Summary

Background to the Health Funding Package

In 2002, the Government introduced a substantial three-year Health Funding Package (the funding package).

The Government introduced the funding package to allow the Ministry of Health (the Ministry) and district health boards (DHBs) to plan their operational spending on health and disability services three years ahead. It provided funding above baseline levels for Vote: Health from 2002-03 to 2004-05.

The funding package (including funding for demographic changes) comprised $501 million in 2002-03, continuing in later years; an extra $496 million in 2003-04, continuing in later years ($997 million total in 2003-04); and another $498 million in 2004-05, also continuing in later years ($1,495 million total in 2004-05).

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.

Components of the funding package

The funding package contained components:

• for inflation;
• for changes in population size and structure;
• to address historical issues in hospital services funding; and
• for new initiatives. A large amount of this funding was used to move DHBs to a population-based funding formula and to fund the Primary Health Care Strategy.

Our conclusions

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

The Minister of Health 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.

The Population-based Funding Formula was a new method for allocating funding to DHBs. Because the funding package was the major source of new funding for DHBs, it was used as a pool of funding to implement the Population-based Funding Formula. The funding package was therefore 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.

Record-keeping by the Ministry of Health

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, and the amounts allocated from the funding package to individual DHBs. The Ministry does not have records of how the DHBs allocated the funding, as this is the responsibility of the DHBs.

District health board and Ministry directorate approach to allocating the funding package

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

Ministry directorates were given flexibility as to how they applied funding package funds. The Ministry sometimes used the funding to implement a Ministrywide policy. However, most decisions on use of funding were made within the Ministry’s directorates. The Ministry stated that this allowed the directorates to manage any funding pressures in their areas.

We were provided with some examples where it was clear how a directorate had decided to allocate funding package funds. However, the funding package was generally seen as a pool of money additional to baseline funding, to be allocated as directorates saw fit. After the first year of new funding, the funding was considered part of baseline funding.

Managing within the funding package

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.

However, additional funding has been appropriated to Vote: Health from outside the funding package during the same period. This has eroded 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.

In addition, it has been difficult for us and others, such as the Health Committee of the House of Representatives, 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. Greater transparency about whether new initiatives were being funded from previously announced funding or from new funding would be useful.

Eliminating district health board deficits

As part of the funding package, the Minister indicated in December 2001 that DHBs must substantially eliminate their deficits by 30 June 2005. We found that the combined DHB deficit did reduce from 2001-02 to 2004-05, but increased in the 2005-06 year.

Innovation and setting priorities

DHBs told us the funding package gave them a small amount of freedom in how to allocate funding, although this freedom was generally achieved by making trade-offs. These trade-offs involved constraining funding for some services to allow a DHB to have funding for certain strategic initiatives.

Implementing the Primary Health Care Strategy

The Primary Health Care Strategy received a significant proportion of the total funding package (about 10% in 2002-03, 14% in 2003-04, and 17% in 2004-05), and the funding package was the major source of funding for implementing the strategy. Funding for the strategy was “ring-fenced”, which meant that the funds could be spent only on the strategy. The Ministry distributed the money to DHBs, and they distributed it to Primary Health Organisations.

Greater certainty in planning

The DHBs we interviewed were generally positive about the change from annual funding to a three-year planning horizon, because it had helped them to plan better. DHBs told us that the amount of the funding increase (or any decrease) was not as important as knowing the amount in advance, so that they could plan.

However, most DHBs we interviewed said planning under the funding package was still not easy. This is because there had been, and continued to be, many other changes happening in the health sector at the same time as the funding package was rolled out, which caused some uncertainty about the level of funding DHBs would receive.

Opportunities for more cost-effective services

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.