Ian Powell: When business consultants are commissioned for hatchet jobs in health

Ian Powell: When business consultants are commissioned for hatchet jobs in health

Increasingly external business consultants are helping “fix” the country’s District Health Boards, with EY becoming the preferred company hired by the Ministry of Health. But health commentator Ian Powell (formerly the Executive Director of the Association of Salaried Medical Specialists) argues that this highlights the shallowness of political governance, and he tells the story of what has occurred in this regard at the Canterbury District Health Board.


One thing guaranteed to make health professionals working for district health boards groan in despair is when their DHB brings in external business consultants, especially when it involves service design, configuration and delivery. Invariably these consultants know much less about the subject matter than the affected health professionals; worse, they believe they know much more. In these situations they fail to provide the basis for good system improvement and cost DHBs a fortune.

Business consultants can have a role in certain more technical fixable areas where a DHB might require additional help. Currently DHBs owe significant monies to their staff who worked on public holidays because of misapplication of the Holidays Act. Remedial calculation requires meticulousness given the large number of different occupational groups. Several DHBs are using Ernst & Young Consulting (EY) for this task. Feedback to date suggests that EY is undertaking this work well.

Canterbury District Health Board (CDHB) has experienced the best and worst of business consultants. The best was in analysing and advising CDHB on the way forward in the aftermath of the devastating Christchurch earthquake of 2011 and the worst was being used to do a hatchet job on CDHB’s senior management team.

The objective of the hatchet job was to discredit a response to an externally generated debt crisis based on improving processes in a high complexity health system to promote an alternative approach of cutting hundreds of nursing staff.


Due to the earthquake few DHBs have been externally reviewed as much as CDHB. Honouring an election commitment then Minister of Health David Clark appointed Garry Wilson (a business consultant) to independently facilitate a process to reconcile past differences between the Ministry of Health and CDHB. Previously the Ministry had difficult relationships with most DHBs but they were accentuated in Canterbury by the earthquake aftermath.

This led to a report submitted to Clark in April 2018 known as the Way Forward Report. At the time EY senior partner Stephen McKernan was the Interim Director-General of Health. Its analysis of CDHB’s unique financial circumstances was consistent with earlier external reports by PricewaterhouseCoopers and Sapere.  Wilson outlined a pathway for CDHB and the Ministry to address the impacts of the earthquakes on CDHB’s infrastructure and operating expenses which included a work programme to be handled by different taskforces (one was resource optimisation).

The Way Forward described the challenges facing Canterbury as different from the other DHBs. They were “complex, substantial and far reaching.” The “…unique capital redevelopment needs of the CDHB and increasing capacity constraints…” were emphasised.

In June 2018 McKernan and then CDHB Chair John Wood put out a joint statement which among other things described “the response of Canterbury DHB to New Zealand’s largest natural disaster has been exemplary despite needing to manage some of the extreme challenges faced by any organisation in NZ”. “The performance of Canterbury DHB and the wider Canterbury Health System has been everything that could be expected from a high performing DHB…” “It is important that the outcomes from an integrated healthcare response in Canterbury are captured as there are many lessons for both New Zealand and Internationally ….” This is significant given McKernan’s subsequent u-turn on behalf of EY.

The work programme had three main components for CDHB and the Ministry:

  1. Agreeing a target operational financial position for the 2018-19 year and out-years.
  2. Inputting into a Treasury review of the capital charge review in the unique CDHB context.
  3. Progressing an indicative business case for the Christchurch Hospital campus (not to be confused with the much delayed building of the new acute services block previously known as Hagley but now called Waipapa).

This approach was agreed with McKernan and subsequently his successor Ashley Bloomfield who commenced his Director-General position on 11 June. In December 2018 the Ministry released a media statement positively reaffirming support for the approach.

Enter EY

EY was then commissioned to undertake two reviews. The first was reviewing the indicative business case for the Christchurch Hospital campus. Completed in October 2018, EY noted that Canterbury’s patient demand modelling was appropriate and commended the bed management functionality as among the best it had seen. Significantly no major further improvement opportunities that might affect future bed capacity were identified. EY’s positive assessment is importance because of the sharp contrast with its u-turn negative report 10 months later.

EY also recognised the serious post-earthquake capacity constraints which had required up to seven theatres (soon to increase to 10) worth of elective surgery had to be undertaken in the private sector or in extended hours. It acknowledged that CDHB had been “quite successful in managing the costs” of this even though this was noticeably more expensive than using its own theatres.

The second EY report considered CDHB’s operational sustainability. Completed in June 2019, EY reported that CDHB was maintaining and delivering a high performing health system despite the earthquake devastation. There had been a financial operational cost deterioration since the 2015-16 year which it attributed to increasing depreciation and capital charges resulting from earthquake damage, transition costs because of the need to maintain core services while infrastructure improvements were delayed, increasing patient demand because of demographic growth, and reduced funding under the Population Based funding formula (unreliable for funding natural disasters).

