Part 1: Introduction

Health sector: Results of the 2014/15 audits.

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

The health sector's operating environment

New Zealand's public health system is administered under the New Zealand Public Health and Disability Act 2000 (the Act). The Act establishes the DHBs and some other Crown entities, setting their purpose, functions, governance arrangements, and reporting obligations. It also establishes certain responsibilities of the Minister of Health (the Minister).

Government expenditure on health in 2014/15 was $15.06 billion, making it the second-largest expenditure after social security and welfare.

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 that we audit.

The public health system has three main components:

  • The Ministry of Health (the Ministry) advises the Minister and the Government on health issues, leads the public health and disability sector, and monitors DHBs and other Crown entities. The Ministry also performs regulatory functions, provides health sector information and payment services, and purchases national health and disability services.
  • DHBs are responsible for providing for the health needs of their district. They do this through various activities, including providing secondary and tertiary health services in their hospitals, and funding other organisations and groups to provide primary health services. DHBs are supported by shared-services agencies, which provide administrative, financial, and information systems and services.
  • Primary health organisations (PHOs) are not-for-profit organisations funded by DHBs to deliver primary health care services. People generally receive these services by visiting general practices, most of which belong to PHOs. PHOs are not public entities, and so are not audited by the Auditor-General, but their general practices are the part of the health system that most people have contact with most often. PHOs receive a large amount (about $1 billion) of health funding.

Ministry of Health and associated bodies

The Ministry is the lead agency in the sector. The Director-General of Health is the chief executive of the Ministry and has statutory responsibilities under the Act and the Health Act 1956.

The Government established the National Health Board (NHB) in November 2009. The NHB was made up of a ministerially appointed board and a business unit in the Ministry. The board was responsible for overseeing the NHB's work programme, which included:

  • funding and monitoring the planning and performance of DHBs; and
  • planning and funding specified national services, such as child health and emergency services.

The NHB had two subcommittees: the Capital Investment Committee and the National IT Health Board. Their responsibilities related to the planning and approval of investments in the sector. In March 2016, the NHB was disestablished. The Capital Investment Committee was reconstituted as a statutory advisory committee to the Minister. The National Health IT Board is now accountable to the Director-General of Health. The Ministry has absorbed the other functions of the NHB into other business units.

Health Workforce New Zealand is a statutory advisory committee to the Minister, supported by the Ministry, with responsibility for planning and development of the health workforce.

District health boards

DHBs were established by the Act, which sets out the objectives that DHBs must work towards. The objectives, as set out in section 22 of the Act, include the following:

  • to improve, promote, and protect the health of people and communities;
  • to promote the integration of health services, especially primary and secondary health services; and
  • to seek the optimum arrangement for the most effective and efficient delivery of health services in order to meet local, regional, and national needs.

DHBs are responsible for providing or funding health services for the people of their districts. The 20 DHBs differ greatly in terms of their population size and density, and their demographics. Waitemata DHB has the largest population of about 583,000, and the smallest is West Coast DHB, with a population of about 33,700.

Each DHB prepares an annual plan, which is agreed with the Minister, and, for those DHBs deemed to be at high financial risk, the Minister of Finance also. The plan includes budget and performance measures. DHBs are organised into four regions: Northern, Midland, Central, and South Island. Since 2011, regulations have required DHBs to prepare plans showing how they will operate regionally, as well as their individual plans.

Other Crown entities

Other Crown entities set up under the Act have various roles in the sector:

  • The Health Quality and Safety Commission works with clinicians, providers, and consumers to improve health and disability support services.
  • The Health and Disability Commissioner investigates and reports on complaints about health or disability service providers to ensure that the rights of consumers are upheld.
  • The New Zealand Blood Service provides the health system with access to blood and tissue products, and related services.
  • The Health Promotion Agency was formed on 1 July 2012 by merging the Alcohol Advisory Council and the Health Sponsorship Council. It leads and supports work in a number of areas, including the promotion of health, well-being, and healthy lifestyles, and provides advice and research on alcohol issues.
  • The Pharmaceutical Management Agency (Pharmac) decides which medicines, medical devices, and related products are to be subsidised. DHBs provide the funding for the subsidies.

