Part 4: Financial performance of district health boards

Health sector: Results of the 2012/13 audits.

In this Part, we describe:

Financial results

We described DHBs' funding in Part 1 and set out the amount of funding that they are directly allocated under Vote Health. DHBs also receive income from other sources, including the Ministry, ACC, and insurance payments. Figure 8 sets out the total revenue for each DHB.

Collectively, DHBs had total revenue of $14.0 billion ($13.7 billion excluding Canterbury DHB's insurance income of $295 million, explained below) and total expenditure of $13.7 billion in 2012/13. Excluding the insurance income, this represents an increase of nearly 3% on 2011/12.15

The aggregate DHB deficit (excluding Canterbury DHB) for 2012/13 was $19.3 million, compared to a planned deficit of $18.5 million, and an aggregate deficit of $22.4 million in 2011/12.16 DHBs continue to work in a financially constrained environment, with nine DHBs reporting deficits and the remainder breaking even or reporting surpluses.

Figure 8 sets out financial results for each DHB, by region, for 2012/13. Amounts have been rounded, so surpluses or deficits (actual and planned) of less than $50,000 will show as 0.0 (nil).

Figure 8
Summary of 2012/13 financial results for district health boards, by region

District health boardRevenue $mExpenditure $mSurplus (deficit)* $mPlanned surplus (deficit)* $mVariance from plan $m
All DHBs 14,006.4 13,739.6 (19.3) (18.5) (0.8)
Northern Region      
Auckland 1,820.1 1,820.1 0.2 0.1 0.1
Counties Manukau 1,405.7 1,402.6 3.0 3.0 0.0
Northland 523.2 523.1 0.1 0.0 0.1
Waitemata 1,423.4 1,416.6 6.8 2.0 4.8
Totals 5,172.4 5,162.4 10.1 5.1 5.0
Midland Region      
Bay of Plenty 656.7 656.7 0.1 0.0 0.1
Lakes 316.2 318.0 (1.8) (0.8) (1.0)
Tairāwhiti 158.9 160.9 (1.5) 0.0 (1.5)
Taranaki 326.7 326.9 0.0 2.7 (2.7)
Waikato 1,184.9 1,183.0 2.1 1.0 1.1
Totals 2,643.4 2,645.5 (1.1) 2.9 (4.0)
Central Region      
Capital and Coast 959.2 970.0 (10.8) (10.0) (0.8)
Hutt Valley 442.9 445.9 (3.0) 0.0 (3.0)
Wairarapa 133.2 136.6 (3.4) (3.1) (0.3)
Hawke's Bay 474.9 472.8 2.1 3.0 (0.9)
MidCentral 582.9 576.5 6.4 1.5 4.9
Whanganui 222.7 224.6 (1.9) (2.9) 1.0
Totals 2,815.8 2,826.4 (10.6) (11.5) 0.9
South Island Region      
Canterbury** 1,791.9 1,505.0 - - 0.0
Nelson Marlborough 420.4 423.4 (2.9) 0.1 (3.0)
South Canterbury 178.0 177.2 0.7 (0.5) 1.2
Southern 849.7 861.3 (11.9) (11.0) (0.9)
West Coast 134.8 138.4 (3.6) (3.6) 0.0
Totals 3,374.8 3,105.3 (17.7) (15.0) (2.7)

Rounding can lead to small differences in the totals and variances. Figures are from DHBs' 2012/13 annual reports.

* The surplus/(deficit) figure does not include revaluations or impairments of asset value. Also, where the surplus/(deficit) figure is affected by profits from joint ventures or associates, it will not be the same as revenue less expenditure.

** Revenue includes insurance receipts. Surplus/deficit is recorded as nil, as explained in paragraph 4.8.

Canterbury DHB

Canterbury DHB's total income of $1.8 billion for 2012/13 includes just under $295 million that came from the final settlement of its earthquake damage claim.