EY’s analysis was consistent with Wilson’s report although it also added increased staffing costs over the past five years as a contributing factor (the accuracy of EY’s assertion was challenged by senior management). With the benefit of hindsight this was sowing the seed for the commissioning of a further EY report. Also ominous was the surprising controversial appointment by Minister Clark of Lester Levy as crown monitor in June 2019.

This work, including that of the Way Forward taskforces, fed into the annual plan process that all DHBs are required to undertake. Annual plans are forwarded via the Health Ministry to the Minister of Health for sign-off. The CDHB plan for the 2019-20 financial year was endorsed by its Board. It proposed a $16 million operating deficit (excluding depreciation and capital charge costs) by 2021-22.

In July the Health Ministry advised that CDHB’s plan would be the first tranche of annual plan approvals. The Ministry also proposed that other DHBs could learn from Canterbury’s approach to planning in order to ensure credible and sustainable savings which subsequently led to CDHB being approached by other DHBs.

U-turn politics

As late as July 2019 things appeared to be working well between CDHB and the Ministry with EY playing a useful role. But things changed with three significant appointments leading to the Board taking an unexpected adversarial attitude towards the senior management team. Levy had become the health minister’s crown monitor. In December 2019 the Board had a new ministerially appointed Chair (John Hansen). Along with the other political appointees the Board had become Ministry compliant.

Third, Michelle Arrowsmith was appointed as a deputy director-general of health in December 2018. Her responsibilities involving DHBs included planning and funding, operational performance, and oversight of infrastructure and capital projects. Arrowsmith quickly generated much concern among DHBs who found her style aggressive and narrowly focussed on short-sighted savings. Reportedly her relations with DHBs (and Ministry staff) led to her resignation after 18 months following a period on gardening leave.

There were two important background factors contributing to this relationship breakdown. First, the new Board wanted to breakeven earlier than its previous position. Unquestionably this was influenced by the Health Ministry and Crown Monitor. Second, there was a further delay to the completion of the Hagley acute services block which meant sharply increased depreciation, capital charge and use of 10 private sector operating theatres costs.

By now CDHB’s senior management team were confronted with extended Ministry delays on whether the capital charge should apply to insurance related repairs (around $9 million; the Wilson report said it shouldn’t but eventually and inexplicably the Ministry said it would) and lack of clarity from the Ministry over its funding parameters.

Mysteriously CDHB’s 2019-20 annual plan so positively received in July didn’t progress to Ministerial sign-off. In a Ministry March 2020 Health Report to Minister Clark it was not flagged as unacceptable when it would have been appropriate to do so if there were concerns. However, without any further engagement or direction, in June 2020 CDHB was advised by letter that the Minister wouldn’t be signing the plan off.

Senior management’s accelerated savings plan

Senior management developed an accelerated savings plan in response to the Ministry’s u-turn. Learning from earlier successes of effective clinical engagement achieving systems improvement and financial benefits, it proposed expanding the resource optimisation taskforce role in this direction.

Arguably the most engagement driven and innovative DHB over the past decade (at the very least one of the top group) Canterbury has many success stories. The biggest has been the development of clinically led health pathways between community and hospital which led CDHB to become the first (possibly only) DHB to bend the curve of acute demand (a huge cost driver for DHBs). Innovation has also included GPs direct access to hospital radiology, electronic referral software between parts of the system, and its patient website for Cantabrians.

These engagement based initiatives succeeded because being developed through clinical leadership, rather than business consultants, they made good clinical sense which also meant that they made good financial sense. It is for good reason that successive surveys of its DHB employed members ranked Canterbury as the DHB most committed to distributed clinical leadership.

EY’s hatchet report

The Hansen-led Board commissioned a further report from EY to assess the credibility of management’s plan. Its team responsible for this latest report was substantially unchanged from the team that previously reported to CDHB, including senior partner Stephen McKernan. But the third report, submitted in August 2020, reads as if it was written by a completely different team (or the authors had suffered a severe attack of amnesia). It couldn’t have been more opposite to their previous work. To put it another way, EY McKernan savaged Interim Director-General McKernan.

There was a sign of things to come in July. Reporting to CDHB’s Quality, Finance, Audit and Risk Committee in July 2020, EY gave a misleading characterisation of the senior management team by implying that there were a range of new taskforces replacing the old ones. In fact, the plan relied on the existing work of the taskforces with the key change being an expansion to one of them (resource optimisation).

Glaring errors of fact meant that EY’s new report should never have been relied upon for decision-making. But it was by the Board, Health Ministry and Treasury. When outgoing CDHB chief executive David Meates did a detailed communication to staff analysing why the DHB was in such a difficult financial position (based on Wilson’s report and updated data), Health Minister Chris Hipkins publicly indicated that Treasury had a different position which he preferred. That position was based on EY’s hatchet job.

