Part 4: Accounting for Health Funding Package allocations and changes

Allocation of the 2002-05 Health Funding Package.

In this Part, we discuss whether our expectations were met that:

  • the funding package had been allocated in accordance with Cabinet Minutes; and
  • allocations had been appropriately approved and documented.

We discuss:

The effect of population-based funding on allocation of the funding package

As discussed above, the Minister had the discretion and delegated authority of Cabinet to change the allocation of the funding package from the original allocation approved by Cabinet. The introduction of the Population-based Funding Formula in 2003 was such a change, which was approved by Cabinet.

What is the Population-based Funding Formula?

The Population-based Funding Formula is now the main method for determining how much health and disability funding DHBs will receive. The formula provides a simple method of allocating all funding available for DHBs, including their share of the funding package. It does not determine funding for services. It was phased in from 1 July 2003, and DHBs were progressively moved to their target level of funding as determined by the funding formula from that date.

How is the Population-based Funding Formula calculated?

A DHB’s funding is primarily determined by the population within its area.

The Ministry also considers the demographics of a DHB’s population in determining its share of funding. Four demographic variables are considered – age, gender, ethnicity, and level of socio-economic deprivation – and are measured by a five-tier scale. An average cost is assigned to each demographic group, and that cost is then multiplied by the population of that group within each DHB.

There is also a policy-based weighting for unmet need, a rural adjustment, and an adjustment for overseas visitors.

The Ministry has made changes to the formula since its introduction, such as changing the way the rural adjustment is calculated, but the basic determinants have remained.

Because the Population-based Funding Formula focuses on funding DHBs based on their resident population rather than on funding specific providers to provide services, the formula does not take into account where the DHB provides the services for its population. A DHB therefore pays for all services that its population receives, wherever in the country the people receive those services.

A DHB is also paid for any services it provides to people who are resident in another DHB’s area. For example, if a DHB does not provide a particular service, it would arrange for another DHB to provide the service on its behalf. It would then reimburse the other DHB for the cost of providing that service. These payments are called inter-district flows, and they can have a significant effect on a DHB’s total funding.

The effect of the Population-based Funding Formula on the funding package

The Population-based Funding Formula is relevant to the funding package because it affects the way funding package money is allocated to DHBs. The Population-based Funding Formula determines the proportion of health funding received by individual DHBs from the funding allocated to all DHBs.

When the Population-based Funding Formula was introduced, some DHBs were significantly overfunded according to the new formula, and some were significantly underfunded.

Because the funding package, particularly its demographic component, was the major source of new funding for DHBs, it was used as a pool of funding to implement the Population-based Funding Formula.

Demographics funding was not allocated uniformly to DHBs based on existing funding levels, as originally envisaged in the Cabinet Minutes, but was allocated in a way that moved DHBs to the level of funding intended under the Population-based Funding Formula. This change in allocation was approved by Cabinet.

Ministry record-keeping

We were satisfied that there was good documentation to support both Cabinet and Ministerial decisions on allocating the funding package. The Ministry has good documentation showing the funding received and how it had been allocated. It also has records showing the allocation of the funding package by appropriation.

The Ministry has records showing how much of the funding package was provided to Ministry directorates.

The Ministry also has records showing the total amounts allocated from the funding package to individual DHBs. The Ministry’s funding advice to DHBs records new FFT and demographics funding that the DHBs receive each year, and the percentage increase in their funding. FFT and demographics funding for previous years become part of the DHBs’ baseline funding in succeeding years. The Ministry does not keep records of how DHBs allocated the funding, as this is the responsibility of the DHBs.

Use of Forecast Funding Track and demographics funding

District health board approach

DHBs treated funds from the funding package as part of their general funding from the Ministry, so they are unable to say specifically where the funding package money had been allocated. DHBs were not required by the Ministry to report specifically how funding package money they received had been used.

Most DHB staff we interviewed told us that they did not regard FFT or demographics funding to be related to anything specific. Rather, they regarded it as part of their total “basket of money” to be distributed as they, and their Board, considered fit. DHBs told us that FFT and demographics funding would sometimes be used to fund price increases for services, while on other occasions the funding would be used for new initiatives. The Ministry advised us that Ministers, including the Minister of Finance, have given DHBs clear messages that inflation-based funding should be reflected in contracts with non-governmental organisation providers.

The advantage of this approach is that it gives DHBs flexibility in how they apply their additional FFT and demographics funding, enabling them to manage areas of pressure within the funding available. For example, DHBs told us they generally pay demographics funding to suppliers of services, but this was considered on a case-by-case basis. It also means that there were no separate administrative requirements from the funding package imposed on DHBs.

The disadvantage of this approach is that it means that it is not possible to track specifically how funding package money was used. According to the Ministry, this risk has been recognised by Ministers, who have made clear the Government’s expectation for use of this funding.

Ministry of Health approach

In 2005, the Minister’s Office asked the Ministry to justify its need for FFT and demographics funding.

The Ministry reported that, as with DHBs, it had been given flexibility as to how it applied additional FFT and demographics funding. Although the Ministry sometimes needed to use funding to implement a Ministry-wide policy, most decisions were made within the Ministry’s directorates, which the Ministry stated allowed the directorates to manage any funding pressures in their areas.

The Ministry did not always include FFT and demographics funding in its contracts with service providers. Some multi-year contracts included an agreed increase or FFT increases. For other ongoing contracts, the Ministry considered whether FFT and demographics funding should be applied. Considerations included:

  • whether there had been increases in previous years;
  • whether the provider was a DHB;
  • the Minister’s requirements for certain services; and
  • service quality and performance issues.

Ministry directorates also indicated that they used demographics funding as they saw fit to manage whatever pressures they faced within their sector. For example, the Clinical Services directorate, which is responsible for the Primary Health Care Strategy, stated that demographics funding was used to manage the pressures generated by PHOs being set up at a faster than expected rate.

The Ministry also checked whether the additional services being funded by demographics funding were being recorded in contracts with providers. Responses from the Ministry directorates indicated that each had a different approach to the use of demographics funding. Some directorates had used demographics funding to fund areas where there were pressures, while others had used it to increase funding for new policy initiatives that they believed merited support.

Responses from directorates indicated that they generally did not differentiate between additional FFT funding, the technology adjustment, and demographics funding. FFT and demographics funding was regarded generally as a pool of money additional to baseline funding when the additional money was provided each year, to be allocated as directorates saw fit. We were provided with some examples where it was clear how a directorate had allocated additional FFT (including the technology adjustment) and demographics funding. After the first year of new funding, the funding was considered part of baseline funding.

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