Part 2: Costs and savings

Inquiry into Health Benefits Limited.


In HBL’s first year operating under its new purpose, the Ministry of Health provided direct funding of $6 million. It was expected that HBL would work with DHBs, the Treasury, and the Ministry of Health to prepare a sustainable future funding model. HBL presented options to the Ministry of Health, but we understand that a model had not been agreed when the Minister of Health announced that HBL would be wound down.

Therefore, DHBs directly funded their share of HBL’s costs. To do this, DHBs had to approve their share of the cost of business cases and programmes and, through this, fund HBL’s activities. Sometimes, this approval was difficult to get. HBL considered that the DHBs had a strong focus on current-year budgets, meaning that programmes that required upfront funding − with benefits later − were difficult for DHBs to commit to.

On the occasions when funding that the DHBs agreed to was not enough to complete business cases, HBL had to get Crown loans to complete the work. Securing approval from all 20 DHBs for business cases and for Crown loans was time-consuming and contributed to delays. The Crown loans were provided as bridging finance with the intention that they be paid back by vendor finance or by DHBs through successful delivery of programmes.

DHBs provided $68.3 million capital funding for the FPSC programme through an issue of shares by HBL.

To achieve the $700 million target, HBL drew up an “invest to save” model that required upfront funding to create future benefits. In some instances, these benefits were not expected to be realised for years and would not necessarily be spread equally throughout the health sector. In effect, DHBs were being asked to support investments that would deliver national savings but might incur local costs.

Operating costs

Between 1 July 2010 and 30 June 2014, HBL’s operating costs were $49 million. Apart from the $6 million that the Ministry of Health gave HBL in its first year, revenue from DHBs or Crown Loans funded these costs. Figure 1 shows HBL’s total operating expenditure by programme.

Figure 1
Health Benefit Limited’s total operating expenditure by programme, 2010/11 to 2013/14

Year ended 30 June2011
Collective procurement, shared banking and insurance 1.7
Finance, procurement, and supply chain* 12.7
Facilities management and support services 4.2
Information services 5.3
New opportunities 1.8
Human resources and workforce management 0.6
Not categorised 4.8 8.0 9.9
Total annual operating expenditure 4.8 8.0 9.9 26.3
Total cumulative operating expenditure 4.8 12.8 22.7 49.0

* These are costs that HBL incurred in running the FPSC programme, rather than costs of operating the FPSC.
Source: Health Benefits Limited.

Reported savings

HBL reported total gross savings to the sector of $301.8 million from 2010/11 to 2013/14. This included $54.1 million of savings from HBL’s first year of operations in 2010/11, which preceded the five-year period identified by the Shared Services Establishment Board for achieving the savings target of $700 million. Figure 2 shows a breakdown of the gross savings across programmes that HBL reported on.

Figure 2
Total gross benefits by programme, 2010/11 to 2013/14

Year ended 30 June2011
Collective procurement, shared banking and insurance 55.2 59.7 97.0 92.1
Finance, procurement, and supply chain 0.4
Facilities management and support services
Information services
Human resources and workforce management
New opportunities
HBL adjustments* -1.1 -1.6 0.1
Total gross annual benefits 54.1 58.1 97.1 92.5
Total gross cumulative benefits 54.1 112.2 209.3 301.8

* Adjustments that HBL made to DHBs’ reported savings after auditing them, to more accurately reflect actual benefits.
Source: Health Benefits Limited.

HBL’s estimated and actual (where applicable) sector savings over the five-year period to 30 June 2016 are shown in Figure 3. Actual savings achieved during the first three years of the five-year period were $247.7 million, compared with estimated savings for the first three years of $220 million.

Figure 3
Health Benefits Limited’s savings estimates and actual savings, 2011/12 to 2015/16

Year ended  30 June 2012
Savings estimate 40.0 60.0 120.0 210.0 270.0 700.0
Actual savings 58.1 97.1 92.5 - - 247.7

Source: Health Benefits Limited.

The savings reported under the Collective Procurement programme came from several sources, including DHB individual and collaborative procurement initiatives; MBIE’s all-of-government initiatives; and healthAlliance procurement, as well as savings from HBL-led procurement initiatives.

When savings resulting from other activities are removed, the reported savings that are directly attributable to HBL up to 30 June 2014 are $71 million. Figure 4 shows reported savings that arose directly from HBL’s services and initiatives.