EY had ignored the previously agreed analysis of CDHB’s financial position (which EY had previously agreed with). In contrast it now implied that CDHB could correct its current deficit by enhancing its operating controls and becoming more efficient. But this u-turn was based on flawed analysis including nursing staff costs and bed management.

Erroneous nurse staffing claims

EY claimed that Canterbury had a nursing workforce in excess of ‘peer DHBs’ (broadly of similar size). But this demonstrates EY’s failure to correctly use the national data sets (DHB data held by the Health Ministry). This data shows the opposite. In fact when you combine nursing and medical full-time equivalents CDHB is not out of line with peer DHBs.

However, cost-wise CDHB is different. Including outsourced, agency and locum staff, Canterbury’s average nursing cost per hour was $41.81 compared $47.29 for large DHBs and $47.78 for all DHBs. Embarrassingly for the Crown Monitor, in the two DHBs he had chaired for several years – Waitemata and Auckland – the respective costs were $48.16 and $50.05.

In the case of medical staff (senior and junior) Canterbury’s average hourly cost was $112.49 compared with $115.42 for large DHBs and $116.66 for all DHBs. For allied health professionals Canterbury was $39.29 compared with $43.31 in large DHBs and $43.28 in all DHBs. To rub it in, for management and administration personnel Canterbury’s hourly rate was $36.06 compared with $40.35 in large DHBs and $39.56 in all DHBs.

Not only did EY get basic facts badly wrong but it also disregarded the fact understood by Canterbury’s senior management that there were no opportunities to reduce nursing staffing without reducing service delivery.

Bed resourcing and management

EY criticised the matching of bed resourcing (nurses) to occupied beds. But it erred by focussing on plans done six weeks in advance (due to contractual requirements) rather than actual occupied compared with actual resourced on the day.

Senior management’s approach in contrast with EY’s to this accelerated pressure was not to change the operating model but instead focus on resource optimisation through working better, improving clinical resourcing and deepening engagement with medical specialists (process improvement). In fact, Canterbury is one of the most effective DHBs in matching resourced beds to occupied beds. One innovation was to develop an internal nursing pool to cover for sick leave which increased safety and reduced expensive agency nursing to zero.

EY tried to use bed days versus nurse full-time equivalence to justify its position. But this is a blunt instrument that fails to consider the patient churn that occurs within these bed days which is where CDHB has done well.  The real challenge for nursing is what EY under-appreciates – lack of physical bed and theatre capacity which has pushed the system to its edge. It has led to a slow increase of patient length of bed stay in Canterbury although still lower than in bigger DHBs. Senior management’s response was to focus on further improving patient flow; EY’s was to reduce nurse staffing.

Faulty analysis leads to dangerous conclusions. EY claimed that CDHB could deliver 60,000 more bed days with the same nursing workforce -just to put that into perspective that equates to 195 beds at 85% occupancy! From this EY implied that CDHB had spent $18.4 million in additional nursing. This faulty analysis sprang from using dated data and simply not understanding the core operational model within Christchurch Hospital. Using correct data doing some simple logic checks would have identified that there was not an excess of nurses.

Questions and responsibilities

If the purpose of EY’s third report was a genuine endeavour and assessed as if it were a school examination I would give it an E grade (and not paid the bill). If its purpose were to do a hatchet job on the senior management team I would give it a C- grade because its flaws were obvious to those with experience in the health system.

Important questions are raised by this scandal. EY’s involvement through the influential Stephen McKernan and its subsequent expansion into the health system raises the issue of conflict of interest. It is unlikely to be unlawful. However, it is sailing close to the wind (or worse) in respect of professional and ethical standards.

If, as it appears likely, EY becomes the health system’s required ‘business consultants of choice’ then it will be at the expense of the voice of clinical leadership in service design, configuration and delivery and fiscally irresponsible as a result.

Is the scandal due to the conduct of Levy, Hansen and Arrowsmith? Destructive politics sits behind them, whether bureaucratic or political. Levy and Hansen were handpicked to perform a task which they did. Arrowsmith had a wider DHB brief (not just CDHB). But her approach was consistent with what those above her required. Her appointment and acrimonious parting of ways weren’t because of the Canterbury scandal.

Shallow political governance

The scandal highlights the question of shallowness of political governance. Health Minister David Clark didn’t drive this scandal but was sufficiently gullible to allow it to unroll. His normally competent successor Chris Hipkins foolishly accepted Treasury advice on what was behind CDHB’s financial position which was based on the highly flawed EY hatchet report.

This leaves Prime Minister Jacinda Ardern. In the lead up to the 2017 election she was sharply critical of the Health Ministry’s behaviour towards DHBs. She now finds herself in the position of heading a government that in its name has seen unkind behaviour become even more unkind.



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.