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Portland District HealthReview of Governance, Management and Financial Processes- June 2011

PORTLAND DISTRICT HEALTH

REVIEW OF GOVERNANCE, MANAGEMENT AND FINANCIAL PROCESSES

JUNE 2011

PAXTON PARTNERS PTY LTD | LEVEL 2, 448 ST KILDA ROAD, MELBOURNE VIC 3004 | PH. 03 9820 0333 | FAX. 03 9820 0777



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1. Executive Summary....................................................................................................2

2. Background and Scope...............................................................................................7

2.1. Terms of reference for this review .............................................................................7

3. Key Findings..............................................................................................................10

3.1. Board Governance ....................................................................................................10

3.2. Management ............................................................................................................15

3.3. Governance - Clinical Risk Management ..................................................................17

3.4. Governance - Corporate Risk Management .............................................................23

3.5. Finance ....................................................................................................................26

3.6. Sea View House (SVH)...............................................................................................29

Table ofContents

Disclaimer:

The information provided in this report is based on Paxton Partners’ discussions withPortland District Health (PDH) board members, management, staff and other stakeholdersand the review of documents supplied by PDH. Paxton Partners has relied on theinformation and data as sourced. The scope of work for this project did not include afinancial review, nor procedures considered necessary under generally accepted auditingstandards for the purposes of expressing an opinion on the data provided. Accordingly,Paxton Partners does not express such an opinion.



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1. Executive SummaryPortland District Health (PDH), like many rural health services, faces the ongoing challenge ofmeeting the expectations of the local community whilst at the same time, delivering clinicallyappropriate services which are financially sustainable. This is a difficult balance, especially giventhe inherent challenges faced in attracting and retaining appropriately trained and qualifiedclinicians.

The Victorian Department of Health (DH) has worked closely with PDH over a number of years toaddress a range of governance, financial and service related issues. PDH continues, however, toface major challenges in terms of financial sustainability and in the provision of services including,most recently, the Sea View House Supported Residential Service (SRS).

In March 2011, the Minister for Health, the Hon David Davis, MP, requested an independent reviewof the governance, financial and management systems at PDH. Paxton Partners were appointed toundertake this review, which is the subject of this report.

We confirm that during the review we have had the full cooperation of the board chair, all boardmembers, the Chief Executive and hospital staff.

We also acknowledge the input of a representative of the Sea View House Support Group.

The review has highlighted four fundamental issues that should be immediately addressed by PDH'sboard and management, with oversight from the DH. These are:

(i) GP Super Clinic

The GP Super Clinic, discussed in Section 3.4.1 of this report has strategic merit, especially as aregional training centre for GPs and other medical staff. The clinic also represents a substantialoperational and financial risk over the next 12 months, especially given there is currently nodetailed operating and financial plan for this facility. A significant amount of senior managementtime should be allocated to this project to ensure that the risks in relation to the construction,mobilisation and operation of the GP Super Clinic are adequately managed.

(ii) Regional service planning and joint medical appointments

PDH has had some success in attracting medical specialists consistent with the desired clinicalprofile of PDH however; PDH has struggled to retain these clinicians in the medium to long term.The relative attractiveness and accessibility of nearby Warrnambool and Hamilton (and otherregional centres) makes PDH’s task of attracting and retaining staff quite difficult. Medicalspecialist retention, together with determination of an appropriate clinical service profile(particularly with maternity and emergency care services) requires a broader strategic approach,including consideration of joint appointments with other health services in the region (i.e.collaboration, rather than competition).

As outlined in Section 3.3.5, we recommend that PDH work with South West Healthcare(Warrnambool) and Western District Health (Hamilton) to develop and agree a collaborative andco-operative approach to planning for, and operating, clinical services across the region. Thisshould be facilitated by the DH. Without impacting the independence of PDH or its board, thisshould ensure that only clinically appropriate services are delivered by PDH. Agreements withWarrnambool and Hamilton should document such things as the patient transfer protocols andrelevant clinical pathways to ensure the timely transfer of patients to other hospitals whenrequired. The joint appointment of surgeons, emergency physicians and other key clinical staffshould also be agreed as part of this process.



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(iii) Financial deficit

PDH has continually incurred financial deficits over recent years, refer Section 3.5. Whilst thecontributing factors have been identified by management, little structural change appears to havebeen made to services or costs to enable PDH to operate within its budget allocation. PDH shouldbe seeking to provide services that are clinically appropriate and cost effective. It should be notedthat any material operating deficit created by the GP Super Clinic would place further financialpressure on PDH.

(iv) Sea View House (SVH)

SVH was opened in 2002 as a privately funded Supported Residential Service (SRS). SVH’s revenueis received in the form of significant upfront lump sum “ingoings” paid by residents, together withongoing monthly rentals. SVH does not receive funding from the Commonwealth or the State.

PDH’s board and management have been reviewing the status of SVH for some time, on the basisof:

SVH financial performance has been declining and is expected to incur an operating deficitin 2010/11 and future years, creating a financial drain on the organisation;

SVH being a non-hospital (non-core) business; and

changes to the SRS (Private Proprietors) Act 2010 restricting collection of upfront lump sumrevenues, creating further pressure on SVH’s financial performance.

The PDH board formally resolved to close SVH in September 2010 based on a board paper preparedby the Chief Executive. The board paper contained errors and an omission in that it suggestedsubstantial capital costs would be required to comply with the new SRS (Private Proprietors) Act2010. These capital costs were advised by an independent consultant, however they did not relateto the requirements of the 2010 Act.

Whilst the board was correct to consider the future of SVH, we believe that the contents of theboard paper were not adequately challenged by the board and the paper did not fully canvas alloptions for SVH. The board paper also did not consider how closure costs would be funded.

The decision to close SVH was announced by the Board Chair and the Chief Executive to residents,families and staff on 21 January 2011, without Ministerial approval, despite previous DH instructionthat the announcement was not to proceed without approval. Subsequent to significant oppositionto the decision from SVH residents’ families and the formation of the Sea View House SupportGroup, the board decided to rescind the motion to close SVH and to work with the Sea View HouseSupport Group to develop a strategy to find an alternative operator for SVH. The board has not yetundertaken a full analysis of the options for Sea View House to inform their decision.

As outlined in Section 3.6 of this report, we recommend that, in consultation with DH, anindependent and comprehensive appraisal be undertaken in relation SVH’s future options. Whilstwe encourage continued community consultation on the future of the facility, we recommend thatany decisions or actions on the future of the SVH be deferred until the board is able to consider thefindings of this independent options appraisal and appropriate consultation with DH takes place.

Board and Management

The decisions and actions of the board reflect a need for greater understanding of their roles andresponsibilities, specifically in relation to interrogation of management information and avoidinginvolvement in operational management. The current membership of the board does not includeclinical, health system, legal and/or specific financial expertise. The board should conduct a



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structured self-assessment of its performance and identify skills that would enhance its ability tofulfill its governance obligations.

PDH lacks senior management resource to support the Chief Executive. An interim seniormanagement resource is required to manage the resolution of the SVH issues, risks in relation tothe construction and operation of the GP Super Clinic and implementation of recommendationsarising from this review.

Recommendations for improving the governance, financial and management capabilityof PDH

A full list of the recommendations made in this review is set out below:

Recommendation Responsibility Timing

1. BOARD GOVERNANCE

Board Composition/Skill Mix

1.1. Conduct a structured self-assessment of board compositionthat includes:

Number of members

Breadth of skill mix, particularly in relation to clinical,health system, legal and/or financial experience; and

Consideration of joint board appointments with otherlocal health services (Warrnambool and/or Hamilton).

PDH Board Sep 2011

1.2. Develop a succession planning strategy for the board thatidentifies potential future board members based on theskills required.

PDH Board Dec 2011

Governance

1.3. Review roles and responsibilities of board members toensure:

Appropriate interrogation of information frommanagement (especially relating to majorrecommendations) including an assessment of thefinancial implications and funding sources to implementrecommendations. This would be assisted by ensuringthat the board quorum is sufficient to consider majorrecommendations;

Compliance with board policies; and

Effective operation of board committees (i.e. committeesmeet with adequate frequency).

PDH Board Sep 2011

2. MANAGEMENT



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2.1 Increase the depth of the senior management team:

Appoint a Director of Nursing (possible succession plan forthe Chief Executive position); and

Explore options for shared corporate and clinicalmanagement positions with Warrnambool and HamiltonHealth Services e.g. Deputy Chief Executive (corporate),Director of Medical Services (clinical).

PDH Board / CE Sep 2011

2.2 Appoint an interim senior executive with dual reportingresponsibility to the Chief Executive and board to manage:

The resolution of Sea View House matters;

The construction and operational implementation of theGP Super Clinic; and

Implementation of recommendations that result from thisreview.

PDH Board / CE June 2011

3. CLINICAL RISK MANAGEMENT

3.1 DH should facilitate a regional service plan for PDH,Warrnambool and Hamilton to determine the appropriatemix of services to be delivered by PDH.

DH Dec 2011

3.2 Based on the joint regional service plan, introduce jointappointments of medical specialists to assist with theattraction and retention of staff.

CE June 2012

3.3 Address resourcing of the Director of Medical Servicesposition. Consider a joint appointment with Warrnambool(currently recruiting deputy DMS).