Canterbury DHB's insurance policy for earthquake-damaged buildings had a cap of $320 million. The estimated cost of the damage (more than $500 million) is well in excess of the cap. The DHB received $25 million of insurance income in 2011/12. The balance of $295 million is recognised in the 2012/13 financial statements. The bulk of this money ($287.5 million) was part of the final settlement agreed in September 2013, and was a post-balance date adjustment to the DHB's income.

This insurance income resulted in the DHB reporting a surplus of $286.9 million for 2012/13. Ignoring the additional insurance income, the DHB effectively "broke even" (after receiving additional funding of $35 million from the Ministry for additional earthquake costs and lower revenue because of estimated population reductions). We have therefore reported a nil result for Canterbury DHB in Figure 8.

Regional financial performance

As Figure 8 shows, the Northern Region reported a cumulative surplus and the other three regions reported cumulative deficits. The surplus/deficit trends for the past seven years are shown in Figure 9.

All four Northern Region DHBs reported surpluses for 2012/13, resulting in a cumulative surplus for the region of $10.1 million, just down from the cumulative surplus of $10.9 million in 2011/12.

Two Midland Region DHBs (Lakes and Tairāwhiti) reported deficits in 2012/13. The Midland Region had a combined deficit of $1.1 million in 2012/13, compared to a regional surplus of $6.5 million in 2011/12.

The main difference was Waikato DHB's result in 2012/13, a surplus of $2.1 million compared to a surplus of $9.4 million in 2011/12.

Four of the six Central Region DHBs reported deficits resulting in a cumulative deficit of $10.6 million compared to a cumulative deficit of $16.7 million in 2011/12.

The main difference was in the result for Capital and Coast DHB, which reported a deficit of $19.9 million in 2011/12 and a deficit of $10.8 million in 2012/13. However, the DHB's total income of $959.2 million includes a building revaluation gain of $20.3 million. This was one of four revaluation gains recognised since 2004 that have cumulatively reversed a $65.9 million revaluation loss recognised in 2002. Without this one-off gain, the DHB's deficit in 2012/13 would have been $31 million.

The combined deficit for the South Island Region (excluding Canterbury DHB) was $17.7 million, which is an improvement on the combined deficit of $23.1 million in 2011/12 (Canterbury DHB's result was nil in 2011/12).

However, we note that Southern DHB's reported deficit was reduced by $3.4 million because of the incorrect accounting treatment of a depreciation expense (see paragraph 2.79).

DHBs continue to work to improve their financial performance by seeking efficiency and productivity gains in clinical and support services. This includes a focus on regional collaboration and national shared service initiatives, such as those led by HBL and others, as discussed in Parts 1 and 2.

Surplus/deficit trends

Figure 9 shows the total deficit, for all DHBs, from 2006/07 to 2012/13, including a breakdown by the four regions.

Figure 9
Surplus/deficit for all district health boards, and the four regions, 2006/07 to 2012/13

Figure 9 Surplus/deficit for all district health boards, and the four regions, 2006/07 to 2012/13.

The total surplus/deficit trends show a general convergence towards zero and "break-even" for the sector. However, the Midland Region went into a regional deficit for the first time in 2012/13.

DHBs spent more than $13.7 billion in 2012/13 (see Figure 8). They are dependent on continuing Crown funding, which is provided monthly. They are also subject to close monitoring of their financial performance and position by the Ministry.

Monitoring of district health boards

The Ministry monitors the performance of DHBs and other Crown entities. It monitors and supports DHBs through its National Health Board business unit, which also monitors each DHB's financial position.

The Ministry's monitoring framework uses three levels of intervention – standard monitoring, performance watch, and intensive monitoring. There is also a Single Event Monitoring regime, introduced to respond to external events such as the Canterbury earthquakes.

Standard monitoring is used when a DHB is in a sound financial position, has supported accountability arrangements in place, and is complying with requirements in a timely manner. DHBs are under a performance watch when there is some non-compliance or deterioration in their performance. Intensive monitoring occurs when a DHB continues to be non-compliant or deteriorates in the performance watch requirements, or a single event creates a material risk.

