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Health ReportDHB Sector Year to Date Financial Performance for the four months to 31 October 2019

Date due to MO:

N/A Action required by: N/A

Security level: IN CONFIDENCE Health Report number:

20192299

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 SecretariesReturn the signed report to the Ministry of Health.

Forward copy of report to Minister of Finance.

Date dispatched to MO:

Health Report: 20192299 1

DHB Sector Year to Date Financial Performance for the four months to 31 October 2019Purpose of ReportThis report provides an overview of the financial performance of the district health board (DHB) sector for the year to date to 31 October 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 October 2019 show the following.

A sector wide deficit of $186 million after four months of the financial year, or a $12 million unfavourable variance to the draft budget. In the same period last year, the sector reported a$124 million deficit, ending the year on a net deficit of $1.248 billion including one-offs, or $432 million excluding one-offs.

DHBs are forecasting a $540 million deficit to 30 June 2020 against the draft budgeted year end result of $534 million.

The sector’s unfavourable variance to the draft budget is due to outsourced personnel costs, outsourced service costs, clinical supplies costs, infrastructure costs, and payments to other providers totalling $87 million.

This is offset by a favourable revenue variance against budget of $42 million and a favourable variance to budget for personnel costs of$33 million.

Eight DHBs achieved a result close to budget. Of these, seven achieved a favourable result and one was less than $0.2 million unfavourable to budget as at 31 October 2019.


Overall, across the sector Full Time Equivalents (FTEs) (1) are lower than plan by 799, but this is 2,614 higher than the same period last year.

DHBs’ capital expenditure for the year to date was $160 million against budgeted expenditure of $252 million.

On 21 October 2019 Tranche one of DHB Annual Plans and Regional Service Plans (RSPs) was sent to your office for approval (HR 20191531 refers). Tranche one included Hutt Valley, MidCentral, South Canterbury, Taranaki, Wairarapa and West Coast DHBs and Midland, Northern and South Island RSPs.

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 to31 October 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.


Operating Results1. The Ministry has received the DHB financial performance results for the year to

31 October 2019. Table One below shows the following:a) A sector wide deficit of $186 million after four months of the financial year,

or a$12 million (7 percent) unfavourable variance to budget. At the same period last year, the sector reported a $124 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 $42 million, offset by unfavourable expenditure against budget of $54 million.

c) The average monthly actual spend to date is $1.551 billion per month, compared to an average budgeted spend of $1.537 billion for the first four months of this year and an average spend of $1.448 billion for the first four months of last year. To meet the full year expense budget, expenditure would need to reduce to a level of $1.536 billion per month for the remainder of the year.

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

Actual Budget Variance Variance Previous Year to Date Variance Variance

$M $M $M % $M $M % $M %REVENUE 6,020 5,978 42 0.7% 5,669 351 6.2% 17,961 33.5%

Operating CostsPersonnel (2,371) (2,404) 33 1.4% (2,186) (185) 8.4% (7,297) 32.5%Outsourced Personnel (82) (48) (35) (73.3%) (76) (7) 8.9% (142) 58.1%Total Personnel (Including Outsourced) (2,453) (2,451) (2) (0.1%) (2,262) (191) 8.5% (7,439) 33.0%Outsourced Services (205) (196) (9) (4.6%) (188) (17) 9.0% (572) 35.9%Clinical Supplies (560) (543) (17) (3.1%) (519) (41) 7.8% (1,601) 35.0%Infrastructure & Non-Clinical Supplies (550) (535) (15) (2.8%) (518) (32) 6.2% (1,631) 33.7%Total Operating Costs (3,768) (3,725) (43) (1.2%) (3,487) (281) 8.1% (11,242) 33.5%