CE July 2011

3.4 Re-engage with Local GPs:

Continue pursuing opportunities linked with the GP SuperClinic;

Investigate the provision of patient admission/visitingrights for GPs including consideration of the financialimpact (if any) on PDH.

PDH Board / CE Sep 2011

3.5 Develop/implement a stakeholder engagement plan toimprove PDH's relationship with the local community.

PDH Board Sep 2011

3.6 Conduct an independent expert review of the maternityservice.

CE Sep 2011

3.7 Review the model of care and the related staffing of theUrgent Care Centre in the context of joint service planningand PDH's financial situation.

CE Dec 2011



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4. CORPORATE RISK MANAGEMENT

4.1 GP Super Clinic:

Develop a detailed business model, operational plan andfinancial model;

Ensure that all property, construction, fit-out, mobilisationand working capital costs, particularly in relation to therecent expansion, are included in the budget/signoff/monitoring process; and

Appoint an interim senior management resource to helpmanage the construction and operationalimplementation of the GP Super Clinic (refer alsorecommendation 2.2).

PDH Board(oversight)

SeniorManagement

Resource(Implementation)

Sep 2011

4.2 Continue regular board monitoring of the Corporate RiskRegister.

Board Audit &Risk Committee

Ongoing

5. FINANCIAL

5.1 Address financial performance:

Review clinical services and related costs;

Joint service planning (recommendation 3.1) and jointclinical appointments (recommendation 3.2) shouldenable increased activity and a reduction in the WIESrecall; and

Forecast and communicate to DH, PDH’s cash flowrequirements up to 30 June 2011 and for 2011/12. Cashflow requirements should continue to be monitored viathe performance meetings with DH.

CE July 2011

5.2 Produce one-page monthly summary management reportwith key KPIs and trend reporting.

CE July 2011

5.3 Continue PDH board representation at DH performancemeetings.

PDH Board Ongoing

6. SEA VIEW HOUSE

6.1 In consultation with DH, commission an independent (andfully costed) appraisal on the future use and ownershipoptions for SVH.

PDH Board June 2011

6.2 Continue community stakeholder engagement. PDH Board Ongoing

7. IMPLEMENTATION OF REVIEW RECOMMENDATIONS



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7.1 Monitor and report progress of implementation ofrecommendations from this review to the Minister

PDH Board Quarterly

2. Background and ScopePDH commenced operations on 1 July 2003 following the amalgamation of the Portland DistrictHospital and the Portland Community Health Service.

Current services include acute care, residential aged care, a SRS and an extensive range of primaryand community care programs. PDH has 67 acute beds, 30 high care residential aged beds(Harbourside Lodge) and a 58 bed SRS (SVH). It is designated by DH as a local rural health service.

The population of PDH’s catchment in 2006 was estimated to be some 17,000 persons, of which11,000 resided in the Glenelg (Portland) SLA and 6,000 in the Glenelg (Heywood) SLA. Portland hasa significant industrial base for a town of its size and major employers include Portland Aluminium,Keppel Prince Engineering, the Port of Portland and Pacific Hydro.

Recent issues for PDH have included:

Recurring operating deficits;

Reducing acute(hospital) activity/throughput due to service issues;

Service delivery issues due to attracting and retaining medical staff/development ofappropriate workforce models;

Service planning issues - e.g. the extent of maternity services and the emergency caredelivery model;

The planned closure of Sea View House; and

Significant projects - GP Super Clinic and a Helipad.

2.1. Terms of reference for this review

The terms of reference for this review were determined by the Minster for Health. These are setout in Attachment A.

The purpose of this review is to identify the overall effectiveness of the systems, procedures andaccountability structures in place relating to the governance, finances and management of PDH.

The scope includes a focus on:

The governance, finance and management systems and processes;

Board members’ roles;

Financial management and performance; and

The management and decision-making processes relating to the decision to close SVH.



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The review included meetings with key management, current board members and a number of pastboard members and other stakeholders. We also reviewed board, committee minutes andmanagement reports. Key policies, procedures and previous external reports were also reviewed.



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A required outcome of the review, as detailed in the scope, includes:

a description of the overall governance, financial and management systems, procedures,accountabilities and structures, including an analysis of strengths and weaknesses; and

Recommendations for improving the governance, financial and management capability ofPDH.

The review was conducted with the assistance of Dr Clive Wellington (Medical Advisor) and MsMarilyn Sneddon (Clinical Advisor).

A list of individuals who were interviewed is included at Attachment B.



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3. Key FindingsPDH faces a number of challenges, many common to other rural health services, some specific toPDH, particularly in relation to Portland's geographical position and travel time to neighbouringregional hospitals such as Warrnambool and Hamilton (both approx. 75 minutes). These challengesinclude:

Attracting and retaining medical specialists;

Relationships with local general practitioners;

Determining the appropriate mix and complexity of clinical services to be delivered;

Running a clinically appropriate maternity service that meets the needs of the localcommunity;

Providing emergency care that meets the needs of the local community, including localindustry;

Running a succession of underlying financial deficits (prior to DH ‘top-up’ supplements);and

Meeting the needs and aspirations of the local community.

Board members, management, staff and other stakeholders that we interviewed during our reviewhave generally indicated that, despite these challenges, the operations and clinical performance ofthe health service have improved over recent years.

A number of recent issues have had a negative impact on the perception of PDH's management andboard performance, including:

The decision making process around the closure of SVH and the subsequentimplementation/review of this decision;

The resignation of key staff and board members; and

Media reports of community concerns about the future of PDH.

The key findings from our review are outlined below.

3.1. Board governance

3.1.1. Board function

3.1.1.1. Operation and structure

The role and operation of the board of management is documented in the board charter. Theboard charter is supported by policy and procedure by-laws, instruments of delegation and detailedorganisational policies and procedures. Relevant policies include:

Board confidentiality (including identification and communication of confidentialinformation);

Management of complaints to board members from the community;

Bequest acknowledgement;

Duties and responsibilities of board members to guide the conduct of board members witheach other and with both internal and external stakeholders to the health service;

Guidelines for release of information to the media; and



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Medical staff appointment, credentialing and scope of clinical practice.

Board members are inducted with a member information folder (dated May 2010) which containsrelevant information.

The board meets at least ten times a year with there being no meeting in January.

The board is supported by three committees as set out below:

3.1.1.2. Role of board committees

Committee Role MeetingFrequency

Membership

Audit & RiskManagement

Required by section 65S of theHealth Services Act 1988 (asamended). Purpose is toensure that PDH’s audit andaccounting systems accuratelyreflect the financial positionand viability of the healthservice and that effective andaccountable non-clinical riskmanagement systems are inplace.

Quarterly(Monthly priorto March2010)

Minimum of three board memberswith a quorum being two boardmembers and the Chief Executiveor nominated delegate. At leastone member must haveappropriate experience in financialaccounting or auditing

Finance Recommends and advises theboard on financial,investment, building andcommercial matters. Thecommittee reserves the rightto investigate matters andconduct its own enquiries,including requiring PDH staffto attend meetings, and hasthe power to seek anyfinancial information it sees fit

At least tentimes a year

Minimum of three board memberswith a quorum being two boardmembers and the Chief Executiveor nominated delegate

Board of

Management

Internal Audit External Audit

Audit & RiskManagement

Committee

FinanceCommittee

Clinical Quality &Risk Management

Committee



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Committee Role MeetingFrequency

Membership

Clinical Qualityand RiskManagement

Assist the board to ensure ahigh standard of health care,continuous improvement ofservice delivery andmaintenance of anenvironment that supportsclinical excellence.

Monthly Minimum of three board memberswith a quorum being two boardmembers and the Chief Executiveor nominated delegate and QualityCoordinator or nominateddelegate.

Chair must not be Board Chair.

We note that board committees have not met regularly over the last year:

The finance committee did not formally meet in September or October 2010;

The audit & risk committee did not meet between March and October 2010;

The clinical quality & risk management committee, due to meet monthly, met only six timesbetween March 2010 and February 2011.

The board is also currently temporarily supported by the SVH working party and GP Super ClinicConstruction Sub-committee.

3.1.2. Governance and board member roles

PDH has faced significant challenges in attracting and retaining board members. At the time of thisreport there are only six board members out of a possible twelve. Six is the minimum number ofboard members allowed under the Health Services Act (HSA).

The following table shows the appointment / resignation of board members over the last threeyears:

Name Appointed Resigned

Mr B DuVergier November 2005 December 2008

Mr M Noske November 2006 -

Mr B Sparrow November 2006 June 2010

Dr H Wellington (Ministerial Delegate) July 2007 June 2010

Mr M Rhook (Ministerial Delegate) July 2007 June 2010

Mr A Govanstone (Chair) October 2007 -

Miss A McLeod October 2007 April 2010

Mr J Harpley November 2008 -

Mr W Reid November 2008 March 2010

Mr B Collett July 2009 -

Mr J Osborne July 2009 -

Mr C Suggate July 2009 February 2010

Mr R Gilby July 2010 -

Mrs R Alexander July 2010 March 2011

Source: PDH Management



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Board member attendance at the Board of Management meetings (2008-09 to 2010-11) andcommittee meetings (2010-11) is detailed in Attachment C

Under section 40C of the Health Services Act, the Minister for Health may appoint not more thantwo delegates to the board of a public hospital if the Minister considers that such an appointmentwill assist the board to improve the performance of the public hospital. Delegates are initiallyappointed for a period of 12 months and may be reappointed.

