Ian Powell: DHB ‘bailouts’ no longer the exception

Ian Powell: DHB ‘bailouts’ no longer the exception

The Government has announced further funding of $180m for the Canterbury District Health Board. But this should not be termed a “bailout” according to Health commentator Ian Powell who explains what’s been going on and what now needs to happen with health funding.

 

In his 3 October article Stuff Political Editor Luke Malpass described the Government’s announcement of a payment of $180 million to the Canterbury District Health Board (CDHB) as a bailout.

Malpass raises thought-provoking issues deserving further consideration. $180 million was the budgeted deficit for the 2019-20 financial year although the actual deficit was $5 million under. The deficit for the current financial year is $145 million.

The use of the term ‘bailout’ is understandable but lacks precision and misleading as a result. The article also implies that there is something unusual about the payment. This requires elaboration as it is the circumstances that are unusual, not the form of payment itself. If it is to be called a bailout then many other DHBs have also received bailout over the years.

The term used to describe the payment is ‘equity injection’. For several years government budgets have had this as a regular item in Vote Health. In effect, this is the way deficits end up being funded through necessity. Deficits are for demand driven actual operational costs where the provision of healthcare is highly labour intensive, again of necessity. If there weren’t equity injections health professionals and other staff would be laid off. Access to patient care (and its quality), including acute and chronic diagnosis and treatment, would be severely restricted. To put it bluntly, many patients would suffer and several would die.

Understanding deficits

This leads to the question why we have deficits for operational expenses. Every year DHBs must submit a draft annual plan the next financial year to the Minister of Health for approval. This approval includes any anticipated operational deficit.

DHBs deficits have been increasing exponentially since around 2015. In the financial year ended 30 June 2020 19, out of 20 DHBs recorded deficits (the exception was South Canterbury). In the main these deficits were big in either relative or absolute although as a proportion of total spending they were small. As the number of DHBs with deficits increases so does the number of equity injections (bailouts) increase.

Health Minister Chris Hipkins announcement of the $180 million payment to CDHB was late because his predecessor David Clark didn’t approve its annual plan because of its deficit level. It is this factor plus CDHB’s circumstances being completely different from the other DHBs (discussed below) that make CDHB unusual, not the payment itself. The equity injection was finally paid because of necessity and politics given the public outcry over the behaviour of the Minister’s Board and Crown Monitor and the threat to health services.

Deficit drivers

Broadly speaking there are two main drivers behind DHB operational deficits. First, in relative terms, DHBs have been significantly underfunded since 2009. Labour in opposition commissioned research from Infometrics which reported that under National led governments total health spending, the large majority of which goes to DHBs, had declined by $2.3 billion in relative terms. This was also consistent with published research undertaken jointly by the Council of Trade Unions and Association of Salaried Medical Specialists.

The first two budgets of the current government slightly improved funding in relative terms while there is a discernible improvement in funding for this financial year although this is likely only to alleviate rather than remove many deficits in 2020-21.

Second, DHB health services are demand driven. There is not a tap that DHBs can turn off. They don’t have the same options as private companies which can choose to reduce or stop a product line. The demand is most noticeable for acute admissions and chronic illnesses both of which are costly absorbers of constrained resources. They are driven by a range of factors, the most important being a linked combination of a growing and aging population, deteriorating social determinants of health (for example, poor housing), and increasing poverty related illness.

Taking acute admissions demand as a telling example, they have increased at a higher rate than population growth. This and the other drivers have significantly driven up costs while funding in relative terms has declined. Ironically, it is the politically and bureaucratically maligned CDHB that has been most successful in addressing acute admissions demand by bending the curve through its approach to clinical leadership and engagement between community and hospital care.

Impact of hospital rebuilding

There is a third driver which affects those DHBs who are undertaking major capital works (hospital and other facility construction). These lead to big financial costs for DHBs through depreciation and capital charges. Major rebuilds are project managed by the Health Ministry despite it having less expertise in this area than DHBs. Delays in these rebuilds also contribute significantly to rebuilds as has been the case in Canterbury and West Coast DHBs recently.

These increased costs have to be paid out of DHBs operational expenses which then contributes to deficit levels. This was less of an issue for the previous National led government because there were less rebuilds but has come to the fore with Canterbury. It can be expected to be a big driver of deficits in several other DHBs with big rebuilds planned for beginning with Dunedin Hospital but also hospitals such as Whangarei, Hawke’s Bay, Palmerston North and Nelson.

What about Canterbury DHB

So why does CDHB have the biggest deficit? I have discussed this in more detail elsewhere.

In summary, it commenced with the fact that our Population Based Funding formula wasn’t designed to cope with natural disasters such as the 2010 earthquake. Fatally then health minister Tony Ryall rejected advice that a separate funding arrangement that recognised the impact of the aftermath on health services be developed for CDHB.

Thereafter, from 2015, CDHB had to cope with the additional factors associated with the earthquake including depreciation, capital charges, major delays in rebuilding (which was project managed by the Health Ministry) and having to outsource 10 operating theatres to the private sector. These all contributed massively to costs. Such was the relative cost effectiveness of CDHB’s leadership culture that had there been no earthquake then, unlike the other 18 DHBs with deficits, it may not have had a deficit (or at worst a relatively small one).

Getting and staying out of deficits

The easiest way to reduce DHB operational deficits would be to increase government funding to a level that would meet these largely anticipated costs. The deficits would then disappear for the following financial year and, providing funding was sufficiently maintained for subsequent years, this would be the end of the matter. But there are three other actions required.

First, a new funding mechanism needs to be developed to assist those DHBs confronted with natural disasters such as the Christchurch earthquake. Former Health Minister Tony Ryall’s decision to ignore advice to do this after the 2010 earthquake was a fatal mistake that must never be repeated.

Second, we need a different method of funding major capital works. Funding them out of annual operational costs is too big an ask of DHBs. DHB chief finance officers collectively would be an excellent place to start considering this challenge. At the very least the capital charge should be binned consistent with the Auditor-General’s previous advice.

Third, comprehensive clinical leadership distributed at all practical levels in DHBs needs to be actively encouraged. This was a priority of former health ministers Annette King, David Cunliffe and Tony Ryall but since then government interest has been non-existent. This subsequent disinterest is both retrogressive and fiscally irresponsible.

This disinterest is responsible for at least six years of wasted opportunity. As a result advocacy for how much DHBs should be funded has had to rely on historical data. The lost opportunity includes tolerating financial wastage because the best skills for systems improvement haven’t been optimally utilised. Ironically, given the misleading attacks on it by the Health Ministry, Treasury and Crown Monitor, CDHB has been the most effective utiliser.

Those best placed to improve the effectiveness and efficiency of the provision of healthcare are those that help provide it. Requiring distributed clinical leadership in DHBs would recognise that what makes good clinical sense also makes good financial sense.

 

Ian Powell was formerly the Executive Director of the Association of Salaried Medical Specialists for over 30 years until December last year.  He is now a health commentator, editor of the blog ‘Otaihanga Second Opinion’, and based in Otaihanga on the Kapiti Coast.

This article can be republished under a Creative Commons CC BY-ND 4.0  license. Attributions should include a link to the Democracy Project.