Health ReportDHB Sector Year to Date Financial Performance for the six months to 31 December 2019

Date due to MO:

N/A Action required by: N/A

Security level: IN CONFIDENCE Health Report number:

20200115

To: Hon Dr David Clark, Minister of Health

Copy to: Hon Grant Robertson, Minister of Finance

Contact for telephone discussionName Position TelephoneMichelle Arrowsmith Deputy Director-General, DHB

Performance, Support and Infrastructure

021 572 584

Fergus Welsh Chief Financial Officer, Corporate Services

021 550 410

Action for Private Secretaries

Return the signed report to the Ministry of Health.

Forward copy of report to Minister of Finance.

Date dispatched to MO:

DHB Sector Year to Date Financial Performance for the six months to31 December 2019

PurposeThis report provides an overview of the financial performance of the district health board (DHB) sector for the year to date to 31 December 2019. The commentary is based on data and responses from DHBs as part of their monthly financial reporting to the Ministry of Health (the Ministry). The report highlights where the sector or an individual DHB reports a significant variance against their Annual Plan financial budgets and provides information on sector wide issues with financial implications.This report is also provided to the Minister of Finance because of his interest in the associated fiscal risks arising from DHBs which are a significant component of the Crown’s balance sheet and operating budget [CAB (00) M19/13 refers].

Key pointsDHB financial results for the year to date 31 December 2019 show the following:

A sector wide deficit of $274 million after six months of the financial year, or a $23 million unfavourable variance to the draft budget. In the same period last year, the sector reported a $207 million deficit, ending the year on a net deficit of $1.248 billion including one-offs, or $432 million excluding one-offs.

For the six months year to date, Holidays Act provisions have increased by $3.6 million across eight DHBs.

DHBs are forecasting a $587 million deficit to 30 June 2020 against the draft year end-result of $534 million. The forecast only includes additional provisions required for Holidays Act remediation in 2019/20 for eight DHBs and includes financial benefits from savings initiatives. The Ministry is working with those DHBs that are not currently providing for additional Holidays Act remediation costs to gain a fuller picture of the impact.

The sector’s unfavourable variance to budget is due to outsourced personnel costs, outsourced service costs, clinical supplies costs and infrastructure costs, totalling $99 million.

This is offset by a favourable revenue variance against the draft budget of $55 million and a favourable variance to budget for personnel costs of $21 million.

Five DHBs achieved a result favourable to budget.

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Overall, across the sector Full Time Equivalents (FTEs) (1) are lower than planned by 488, but this is 2,535 higher than the same period last year.

DHBs’ capital expenditure for the year to date was $272 million against budgeted expenditure of $379 million. The sector forecast for the full year is for an underspend of $28 million.

Seventeen DHB 2019/20 annual plans have been approved as at 31 December 2019. We are working with the three DHBs (Auckland, Canterbury and Nelson Marlborough) who have plans yet to be approved to resolve issues to allow the plans to be submitted for your consideration.

RecommendationsThe Ministry recommends that you: a. Note this report is specifically for the purpose of informing the

Ministers of Health and Finance, of the current financial performance and arising issues of the DHB sector to 31 December 2019.

b. Agree to refer this report to the Minister of Finance for his information.

Yes / No

c. Note this report will be published on the Ministry’s website

Michelle Arrowsmith Hon Dr David ClarkDeputy Director-General Minister of HealthDHB Performance, Support and Infrastructure

Date:

Fergus WelshChief Financial OfficerCorporate Services

1 In the FTE counting framework, the definition for Accrued and Worked FTEs for all personnel categories is based on a nominal standardised full-time week of 40 hours. This standardisation factor converts to 2,086 hours per year. Further information is contained in the document ‘‘measuring staff resources – counting FTEs’ that is available on the National Service Framework Library (NSFL) Ministry of Health website.

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Operating results1. The Ministry has received the DHB financial performance results for the year to 31

December 2019. Table one below shows the following:a) A sector wide deficit of $274 million after six months of the financial year, or a

$23 million (9.1 percent) unfavourable variance to budget. At the same period last year, the sector reported a $207 million deficit, ending the year on a net deficit of $1.248 billion or an operational deficit of $432 million excluding one off costs such as Holidays Act provisions.

b) The net deficit comprised a favourable revenue variance against budget of $55 million, offset by unfavourable expenditure against budget of $78 million.

c) The average monthly actual spend to date is $1.550 billion per month, compared to a year to date average budgeted spend of $1.537 billion and an average spend of $1.453 billion for the first six months of last year. To meet the full year expense budget, expenditure would need to reduce to a level of $1.532 billion per month for the remainder of the year.