On 1 July 2007 the Minister appointed two ministerial delegates - Michael Rhook (health financebackground) and Dr Heather Wellington (clinical and legal background). The delegates wereappointed for three years, after which we understand that the DH felt that there had beensufficient progress made to reasonably expect the board to operate effectively without theministerial delegates. We note that the departure of these members did leave a void with theboard no longer having members with specific clinical, legal or financial skills. The current numberof board members (six) also results in a quorum of only three being required for decisions. Thisnumber is not sufficient to assess key proposals.

Based on our meetings with current board members and, notwithstanding the challenges facingPDH, all reaffirmed their full commitment to PDH. They all believe that they received anappropriate induction into their role as a board member. We have reviewed the "MemberInformation Folder" that is provided to all new board members and this appears to be adequate.We also understand they received open access to PDH and its staff upon commencement, andboard members interviewed confirmed this.

The handling of the proposed SVH closure, discussed in Section 3.6 of this report, indicates that theboard could operate more effectively in making key decisions. (Please note in all interviews withboard members they acknowledged that mistakes were made in the handling of this decision.) Inrelation to the board's decision to close SVH, we note the following issues in relation to boardgovernance:

The decision to close SVH was the first major board decision after the completion of thethree-year terms of the ministerial delegates (although the future of SVH was discussed anumber of times during the tenure of the ministerial delegates);

The decision-making process was impacted by factual errors and omissions contained in theChief Executive’s board paper and a lack of robust challenge by board members; and

The subsequent reversal of the decision to close was based on information provided by theSea View House Support Group that contradicted the CEO’s original board paper, and notthe board's own due diligence.

Our interviews have indicated that the general consensus of board members is that the decision toclose SVH was the correct decision, given the information in both the CEO’s board paper and earlierpapers presented to the board raising concerns about SVH’s ongoing viability, even if thedocumented premise of the September 2010 board paper was not correct. However, we believethat this conclusion was premature given that a detailed options appraisal has not been carried outto fully inform the board. (This is explored in more detail at section 3.6.)



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Summary of strengths, weaknesses and recommendations for improving the governance,financial and management capability of PDH

1. BOARD GOVERNANCE - Structure, Membership and Roles

Strengths Weaknesses Recommendations* Responsibility Timing

Overallgovernancestructure,including theboard andsub-committees,appearsappropriate.

Localrepresentation on theboard.

Boardinductiondocumentation andprocessesappearadequate.

Boardpapers,minutes andotherdocumentation wellmaintained.

Ministerialdelegatesbroughtadditionalskills (untilmid-2010).

Board Composition/SkillMix

Inherent difficulty inattractingappropriately skilledboard members.

Currently six boardmembers (which isthe statutoryminimum) – notingthe meeting quorumis technically onlythree.

Void left by departedMinisterial delegates- clinical, legal andfinancial expertise.

Consistent with manyrural health services,the board relies onthe Chief Executivefor system-widehealth experience.

Board Composition/Skill Mix

1.1. Conduct a structured self-assessment ofboard composition that includes:

Number of members;

Breadth of skill mix, particularly in relationto clinical, health system, legal and/orfinancial experience;

Consideration of joint boardappointments with other local healthservices (Warrnambool and/or Hamilton).

PDH Board Sep2011

1.2. Develop a succession planning strategyfor the board that identifies potentialfuture board members based on the skillsrequired.

PDH Board Dec2011

Governance

Board sub-committees (Clinical,Quality & Risk, andAudit & Risk) metinfrequently during2010

SVH - insufficientchallenge of the ChiefExecutive’s boardpaper and lack of

Governance

1.3. Review roles and responsibilities of boardmembers to ensure:

Appropriate interrogation of informationfrom management (especially relating tomajor recommendations) including anassessment of the financial implicationsand funding sources to implementrecommendations. This would be assistedby ensuring that the board quorum issufficient to consider major

PDH Board Sep2011



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detailedconsideration of therange of optionsavailable.

recommendations;

Compliance with board policies;

Effective operation of board committees(i.e. committees meet with adequatefrequency).

* Recommendation No. sequence ties in to Executive Summary format

3.2. Management

3.2.1. Organisation structure

The PDH organisation structure as at August 2010 is shown in the following diagram:

Board ofManagement

Internal Audit External AuditChief Executive

Director ofNursing

Deputy ChiefExecutive(vacant)

ManagerCorporate

Services

DirectorHuman

Resources

Sub RegionalPartnerships

ManagerPrimary &

CommunityCare

Quality Co-ordinator

3.2.2. Management resource

Based on our discussions with board members and key stakeholders, including a number ofclinicians who work at PDH, there was a strong view expressed that the Chief Executive and seniormanagement had made progress with regard to operational and clinical improvements over the lastfew years.

In our view there is currently a lack of senior management resources available to support the ChiefExecutive:

The Director of Nursing (DON) recently resigned and this position (which is combined withthe Deputy Chief Executive position) is currently vacant; and

The current Director of Medical Services (DMS) reports to the DON and is employed as aconsultant for two days per month only. The DMS does not attend the clinical risk andquality management board sub-committee.

Given the significant challenges that have, and will continue to face PDH (especially in the short tomedium term) we believe additional senior management depth is required.

The Chief Executive currently has a wide span of areas to manage. Apart from overseeing generaloperations, these specifically include:

The issues regarding SVH;



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Medical specialist recruitment and retention;

Local community engagement;

The construction, commission and operation of the GP Super Clinic;

Regional service planning and linkages; and

The approval and construction of the helipad.

The most significant short to medium term challenges facing PDH are:

The construction and operation of the GP Super Clinic (refer section 3.4.1 for furtherdiscussion). We believe senior management resource support is required to ensure thatthis project is implemented on time and on budget, that the operations generate asurplus/positive cash flow and that risks associated with service interfaces between the GPSuper Clinic and the hospital are successfully managed;

The resolution of SVH’s future. A senior management resource is also required to managethe options analysis and associated stakeholder issues.

The PDH board has direct oversight of both of these issues, together with implementation ofrecommendations arising from this review, and will require direct access to this resource.Accordingly an interim management resource should be appointed with dual reportingresponsibility to the Chief Executive and the board.

Given the likely cost of employing additional permanent members of senior management on a full-time basis, consideration should also be given to further joint executive arrangements with otherhealth services, such as Warrnambool and/or Hamilton. (We note that PDH already has a sharedDirector of Finance role with Hamilton). This could include shared management who could fillpositions such as Deputy Chief Executive and DMS at PDH. We understand that Warrnambool iscurrently investigating the recruitment of a Deputy DMS and may be receptive to this post being ajoint appointment with PDH (i.e. also fulfilling the role of DMS at PDH).



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2. Management


ExperiencedChief Executivewho hasprovided seniormanagementstability.

Multiplestakeholders(includingclinicians) havecommented onthe positiveimpact ofcurrent ChiefExecutive since2007.

Implementationof robustqualitymanagementprocesses overrecent years.

Some sharedmanagementroles withWesternDistrict Health(e.g. Finance).

Significant number ofdistractions from day-to-day operations: e.g. SVHclosure, implementationof the GP Super Clinicproject.

Over reliance on singleindividual, i.e. ChiefExecutive.

Lack of seniormanagement support forChief Executive orsuccession plan.

Chief Executive on site 4days per week on flyin/fly out basis.

2.1 Increase the depth of the seniormanagement team:

Appoint a Director of Nursing(possible succession plan for theChief Executive position); and

Explore options for sharedcorporate and clinicalmanagement positions withWarrnambool and HamiltonHealth Services e.g. Deputy ChiefExecutive (corporate), Director ofMedical Services (clinical).

CE Sep 2011

2.2 Appoint an interim seniorexecutive with dual reportingresponsibility to the ChiefExecutive and board to manage:

The resolution of Sea View Housematters;

The construction and operationalimplementation of the GP SuperClinic; and

Implementation ofrecommendations that resultfrom this review.

PDH Board Jun 2011

* Recommendations No. sequence ties into Executive Summary format

3.3. Governance - clinical risk management

Our review of clinical risk management processes has focussed on the management of specific risks(i.e. clinical staffing, maternity services and emergency care), together with a review of PDH’sclinical governance framework and processes.

Clinical risk management has been a key focus of the PDH board and management during recentyears, with a number of key clinical risks requiring careful management, specifically medical staffingof the urgent care and maternity services.

Risk management actions have included changing the Urgent Care Centre staffing to make it lessreliant on a GP medical workforce model and utilising the Capability Framework for VictorianMaternity and Newborn Services to ensure appropriate antenatal assessment of pregnant womenso that complicated births are not booked or undertaken at PDH.



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These risk management actions have been required in an environment of intense competition formedical specialists. We also note that PDH’s investment in the GP Super Clinic is a key strategy inattracting appropriately qualified medical staff to the area.

There are policies and procedures in place for credentialing and defining the scope of clinicalpractice and we note that no significant issues were raised in relation to clinical governance policiesand procedures in the last PDH accreditation review in May 2010.