As at 1 March 2014, 10 DHBs were on standard monitoring and 10 were being monitored more closely:

  • Taranaki, Waikato, Hutt Valley, and Whanganui DHBs were on performance watch;
  • Capital and Coast, Wairarapa, Nelson Marlborough, Southern, and West Coast DHBs were on intensive monitoring; and
  • Canterbury DHB has been on a Single Event Monitoring regime since the Canterbury earthquakes.

As well as monitoring, the Minister of Health can change how a DHB is governed, to help improve its performance. To do this, the Minister can appoint one or more Crown monitors to observe the decision-making processes of the DHB board, to help the board understand the policies and wishes of the Government, and to advise the Minister on any matters about the DHB or its board. If seriously dissatisfied, the Minister can dismiss the board and appoint a commissioner.

As at 1 March 2014, Southern DHB had a Crown monitor and no commissioners were appointed to DHBs.

Using financial statements to understand financial health

Last year, we reported on our analysis of DHB financial statements to better understand financial risk and financial performance.17 We have continued this analysis to better understand the financial health of DHBs and their ability to deliver on their objectives. We report elsewhere on our analysis of other central government entities (government departments, Crown research institutes, and other Crown entities).18

We examined the audited financial statements of DHBs over seven years, to assess three accounting relationships:

  • Ability to operate as planned. We examined the relationship between planned expenditure and actual expenditure for operational and capital spending. We also examine the likelihood of DHBs spending more than they receive.
  • Ability to manage uncertainty. We examined the ability of DHBs to cover their current liabilities and adjust their operations in times of change.
  • Ability to invest for the future. We examined the general level of expenditure on capital assets and the level of total liabilities the DHB is responsible for.

Figure 10 summarises the accounting relationships we examined to better understand the financial health of DHBs.

Figure 10
Accounting relationships examined to better understand the financial health of district health boards

Ability to operate as planned (stable services)Ability to manage uncertainty (resilient services)Ability to invest for the future (sustainable services)
Budgeted to actual operational spending Current assets to current liabilities (working capital) Spending on capital compared to depreciation
Budgeted to actual capital spending Ongoing operating expenses* to total operating expenses Total liabilities to total assets
Net operating cash flow (excluding depreciation and amortisation) to total cash flow received Retained earnings to total assets

* By ongoing (or fixed) operating expenses, we mean employee benefits, interest, depreciation, and amortisation.

Sector overview

Overall, our findings reflect the challenging operating environment and expectations for DHBs to deliver quality health services and improve health outcomes in financially constrained times. DHBs are working to improve their financial performance and to "live within their means". The aggregated sector deficit for 2012/13 and trend during the past seven years shows a decreasing sector deficit since 2008/09.

Our findings show a sector with a strong focus on delivering short-term results, particularly in the planning and budgeting of operational activities. However, many of the longer-term ratios also suggest that the adequacy and alignment of financial resources may limit the ability of DHBs to respond to unexpected events or exploit future opportunities without recourse to the Crown.

Figure 11 summarises the financial health of DHBs, using data from the past seven financial years. Fewer than half of all DHBs have indicators at levels that would characterise good financial health and their results have been consistent for the last seven years. There is sizeable over-budgeting of capital spending, low levels of working capital, and moderate to high liabilities compared to assets. The high liabilities include debt associated with previous operating deficits and spending on capital items.

Figure 11
Summary of the financial health of district health boards, using data from the past seven financial years