Table One: DHB Sector Financial Results YTD to 31 December 2019 Consolidated Revenue, Expenditure, Net Result, FTEs

Actual Budget Variance Variance$M $M $M % $M $M %

REVENUE 9,030 8,975 55 0.6% 8,511 17,962 50.3%

Operating CostsPersonnel (3,587) (3,607) 21 0.6% (3,311) (7,297) 49.2%Outsourced Personnel (124) (71) (53) (74.8%) (113) (142) 87.2%Total Personnel (Including Outsourced) (3,710) (3,678) (32) (0.9%) (3,424) (7,439) 49.9%Outsourced Services (304) (291) (13) (4.5%) (283) (572) 53.2%Clinical Supplies (841) (809) (32) (3.9%) (783) (1,601) 52.5%Infrastructure & Non-Clinical Supplies (810) (809) (1) (0.1%) (776) (1,631) 49.7%Total Operating Costs (5,665) (5,587) (78) (1.4%) (5,266) (11,242) 50.4%

Payments to ProvidersMoH - Personal Health (2,368) (2,363) (5) (0.2%) (2,246) (4,707) 50.3%MoH - Mental Health (262) (269) 6 2.3% (245) (537) 48.9%MoH - Public Health (17) (19) 2 12.4% (16) (38) 44.1%MoH - Disability Support Services (966) (964) (2) (0.2%) (921) (1,924) 50.2%MoH - Maori Health (25) (24) (1) (3.6%) (23) (47) 53.4%Total Payments to Providers (3,639) (3,639) 0 0.0% (3,452) (7,254) 50.2%

TOTAL EXPENDITURE (9,304) (9,226) (78) (0.8%) (8,718) (18,496) 50.3%NET RESULTS: Surplus/(Deficit) (274) (251) (23) (9.1%) (207) (534) 51.3%

Average FTEs YTD 69,411 69,899 488 0.7% 66,876 70,235

Year to Date

Previous Year to Date

Full Year Target Budget

Spend Against Budget

after 50% of Year Gone

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2. Total expenditure was unfavourable to budget by $78 million (0.8 percent) due to unfavourable variances for outsourced personnel costs, outsourced clinical services costs, clinical supplies costs and infrastructure & non clinical supplies costs. Against the prior year to date, total expenditure has increased by $586 million or 6.7 percent.

3. Personnel costs were favourable to budget by $21 million across the sector mainly due to lower than planned FTEs, although these were augmented by lower than expected pay rates and higher outsourced personnel costs. Personnel costs were $276 million or 8.3 percent higher than the equivalent period last year, due to a combination of more FTEs, particularly in nursing, and the impact of rate increases.

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4. Outsourced personnel costs were unfavourable to budget by $53 million across the sector. This more than offsets the favourable variance to budget for personnel costs. The unfavourable variance reflects costs for outsourced staff who are used to cover vacancies, staff leave, rosters and other workloads. Against the equivalent period for last year, outsourced personnel costs were $11 million or 9.7 percent higher in 19/20 reflecting increased costs of using outsourced providers and increased levels of activity to meet demands in certain regions. This is principally driven by the cost of using outsourced medical personnel.

5. Across the sector, FTEs are 488 lower than planned, but this is 2,535 higher than the same period last year. The increase in FTEs is driven by a range of factors, such as collective agreements and associated roster changes for nurses and junior doctors, increased demand from demographic growth, mental health services, national bowel screening, filling of vacancies and bringing outsourced functions back in house.

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6. Most categories of personnel numbers were favourable to budget. The key exception is nursing personnel which is higher than planned. Medical personnel were 373 FTEs favourable, however this may be a driver of higher than planned outsourced medical costs. Nursing personnel were 412 FTEs unfavourable, allied health personnel were 379 FTEs favourable, support personnel were 36 FTEs favourable and management/administration were 112 FTEs favourable.