Figure 4
Health Benefit Limited’s total gross benefits by activity and service, 2010/11 to 2013/14

Year ended 30 June2011
HBL-led procurement 9.4 20.2 6.6 36.2
Insurance 14.0 11.3 25.3
Shared banking 4.6 4.5 9.1
Finance, procurement, and supply chain 0.4 0.4
Total gross annual benefits 9.4 38.8 22.8 71.0

Source: Health Benefits Limited.

HBL also contributed to procurement savings over the same time period achieved by MBIE’s all-of-government initiatives and by healthAlliance Limited, totalling $73.6 million.

Types of savings

HBL grouped the savings it recorded into two categories − budgetary benefits and non-budgetary benefits. HBL defined budgetary benefits as changes that result in a budget line reduction compared with the previous year. Non-budgetary benefits included preventing projected increases in costs that, because of changes, did not take place, and qualitative benefits, such as productivity improvements or reduced clinician time in administration, arising from changes made.

HBL reported total savings rather than the amount of savings in each of these categories, despite our recommendations in successive audit reports that they provide the breakdown. However, HBL worked on the methodology to provide DHBs with the breakdown by savings type and intended to publish results in its 2014/15 annual report. The data that HBL gave us indicate that the split for 2013/14 was $52.5 million for budgetary and $40 million for non-budgetary benefits.

How savings were reported

To quantify and report savings, HBL needed to create a baseline against which future savings could be measured. For example, for procurement activities, baselines were the price of a product or service that a DHB bought before a negotiated contract came into effect.

The low quality of information from DHBs made it more difficult for HBL to obtain baseline data. The lack of a common chart of accounts in DHBs meant financial information was not directly comparable.

HBL had to do a lot of work to cleanse and verify data before it could rely on that data. This is a problem that the FPSC programme was designed to solve.

In the end, HBL relied on the information that DHBs gave it, in line with an agreed methodology with sign-off from the DHBs’ chief financial officers. At first, HBL did little to test the accuracy of information that DHBs provided. In our view, this reduced confidence in the numbers reported. In response to our recommendations over successive audits to provide more quality assurance, HBL did make improvements. For example, from 2013/14, HBL employed internal auditors to visit DHBs and test reported savings.

In September 2014, HBL hired Grant Thornton Limited to audit the benefits that DHBs reported. Grant Thornton’s audit found inconsistent reporting of benefits by DHBs, resulting in under- and over-statements of some reported benefits. Grant Thornton recommended ways to address these problems, including updating guidelines for DHBs to report benefits and formalising HBL staff visits to DHBs, of at least once a year, to review information and provide help with reporting. HBL’s managers acted on these recommendations and the savings figures were adjusted accordingly.

Other benefits

A range of non-financial benefits have resulted from HBL’s work. The work to produce baseline data required some DHBs to improve their data integrity. This should help DHBs’ financial decision-making. Producing baseline data also allows benchmarking of DHBs’ financial performance and allows DHBs to share lessons learned.

Good practice in administrative and support services is now being shared more between DHBs. Creating a national catalogue for DHB procurement and national contracts has led to options to standardise products.

Our observations

We question how compatible the “invest to save” model was with the DHBs’ operating environment. DHBs agreed with the overall objectives of saving money in administration and corporate services to invest in frontline services. However, DHBs are expected to achieve financial results in the short term. Therefore, investments making immediate savings are more palatable to DHBs than investments that result only in future savings.

It is worth considering whether DHBs had enough incentive to fully engage with and support HBL’s programmes. Lack of total DHB engagement and support contributed to the slow progress. HBL’s successor will need to manage these tensions carefully.

An option that was available but not requested was for the Minister of Health to exercise powers in the Public Health and Disability Act 2000 to direct DHBs. For example, section 33A of that Act provides for the Minister to give directions about administrative, support, and procurement services. This could have resolved situations where HBL had reached an impasse with one or more DHBs, acting in what they saw as the best interests of their district but causing delays in the programmes.

During the period covered by our inquiry, HBL contributed directly to sector savings of $71 million, at an operating cost of $49 million, a positive result of
$22 million. HBL also contributed to a range of non-financial benefits for the sector, as described above.

DHBs have also incurred capital costs for the FPSC programme, which should be able to support the operation of the programme in future years (see Part 4).