AbilityFinancial statement items we comparedVarianceComment
to operate as planned Budgeted and actual operational spending Less than 5% The small variance suggests that the sector is generally good at spending what it plans to spend on its operational activities.
Budgeted and actual spending on capital 20% to 50% less than budgeted The large variance suggests that the sector is not generally good at spending what was planned.
Operational income and spending 2% higher or lower This ratio suggests that the sector is generally good at spending what it receives in funding but has little left over as reserves.
to manage uncertainty Current assets and current liabilities 50% to 70% This ratio suggests that the sector could experience difficulty in paying its current liability obligations in times of change and/or uncertainty.
Ongoing operating expenses and total operating expenses 30% to 50% This ratio suggests that the sector has the ability to adjust its spending patterns in times of change. However, we note that a sizeable proportion of DHB spending is contracted through other health service providers.
to invest for the future Capital spending and depreciation 100% to 150% This ratio suggests that the level of capital expenditure across the sector is likely to be enough to replace existing assets (although the figure also includes spending on new assets).
Total liabilities and total assets 50% to 100% This ratio suggests that the sector's liabilities could restrict management's focus on, and capability for, investing in longer-term assets.
Retained earnings and total assets -5% to -20% This ratio reflects historical operating deficits and suggests that the sector has limited reserves.

The ability to operate as planned

How likely are DHBs to over- or under-forecast their operational spending needs?

Overall, the financial statements show that DHBs' operational spending is generally in line with their operational budgets. This result is consistent with the tight financial environment that DHBs operate in and their aim to manage within their means and break even.

For cash flows, the difference between budget and actual operational spending has been consistently small among DHBs. As a group, DHBs have consistently kept within 5% of their budgeted operational spending in recent years as they focus on managing within their operating budgets.

How likely are DHBs to over- or under-forecast their capital spending needs?

Our analysis of financial statements shows that the difference between budget and actual capital spending has been consistently large among DHBs. The variances relate to over-budgeting (or under-spending) on capital assets.

Capital asset management is about effectively managing assets during their economic lives. Good asset management planning underpins accurate capital budgeting and spending. We discussed DHBs' asset management in Part 2, including the need for many DHBs to update or improve their asset management plans and practices. Some DHBs have delayed updating their plans, pending the development of regional plans. Given this context, it is difficult to know whether budgeted capital spending by DHBs as a group is in keeping with DHBs' current asset management plans.

How likely are DHBs to spend more than they receive on their operations?

In most instances, the difference between what is received and what is spent on DHBs' operational costs has ranged from between a 2% surplus and a -2% deficit (excluding depreciation and amortisation funding received). This shows that the funding that DHBs receive for their operational expenses is reasonably consistent with the level of their operational costs.

DHBs continue to work hard to manage within their means, reduce deficits, and, where possible, "break even". The financial results for 2012/13 (see Figure 8) show that, as a group, DHBs had total expenditure of more than $13.7 billion and a collective deficit variance of $0.8 million, which is very small given the level of expenditure.

The ability to manage uncertainty

Could DHBs find it difficult to cover their current liabilities, with current assets, if needed?

DHBs receive funding based on their population profile (see Part 1) to provide health services to their population. This amounted to about $11 billion for all DHBs in 2012/13. Collectively, they also received about $1 billion from the Ministry for nationally funded health services.

DHBs regularly deal with low levels of uncertainty, responding to peaks in demand for health services (such as high rates of influenza or increased demand for emergency department services) and working with inter-district funding flows. Inter-district funding flows provide a means for a DHB to pay another DHB for providing health services to people from its population (for example, for specialist health services or for patients needing care when out of their own district).

DHBs can generally manage minor fluctuations in inter-district funding flows or service demands but more significant fluctuations can affect their ability to meet their short-term financial responsibilities. DHBs would expect to manage major events, such as a pandemic or a natural disaster, with the support of the Government (for example, Canterbury DHB received additional support of $35 million in 2012/13 after the Canterbury earthquakes).

DHBs' levels of current assets might not be sufficient to cover current liabilities, if required. A result of 100% means that the value of current assets equals the value of current liabilities. For DHBs, the results were in the range of 50% to 70%. There is a moderate risk that DHBs' levels of current liabilities could be onerous in times of uncertainty.

Could DHBs find it difficult to adjust operations in times of change?