3.3.1. Medical staffing

The biggest operational challenge for PDH management over recent years has been the recruitmentand retention of appropriately trained, qualified and experienced medical staff, including surgeons,physicians and Career Medical Officers (CMOs).

The hospital service mix and activity volumes have fluctuated over time with the availability of keymedical specialists (both employed and visiting from other hospitals) and their expertise. Therecent loss of a general surgeon has substantially impacted PDH's ability to meet its 2011-12 WIEStarget.

The Chief Executive has focussed on attracting medical specialists whose skills are consistent withthe desired clinical profile of PDH, and has had some success, however, PDH has struggled to retainthese clinicians in the medium to long term. Whilst this may be a common problem for ruralhospitals, the relative attractiveness and accessibility of nearby Warrnambool and Hamilton andother regional centres appears to make PDH's task of attracting and retaining staff more difficult.This represents an ongoing retention issue for PDH, requiring a broader strategic approach, such asjoint appointments with other health services in the region (i.e. collaboration, rather thancompetition – refer section 3.3.5).

3.3.2. Maternity services

All Victorian maternity services are required to operate within the “Capability Framework forVictorian Maternity and Newborn Services” (State of Victoria, Department of Health, 2010). Thisframework ‘delineates the role of each maternity and newborn service in metropolitan, regional andrural areas. It describes the services required at each level of care and the relationships with othermaternity and newborn services within the context of statewide services. Health services will usethis framework to identify and demonstrate their role as a provider of safe and effective maternityand newborn services within Victoria’s maternity system’ .

PDH was providing a “Level 3” maternity service within this framework until a obstetric trainedmedical practitioner resigned and couldn’t be replaced leaving the hospital with only one localgeneral practitioner (who can provide both the birthing and anaesthetic service). This resulted inthe service being downgraded to a Level 2 service.

We understand that there are approximately 150 women from the PDH catchment area birthing ateither PDH or elsewhere each year. The hospital is currently taking bookings for some 50 births perannum, which is below the number required in order for midwives to maintain their skills. There isa risk management strategy in place, financially supported by DH, to increase the number of births.DH has fully funded 70 WIES to facilitate an increase in the service up to 100 births, through therecruitment of appropriately qualified medical staff.

As discussed above, the service is currently operating at “Level 2” within the Framework throughhaving implemented the following risk management processes:

Low risk normal births only are planned (i.e. no predicted anaesthetic requirement);



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The doctor is rostered Monday to Friday so that there is a degree of predictability andplanning for the service; and

If the doctor is not available when a woman presents in labour, then a decision is madeabout how the birth should proceed based on clinical assessment by a midwife (i.e. if birthis imminent, then the birth can proceed with telephone support from an obstetrician inWarrnambool).

Whilst the current midwives appear to be performing individual maternity risk assessmentsappropriately (given the history of no additional medical cover being required since the currentprotocols were introduced), the lack of local medical cover of additional obstetrics and anaesthetictrained staff presents a residual clinical risk, consistent with the risk in many other rural maternityservices (both in Victoria and nationally) in the event that urgent medical intervention is required.

We understand that PDH is currently in the process of recruiting an obstetrician, who will also workat Warrnambool. There are also some local GPs who are currently training in obstetrics andanaesthetics. These additional resources should become available between mid-2011 and mid-2012. Until sufficiently trained medical staff have been recruited, consideration should be given tothe level of maternity service that is appropriate to be provided at PDH and we recommend that anexpert review of the maternity service be conducted.

3.3.3. Emergency care

PDH has an Urgent Care Centre that operates 24 hours, 7 days per week. The primary function ofPDH's Urgent Care Centre is to treat urgent primary care patients and to stabilise seriously ill orinjured patients who may require transfer to a larger regional hospital, such as in Warrnambool,Geelong or Melbourne. The Urgent Care Centre is staffed by Career Medical Officers and nursingstaff. The Centre has six cubicles, three of which close during the overnight shift.

The Centre is supervised by the Director of Emergency Medicine is who is on-site one day per week.There is also another emergency physician who works at PDH one day per week. We understandthat both of these individuals also work one day a week at the Warrnambool EmergencyDepartment (based on a separate contractual arrangement with South West Healthcare). When onduty, the hospital's medical physician also provides supervision to the Urgent Care Centre.

Data supplied by PDH indicates that the Urgent Care Centre receives approximately 9,200presentations per annum, an average of 25 per day. Approximately 65% to 70% of presentationsare Triage Category 4 and 5 (non-urgent) and the average number of patients presenting each nightis 1. We understand that some 15% of presentations result in admissions to PDH.

The majority of Triage Category 4 and 5 presentations are typically patients that prima facie couldbe treated in general practice. Generally these patients present at PDH because:

their GP practice is closed;

they cannot get a GP appointment at a convenient time;

their GP practice does not bulk bill and they don't want to pay an out of pocket; or

their own assessment is that their condition or injury is too serious to be treated by a GP.

Management have advised the average transfer waiting time is approximately five and a half hours.We are informed that this is impacted by the fact there is only one ambulance crew in Portland.We understand that an additional ambulance crew is currently being recruited for Portland, whichwill assist with this issue. There are also plans for a helipad to assist with urgent transfers althoughwe understand the helicopter can currently land close .



20

PDH receives a grant which includes funding for urgent care services. Whilst PDH managementhave advised that this grant is not sufficient to cover the costs of providing emergency care, theHealth Service has the flexibility to determine the most appropriate staffing model based on serviceneed and funding available. In addition, services delivered by a GP (outside of a hospital setting)can be eligible for funding through the Commonwealth Medicare Benefits Schedule.

PDH's use of CMOs within its Urgent Care Centre increases the cost of delivering this service, whichcreates some financial pressures for the health service. Given the financial issues that PDH isfacing, the model of care and related staffing of PDH's Urgent Care Centre should be reviewed andconsidered as part of the regional service planning discussed in section 3.3.5.

3.3.4. Engagement with local GPs

PDH have made considered decisions regarding clinical risk management which have includedremoval of the accreditation of a GP in 2009. This has resulted in relationships between PDH and anumber of local GPs being difficult since that time.

We noted from discussions that some local GPs expressed concern about their lack of involvementwith the hospital, especially after the clinical model in the Urgent Care Centre was changed to usingCMOs. (The Urgent Care Centre was previously staffed by GPs, however this practice wasdiscontinued a number of years ago).

In recent months PDH has invited local GPs to become credentialed to have admitting rights to PDHfor private patients (which would allow the patients to choose to be seen by their GP in the hospitaland for the GP to bill Medicare). We understand that six GPs have applied, and there is also one GPwho already has these rights.

We further note that no local GPs currently have admitting rights (i.e. are able to admit directly intothe hospital) in relation to public patients with the exception of one GP obstetrician. (GPs canadmit public patients, but admission must be via a hospital doctor). Some GPs have indicated thatthey would be interested in obtaining public patient admitting rights.

The proposed introduction of the GP Super Clinic (refer section 3.4.1 below) has caused someconcern amongst local GPs who, despite PDH’s attempts to consult, are worried that it wasdeveloped without their consultation and that it could impact their existing practices.

We did, however, note that a number of local GPs appear willing to re-engage with PDH, both inrelation to the GP Super Clinic and the hospital. The GP Super Clinic does provide a uniqueopportunity to re-engage with local GPs, while increasing services to the community.

3.3.5. Regional service planning and medical staffing

As discussed previously, the Chief Executive and his human resources management spendsignificant amounts of time securing and retaining medical specialists. The activity mix and volumesat PDH are currently driven by the physicians and surgeons available to work at the hospital,whether employed or visiting, for example, a key surgeon has recently left PDH, this has had asignificant negative effect on surgical activity. We believe it is more appropriate for PDH to plan forclinical services in conjunction with its neighbouring health services (i.e. Warrnambool andHamilton) so that there is a combined approach to clinical services (i.e. collaborative rather thancompetitive) and to ensure that PDH is able to provide services that are clinically appropriate for ahospital of Portland's size and catchment area.

Joint appointments would be a logical follow-on from a regional service plan (which would includeclear protocols including role delineation between hospitals). Joint appointments, with site specificprivileges for hospitals in each health service, would allow these staff to be based at their preferredlocation in the region and rotate through PDH and the other hospitals as appropriate.



21

We have discussed these issues with the Chief Executive/Medical Director of South WestHealthcare and the Chief Executive of Western District Health Service and they have indicated theirwillingness to explore regional service planning and joint appointments with PDH.

Whilst we understand that both PDH and South West Healthcare (Warrnambool) are receptive todiscussing joint appointments of medical specialists, there have been attempts to make jointappointments, these are yet to happen in any significant way. In discussions with South WestHealthcare, they indicated that they were unaware of PDH’s service planning and recruitmentstrategies, which would be important to clarify as part of future discussions on joint appointments.

Regional service planning would also require consultation with various medical specialist groups toensure their support.

Whilst this joint service planning should be across all clinical services, particular benefit is likely inthe following three areas:

Maternity Services

As discussed above, PDH's maternity service has staffing challenges. We understand thatmanagement is in the process of recruiting an additional obstetrician and that some local GPs areobtaining obstetrics and/or anaesthetics qualifications. Whilst this will provide better cover in thefuture, it doesn't provide certainty of medical cover required now and still leaves PDH exposed inthe event of staff annual/sick leave or resignations.

