Part 1: Overview of the health sector

1.1
In this Part, we discuss the health sector's operating environment, including some recent structural changes and the shift to regional planning and accountability. We also set out the funding of district health boards (DHBs) and the population in each district.¹

1.2
In the rest of this report, we discuss the financial performance of DHBs in 2010/11 (Part 2), the audit results for 2010/11 (Part 3), our review of DHBs' management of their assets (Part 4), DHBs' reporting of their efforts to reduce health disparities for Māori (Part 5), and our recent and ongoing work in the health sector (Part 6).

The health sector's operating environment

1.3
The public health system faces serious challenges from a rising demand for services and for access to improved technologies, exacerbated by an ageing population. There are international shortages of skilled clinical specialists, remuneration pressures, and significant building and clinical equipment replacement costs, which are unlikely to reduce in the short term.

1.4
The Canterbury earthquakes have affected and will continue to affect the services and infrastructure of DHBs, particularly Canterbury DHB (see Part 4). Our earlier report on the 2011 annual audits of central government discusses the effects of the earthquakes in more detail.² For DHBs, one particular effect has been suspension of the 2011 capital round. This has led to delays in approvals for business cases, because resources have been redirected to Canterbury DHB.³

1.5
Vote Health continues to increase, but the Government expects increased financial pressure on the health services and has indicated a tightening of funding increases during the next several years. Vote Health had appropriations of nearly $14 billion for 2011/12.

1.6
About three-quarters of Vote Health is funding for the health services that DHBs provide, based on the Government's spending priorities, the size of the district's population, and socio-economic factors. The funding covers the health and disability services that the DHB provides directly to its population or indirectly through another provider – such as another DHB, a not-for-profit primary health organisation (PHO), or a private for-profit or not-for-profit provider such as a non-government organisation.

1.7
The Ministry of Health (the Ministry) oversees almost $10.5 billion of public funds that DHBs spend on public hospitals and primary health care.⁴ It also manages the national planning and funding of all information technology, workforce planning, and capital investment in DHBs.

1.8
Although there have continued to be increases in the Budget for Vote Health (against the trend for most other sectors), the amount for new initiatives is less now than it was in 2009/10. Then, there was almost $723 million for new operating and capital initiatives (as well as $86 million reprioritised from existing areas). In 2011/12, there was $516 million for new operating and capital initiatives (plus $109 million reprioritised from existing areas). Much of the increase for Vote Health has been to keep up with demographic and cost changes in the sector.⁵

1.9
The sector is under pressure to provide better, more timely, and more convenient health services. The Government continues to review expenditure to identify funding that could be better used in other areas, particularly in frontline health services rather than "back office" functions.

Structural changes in the health sector

1.10
In July 2010, Health Benefits Limited (HBL) was set up to reduce DHBs' costs by increasing the effectiveness and efficiency of administrative, support, and procurement services.⁶ HBL is tasked with contributing to $700 million of savings for DHBs during its first five years.⁷

1.11
In December 2010, the Health Quality and Safety Commission was set up to examine and improve the quality and safety of health and disability support services and achieve better value for money. The Commission took over the mortality review functions set out in the New Zealand Public Health and Disability Act and responsibility for rolling out the Safer Medication Management Programme.

1.12
The number of PHOs continues to reduce: there were 55 at 31 January 2011 and 32 at 31 July 2011. This figure does not include South Canterbury DHB's Primary and Community Services unit, which replaced the district's only PHO in May 2010. The 32 PHOs vary widely in size and structure.

1.13
Further structural changes have been signalled for the health sector. Parliament is considering disestablishing the Crown Health Financing Agency at the end of 2011/12. This would affect DHBs in particular because it lends money to DHBs and is involved in property disposal. The Ministry would take over its functions. Disestablishment of the Health Sponsorship Council and the Alcohol Advisory Council of New Zealand is also being considered (to form a new agency, the Health Promotion Agency), as well as disestablishment of the Mental Health Commission (with its functions moved to the Office of the Health and Disability Commissioner).

Population and funding of district health boards for 2010/11

1.14
There have been across-the-board increases in the population-based funding of DHBs since 2009/10. Figure 1 shows each DHB's population at 30 June 2011 and its 2010/11 and 2009/10 funding.

Figure 1
Population of district health boards at 30 June 2011, and funding for 2010/11 and 2009/10

* Statistics New Zealand estimate, 30 June 2011.

** Total Budget, Supplementary Estimates of Appropriations for the year ending 30 June 2011, pages 443-444.

*** Total Budget, Supplementary Estimates of Appropriations for the year ending 30 June 2010, pages 128-130.

Regional planning and accountability

1.15
DHBs are responsible for identifying and providing for the health needs of their district.

1.16
In our earlier report on the 2010/11 audits of the central government sector as a whole, we commented that:

It is not easy to combine the existing appropriation and reporting requirements, which are annual and based on individual entities, with the more collective and longer-term governance needs of the [central government] sector.⁸

1.17
One of the main changes to accountability arrangements in the health sector has been the establishment of regional planning requirements. Some DHBs (particularly those in greater Auckland) already had mechanisms for regional planning and collaboration. Under a 2010 amendment to legislation, each DHB is now required to prepare an annual plan and collaborate throughout its region to produce regional plans for health services and resourcing, which are reflected in the annual plan. Together, these replace the former district annual plan and the district strategic plan. There are four regions: northern, midland, central, and southern.

1.18
Despite requirements for regional planning, the requirements for reporting still focus on individual DHBs. There are no mechanisms for collective public reporting. Further, services are increasingly being rationalised regionally and nationally, and inter-agency service collaboration is increasingly encouraged. To the extent that regional planning is reflected in an individual DHB's annual plan, the DHB can be held to account for its regional responsibilities.

1.19
In our view, it is important that accountability arrangements in the health sector keep pace with the regionalisation of planning and services. We will continue to discuss with interested parties how the sector can best be held to account for effective delivery of health services in an increasingly regionalised and nationalised system and within an inter-agency environment.

1: The structure of the sector is outlined in the Ministry's briefing to the Minister of Health, The New Zealand Health and Disability System: Organisations and Responsibilities (2011), Wellington, page 2 and pages 19-26.

2: Office of the Auditor-General (2011), Central government: Results of the 2010/11 audits (Volume 1), Part 2, Wellington.

3: National Health Board (2011), Capital Investment Committee Update, Wellington.

4: Health Sector Information Supporting the Estimates of Appropriations for the Government of New Zealand for the year ending 30 June 2012, Volume 6, page 8.

5: Health Sector Information Supporting the Estimates of Appropriations for the Government of New Zealand for the year ending 30 June 2010, and Health Sector Information Supporting the Estimates of Appropriations for the Government of New Zealand for the year ending 30 June 2012, Volume 6, pages 12-13 for each year.

6: Health Benefits Limited was a dormant company, reactivated to carry out these functions.

7: Health Benefits Limited, Annual Report 2011, page 2.

8: Office of the Auditor-General (2011), Central government: Results of the 2010/11 audits (Volume 1), Wellington, page 81.