Media Release

10 November 2006

Health Funding Package Report by the Office of the Auditor General

The Ministry notes the findings of an Audit Office report into the Health Funding Package.

The Audit office report is generally positive, though it does identify some areas for improvement.

The report finds a number of positive points since the introduction of the Health Funding Package (HFP). They include:

• DHB deficits have been substantially eliminated
• Significant new policy (Primary Health Care Strategy) has been introduced and funded form within the HFP
• DHBs are able to plan with greater certainty into future years
• Changes to accounting standards have not impacted on the funds available for Health Services
• Allocation of Health Funding to services is made at a local (DHB level)
• DHBs have been moved towards Population Based funding levels using HFP funds, not additional funding
• The Ministry has clearly tracked funds from the HFP allocation to DHBs and Ministry Directorates to ensure the base funding has been maintained with additional Demographics and Health inflation funding.

One of the key drivers of the HFP was greater certainty of funding levels for the sector, DHBs, the Ministry and the Government. This has been achieved. Additional funding being made available has been with Cabinet’s approval and covered such items as DHB asset revaluations and Asset Testing for people in rest home care.

Deficits have been largely eliminated. Deficits of $287 million in 2001/2002 have dropped to $42 million now (2005/06). This is a significant decrease as a percentage of Vote:Health (3.9 to 0.4%).

The report claims that deficits have again increased in the last year. In fact, Boards with deficits have decreased them, and boards with surpluses have spent them - as the public would expect the funding is reinvested into health services which artificially looks like deficits are increasing when in fact the sector is making considerable progress on them.

Ministry of Health Deputy Director-General (Corporate and Information) Debbie Chin, welcomes the report and acknowledges the assistance that it gives the Ministry to further increase the transparency of the HFP and its use.

Ms Chin said the HFP has made planning/budgeting into the future significantly more certain.

“The package was not intended to be a straight jacket to completely constrain funding to Vote Health and as additional budget has been made available to the whole of the Government Sector, so health has benefited form additional funds being made available”.

ENDS


BACKGROUND

Limiting health funding expenditure
The amount of extra funding (outside the Health Funding Package identified in the report) for the three year period to 2005/6 is $277 million. Two of the largest items included are DHB Asset revaluations ($101.5m over three years) which is due to changes in financial reporting standards and a change to the income and asset testing regime ($105.5m). The remainder includes a number of relatively small initiatives provided under coalition arrangements. Excluding the two large items (asset testing and asset revaluations) leaves $70 million of newly funded ‘Health’ initiatives which represents less than 1 percent of the Vote.

It was made clear at the time that some costs were not included in the funding package. When the Health Funding Package was announced, it was noted that impacts of major Capital expenditure and asset revaluation that are expected over the next few years are not taken into consideration in the package.

DHB deficits
The Health Funding Package has helped to substantially reduce all of the DHB deficits.

The original plan was for no material deficits by 2004/05 and no deficit support from 2005/06 at the individual DHB level. This has been substantially achieved.

The $42 million combined deficit of all DHBs as a percentage of the Vote in 2005/06 is 0.4% of the Vote compared to $287 million or 3.9% of the Vote in 2001/02.

Deficits in DHBs will always show some fluctuation. Due to accounting standards, revenue has to be recognised when it is received and yet the incurring of expenditure relating to the revenue can be recognised in a later year. Eg, Mental Health Blueprint funds are passed to DHBs each year, however, since they can only be used for that specific purpose, they are sometimes spent in the following year. As a result that can cause a surplus in one year, followed by a deficit in the next.

Other causes of deficits include asset write downs due to the significant investment in new hospitals. Old buildings have had to be written off and demolished. This occurred for Whanganui DHB in 2005/06 and is in part responsible for the increase in deficits for DHBs in that year. Lastly, there are underlying structural deficits in Auckland DHB which is noted in the report.

Centralised tracking of health funding package funding
Health funding operates through a decentralised model where DHBs are responsible for decisions around funding services for their own populations. That means that DHBs are not specifically required to report separately on the Health Funding Package funding. DHB funding is effectively pooled in the same way that an individual's salary and pay rise are pooled and it would be unusual to separate out one from the other.

Pooling DHB funding helps ensure that it is easier for those who deliver services to the public to allocate funds where needs are greatest (at a local level). To increase the burden on those who deliver services to explain exactly how the funding from different sources has been applied is possible but would remove sector efficiencies.

Population based funding formula
The population based funding formula has had a significant impact on the HFP.

Moving DHBs to a consistent and fair level of funding under population based funding formula quickly would have meant cutting funding to some DHBs and moving funds to others. Funding cuts for some of the affected DHBs is regarded as unacceptable. Instead, it was agreed to accelerate the move to a population based funding formula by using the Health Funding Package - but changing slightly the way the package was originally intended to be used.

The Primary Health Care Strategy
Using the Health Funding Package to fund the primary health care strategy (10%, 14% and 17% respectively of the health funding package over the three years to 2005/6) shows how the Health Funding Package has been used to meet the cost of new initiatives - even ones of substantial costs.

Funding announcements
In the past, the announcement of Health Funding Package funding increases has been announced broadly and then subsequent announcements have included more detail of what the specific funded initiative entails.

Changes to the Health Funding Package
All changes to the HFP and its use has been approved by Cabinet. Additional funds applied to the HFP have been possible due to additional funds available for the Crown’s budget as a whole.

For further information, please contact Peter Abernethy, Communications Manager, 04-496-2008 or 021-366-111