7. DHBs have budgeted an average of 3.3 percent rate increase over the 2018/19 average rate per FTE excluding Holidays Act. This rate is lower than the expected average rate increase of around 5 percent. The Ministry’s analysis suggests that the budget for personnel dollars, after allowing for the expected average rate increase, is enough to fund only half of the budgeted FTE increase of 2,357 FTEs (3.5 percent).

8. Outsourced service costs (excluding outsourced personnel) were unfavourable to budget by $13 million across 13 DHBs with MidCentral and Northland DHBs having the largest variances.

i. Outsourced radiology reading services covering Radiologist vacancies in medical imaging in MidCentral DHB.

ii. Outsourcing of radiology reading services and sending away pathology testing due to vacancies in these services in Northland DHB.

Costs associated with outsourced services have increased by $21 million or 7.4 percent against the equivalent period in the previous year.

9. Clinical supplies costs were unfavourable to budget by $32 million across 18 DHBs with Counties Manukau and Waikato DHBs having the largest variances.

i. For Counties Manukau DHB the following points drove the variances:1. Whakaari White Island response costs, particularly dressings, skin

grafts and surgical instruments;2. unrealised target savings;3. expenditure increases in pharmaceuticals to support an increase in

burns patients (acute and Tahitian) and non-PCT drugs.ii. Higher than budgeted costs for diagnostic supplies, implants and

prostheses with additional costs relating to treatment of Whakaari White Island patients in Waikato DHB.

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The Ministry, impacted DHBs and ACC are working to determine what Whakaari White Island costs DHBs can be compensated for under the Public Health Acute Services (PHAS) agreement.Clinical supplies costs have increased by $58 million or 7.4 percent against the equivalent period in the previous year.

10. Non clinical supplies costs were unfavourable to budget by $1 million across nine DHBs. Against the same period in the previous year, costs have increased by $34 million or 4.4 percent

11. Payments to other provider costs were in line with budget.When comparing to the same period last year, payments to providers have increased by$187 million or 5.4 percent.

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12. Five DHBs achieved a result better than budget as at 31 December 2019.

Forecast Sector Result13. DHBs are forecasting a $587 million deficit to 30 June 2020 against a draft budgeted

year end-result of $534 million. 14. Many DHBs assumed that the Holidays Act remediation work will be completed in

2019/20 thus avoiding the need to provide remediation cost for 2020/21. The 2018/19 total Holidays Act remediation provision ($770 million) was for nine years. One ninth of the total provision is around $90 million providing an estimate of the impact in 2019/20 if the Holidays Act remediation process is delayed. So far this year, eight DHBs have provided for $3.6 million additional remediation cost.

15. The December year to date deficit plus budget for the remaining six months would indicate a forecast deficit of $557 million or $30 million less than the DHBs forecast of $587 million, assuming that DHBs met budget for the remaining six months. The December result is $23 million unfavourable to plan suggesting that DHBs forecasts have included financial benefits from savings initiatives to enable DHBs to operate within their plan.

16. DHBs have tended to have higher expenditure in the later months of the financial year due to higher activities and employment agreement wage increases, suggesting the higher deficit forecast is more likely. This is supported by DHBs forecast FTEs of 70,430, an increase of 195 above budget of 70,235.

17. The unapproved draft budgeted result numbers as shown in Table Two for Auckland, Canterbury and Nelson Marlborough DHBs are as submitted by the DHBs and are under review by the Ministry.

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Table Two: DHB Financial Results YTD to 31 December 2019 Net Surpluses / (Deficits)