Emergency Services- Urgent Care Centre

PDH needs to review its model of care (and related workforce requirements) in the Urgent CareCentre to ensure that it is viable in the longer term, whilst continuing to meet local communityneeds.

A regional approach to emergency services would help provide staffing cover and alleviate thecurrent issues with transferring patients. We note that PDH's Director of Emergency Medicine iscurrently employed separately at PDH and Warrnambool. This position would benefit from a jointappointment, which may also provide PDH with access to associated staffing resources andcoordinated management, for which staff can rotate through PDH’s Urgent Care Centre fromWarrnambool.

Orthopaedics

PDH currently utilise "fly in, fly out" orthopaedic surgeons from South Australia. We understandthat where complications arise post-surgery, transfer of patients to other local hospitals can bedifficult to co-ordinate. We understand that PDH is currently in discussion with a group of doctorsin relation to providing a regional orthopaedics service. A regional service approach toorthopaedics (with joint clinical appointments) would be more likely to ensure a collectiveownership of patients and could streamline local access to follow-up care.

Local community engagement

Whilst we have not specifically met with local members of the Portland community, as it was notpart of the scope of this review, we understand that concerns have been expressed with regard toPDH, especially in relation to a lack of community engagement in relation to key decisions, forexample, the decision to close SVH. We note that PDH has called for expressions of interest toestablish a community advisory group in 2010 and received no applications.



22


3. Governance - Clinical Risk Management


Clinical riskmanagementframeworkappearsreasonable.

Clinical boardsub-committeescheduled tomeet every twomonths.

PDH has takenaction toaddress anumber of keyclinical risksover recentyears.

Reasonablesuccess inrecruitingmedical staff,given thedifficultenvironment.

GP Super Clinicmakes strategicsense in termsof training andattractingmedical staff.

Accreditation ofhospital, agedcare facility andSVH all currentand wereachieved withno major issues.

Inherent difficulty inattracting and retainingclinicians.

The availability of cliniciansdrives the nature andvolume of servicesdelivered.

Some issues regardingclinical appropriateness andsustainability of the currentclinical services profile:

Maternity - determineclinical level of service to beprovided and staffaccordingly.

Emergency services - assessthe optimum operatingmodel.

Currently no regional serviceplanning with Warrnamboolor Hamilton.

No joint clinicalappointments.

Current Director of MedicalServices (DMS) works only 2days per month and doesn'tattend clinical board sub-committee meetings.

Lack of involvement of localGPs - restricts theexperience and depth ofclinical resource available.

Impact of perceived/actualcommunity concernsregarding consultation inrelation to key decisions.

3.1 DH should develop aregional service plan forPDH, Warrnambool andHamilton to determine theappropriate mix of servicesto be delivered by PDH.

3.2 Based on the joint regionalservice plan, introduce jointappointments of medicalspecialists to assist with theattraction and retention ofstaff.

3.3 Address resourcing of theDirector of Medical Servicesposition. Consider a jointappointment withWarrnambool (currentlyrecruiting deputy DMS).

3.4 Re-engage with Local GPs:

Continue pursuingopportunities linked withthe GP Super Clinic;

Investigate the provision ofpatient admitting/visitingrights for GPs includingconsideration of thefinancial impact (if any) onPDH.

3.5 Develop/implement astakeholder engagementplan to improve PDH'srelationship with the localcommunity.

3.6 Conduct an independentexpert review of thematernity service.

3.7 Review the model of careand the related staffing ofthe Urgent Care Centre inthe context of joint serviceplanning and PDH's financialsituation.

DH

CE

CE

PDH Board/CE

PDH Board

CE

CE

Dec 2011

Jun 2012

July 2011

Sep 2011

Sep 2011

Sep 2011

Dec 2011




23

3.4. Governance - corporate risk management

Corporate Risk Management is overseen by the Board Audit and Risk committee which meetsquarterly (from March 2010, monthly prior to this date).

As a part of its risk management processes, PDH engaged the services of an independent consultingcompany in June 2010 to assist management in the identification and assessment of key risksassociated with the achievement of its strategic priorities and related goals. This work included anEnterprise-Wide Risk Assessment Workshop with PDH's management team. The risk assessmentincluded the determination of risk mitigation strategies with action plans, action owners and duedates for actions to be implemented.

Whilst not specifically identified in the report, we believe that the most significant corporate risk atpresent is the construction and operation of the GP Super Clinic, which is discussed below in moredetail.

3.4.1. GP Super Clinic

The Clinical Services Plan (CSP) completed by Aspect Consulting in 2007/08 highlighted the need forPDH to develop a large ambulatory clinic to assist in service delivery to chronically ill patients andalso provide a critical mass of GPs associated with the hospital to become VMOs.

In 2009 PDH was successful in being selected for development of a Commonwealth Government GPSuper Clinic with a submission based around the care plan outlined in the CSP. PDH plans toestablish the GP Super Clinic in a newly formed legal entity. PDH management have advised thatthe shareholders will be the ‘founding partners’, although PDH is expected to have full financialresponsibility for the GP Super Clinic, (both in terms of construction and operations). The four‘founding partners’ are:

Portland District Health;

Deakin University;

Greater Green Triangle (GP Training); and

Otway Division of General Practice.

(Note that at the time of conducting this review, the corporate structure and nature of PDH’sfinancial obligation had not been determined by PDH. The nature and extent of PDH’s obligationswill depend on the nature of the corporate and associated legal structures agreed).

PDH submitted an Expression of Interest for the GP Super Clinic in November 2008, and a capitalgrant to PDH of $4.9 million was announced by the Commonwealth in August 2009.

To date $2.2 million has been received from the Commonwealth. This is deposited in a dedicatedbank account and accumulates interest, which we understand is able to be used towards the cost ofthe project.

Construction commenced in January 2011, with the foundations currently being completed. Thefacility is expected to be commissioned in February 2012.

PDH is planning to use the GP Super Clinic to treat chronically ill patients with respiratory anddiabetic issues and as a training facility to assist with attracting medical workforce to the region.Benefits will include:

The ability to provide hospital CMOs with GP training during their employment at PDH;



24

Attracting GPs to the local area who are interested in providing training; and

Potential to attract medical students back to Portland (hospital or as GPs) once theirtraining is complete.

PDH was subsequently successful in securing a further $748,000 capital grant from HealthWorkforce Australia to be used to provide further training facilities at the GP Super Clinic. Thisgrant is expected to be received by June 2011. As a result of this grant, PDH have expanded the GPSuper Clinic and we understand that the plans and construction costs are in the process of beingupdated (as at May 2011) to reflect this.

The PDH board has appointed a sub-committee to oversee the construction of the GP Super Clinic.The board has a number of members with commercial/project management skills to oversee aproject of this nature, however, there remains a risk (as with any capital project) that cost couldexceed the various capital grants (i.e. $5.6 million). The construction budget and costs incurred todate are summarised as follows (based on an analysis by external consultants, Plancost):

GP Super Clinic Budget Spent % Spent

$'000 $'000 $'000

Building contract 3,805 216 5.7%

Construction Contingency 201 0 0.0%

Consultant's Fees/Disbursements 522 248 47.5%

Fixtures, Furniture & Equipment 247 0 0.0%

IT & Communications 127 0 0.0%

Authority Charges 11 0 0.0%

Land Costs 415 350 84.3%

Project Contingency 319 0 0.0%

5,647 814 14.4%

Source: Plancost PCG Cost Report - GP Super Clinic - 28 April 2011

We note the following issues regarding the above costs:

The allowance for land of $415,000 only includes the second purchase of land. The firstland purchase was for some $290,000 and this is not included within the above analysis.

Working capital and mobilisation costs are not considered in the above analysis. Weunderstand that the original plan for the GP Super Clinic included a $300,000 allowance forworking capital.

Whilst management have advised that final construction costs are likely to be less than thoseoutlined above, there is a risk that any blow-out in construction, fit-out, mobilisation and workingcapital costs will be covered by the $5.6 million available.

PDH management is currently preparing an operational plan for the GP Super Clinic, which isrequired to be submitted to the Commonwealth by 31 May 2011. (A draft plan was not availablefor this review). We are not aware of the Commonwealth’s specific requirements for theoperational plan, but at a minimum we recommend that it should include:

the role, responsibility and funding obligations of each of the founding entities;

the identification of services to be delivered from the facility;

the providers who are likely to deliver those services;



25

for those services to be delivered by PDH (i.e. cleaning, payroll, finance etc.), a detailedassessment of the cost to the GP Super Clinic;

the calculation of full-time and sessional rents to be charged to external providers who rentareas of the facility;

the basis of any rent concessions to tenants, including a justification of the benefits to PDH(e.g. GPs working extended hours or in the hospital);

an identification of all costs that will be incurred in running the facility, both cash and non-cash (e.g. depreciation and provision for future maintenance);

an overall detailed operational profit and loss and cash flow to ensure that the facility willgenerate a surplus and will not be a financial drain on existing PDH resources;

a detailed project implementation plan, including key milestones;

agreed exit arrangements for partners;

how the GP Super Clinic will interact with the hospital both clinically and administratively;and

the impact on existing community services provided by PDH.


Governance - Corporate Risk Management

GP Super Clinics


PDH has acorporate riskmanagementframework.