Funding for DHBs is adjusted each year to reflect demographic changes, increased demand for services, inflationary pressures, and new government initiatives (see Part 1). However, the rate of annual increases has reduced in recent years as the Government works to "bend the curve" of health spending and focus on financial sustainability. DHBs are expected to manage their budgets within constrained funding increases and lift productivity and health outcomes for New Zealanders.

Where DHBs have a high proportion of ongoing (or fixed) expenses (employee benefits, interest, depreciation, and amortisation), the ability to adjust and adapt in times of change could be limited. We note that a sizeable portion of DHBs' spending is contracted to third-party health providers.

Overall, the financial statements indicate that DHBs' levels of current liabilities and ongoing costs are not onerous, given the surety of their revenue, and would not adversely affect their ability to manage uncertainty in times of change.

The ability to invest for the future

How likely are DHBs to be underinvesting in their assets?

Figure 12 shows steady increases in total assets, total liabilities (including total debt), and total debt over the past seven years. The increase from 2011/12 to 2012/13 was most notable for total assets, an increase of more than 10%, followed by an increase of nearly 8% in total debt and just under 5% in total liabilities.

Figure 12
District health boards' total assets, total liabilities, and total debt, 2006/07 to 2012/13

Figure 12 District health boards' total assets, total liabilities, and total debt, 2006/07 to 2012/13.

There has been some significant capital investment in recent years, with a number of hospital redevelopments (including at Waikato DHB and Capital and Coast DHB). The pending redevelopment of Canterbury DHB hospitals is expected to cost more than $650 million and will be the largest ever health-related building project in New Zealand.

Maintaining the operational capacity of DHB assets is fundamental to the long-term sustainability of health services. Comparing an entity's capital expenditure to its asset consumption (as measured by depreciation) is one way of understanding the level of investment in an entity's capital assets. A result of 100% would mean that levels of capital expenditure were equal to depreciation – in other words, new and replacement assets were equal to assets used up.

We would expect a result of more than 100% because capital expenditure includes not only replacing existing assets but also spending on new assets and the health sector has high capital needs. Our comparison for DHBs results in an average of 100% to 150%. This could indicate a low to moderate risk of underinvestment in DHBs' capital assets. It is worth noting that the ratio does not distinguish between spending on existing or new assets.

Are total liabilities becoming onerous?

Overall, DHBs have a high level of total assets compared to their total liabilities. Too many liabilities can reduce future funding options and distract management from a focus on the long-term assets of the DHB.

Our analysis showed a moderate risk of DHBs being restricted by too many liabilities. The result for all DHBs ranged from 50% to 70% (when 100% would mean that total liabilities were equal in value to total assets). This indicates that levels of total liabilities would not adversely affect the overall ability of DHBs to invest for the future. However, this might not be so for an individual DHB, if it had high levels of debt or persistent deficits.

Could DHBs find it difficult to manage within their means in the long term?

Figure 9 shows that DHBs have reported significant collective deficits since 2006/07, but there has been some improvement in more recent years.

Retained earnings reflect historical accumulated surpluses or deficits. Low or no retained earnings indicates that DHBs are operating in a tight financial environment. This can result in, and it has for some DHBs, contributions from the Crown to offset these losses. In our analysis, a result of 100% would mean that retained earnings were equal in value to total assets. The average result for DHBs during the past seven years ranged from -5% to -20%.


Overall, our analysis of DHBs' financial statements shows that, collectively, DHBs are generally managing within their means. This includes managing in a more constrained financial environment in recent years, with lower rates of annual increases in funding. Although nine DHBs reported deficits in 2012/13, the remainder were breaking even or reporting surpluses.

Financial and service sustainability, including investing in health infrastructure and assets to planned levels to meet future needs, is an ongoing challenge for DHBs.

15: Health sector: Results of the 2011/12 audits, page 43. Amounts are rounded.

16: The figures for 2011/12 include Canterbury DHB. Its deficit in 2011/12 was effectively zero, so its inclusion does not affect this comparison.

17: Health sector: Results of the 2010/11 audits, Part 5.

18: See our 2014 report, Central government: Results of the 2012/13 audits (Volume 2).

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