DHB

YearTo Date Result

2019/20

Unfavourable / favourable to Budget - Dec 2019

Variance from

previous month

2019/20 Plan Approved

Targeted Budgeted Year End

Result

Forecast Year End

Result Dec 2019

Forecast Year End Result vs Budget

$M $M $M $M $M $MAuckland DHB (14,767) 6,569 1,456 No (56,968) (51,967) 5,001 Bay of Plenty DHB (5,463) (1,521) (300) Yes (10,500) (16,534) (6,034) Canterbury DHB (67,369) 5,202 4,442 No (180,470) (188,990) (8,520) Capital & Coast DHB (16,894) (8,897) 19 Yes (15,900) (29,500) (13,600) Counties Manukau DHB (21,206) (2,393) (2,613) Yes (38,594) (46,595) (8,001) Hawke’s Bay DHB (13,309) (5,448) (1,587) Yes (12,900) (23,810) (10,910) Hutt Valley DHB (5,932) (1,350) 577 Yes (8,142) (8,576) (434) Lakes DHB (6,358) (1,365) (46) Yes (10,130) (10,865) (735) MidCentral DHB (6,193) (276) 82 Yes (12,100) (12,100) (0) Nelson Marlborough DHB (4,803) (1,076) 113 No (6,042) (7,930) (1,888) Northland DHB (6,376) (1,209) (298) Yes (12,800) (14,008) (1,208) South Canterbury DHB (403) (1,240) (260) Yes 27 (1,100) (1,127) Southern DHB (22,505) (5,376) (1,936) Yes (38,512) (42,996) (4,484) Tairawhiti DHB (6,568) (913) (324) Yes (12,000) (13,142) (1,142) Taranaki DHB (13,201) 27 13 Yes (18,023) (18,023) 0 Waikato DHB (39,660) (3,738) (694) Yes (72,425) (72,425) 0 Wairarapa DHB (3,789) 1,044 361 Yes (9,527) (8,750) 777 Waitemata DHB (7,636) 251 114 Yes 0 0 0 West Coast DHB (3,831) (418) (27) Yes (6,613) (6,791) (178) Whanganui DHB (7,732) (837) 123 Yes (12,597) (12,597) 0

Total (273,994) (22,963) (784) (534,216) (586,699) (52,482)

Capital Expenditure18. DHBs’ capital expenditure for the year to date reported an actual expenditure of

$272 million against a budgeted expenditure of $379 million. The $107 million underspend against the plan largely consists of delays and underspends of $43 million in Buildings and Plant, $45 million in Clinical Equipment and $24 million in Information Technology and Software.

19. Historically, the sector has tended to be below budgeted capital expenditure levels, which is mostly driven by delays in projects commencing. In the same period last year, DHBs reported a total underspend of $112 million from underspends of $18 million in Buildings and Plant, $59 million in Clinical Equipment and $36 million in Information Technology and Software.

Liquidity20. The DHBs manage a shared banking and treasury service through a cash offset

arrangement with the Bank of New Zealand. Individual DHBs can go overdrawn on any day provided there are surplus funds held by other DHBs, so the net balance is positive. A significant decrease in the total sector cash over several years is likely to result in early 2019/20 cash offsets arrangements being breached based on current forecasts.

21. The Ministry and Treasury have been working closely with New Zealand Health Partnerships to develop options to manage forecast breaches from July 2019. After joint advice provided to Ministers (HR20191004 and T2019/1529 refers) the sector received $141.911 million equity deficit support in June 2019. This will

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alleviate the short-term pressure on the DHB cash offset arrangement. The Ministry and Treasury continues to monitor the sector’s cash balances in 2019/20.

Monitoring22. Performance discussions are continuing between Ministry officials and DHB

executives. Formalised engagements scheduled include: Deputy-Director General DHB Performance, Support and Infrastructure / DHB

Chief Executive phone calls- Waikato DHB, 13 December- Hawke’s Bay DHB, 19 December- Hawke’s Bay DHB, 9 January- Nelson Marlborough DHB, 24 January

Monitoring Intervention Framework (MIF) meetings- Southern DHB, 5 November, 26 November- Capital & Coast DHB, 20 November- Hutt Valley DHB, 5 December- Hauora Tairāwhiti, 17 December

DHB onsite visits- Canterbury Operational Meeting, 31 January

Other- Teleconferences with all DHB Chief Executives and Chief Financial Officers

on outyear planning, 9 & 14 January- Full day induction meeting at Ministry of Health, Hon Rick Barker, Chair

West Coast DHB, 16 January- Waikato DHB Cardiac Recovery Plan, 23 January- Issues discussion with Hawke’s Bay DHB, 24 January- Attendance at DHB General Managers, Planning & Funding meeting, 30

January23. The Deputy Director-General, DHB Performance, Support and Infrastructure

continues to engage with the Chief Executives of DHBs where their latest monthly forecast template reflects a position that is a deterioration over planned levels. Additional information on the drivers and actions being taken to contain expenditure has been sought and is being followed up.

ENDS.

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