Funding for the health sector

Government spending on health has increased from $13.13 billion to $15.06 billion since 2009/10. The rate of increase in expenditure on health over this period has levelled off compared with previous years. For example, in the five years to June 2015, government expenditure on health increased by 9.5%, whereas in the five years to June 2010, it increased by 37.5%.

The challenge is to continue to provide New Zealanders with high-quality health care while ensuring that the health system is financially sustainable.

District health board funding and expenditure

The bulk of DHB funding is allocated using the population-based funding formula (PBFF), which we describe below. DHBs also collectively receive additional funding of about $1 billion for national health, public health, and disability services.

DHBs provide hospital-based services and purchase services from third parties such as PHOs and residential facilities. Collectively, DHBs spend about $5.9 billion on services from other providers each year.1

The health services that DHBs provide and purchase are grouped into four output classes:

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

Population-based funding formula recently reviewed

The PBFF is used to calculate the share of funding allocated to each DHB, on the basis of its population, the population's needs, and the costs of providing health and disability services. The formula includes weightings and adjustors for population age and other indicators of need, such as deprivation status and ethnicity. 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 "rural" adjustors to reflect the higher cost of providing services in rural areas).

Funding for DHBs under Vote Health has been increasing annually through the Budget process, reflecting relative priorities across government. Assumptions about annual demographic changes are based on Statistics New Zealand's population projections. Additional funding has also been provided for specific new initiatives.

The PBFF was devised in 2000, using 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.

The Ministry completed the latest full review of the PBFF in late 2015. The review looked at whether the PBFF was still fit for purpose, and considered matters including whether the core model's weightings and the adjustors should be changed.

The review recommended no structural change to the PBFF model, but it has resulted in technical changes to each of the components of the model, such as updated inputs. The biggest change is to the rural adjustor, which affects the underlying model used. This is likely to result in slightly larger funding increases for DHBs with high rural populations, such as Southern DHB, than more densely populated DHBs such as Auckland. The changes to funding resulting from these changes to the model will start in 2016/17.

Figure 1 shows the population figure for each DHB that the Ministry used to calculate Vote Health Budget funding for 2014/15, and the actual, "fully devolved" funding for 2014/15. The fully devolved funding is funding that each DHB can determine how best to spend in order to meet the health needs of the people in its district. In addition to this funding, DHBs receive funding for specified services (for example, additional elective surgeries). Further financial information on DHBs is set out in Part 3, where we discuss DHBs' financial performance and set out our analysis of their financial health.

Figure 1
Population of district health boards (2015/16 estimates), and fully devolved funding for 2015/16 (Budget) and 2014/15 (actual)

District health boardsPopulation*2015/16 Budget funding $million**2014/15 actual funding $million***
Northern region
Auckland 482,015 1,115.6 1,092.3
Counties Manukau 524,505 1,268.5 1,246.4
Northland 169,035 509.3 487.9
Waitemata 582,765 1,342.1 1,311.8
Northern region totals 1,758,320 4,235.5 4,138.4
Midland region
Bay of Plenty 222,235 633.6 614.4
Lakes 103,920 283.5 278.3
Tairāwhiti 47,603 146.8 144.3
Taranaki 118,560 317.7 304.2
Waikato 391,770 1,040.1 1,002.4
Midland region totals 884,088 2,421.7 2,343.6
Central region
Capital and Coast 301,170 689.6 678.8
Hawke's Bay 160,735 457.1 435.5
Hutt Valley 144,550 363.6 357.8
MidCentral 171,250 465.9 458.0
Wairarapa 43,880 127.8 122.5
Whanganui 62,453 205.6 202.3
Central region totals 884,038 2,309.6 2,254.9
South Island region
Canterbury 529,905 1,281.4 1,268.4
Nelson Marlborough 146,270 393.2 378.2
South Canterbury 59,043 167.4 164.6
Southern 313,050 789.6 776.5
West Coast 33,685 121.5 119.6
South Island region totals 1,081,953 2,753.1 2,707.3
All district health boards 4,608,398 11,719.9 11,444.2

* Data provided by the Ministry of Health.
** The Treasury (2015), The Estimates of Appropriations 2015/16.
*** Ministry of Health (2015), Annual Report for the year ended 30 June 2015.

