Part 2: Background to the Health Funding Package

2.1
In this Part, we discuss:

• the funding of the health sector;
• the introduction of the funding package;
• how much money was in the funding package;
• the conditions and components of the funding package; and
• Cabinet’s original allocation of the funding package.

Funding of the health sector

2.2
Funding for the health sector is provided through the Estimates of Appropriations approved by Parliament for Vote: Health following each year’s Budget. Additional funding can also be provided by Parliament between Budgets. Vote: Health is administered by the Ministry, which enters into funding agreements with health providers (through its eight directorates), and with 21 DHBs.

2.3
The scope of the Vote: Health appropriations is broad. For example, each DHB has one appropriation, which covers all the health and disability services that they provide and fund. For most DHBs, each appropriation is for several hundred million dollars. The description of the scope of the appropriation is the same for each DHB, and states that the funds are for “funding of personal and mental health services, including services for the health of older people, provision of hospital and related services and management outputs”.

2.4
The Ministry’s departmental appropriations are established mainly on a directorate-by-directorate basis. There is little information in the Estimates of Appropriations about how each directorate allocates and spends its funding. The Ministry of Health says this is because a large number of different services are provided under Vote: Health, so it is not practical to define appropriations to the service level.

2.5
DHBs agree District Annual Plans (DAPs) with the Ministry, and these provide greater detail about what services each DHB is providing. DHBs also produce Statements of Intent that set out the intentions and main objectives of a DHB for each year. Each DHB Statement of Intent is presented to Parliament. Statements of Intent and DAPs do not contain any specific detail about the funding package or its components.

History of health funding

2.6
In 1996-97, automatic adjustments to funding were introduced for Vote: Health, initially only for demographic changes. In 1997, Cabinet agreed to a health funding package to maintain the existing level of health and disability services. Included in this package was the “sustainable funding path”, which was an adjustment to the Vote to allow for the effects of inflation, technology, and improvements in efficiency, and to allow for some new initiatives. In 1999, funding was agreed for 2000-01. Subsequently, a funding increase was also announced for 2001-02. In December 2001, the Government announced the funding package that is the subject of this report.

Effect of annual funding cycle on health sector planning

2.7
Before the funding package was introduced, health funding was allocated one year at a time to the Ministry, which either contracted directly with the health sector or used it to fund DHBs (or their predecessors). There was no guarantee of the level of funding in future years, although DHBs expected to receive at least as much funding as in the previous year.

2.8
Indicative levels of funding were identified for the next two years, but this could be changed in subsequent Budgets. Therefore, it was difficult for the health sector to plan very far ahead for funding increases, and DHBs were restricted in their ability to plan service delivery or to take advantage of opportunities to fund and deliver services more cost-effectively.

2.9
The environment that DHBs operate in means it is particularly important for them to have certainty about future funding increases. They are large entities that deliver and fund a number of important health services. Changing the mix of services can require considerable lead times for several reasons, such as a tight labour market with critical shortages of trained staff in some areas, the need for specialist equipment, and/or capital requirements (such as operating theatres and wards). Such pressures can, in turn, subject the health sector to stronger inflationary pressures than the rest of the economy.

2.10
In addition, DHBs face considerable increases in demand for some services at different times because of lifestyle and demographic changes. For example, one DHB told us the demand for renal dialysis had increased 16% in one year.

Introduction of the funding package

2.11
The Government introduced the funding package to allow the Ministry and DHBs to plan their operational spending on health and disability services three years ahead.

2.12
The funding package was announced in December 2001, was introduced in the 2002 Budget, and began in the 2002-03 financial year. The funding package provided funding above baseline levels for Vote: Health from 2002-03 to 2004-05.

How much money was in the funding package?

2.13
In all, the funding package, as initially announced, was new funding of nearly $3,000 million above baseline funding for the three years from 2002-03 to 2004-05.

Initial funding package

2.14
The funding package comprised an extra $400 million a year for three years from 2002-03 (that is, $400 million in 2002-03, $800 million in 2003-04, and $1,200 million in 2004-05), giving a total of $2,400 million extra funding in the three years. This funding continued to be provided in later years.

Additional demographics funding

2.15
The Government announced another funding increase for the same period, to provide for population growth and changes in the structure of the population (for example, an increase in the number of elderly patients).

