Part 1: Overview of the health sector

Health sector: Results of the 2012/13 audits.

In this Part, we provide an overview of the health sector to help set out the context for our work, including describing:

Operating environment

The health sector faces complex and ongoing challenges, including an ageing population, people living longer with multiple health conditions, and the increasing costs of new technologies and medicines. Non-communicable diseases, such as cardiovascular disease, diabetes, and cancer, are the leading cause of mortality. Mental health problems, including worryingly high suicide rates, are also a significant issue for New Zealand.

New Zealand's health and disability services are delivered through a complex network of organisations. Appendix 1 lists the public entities in the health sector. We described the sector's structure, regional and sub-regional arrangements, and recent structural and non-structural changes in our 2013 report, Health sector: Results of the 2011/12 audits. These changes are expected to lead to improvements in various aspects of the capability and infrastructure needed to support the health system and the sustainability of the health sector.

There are two key components of the public health system:

  • The Ministry of Health (the Ministry), which advises the Minister of Health and the Government on health issues and leads the public health and disability sector, including monitoring DHBs and other Crown entities.1 The Ministry also operates regulatory functions, provides health sector information and payment services, and purchases national health and disability services.
  • DHBs, which are responsible for identifying and providing for the health needs of their district. The 20 DHBs are grouped into four regions (Northern, Midland, Central, and South Island).

Government expenditure in Vote Health in 2012/13 was just under $14 billion, which was about 18% of total government expenditure ($78.6 billion). More than three-quarters of the health budget is allocated directly to the DHBs in the form of population-based funding.

As the second largest area of public spending (after Social Development), health spending plays a key role in government financial sustainability. The challenge is to continue to provide New Zealanders with high-quality health care while ensuring that the health system is sustainable. The previous high rate of annual increases in health spending, particularly since the 1990s, has now started to level off.

District health board funding

DHB funding is largely based on the population of each district. It is calculated using a population-based funding formula (PBFF). DHBs also collectively receive additional funding of about $1 billion from the Ministry for national health services (for example, funding to provide national elective services). Other funding sources include other government agencies (most notably Accident Compensation Corporation, or ACC), local government, and private sources, such as insurance and out-of-pocket payments (for example, payments from international patients).

Population-based funding formula

The PBFF is used to determine the share of funding allocated to each DHB, based on its population, the relative needs of the population, and the costs of providing health and disability services. The formula includes weightings and adjustors for population age and other indicators of high needs, such as deprivation status and ethnicity.2 These weightings are based on expected average health care costs for each person, such as inpatient, outpatient, maternity, immunisation, mental health, and pharmacy costs, and adjustors for unavoidable costs (such as the higher cost of providing services in rural areas).3

The PBFF was developed in 2000 and used population data available at the time. Cabinet approved the formula in November 2002 and directed that it be reviewed every five years to include new data about deprivation from the population census.4 It is updated each year with population projections from Statistics New Zealand.

The PBFF was introduced in 2003 and was also reviewed in 2003, when 2001 census data became available. The 2003 review5 did not consider any structural issues, but the PBFF was updated using the 2001 data. The PBFF was also reviewed after the 2006 census, which led to a few minor changes and recalculations. In conjunction with updating the PBFF with new data from the 2013 census, a full policy review of the PBFF is currently being scoped by the Ministry.

Funding for DHBs under Vote Health has been increasing annually using demographic and "contribution to cost pressures" adjusters. These increases are intended to help meet inflationary pressures and service demand pressures caused by population changes. There has also been additional funding for specific new initiatives (such as funding for dementia in Budget 2013).

Figure 1 shows the population for each DHB that the Ministry used to determine Vote Health Budget funding for 2013/14, and the actual funding for 2012/13. Further financial information for DHBs, including total revenue and expenditure for each DHB in 2012/13, is set out in Part 4.

Figure 1
Population of district health boards (2013/14 estimates), and funding for 2012/13 and 2013/14

District health boardPopulation*2013/14 Budget
2012/13 actual
All DHBs 4,490,851 11,104.4 10,891.0
Northern Region
Auckland 469,585 1,068.6 1,051.2
Counties Manukau 517,070 1,203.4 1,174.7
Northland 159,765 474.9 465.6
Waitemata 564,755 1,252.8 1,217.9
Northern Region totals 1,711,175 3,999.7 3,909.4
Midland Region
Bay of Plenty 216,040 593.6 584.8
Lakes 103,110 272.8 268.5
Tairāwhiti 46,715 141.2 137.3
Taranaki 110,773 296.0 290.9
Waikato 374,475 977.9 948.1
Midland Region totals 851,113 2,281.5 2,229.6
Central Region
Capital and Coast 300,330 661.0 643.5
Hutt Valley 145,410 346.0 342.3
Wairarapa 40,760 119.2 116.0
3 DHB sub-region totals 486,500 1,126.2 1,101.8
Hawke's Bay 156,900 430.4 419.2
MidCentral 170,430 447.6 440.5
Whanganui 62,868 198.0 195.7
Central Region totals 876,698 2,202.2 2,157.2
South Island Region
Canterbury 509,955 1,218.6 1,222.0
Nelson Marlborough 142,075 367.5 359.1
South Canterbury 57,055 160.9 156.1
Southern 309,600 758.0 743.0
West Coast 33,180 116.0 114.6
South Island Region totals 1,051,865 2,621.0 2,594.8

* Updated data received from the National Health Board (Ministry of Health).