Changes in the health sector

Updating the New Zealand Health Strategy

One of the responsibilities of the Minister as set out in section 8 of the Act is to determine a strategy for health services, called the New Zealand Health Strategy (the Strategy), and to report each year on progress in implementing it.

The previous Strategy was approved in December 2000. In November 2014, the Minister announced that the Ministry would be reviewing the Strategy. Public consultation on a draft strategy began in October 2015, and the Minister launched the finalised Strategy in April 2016.

The Strategy sets out the global challenges facing the health system:

  • providing health and social services to increasing numbers of older people who are living longer;
  • a growing burden of long-term conditions, such as heart disease, diabetes, depression, and dementia;
  • how to afford new technologies and drugs and meet rising expectations;
  • a highly mobile global workforce;
  • the emergence of new infections and antibiotic resistance; and
  • the health and social consequences of climate change.

Other challenges in New Zealand include reducing health disparities for Māori and other population groups, and maintaining and developing the health workforce. The Strategy clearly signals that significant changes will be needed in models and approaches to health care provision.

The Strategy notes the likelihood that maintaining services as they are currently provided will become unaffordable, with the proportion of gross domestic product needed to fund these services rising from 7% now to 11% in 2060.2 It says that a change to the system is needed to put more emphasis on prevention and less on treatment. The Strategy will require everyone involved in health care delivery, including the Ministry and DHBs, to make the necessary changes and exercise the flexibility to be effective within financial constraints.

Towards this change, the Strategy specifies five strategic themes with associated objectives, and includes a "roadmap" of actions to be completed within five years. The updated Strategy is likely to result in a period of sustained change as the sector carries it out. An early indication of this is an extensive restructure of the Ministry now in progress, to position it to carry out the Strategy.

An example of an innovative approach already being taken to service delivery is Whānau Ora, which we reported on in 2015.3 We found that, despite some gaps in communication and inconsistency between the agencies involved, Whānau Ora has produced some benefits for many families and whānau who have been directly supported, and their communities. However, we noted that the Ministry had no plans then to make any changes to take advantage of the work already done, or to improve the Whānau Ora funding model.

Using information and information technology to support health services

Effective use of information is essential to maintaining and improving the public health system. In our work, we consider how the Ministry and other agencies gather clinical and quality information on performance for reporting and for supporting decision-making.

The National Health IT Board has the role of leading and co-ordinating information and information technology (IT) development in the health sector. This role includes setting the sector's strategic direction, and providing advice to the Director-General of Health or the Minister on requests by DHBs to make IT investments exceeding a specified amount.

In November 2015, the National Health IT Board released a revised five-year work plan to 2020. The plan specified four priority areas:

  • a single national electronic health record for every New Zealander, with a working target date of mid-2018 for establishing a base electronic health record;
  • a standard for the use of digital solutions by hospital and specialist services;
  • a preventative health IT platform to capture information relating to population screening programmes for individuals; and
  • data to support health and social investment.

Working towards these priorities will require entities in the sector to work together closely and carefully manage investments in IT to allow the sharing and exchange of information that these priorities will require.

In our recent progress report about how the Ministry and DHBs deliver scheduled services to patients,4 we noted the introduction of the National Patient Flow Collection, a new national patients' information system, which will eventually allow patients to be followed from referral to scheduled services to the outcome of the referral, between services in a DHB, and between DHBs. This new system is expected to provide comprehensive information on patient "pathways" at individual, DHB, and national levels.

In our Annual plan 2016/17, we state our intention to look at work to improve patient information systems. This work will focus on the Patient Portals programme. Patient portals are online sites, provided by general practitioners, which enable patients to get their health information and interact with their general practice.

Changes at agency and sector level

There were two major changes in the health sector in 2014/15.

Southern DHB's board replaced by a commissioner

Southern DHB is the southernmost, and geographically the largest, DHB. It was formed in May 2010 as the result of the merger of Southland and Otago DHBs. It has reported deficits every year since 2011/12. It recorded its largest deficit, of $27.2 million, in 2014/15.

In June 2015, the Minister, using powers provided by section 31 of the Act, dismissed the Southern DHB board and replaced it with a commissioner. In his statement announcing the decision, the Minister noted long-standing financial problems at Southern DHB, and his lack of confidence that the existing governance arrangements were suitable for delivering the changes needed.

