Part 5: Have our expectations for the Health Funding Package been met?

5.1
In this Part, we discuss whether our expectations for the funding package have been met.

5.2
Taking into account the benefits anticipated by the Government and the aims of the Ministry (see paragraphs 1.8-1.9), we expected that:

• the health sector had managed budgets within the funding package;
• DHBs had not relitigated the funding package;
• DHBs had eliminated deficits;
• the health sector had been able to be innovative and set priorities for implementing the New Zealand Health Strategy and the New Zealand Disability Strategy;
• the funding package had been used to implement the Primary Health Care Strategy;
• the funding package had enabled greater certainty for planning by DHBs; and
• the funding package had created opportunities for more cost-effective services.

Managing within the funding package

5.3
We have previously noted that one of the aims of the funding package was to cap the amount of new funding available to the health sector to the amount of the funding package. The funding package was proposed as the entire budget increase for Vote: Health for the three years it applied to.

5.4
The Ministry emphasised that, as a condition for agreeing to the three-year funding, the Government expected the health sector to manage within the funding available. In particular, the Ministry warned DHBs that any funding required to fund DHB overspending would not be available for new policy initiatives.

5.5
Notwithstanding these intentions, additional funding has been appropriated from outside the funding package for three reasons:

• additional funding that Cabinet agreed to at the time of the funding package – for example, funding was allocated to the Mental Health Blueprint initiative ($25 million in 2004-05 and $50 million in 2005-06) and the meningococcal vaccine strategy ($82 million in 2003-04, $30.3 million in 2004-05, and $33.3 million in 2005-06);
• additional funding allocated as a result of changes to demographics funding and FFT assumptions; and
• additional funding as a result of new policy initiatives. We have listed some of these in Figure 7.

Figure 7
Additional funding for some new policy initiatives outside the Health Funding Package

Source: Ministry of Health (2005)

* Asset revaluations result from DHBs revaluing assets because of changes to fi nancial reporting standards.

5.6
We note that additional funding was also provided for a pay settlement for nurses.

5.7
We do not have any comment on the worthiness of the new policy initiatives. We recognise that, subject to appropriations, the Government is entitled to make funding and spending decisions as it wishes. However, an increasing number of new initiatives were funded from outside the funding package. A good example is the funding for orthopaedics in 2004-05 and beyond. This approach erodes the principle underpinning the funding package – that health funding will be limited to the money in the funding package, except in exceptional circumstances authorised by Cabinet.

5.8
In addition, it has been difficult for us and others, such as the Health Committee, to work out whether new initiatives have been funded from inside or outside the funding package. This is because some items are shown separately in the Estimates of Appropriations, while others are included within the existing categories of funding. It would be useful if there were greater transparency about whether new initiatives were being funded from previously announced funding or new funding.

Avoiding relitigation of the funding package

5.9
The Ministry told DHBs that the Government expected the sector to “live within” the funding package.

5.10
DHBs we spoke to generally appeared to accept the method for allocating the funding package and their shares of it, and did not seek to question the method. Some DHBs mentioned that the funding package saved time previously spent on arguing for more funds.

5.11
Given the amount of new funding that flowed to DHBs, we consider that they would be unlikely to question the funding package. DHBs we interviewed also generally believed that the Population-based Funding Formula was a satisfactory way of distributing funds.

Eliminating district health board deficits

5.12
As part of the funding package, the Minister indicated in December 2001 that DHBs must substantially eliminate their deficits by 30 June 2005. The “deficit trend” target was that DHBs would have a combined deficit of $80 million in 2002-03, reducing to zero by the end of the 2004-05 financial year.

5.13
Figure 8 sets out the actual combined DHB deficit for the years 2001-02 to 2005-06 inclusive.

5.14
Figure 8 shows that the combined DHB deficit reduced from 2001-02 to 2004-05. The combined deficit was $287 million in 2001-02, but had reduced to $15 million in 2004-05. However, we note that deficits have increased in the latest year, with the combined deficit in the year to 30 June 2006 being $42 million. Accordingly, although the original deficit targets have not been achieved, the latest combined deficit shows a substantial improvement compared with the 2001-02 position. Systemic deficits in the DHBs have now been largely eliminated, except for problems still being addressed at the Auckland DHB.