Externalconsultants wereengaged to assistwithdevelopment of arisk register.

Audit & Risk sub-committee hasrecently been setup and will meetevery two months(note clinical risksmanaged byseparate sub-committee).

Separate sub-committee

GP Super Clinic risks tobe managed:

Construction, fit outand mobilisation costswithin budget.

Establishment of anoperating businessmodel.

Detailed operationalplan and budget (notprepared (at time ofthis review).

4.1 GP Super Clinic:

Develop a detailedbusiness model,operational plan andfinancial model;

Ensure that all property,construction, fit-out,mobilisation andworking capital costs,particularly in relation tothe recent expansion,are included in thebudget/signoff/monitoring process;and

Appoint an interimsenior managementresource to help managethe construction andoperationalimplementation of theGP Super Clinic (referalso recommendation

PDH Board

(oversight)

Seniormanagement

resource(implementation)

Sep 2011



26


recently set up tooversee theconstruction andfit-out of the GPSuper Clinic(meets monthly).

2.2).

4.2 Continue regular boardmonitoring of theCorporate Risk Register.

Board Audit &Risk Committee

Ongoing


3.5. Financial management

3.5.1. Financial position

PDH has incurred significant financial deficits over recent years and has received sustainabilityfunding from the DH to contribute to these deficits. The historical results from the last three years,together with the 2010/11 Budget and Forecast are summarised in the table below.

Portland District Health Budget Forecast

2007/08 2008/09 2009/10

$'000 $'000 $'000 $'000 $'000

Operating Revenue 27,220 28,976 30,046 30,081 30,200

Operating Expenses

Salaries & Wages 19,066 20,439 22,424 22,377 22,701

Fees for Visiting Medical Officers 2,390 1,703 1,305 784 724

Other Expenses 5,807 6,150 6,497 7,363 7,373

27,263 28,292 30,226 30,524 30,798

Reported Surplus/Deficit (43) 684 (180) (443) (598)

DH Sustainability Funding (850) (800) (500) (250) (250)

DH Maternity Funding* - (250) 125 125 125

Underlying Deficit (893) (366) (555) (568) (723)

WIES Recall 1,293 1,011 112 295 711

DH Equity Contribution 1,000 - - - -

Actual

2010/11



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Source: PDH Annual Reports and Management Information as at the end of March 2011

Notes:

DH provided additional funding to support maternity services at PDH including $250,000 in 2008/09 and$26,000 in 2009/10. In addition 70 WIES has been quarantined in 2009-10 and 2010-11 to support thematernity services model.

In 2010-11, DH agreed to the conversion of some activity based funding grants to a specified grant whilst theservice volumes are low to provide sufficient flexibility to adjust service activity. In addition, DH provided$250,000 in sustainability funding in mid 2010-11..

The table above illustrates the sustainability funding that has been received from the DH in eachyear. In addition to this, PDH received an equity (one-off cash) contribution of $1 million in2007/08.

The key drivers of PDH's recent deficits have been identified by management as including thefollowing:

The inconsistent availability of surgical and medical staff, impacting on PDH's ability toachieve its WIES targets;

An expensive business model of emergency services in the Urgent Care Centre, includingthe use of Career Medical Officers (CMOs) ;

The cost of staffing a maternity service for a limited number of births each year; and

SVH forecast deficit (for 2010/11).

The 2010/11 forecast (based on March 2011 actual results, rolled forward) is for a deficit of$598,000 compared to an original budget deficit of $443,000. Management believe that this resultis achievable, but is largely dependent on the final WIES recall (i.e. under-target activity) for April,May and June 2011.

Management’s estimates for the April 2011 WIES recall (as at mid-May 2011) indicate that actualWEIS will be close to the original budget, giving them added confidence regarding the achievementof their current year-end forecast. We are not in a position to comment on how close the actualresult will be to the budget.

PDH's latest forecast cash flow (March 2011) indicates a cash deficit (‘Unrestricted Cash’) at 30 June2011 of $715,000, after repayment of a $1 million cash advance (loan) from the DH in June 2011(which was received by PDH in July 2010). The 2010/11 WIES recall, currently estimated bymanagement at some $700,000, would also need to be funded in 2011/12.

We recommend that PDH management provides an update to the DH on its cash flow requirementsfor the remainder of 2010/11 and for 2011/12 and that this is monitored via the performancemeetings with DH.

3.5.2. Financial management

PDH’s finance function is managed via a shared resource with Hamilton. This arrangement appearsto work well and provides PDH with access to a level of resource/experience that would otherwisebe difficult to obtain.

Finance is overseen via a board finance sub–committee that meets monthly. The sub-committeeChair has also recently commenced attending PDH’s performance meetings with the DH. The boardhas found this useful in a governance sense in obtaining an insight into DH’s dealings with PDH.

The PDH annual budget setup process replicates Hamilton’s process and appears reasonable.Management reports are very detailed, however they do not include a summary of key numbers,KPIs and trend reporting.



28


5. Financial


Leverage offinancialexpertise fromHamilton.

Finance sub-committeescheduled tomeet on amonthly basis.

The annualbudget settingprocessesappearsreasonable(based on thereplication ofthe Hamiltonprocesses).

Managementreportingtemplatesdeveloped bymanagement.

Recent PDHboardrepresentationat DH "CloseWatch"meetings.

Succession of financial deficitsundermining PDH'ssustainability:

Actual results tend to beworse than budget.

On DH performance watchfor a number of years.

Key risks to current 2010/11forecasted deficit ($598k):

Final WIES recall (i.e. activitybelow target).

Reliance on availability ofkey surgeons.

DH concerned regardingcontinued updates/changes tobudgets and forecaststhroughout the year.

High cost CMO staffing modelfor urgent care - contributes tofinancial deficit.

SVH - currently contributes tooverall deficit.

Management reporting verydetailed - lacks a summary ofkey numbers/KPIs/trendreporting.

5.1 Address financial performance:

Review clinical services andrelated costs;

Joint service planning(recommendation 3.1) andjoint clinical appointments(recommendation 3.2) shouldenable increased activity anda reduction in the WIES recall;and

Forecast and communicate toDH, PDH’s cash flowrequirements up to 30 June2011 and for 2011/12. Cashflow requirements shouldcontinue to be monitored viathe performance meetingswith DH.

CE July 2011

5.2 Produce a one-page monthlysummary management reportwith key KPIs and trendreporting.

CE July 2011

5.3 Continue PDH boardrepresentation at DHperformance meetings.

PDH Board Ongoing




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3.6. Sea View House (‘SVH’)

3.6.1. Background

SVH was opened in October 2002 and was developed as a privately funded business unit. Itoperates under the Supported Residential Services (‘SRS’) Regulations 2001.

As a private ‘for-profit’ business, SVH does not receive State or Commonwealth funding, rather allincome is received directly from SVH residents, with any operating shortfalls funded from PDH'sfinancial resources. We are not aware of any other SRS operated by a Victorian public healthservice.

The original construction cost of SVH was $3.2 million. Originally $2.3 million was borrowed from acommercial financier, National Australia Bank. The loan was refinanced in 2005 with a $2.0 millionloan from the Victorian Treasury Corporation. The loan balance will be some $0.7 million at 30June 2011, with the interest rate fixed at 5.75%. This loan matures in April 2014.

We understand that the original business case for SVH was predicated on obtaining significant"ingoings" (one-off lump-sums) from residents, as well as ongoing monthly rentals. The amount ofthe ingoing and rental was based on negotiations with individual residents, not based on a fixedpricing schedule. There are three different resident contracts in place at SVH, with two differentterms relating to the period after which ingoings become non-refundable - after either 6 months or2 years (with a pro-rata refund for residents who leave between 6 months and 2 years).

Ingoings (i.e. the negotiated one-off lump sum) were fully recognised as revenue in the PDHaccounts once there is no legal entitlement to a refund. Therefore, SVH reported financialsurpluses in early years when there were significant ingoings, compared to later years whenrevenues have been increasingly reliant on rentals.

We understand that SVH was originally marketed as a facility that would provide for ageingresidents’ needs on a long-term basis, implying a level of care that exceeds that generallyassociated with a facility of this type. As residents have "aged in place" their care requirementshave, and will continue, to increase.

Under the Victorian Health Services Act, PDH is required to provide services and care to residents inline with the standards set out under that legislation and supporting regulations, and in line withthe residential statements in place for each resident. Under section 107 of the Act, if the proprietoris aware that a resident of the service is in need of more health care than can be provided at theservice, they must take all reasonable steps to ensure that the appropriate health care is providedto the resident.

An operating financial deficit of $338,000 is forecast for Sea View House in 2010/11. Prior to2010/11 SVH had reported an operating surplus, however we note that the operating surplus in2000/10 was not sufficient to cover loan repayments.

SVH had incurred a net cash deficit, after taking into account loan repayments, from 2009/10.