** The Estimates of Appropriations 2013/14, Vote Health, pages 130 to 132.

*** CFISnet.

DHBs deliver hospital-based services and purchase services from third parties, such as primary health organisations (PHOs) and residential facilities. Collectively, DHBs spend about $5.7 billion on services from third parties each year. We discuss the DHBs' reporting of service performance information in Part 3.

The health services that DHBs provide and purchase are categorised into four output classes (groups of similar services/activities):

  • early detection and management;
  • intensive assessment and treatment;
  • prevention; and
  • rehabilitation and support.

Figure 2 shows the distribution of total expenditure for all DHBs in 2012/13 across the four output classes.

Figure 2
Distribution of spending by all district health boards in 2012/13

Figure 2 Distribution of spending by all district health boards in 2012/13.

In Part 4, we discuss DHBs' financial performance, including their financial results for 2012/13 and our analysis of their financial health.

Regional and national collaboration

Increased regional and national collaboration is a focus for the sector as further efficiencies and cost savings are sought. There is a current expectation that initiatives led by Health Benefits Limited (HBL) will produce sector savings of $764 million over five years (from July 2010).

The evolving regional and sub-regional operating environment for DHBs is set out in our 2011/12 report. Shared services agencies, such as healthAlliance N.Z. Limited (healthAlliance), have continued to take on expanded roles, with an increasingly wider scale and scope of functions (see Part 2).

DHB elections were held in October 2013, resulting in changes in board memberships. Those changes included six new chairpersons and six new deputy chairpersons. There are seven chairperson and deputy chairperson cross-appointments, which are intended to encourage greater regional collaboration in the planning and delivery of health services.

Individual DHBs are held accountable for delivering services. Although DHBs are planning regionally, there are still no formal arrangements (other than publishing regional plans) for public accountability about regional service delivery between entities or regions. This is an area of increasing interest for our Office because agencies are increasingly expected to work more collaboratively throughout the public sector.

Regional services planning

With health spending of just under $14 billion, it is important that services are designed and delivered without unnecessary waste.

A 2010 amendment to the New Zealand Public Health and Disability Act 2000 required DHBs to collaborate at local, regional, and national levels for the most effective and efficient delivery of health services. Changes to regional services planning were introduced in the health sector in 2011 to support the effective and efficient design and delivery of services.

The expectation was that DHBs would plan together to reduce service vulnerability, reduce costs, and improve the quality of care. We decided to see what progress had been made and so carried out a performance audit on regional services planning. We published our report in November 2013.6

We looked at the effectiveness of the planning process in helping to ensure a sustainable health system for the future, including the extent to which the intended benefits were being achieved. We focused on aspects of service delivery, capital investment, and the availability of good quality data to support decision-making.

We found some signs of success but not as much progress as expected, and there were some challenges that needed to be overcome. The Ministry and DHBs had put effort into creating the conditions for success and collaboration had increased but it was still not yet business as usual.

The Ministry was not systematically monitoring and measuring progress, or quantifying the benefits achieved by regional services planning. It was difficult to tell whether the sector was going far or fast enough to achieve what it was trying to achieve.

In our view, the Ministry needed to do better in setting the direction for DHBs and in providing guidance.

Good planning requires good information, based on data that is complete, reliable, consistent, and comparable. In the areas that we looked at, the quality of data used for planning and reporting needed to improve. We recommended that the Ministry and DHBs work together on this.

We made seven recommendations to help the Ministry and DHBs as they continue with regional services planning. We expect to follow up on this work in 2015/16.

Public sector legislative reform

Three principal statutes governing the management of the State sector and public finances were amended in 2013. The changes support the goals of the Government's Better Public Services (BPS) programme, which is meant to see public entities working more closely together to deliver better results for less money. The legislative changes are intended to provide for:

  • greater financial and reporting flexibility; and
  • stronger leadership at the system, sector, and departmental level to achieve the desired change in the performance of the State sector.

The amendments to the Crown Entities Act 2004 were enacted in July 2013. They change aspects of the way in which statutory Crown entities, including DHBs, can present information on their financial and service performance (both forecast information and end-of-year reporting).

The changes also mean that subsidiaries of Crown entities are not required to produce their own annual report (or statement of intent) unless they are directed to by the Minister of Finance (for example, to support public accountability).

We have discussed with the Ministry whether the three significant DHB-owned shared services agencies (healthAlliance, HealthShare Limited, and Central Region's Technical Advisory Services Limited) should continue to produce their own accountability documents. In our view, given the significance of their operations, it would be appropriate for them to do so.

1: Associated bodies such as the National Health Board, Health Workforce New Zealand, IT Health Board, and Capital Investment Committee also have a role in advising and leading the sector.

2: Ministry of Health (2003), Population-based Funding Formula, page vii.

3: Penno E. and Gauld R (2013), "How are New Zealand's District Health Boards funded and does it matter if we can't tell?", New Zealand Medical Journal, Vol. 126, No. 1376, page 25.

4: Ministry of Health (2003), Population-based Funding Formula, page 1.

5: See

6: Regional services planning in the health sector, available at

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