The commissioner started on 18 June 2015, and has been joined by three deputy commissioners. The original term for the commissioner was until December 2016, at which point a new board would have started its term after the elections in October 2016. Legislation enacted in May 2016 cancelled the 2016 election for Southern DHB, allowing the commissioners' appointments to be extended beyond the original December 2016 deadline.

Southern DHB has the challenge of achieving financial sustainability without repeated recourse to the Crown for additional support. Its planned deficit for 2015/16 is $35.9 million. We discuss Southern DHB further in Part 2.

Health Benefits Limited and New Zealand Health Partnerships

Health Benefits Limited (HBL), was a Crown-owned company set up to prepare national programmes in partnership with the health sector to reduce the costs of non-clinical support services to DHBs, by using a centralised shared-services model. However, after difficulties and delays in delivering some of HBL's programmes, the Government decided to wind down its operations and replace it with a DHB-owned entity. HBL's last day of operation was 30 June 2015.

A Transition Interim Governance Group was established to oversee the transition from HBL to a new entity that will continue HBL's work. The group included representatives from DHBs, the Ministry, the Treasury, and HBL.

The new entity, NZ Health Partnerships Limited (NZHP), started on 1 July 2015 as a Crown subsidiary owned by all the DHBs. NZHP works with DHBs and other entities to "… enable DHBs to collectively maximise shared-services opportunities for the National Good".5 It is led, supported and owned by the 20 DHBs.

NZHP continued the programmes begun by HBL and started some new work. Programmes still operating include a sector procurement strategy, a common financial management information system, a shared information technology infrastructure to replace separate infrastructure in each DHB, and food services for both hospitals and Meals on Wheels.

Our inquiry into Health Benefits Limited

In November 2014, Hon Annette King MP asked the Auditor-General to look into the performance of HBL, the decision to wind it down, what it had cost the health sector, and what benefits it had achieved. We looked into the costs and benefits of HBL's work in the health sector, seeking lessons about shared-services programmes. We also looked at:

  • how HBL managed relationships with health sector entities;
  • the approach and processes that HBL used in business cases; and
  • the governance and management arrangements for delivering HBL's programmes.

By the end of June 2014, HBL had reported total gross savings of $301.8 million on behalf of the sector, of which $71 million was attributable directly to HBL. As well as savings, other benefits resulted from HBL's work, such as improvements to DHBs' data integrity and the sharing of good practice in administrative and support services.

HBL's most ambitious programme was the Finance, Procurement and Supply Chain (FPSC) programme. It was intended to provide a common financial management information system for all DHBs, a centralised procurement function performed by healthAlliance N.Z. Limited (healthAlliance), and a redesigned supply chain. The original completion date was November 2014. However, the programme encountered delays and was paused in 2014 so that it could be revised.

HBL encountered several problems with the FPSC programme. They included inadequate communication with DHBs, which contributed to a lack of commitment from some DHBs, and DHBs not supplying timely and accurate information to HBL's board. HBL also had no programme management office for maintaining project management discipline, and there were weaknesses in the programme's governance structure. The budget for the FPSC programme was revised more than once to accommodate costs that were not budgeted for. By March 2015, it had spent $80 million of the budgeted $92.1 million, and was not yet complete.

At the time of our inquiry, it was too soon to assess the benefits of the FPSC programme, which we found to be ambitious, complex, and risky. We will continue to monitor the programme in the course of our annual audit work of NZHP.

We included 11 lessons in our report on HBL about managing new programmes for a sector. Lessons for sector-wide initiatives include:

  • ensuring open two-way communication with the parties to align the programme with DHBs' objectives, and to gain commitment to and understanding of requirements, especially that of providing good information;
  • ensuring that solutions are scalable; and
  • establishing sound governance and management structures for programmes, including comprehensive planning for change.

1: This is the amount paid by DHBs to all other providers, which includes $1.48 billion paid to other DHBs for inter-district flows – that is, payment for care provided to patients who live in another district.

2: Ministry of Health, New Zealand Health Strategy, page 11.

3: Whānau Ora: The first four years, available at

4: Delivering scheduled services to patients – Progress in addressing the Auditor-General's recommendation, available at

5: See