30

SVH's financial position can be summarised as follows:

Sea View House Forecast

2007/08 2008/09 2009/10 2010/11

$'000 $'000 $'000 $'000

Units available 57 57 56 56

Average units occupied 50 52 49 36

Operating Revenue

Retained ingoings 682 384 159 -

Daily fees 968 1,049 1,016 863

1,650 1,433 1,175 863

Operating Expenses

Salaries & Wages 667 781 724 866

Other 346 319 323 285

Interest 87 75 63 50

1,100 1,175 1,110 1,201

Result before capital items 550 258 65 (338)

Loan Repayment (197) (209) (221) (234)

Net Cash Flow 353 49 (156) (572)

Loan Outstanding 1,405 1,197 976 741

Actual

Source: PDH Management Information as at March 2011

3.6.2. Decision to close SVH

PDH's board and management had been reviewing the status of SVH for some time, on the basis of:

SVH being identified as a current/potential future financial drain on PDH;

SVH being a non-hospital (non-core) business;

The ongoing care requirements of its residents who are "ageing in place" and the resultingobligations under section 107 of the Health Services Act;

The new 90 bed aged care facility that opened in Portland in early 2011, providing arealistic alternative for residents who require a higher level of care; and

The on-going requirements of the SRS Regulations and of the new Supported ResidentialServices (Private Proprietors) Act 2010, including staffing levels and obligations.

An initial analysis of the impact of the 2010 Act on SVH was prepared by management andpresented to the board in August 2010. The paper identified numerous management observationsand recommendations including potential capital costs relating to the Supported ResidentialServices Design Guidelines 2006. The paper specific recommendations to seeking further advicefrom an external consultant relating to potential capital obligations.

3.6.2.1. Board paper considered at September 2010 board meeting

The Chief Executive presented a board paper to the September 2010 board that considered variousissues and recommended SVH’s closure. The paper stated that, amongst other things, substantialcapital investment would be required to comply with new legislation and that the commissioning of



31

a new 90 bed aged care residential facility in Portland provided PDH with a “once in a lifetime”opportunity to secure appropriate long term accommodation for the residents of SVH.

Specifically, the board paper stated that:

capital investment of $460,000 would be required to comply with the new SupportedResidential Services (Private Proprietors) Act 2010; and

additional design compliance issues, independent of building regulations, would alsorequire capital works estimated to cost $310,000.

(Please note that professional fees of 30% of capital cost would be included in addition to thesecosts).

The capital works costs referred to in the board paper were advised by an independent consultant.

The board paper also separately identified that there would be increased staffing costs arising fromincreasing care requirements of residents of some $470,000 per annum.

3.6.2.2. Independent consultant review (attachment to September 2010 board paper)

The scope of the independent consultant’s report on capital costs (refer above) was:

“to review the facility’s compliance with current Supported Residential Service Design Guidelines2006”.

The consultant estimated that $310,000 of works would be required to comply with the SRS DesignGuidelines. We note that the SRS Design Guidelines 2006 are intended for use by prospectiveproprietors or developers who plan to build a new SRS, lease or purchase an existing SRS or areconsidering physically upgrading an existing SRS. As such, the estimated costs of $310,000 wouldnot apply to SVH unless the SVH facility was planned to be physically upgraded or sold to anotherproprietor.

We note that the external consultants report was silent as to whether the SRS Design Guidelinesapplied to SVH as their scope assumed application.

Further to the above, the consultant noted that a number of residents were advised as havinglimited mobility (specifically referring to some residents requiring a four-wheeled walker or walkingstick to move around). Based on this, the consultant noted that “given residents are becomingfrailer, it is suggested that the building be upgraded to Class 9c [under the Building Code ofAustralia (BCA)] to allow for greater flexibility in the future”.

The consultant estimated costs of compliance with the BCA under two scenarios:

$210,000 to comply with Class 3 requirements, which would allow SVH to house a limited,more independent, cohort of residents; or

$461,000 to comply with Class 9c requirements, which would SVH to house a greater rangeof more dependent residents.

We note that the costs of either $210,000 or $461,000 to comply with the Building Code would berequired only in the event that PDH determined to:

operate SVH as a residential aged care facility; or

felt that SVH should be upgraded to a higher standard than present to meet an actual orperceived duty of care to residents by PDH (and used the BCA as a reference point todetermine the estimated upgrade requirements).



32

3.6.2.3. Paxton Partners review of the impact of the Supported Residential Services(Proprietors) Act 2010

Our understanding of the key impact of the SRS (Proprietors) Act 2010, which will come into forcein 2012, is that it will forbid significant ingoings of the type charged by SVH (limiting these to up-front payments for a few specific purposes, each capped at between two weeks and one month'srent).

The 2010 Act does not specifically require changes to physical facilities. The Act requires SRSproprietors to comply with “the prescribed accommodation and personal support standards”(Division 4, section 59). We note that the Act does not define which accommodation standardsshould be applied. There is no reference in the Act to Building Code or to the SRS DesignGuidelines. We further note that accommodation standards have not yet been publicly released (atJune 2011). Accordingly, the 2010 Act does not appear to impose new obligations on PDH tocomply with Building Code or the SRS Design Guidelines 2006.

3.6.2.4. Errors and omissions in the Chief Executive board paper

The Chief Executive board paper was incorrect in stating that “new legislation brings with it anunescapable responsibility for PDH to upgrade its facilities”. This conclusion overstated thepossible impact of the new Supported Residential Services (Proprietors) Act 2010, as the new Actdoes not specify compliance with specific standards.

The board paper also contained the following error and omissions:

The statement that $460,000 was required in “meet new legislative compliancerequirements” is not correct. These capital works were stated by the external consultant asbeing required if PDH wished to upgrade SVH to being a Class 9c facility under the BCA;

The statement that “there are other design compliance issues in the SRS Design Guidelines”that cost $310,000 omitted to state that the SRS Design Guidelines do not apply to SVH.We note that the external consultant report was also silent in this regard; and

The paper did not adequately consider how closure costs (staff redundancies, leave payoutsand refund of residential ingoings) would be funded.

3.6.2.5. Board decision

In September 2010, based on the Chief Executive’s paper, the PDH board formally resolved to closeSVH and to commence negotiations to relocate all residents to accommodation commensurate totheir individual care needs.

The September 2010 board meeting was attended by 4 board members (which was a quorumbased on the total of 7 board members at the time). The Chief Executive and Finance Managerwere also in attendance. Apologies were received from the Chairman (who was overseas) and twoother board members.

Whilst the board was correct to consider the future of SVH, we believe, based on the board minutesand from our discussions with board members, that the contents of the board paper were notadequately challenged, and the paper did not fully canvas options for SVH for consideration.

Alternative options that could have been formally considered by the board include:

Continuing to operate and market SVH under a new fee regime;

Selling the SVH business as a going-concern; or

Transferring patients to suitable alternative accommodation and then either:



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o identifying alternative uses for SVH; or

o selling the freehold of SVH on the basis of vacant possession.

These alternative options should have been supported by:

Financial analysis, including projection of profitability cash flows, to demonstrate theimpact of each option on PDH, its ongoing financial position, including redundancy andother exit costs and how these costs would be funded; and

Consideration of the likely level of market interest in the disposal options (i.e. going-concern sale and vacant possession sale).

We understand that the board discussed an alternative option of increasing the weekly fees, butthis was discounted as not viable (i.e. residents would not pay a substantially higher amount).These discussions were not documented in the minutes.

Also, whilst the board decision stipulated that residents would be supported in finding suitablealternative accommodation (understood to be over two years, although not documented in theboard paper), the decision did not fully consider the level of consultation and stakeholdermanagement that would be required, especially with SVH's residents and families.

3.6.3. Implementation of the decision to close

3.6.3.1. Decision to close

As discussed above, the decision to close SVH was made at the September 2010 board meeting,whilst the announcement to residents, families and staff took place on 21 January 2011.

The Chief Executive wrote to the incumbent Government Health Minister on 5 October 2010,seeking approval for the closure of SVH, however, no response was received to this letter beforethe Government entered caretaker mode on 2 November 2010, with an election following on 27November.

After the change of Government, the DH requested that the Chief Executive write to the newHealth Minister on 21 December 2010 to seek approval for the closure. At the same time, the DHrequested that the Chief Executive provide a detailed proposal for the planned closure, including afinancial analysis and implementation plan. The DH has advised that such a proposal was notreceived.

3.6.3.2. Announcement to residents and staff

PDH scheduled a meeting with SVH residents, families and staff to discuss the future of SVH on 19January 2011, with stakeholders being notified by letters sent on 14 January 2011. The meetingwas cancelled on the morning on 19 January based on verbal advice from DH that the meetingshould not proceed as sufficient information had not been provided to enable DH or the Minister toform a view about the proposed SVH closure.

PDH agreed a process with DH to work towards approval, the next step being a teleconferencebetween PDH and DH to be held late in the morning of 21 January 2011.

Prior to the teleconference on the morning of 21 January 2011, meetings were held by the Chair ofthe board and Chief Executive separately with residents and staff to announce SVH’s closure.

At the meeting with residents and their families, there was significant opposition expressed to thedecision to close SVH. Residents' families subsequently formed a community group to oppose theclosure (Sea View House Support Group).



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3.6.3.3. Stakeholder consultation

We believe PDH management and the board did not adequately consider the impact that theproposed closure would have on residents and their families and did not sufficiently plan for themanagement of the issues that would result from the decision.

Residents were advised that the decision to close SVH was ‘final’. There was no consultation periodwith residents or their families prior to the final board decision, nor approval from the Minster.