5.15
This result is not surprising, given the significant amount of additional funding that has been provided to both the Ministry and DHBs through the funding package.

Figure 8
Combined district health board deficit trend from 2001-02 to 2005-06

5.16
We also note that, when the funding package was first announced, some funds were not allocated to specific initiatives for the three years of the funding package. These were described as “Future Initiatives and Risk Management”. The amounts were $2 million for 2002-03, $85 million for 2003-04, and $255 million for 2004-05. Some of these funds were used to fund DHB deficits for the relevant years.

Innovation and setting priorities

5.17
One of the aims of the funding package was to allow DHBs and others in the health sector the opportunity to be innovative and to set priorities for implementing the New Zealand Health Strategy and the New Zealand Disability Strategy.

5.18
DHBs told us they had a small amount of freedom in how to allocate funding, although this freedom was generally achieved by making trade-offs. DHBs told us these trade-offs involve constraining funding for some services to allow a DHB to have funding for certain small strategic initiatives.

5.19
Although the health sector received significant new funding, DHBs said that some of this has been tagged for specific purposes. Two areas of significant new funding have been primary health care and mental health. DHBs have had little to do with determining the allocation of the primary health care funding, as its allocation was determined by the Ministry and was not at the discretion of DHBs. DHBs were responsible for transferring this funding to the relevant providers.

5.20
DHBs have had more control over how to spend the mental health funding within the limitations of the “ring-fence” placed around the funds. However, they told us it has been difficult to spend all the mental health funding, mainly because of a shortage of experienced mental health workers.

Implementing the Primary Health Care Strategy

5.21
A significant proportion of the funding package was spent on the Primary Health Care Strategy, and the funding package was the major source of funding for implementing the strategy.

Greater certainty for planning

5.22
The DHBs we interviewed were generally positive about the change from annual funding to a three-year planning horizon.

5.23
DHBs told us the amount of the funding increase (or decrease) was not as important as knowing the amount in advance, so that they could plan. The early funding certainty that the funding package provided was important in allowing quality decision-making, because it took some time to either increase or reduce services in response to changes in funding. Some DHBs also said another benefit was the time saved from not having to renegotiate funding levels every year.

5.24
Some DHBs said that having the funding package was fundamental to certainty, and that out-years of their planning documents were not as robust without the three-year horizon. All DHBs we spoke with agreed that, whether the advice they received was about a percentage increase in funding or about a specific amount, it was the certainty that was important. However, the DHBs differed in the degree of certainty they attached to the advice of a percentage change.

5.25
Most DHBs we interviewed said that planning under the funding package was still not easy. This was because there had been, and continued to be, many other changes in the health sector at the same time as the funding package was rolled out. Some examples include the consolidation of DHBs, the change to the Population-based Funding Formula, and the need for DHBs to reduce their deficits, as well as other changes.

5.26
In addition, some DHBs were uncertain about what their final funding would be after inter-district flows had been calculated. Inter-district flows are DHB-to-DHB payments for services provided by one DHB to the resident population of another DHB.

5.27
Staff at one DHB told us that the inter-district flow for their DHB was $160 million out of total funding of $840 million, and differed by $18 million from the previous year. The actual funding a DHB will receive is uncertain until after a DHB has provided its services. Uncertainty about the final inter-district flow hampers accurate planning.

Opportunities for more cost-effective services

5.28
Some DHBs told us they had already entered into contracts for more than one year before the funding package was introduced, assuming they would receive at least existing baseline funding levels in a future year. Therefore, the three-year horizon of the funding package has not necessarily increased the opportunity to enter more cost-effective long-term contracts.

5.29
The greater certainty afforded by the funding package has meant that DHBs have not had to increase or reduce services suddenly to match funding levels. By having more time to adjust to changes in funding levels, DHBs have been able to change the volumes of services more efficiently.