority in the section “assumptions underpinning the bid”.

“The secrecy surrounding the business case bodes poorly for the wise use of health funding under the proposed reforms.”

He also attacks the Government’s record on health, stating every health target has declined since the 2017, when a Labour-led coalition won the election. “Labour has spent more money on health yet we have worse outcomes.”

“It’s a starved system, and starved systems are actually inefficient.” – Sarah Dalton

After 20 years of DHBs, the new funding regime will only be announced months before the new structure is implemented.

That necessitates a bit of crystal ball gazing.

Dalton, of ASMS, thinks Minister Little expects the establishment of Health New Zealand will drive efficiencies reasonably quickly.

“We are less confident, and I’m not sure efficiencies is the name of the game. We think we run a pretty lean, mean machine, but it’s a starved system, and starved systems are actually inefficient.

“So what we need, really, is a larger national conversation about what level of healthcare is acceptable to New Zealanders, that is funded by the state. What investment are we prepared to make through taxes, etc, to ensure that the staff we do have are able to work safely and sustainably to provide that care?”

Gauld, of University of Otago, has high expectations of the transition unit, which, he says, is stacked with high-calibre people. They include former Middlemore intensive care specialist David Galler, and Peter Crampton, a former dean of the University of Otago Medical School. The appointment of Dr Mataroria Lyndon, a senior lecturer at University of Auckland, to the Māori Health Authority’s interim board, is another savvy move, Gauld says.

However, he worries the new regime won’t address inequity. At the moment, New Zealand’s health system serves the well-off, he says. “The way we fund has done its day and I think it’s time to look at social insurance.”

(Social insurance, used in Germany, Japan and other countries, involves a payroll payment, like ACC, to a nationally managed fund that pays out for treatment – no matter if you’re treated publicly or privately.)

Dalton, meanwhile, is impressed with the aspirations contained within the Pae Ora (Healthy Futures) Bill, and the plans to build a more equitable system, rather than just a “centralised juggernaut”. But she airs that optimism with a warning.

“If we don’t staff it up and if we don’t front-load some funding, so that there’s room to play a bit and sort some things out, then it will just be old dog, new collar.”

David Williams is Newsroom's environment editor, South Island correspondent and investigative writer.

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