There were several more meetings between members of the PDH board and the Sea View HouseSupport Group. At these meetings the shortcomings of the September 2010 board paper werehighlighted to attending PDH board members.

At a meeting with the Sea View House Support Group on 3 February 2011, representatives of thePDH board agreed to delay any actions relating to the proposed closure of SVH for 6 weeks whilst:

Further financial analysis was carried out;

Alternative business models were considered; and

SVH was valued on a going-concern basis.

3.6.3.4. Board extraordinary meeting

On 17 February 2011 the board held an extraordinary meeting and resolved:

To rescind the motion to close SVH subject to the Sea View House Support Group, agreeingto work with PDH to find an independent operator;

To review this resolution in six months’ time;

To seek financial assistance from the DH to appoint a manager to operate the facility and todevelop a strategy/package to find an alternate operator;

That it has full confidence in the Chief Executive and directed the Chief Executive tomanage SVH in accordance with the SRS Guidelines; and

To appoint 3 board members to participate in a joint Working Party with the Sea ViewHouse Support Group to develop a strategy package to find an alternative operator for SVH.

3.6.4. Current considerations

We understand from recent discussions with the Board Chairman and the Chief Executive, that PDHhas appointed a project manager and is currently actively working with the Sea View House SupportGroup to investigate the sale of SVH as a going concern. We note that this is only one possibleoption and a detailed options appraisal with supporting financial analysis has not yet beenprepared.

Whilst the board has resolved to take 6 months to investigate the sale of SVH as a going concernand to work with the Sea View House Support Group, we believe this strategy lacks consideration ofother potential options for SVH. We have therefore recommended that a fully-costed optionsappraisal be conducted, ideally by an independent organisation. Given the sensitivity of localstakeholder issues, the options appraisal, while the responsibility of the board, should becommissioned in consultation with DH.

There is an ongoing requirement for PDH management to appropriately manage the carerequirements of residents based on an assumption of continued residence. This will represent achallenge for PDH given the significant uncertainty that still exists over the future of SVH.



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3.6.5. SVH decisions - in summary

We believe that the PDH board acted reasonably in identifying that SVH was not a core hospitalactivity and that it was becoming a financial drain on the health service although, we note that inpart the poor performance was due to the resident fee policy and cessation of marketing activitiesfor SVH, which led to a reduction in resident numbers. We note also, based on the informationprovided to us by management, that in 2009/10 and YTD 2010/11 SVH did not generate sufficientfunds to cover interest and principal repayments.

Key issues relating to handling of this matter by management and the board include:

Mistakes and omissions in the Chief Executive's September 2010 board paper, partiallyrelated to the external consultants advice not being directly referrable to the currentcircumstances and also not fully considering how closure costs would be funded;

The board did not adequately challenge the premise of the board paper or explore allreasonable potential options;

The board did not fully consider the financial implications of closure and how they would befunded;

The impact on residents and their families did not appear to be fully considered;

At the time of the decision, the future use or disposal of the facility was not fullyconsidered; and

Formal approval had not been received from the Minister and the Department of Healthprior to announcing the closure.

In reviewing the SVH decision making process, it was positive to note that all current boardmembers recognised these errors in hindsight, and rescinded/postponed the original decision toclose SVH. Notwithstanding this, we make the following observations:

Mistakes in the board paper recommending the closure were brought to the board'sattention by the Sea View House Support Group, not as a result of the board's owninterrogation;

That the board is currently working with the Sea View House Support Group to investigateselling the SVH business as a going concern. However, this is only one of many options forSVH and the PDH board does not have sufficient information or analysis at this stage todetermine that this is the best or most appropriate option.




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6. Sea View House


PDH board andmanagement correct toreview the status of SVHon the basis of:

SVH identified ascurrent and futurefinancial drain on PDH.

SVH being a non-hospital (non-core)business.

The care requirementsof its residents whoare ageing in place.

Increased local agedcare capacity given thenew 90 bed aged carefacility opening inPortland.

New SRS legislationrestricting ingoing feesand potentiallyimpacting staffingrequirements.

PDH board acknowledgedissues with their decision-making process andrescinded the decisionand engaged the localcommunity

Mistakes and omissions inboard paper recommendingclosure.

Funding of closure costs wasnot considered.

Insufficient challenge from theboard (board paper mistakesnot recognised).

Not all viable options explored.Future use of SVH notconsidered.

Formal clearance to announceclosure not obtained from DHor Minister.

No stakeholder consultation orcommunications plan.

Since the decision to close wasannounced resident numbershave reduced significantly,increasing the financial impacton PDH.

Current working group(comprised of PDH boardmembers and Sea View HouseSupport Group) is onlyconsidering the option of sellingSVH as a going concern.

6.1 Inconsultationwith DH,commissionanindependent(and fullycosted)appraisal onthe futureuse andownershipoptions forSVH.

PDH Board Jun 2011

6.2 Continuecommunitystakeholderengagement.

PDH Board Ongoing




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ATTACHMENT ATerms of Reference for a review of Portland District Health’s Financial, Governance andManagement Processes

The purpose of the review is to identify the overall effectiveness of the systems procedures andaccountability structures currently in place relating to the governance, finances and managementof PDH.

The scope of the review will include a focus on:

governance, finance and management systems, procedures and structures;

each board member’s understanding of their role, responsibility and accountability

within the context of these structures and processes;

an examination of governance and management processes, including planning,

communication, decision making, monitoring, reporting and risk management where

required;

financial management and performance including planning and budget development,

monitoring and reporting processes, and cash management systems ; and

a review of the management and decision-making processes related to the decision to

close Sea View House.

The methodology will consist of:

consultations with the PDH board, management and staff;

review of existing documentation, structures and processes relating to strategic planning,

risk management, reporting and accountability;

review of board, committee and management reports;

review of risk management practices including identification, analysis and risk reporting;

and

additional information as required

The outcome of the review is expected to be a report comprising:

a description of the overall governance , financial and management systems, procedures,

accountabilities and structures in place at PDH, including an analysis of strengths and

weaknesses; and

recommendations for improving the governance, financial and management capability of

PDH.



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ATTACHMENT B

List of Individuals Interviewed (in person and/or by telephone)

Name Role

Andrew Govanstone President/Board Chair

William Collett Board Director

Ray Gilby Board Director

James Harpley Board Director

John Osborne Board Director

Michael Noske Board Director

Dr Heather Wellington Ex Board Director (Ministerial Delegate)

Michael Rhook Ex Board Director (Ministerial Delegate)

John O'Neill Chief Executive

Pat Turnbull Director of Corporate Services - Western District Health

David Rae Finance Manager

Anne-Marie Scully Acting Director of Nursing

Roslyn Jones Quality/Corporate Services Manager

Annette Hinchcliffe Community Care Manager

Heather Sayner HR Manager

Dr Tim Baker Director of Emergency Medicine

Dr Amanda Lishman Emergency Physician

Dr David Taylor Director of Internal Medicine

Mr Uvarasen Naidoo General Surgeon

Erin Barker After Hours Coordinator

Kerry Hancock Care coordinator SVH

Mr Paul Kearns Visiting Urologist

Dr Chris Beaton Director of Obstetrics

Dr William Rieger Local GP

Dr Jesse Das Local GP

Dr Wladek Smolilo Local GP, GP Obstetrician and Anesthetist

Dr Dalbir Singh Local GP

Dr Abraham Stephenson Local GP

Yaser Dardr Career Medical Officer



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Name Role

Glenda Carswell Sea View House Support Group

Jim Fletcher Chief Executive - Western District Health

John Krygger Chief Executive - South West Healthcare

Dr Peter O'Brien Director of Medical Services - South West Healthcare

Chris Faulkner DH - Barwon South West Regional Office

Anne Fairbairn DH - Barwon South West Regional Office



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ATTACHMENT C

Detail of Board and Board Committee attendance

(Source: PDH Management)

1. Board of Management (July 2008 – March 2011)

Board of Management 2008-09 2009-10 2010-11Board Members Eligible Attended Eligible Attended Eligible Attended

Mr W Collett 4 4 10 8 7 6

Mr A Govanstone 11 7 10 10 7 5

Mr M Noske 11 8 10 7 7 6

Mr W Reid 11 11 10 8 - -

Mr B Sparrow 11 10 10 8 - -

Mr J Harpley 11 8 10 10 7 6

Miss A McLeod 11 7 9 7 - -

Mr B DuVergier 4 1 - - - -

Mr J Osborne - - 10 4 7 4

Mr C Suggate 2 6 5 - -

Mrs R Alexander - - - - 7 6

Mr R Gilby - - - - 7 6

Ministerial Delegates

Mr M Rhook 11 10 10 7 - -

Dr H Wellington 11 9 10 5 - -

2. Audit & Risk Management Committee (2010-11)

2010-11

Board Members Eligible Attended

Mr A Govanstone 3 3

Mr R Gilby 1 1

Mr J Osborne 2 2

Mr J Harpley 3 3

3. Finance Committee (2010-11)

2010-11

Board Members Eligible Attended

Mr A Govanstone 1 1

Mr W Collett 7 7

Mr M Noske 7 7

Mr J Osborne 7 5



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4. Clinical Risk and Quality Management (2010-11)

2010-11

Board members Eligible Attended

Mr J Harpley 4 4

Mrs R Alexander 3 3

Mr R Gilby 2 2

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