2.16
Called demographics funding, it comprised additional funding of $101 million in 2002-03, $96 million in 2003-04, and $98 million in 2004-05. This funding also continued to be provided in later years (an extra $197 million in 2003-04 and an extra $295 million in 2004-05), giving a total of $598 million in new funding for the three years. Funding for demographic changes had been provided to Vote: Health since 1996.

2.17
While demographics funding was separately identified between 2002-03 and 2004-05, it is generally considered part of the funding package and is treated as such in this report, unless otherwise indicated. Demographics funding was formally included as part of the funding package from 2005-06.

The “total” funding package

2.18
Including demographics funding, the funding package as announced therefore comprised $501 million in 2002-03 continuing in later years, an extra $496 million in 2003-04 continuing in later years ($997 million total), and another $498 million in 2004-05 also continuing in later years ($1,495 million total).

2.19
The initial funding package and the demographics funding, as announced in December 2001, are shown in Figure 1.

Figure 1
The Health Funding Package for the three years from 2002-03 to 2004-05

2.20
The funding package was set at this level based on forecast inflation (which is 35% consumer price index and 65% wage price index), and there was no capacity to deal with inflationary pressures above the initial calculation. Inflation did subsequently exceed the prediction the funding package was based on.

2.21
The Government subsequently added more money to the funding package (above that initially announced) during the three years to 2004-05. This is discussed further in Part 5.

2.22
The Government also extended the funding package beyond 2004-05. In the 2003 Budget, additional funding (above the 2004-05 funding) was provided for 2005-06, continuing in later years. In the 2004 Budget, additional funding (above the 2005-06 funding) was provided for 2006-07, continuing in later years.

2.23
Additional funds for the funding package for 2007-08 have not as yet been appropriated, but Cabinet has given a three-year planning signal to the health sector that $750 million would be available in 2007-08 and later years, and a further $750 million in 2008-09 and later years.

Conditions of the funding package

2.24
There were several conditions associated with the funding package:

• DHBs were required to reduce their deficits to (or close to) zero by 30 June 2005.
• The Minister of Health (the Minister) was given complete discretion as to how the funding package was spent, but was expected to fund all new health initiatives from within the funding package (with the exception of some initiatives, such as the meningococcal vaccine strategy).
• DHBs were told they must manage within their budgets, and that no more money would be available to fund health services.

Components of the funding package

2.25
The funding package contained four components:

• the Forecast Funding Track (FFT), also known as the Future Funding Track, which provided for automatic adjustments for inflation (based on the FFT forecast available at that time) and annual adjustments for advances in technology and for efficiency gains;
• demographics funding;
• a revenue catch-up item to address historical underfunding of DHBs; and
• funding for new policy initiatives (mainly the Primary Health Care Strategy – see paragraphs 3.22-3.28).

2.26
The three components other than demographics funding were part of the initial funding package of funding increases of $400 million a year for three years. We discuss all four components in detail in Part 3.

Cabinet’s original allocation of the funding package

2.27
Cabinet’s original 2002 decision on the allocation of the funding package (including demographics funding, for which the Cabinet decision was made in 2001) is shown in Figure 2. We note that Cabinet subsequently approved additional funds for the funding package, and that the actual allocation of the funding package (see Appendix 1) differs from the allocation originally approved by Cabinet. One of the major reasons for this was adoption of the Population-based Funding Formula, that we discuss in Part 4.

Figure 2
Original allocation of the Health Funding Package (including demographics funding)

Source: Cabinet Minutes (02) 12/8 (16) and (01) 20/2.

* A more detailed outline of the allocation of demographics funding approved by Cabinet, including the additional demographics funding approved by Cabinet for the 2003 and 2004 Budgets, is provided in Appendix 2.

Actual allocation of the funding package

2.28
For a detailed summary of how the funding package was allocated, see Appendix 1. Appendix 3 summarises how the funding package (including demographics funding) was allocated to the various appropriations in Vote: Health.

1: An appropriation is a parliamentary authorisation for the Crown or an Office of Parliament to incur expenses or capital expenditure. Appropriations are specified by amount, scope and period.

2: A Vote is a grouping of one or more appropriations that are the responsibility of one Minister of the Crown and are administered by one government department.

3: The eight directorates are Clinical Services, Corporate and Information, DHB Funding and Performance, Māori Health, Disability Services, Mental Health, Public Health, and Sector Policy. Each directorate is led by a Deputy Director-General.