District health boards: Main findings from the 2018/19 audits

Letter sent on 30 June 2020 to chief executives and chairpersons of district health boards by John Ryan, Controller and Auditor-General. The letter summarises the main matters from the 2018/19 audits of district health boards and shares some thoughts about the future. 

30 June 2020

Tēnā koutou

District health boards: Main findings from the 2018/19 audits

This letter outlines our main findings from the previous year’s audits of district health boards (DHBs). Our audits give us visibility of all DHBs and I thought it useful to summarise the main matters we have seen during the past 12 months. This information may be useful as you approach this year’s financial and performance reporting.

This year, the environment has dramatically changed. The response to Covid-19 has profoundly affected us all. I acknowledge, in particular, the effect on DHBs, especially many of your staff at the frontline of the health response. I am aware that you have had to respond in tight time frames to a new set of requirements to meet the Covid-19 threat. The level of effort involved, and the disruption to standard operating models, has been significant.

In this context, it is more important than ever to focus on the essentials of good management and good governance in order to maintain public trust and confidence, achieve value for money, and continue improving your organisation’s performance.

The following observations are based on what we saw during the 2018/19 audits and our thoughts about the future.

Covid-19

The impact of Covid-19 on DHBs is not limited to managing risks associated with the response and normal service delivery. It will also have a significant effect on your financial and performance reporting and the control environment.

The full effect of the Covid-19 response on financial and performance reporting for 2019/20 and beyond is not yet known. However, it will include the re-prioritisation of service delivery, the unplanned services provided when responding to Covid-19 (and associated effects on performance information), and the effect on asset valuations and financial disclosures.

You will need to assess the impact of Covid-19 on your DHB’s financial and performance reporting requirements and discuss this assessment with your auditor. To ensure high-quality reporting, governors and preparers need time to fully consider all the risks and issues affecting the DHB, make the required judgements, document the rationale for those judgements, and make those judgements transparent through enhanced disclosures in annual reporting. We anticipate extra work will be required, both by auditors and those preparing financial statements and performance information.

Given this, I support proposed legislative amendments to extend the 30 June 2020 statutory reporting time frames by up to two months. The response to Covid-19 has not only added complexity to audits but also, in many cases, prevented auditors accessing documentation, systems and processes. Although this proposed extension will relieve the immediate pressure for some DHBs, the Government proposes to continue to report on its financial statements in the normal timeframes. It is important therefore to talk to your auditor about how any time frame changes might affect your DHB.

Financial sustainability

Financial sustainability continues to be one of the largest shared challenges in the sector. DHB deficits have increased to the point where they are a feature of the system instead of just a budget management issue for individual DHBs to solve. In my view, this requires both a DHB and a system response.

I note the significant increase in DHB funding in Budget 2020 compared with Budget 2019. Achieving sustainability, however, is about more than funding. DHBs need a clear understanding of what is driving their costs, how their costs compare with sector best practice, and what are their realistic options to address cost pressures. This is difficult to achieve in isolation – co-ordination and leadership are necessary components of system sustainability. 

For this reason, I have included, as part of the 2020/21 work programme for my Office, gaining a better understanding of how the Ministry of Health and the Treasury are working together to support the financial sustainability of DHBs (together with the work DHBs are doing) and, where possible, to support this work by identifying where improvements could be made.

Holidays Act 2003

In 2018/19, all but one DHB’s audit opinion was qualified because of the material uncertainty in the provisions made for Holidays Act 2003 liabilities. We have been reporting on this issue since 2015/16, but DHBs’ progress to fix this has been slow. In 2018/19, the aggregate liability reported by DHBs was $762 million, but we did not have enough confidence that this figure was a reliable estimate.

DHBs have been working collectively on resolving holiday pay issues, which is essential to achieving consistency of treatment and buy-in from staff. However, this liability remains a significant issue because of its accumulating size and, more importantly, employees have not been paid what they are entitled to. This is an ethical issue as much as a financial one. I urge you to continue to prioritise addressing this problem.

Procurement and contract management

Procurement and contract management are strategically significant for DHBs because of the number of products and services procured to support the delivery of services, and DHBs’ reliance on other providers to deliver health services in the community. I note that good progress has been made in some DHBs on procurement policies and planning, and the development of regional approaches to procurement, which has potential to deliver benefits. I recently published an article about procurement for local government that asks councils questions about procurement practice and culture in their organisation. These questions can be readily applied to DHBs.

Our report Ministry of Health: Management of personal protective equipment in response to Covid-19 was published in June and includes useful lessons for DHBs and the broader health and disability sector. I encourage you to consider these at the board level.

Some of the lessons in the report that are relevant to DHBs include:

  • Elements of the health emergency planning framework were not up to date. Not all DHBs had current plans or plans consistent with each other or the Ministry’s overarching plan.
  • The process for preparing, amending, and consistently communicating clinical guidelines for personal protective equipment (PPE) during emergencies needs to be reviewed by DHBs and the Ministry of Health.
  • Some basics of stock management were not consistently applied, causing some PPE held by DHBs to be well past its expiry date.
  • Procurement of PPE during an emergency presents special challenges. The DHB procurement strategy should be strengthened by including an analysis of risks to the supply chain, and a plan to address these risks.

Asset management

DHBs, more than most public organisations, rely heavily on assets to deliver public services. We continue to focus on DHB asset management in our audits – not only because of its strategic importance, but because our most recent in-depth review of DHB asset management in 2016 found much that needed improvement.

A positive development is the National Asset Management Programme for district health boards and the recently completed Report 1: current-state assessment. This sets out current issues and enables a co-ordinated and more informed approach to asset investment across the sector. We will watch the development of the programme with interest.

DHBs need to maintain or strengthen the focus on the fundamentals of good asset management, which include:

  • planning that clearly links investment to strategic need;
  • visibility over asset condition and required maintenance; and
  • engagement at all levels of the organisation, especially with governors.

Without effective engagement by the board, asset management can drift in an organisation – resulting in buildings and equipment that are not fit for purpose, and plans and resources that are inadequate for ensuring proactive asset maintenance and replacement.

Proposed changes to health system

The final report of the New Zealand Health and Disability System Review is now released. It presents several opportunities and challenges for the sector. It could mean a period of significant change for the sector. At times of change and uncertainty, it is especially important to ensure that systems and controls are strong.

I have attached questions on some of these matters in the hope that they will help start useful conversations with your management team.

Nāku noa, nā

Signature - JR

John Ryan
Controller and Auditor-General