Payments to ProvidersMoH - Personal Health (1,590) (1,575) (15) (0.9%) (1,497) (93) 6.2% (4,707) 33.8%MoH - Mental Health (175) (179) 4 2.3% (163) (11) 6.9% (536) 32.6%MoH - Public Health (12) (13) 1 9.3% (12) (0) 0.9% (38) 30.6%MoH - Disability Support Services (645) (643) (1) (0.2%) (618) (27) 4.4% (1,924) 33.5%MoH - Maori Health (17) (16) (0) (2.7%) (16) (1) 3.2% (47) 35.4%Total Payments to Providers (2,437) (2,426) (11) (0.5%) (2,305) (132) 5.7% (7,253) 33.6%

TOTAL EXPENDITURE (6,206) (6,151) (54) (0.9%) (5,792) (413) 7.1% (18,495) 33.6%NET RESULTS: Surplus/(Deficit) (186) (174) (12) (7.0%) (124) (62) 50.0% (534) 34.8%

Average FTEs YTD 69,005 69,804 799 1.1% 66,391 2,614 3.9% 70,235

Year to Date

Draft Budget Result 2019/20

Spend Against Budget

after 33.33% of

Year Gone


2. Total expenditure was unfavourable to budget by $54 million (0.9 percent) due to unfavourable variances for outsourced personnel costs, outsourced clinical services costs, clinical supplies costs, infrastructure & non clinical supplies costs and payments to other providers. Against the prior year to date, total expenditure has increased by $413 million or 7.1 percent.

3. Personnel costs were favourable to budget by $33 million across the sector mainly due to higher than expected vacancies, although there was a partial offset through higher than planned pay rates and higher outsourced personnel costs. Personnel costs were $185 million or 8.4 percent higher than the equivalent period last year, due to a combination of more FTEs, particularly in nursing, and the impact of rate increases.


4. Outsourced personnel costs were unfavourable to budget by $35 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 $7 million or 9 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 799 lower than planned, but this is 2,614 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.

6. Most categories of personnel numbers were favourable to budget, apart from nursing personnel; medical personnel (461 FTEs favourable), nursing personnel (256 FTEs unfavourable), allied health personnel (400 FTEs favourable), support personnel (101 FTEs favourable) and management/administration (93 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 costs) were unfavourable to budget by $9 million across 14 DHBs with Auckland, MidCentral and Northland DHBs having the largest variances.

i. Auckland saw higher than planned MRI and cardiothoracic outsourcing, alongside higher than budgeted requirement for outsourced lab tests.

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

iii. For Northland the main contributor was outsourced Corporate/Governance Services costs and pathology services for the outsourcing of tests.

Costs associated with outsourced services have increased by $17 million or 9 percent against the equivalent period in the previous year, with the increase being largest in Auckland DHB. This was due to increased requirements for MRI and cardiothoracic outsourcing driven by higher referrals from other DHBs which was partly offset by additional revenue. Activity levels in 2019/20 were planned to be 10.4 percent higher than 2018/19 actuals.


9. Clinical supplies costs were unfavourable to budget by $17 million across 16 DHBs with Counties Manukau and Waikato DHBs having the largest variances.

i. Unrealised savings and overspend in Gastroenterology and Renal services in Counties Manukau DHB.

ii. Higher than budgeted costs for diagnostic supplies, implants and prostheses in Waikato DHB.

Clinical supplies costs have increased by $41 million or 7.9 percent against the equivalent period in the previous year.

10. Non clinical supplies costs were unfavourable to budget by $15 million across 12 DHBs. Waitemata DHB had the largest variance, mainly driven by savings plans not being achieved although the DHB is still forecasting that it will achieve its planned result. Against the same period in the previous year, costs have increased by $32 million or 6.2 percent.


11. Payments to other provider costs were unfavourable to budget by $11 million across 12 DHBs, with Counties Manukau and South Canterbury DHBs having the largest variances;

i. More GP practices have enrolled with Counties Manukau PHO resulting in higher external Provider expenditure.

ii. For South Canterbury, the increased cost in the month was offset completely by an increase in revenue. This is a passthrough related to the provision of PHO services.

When comparing to the same period last year, payments to providers have increased by $132 million or 5.7 percent.

12. Eight DHBs achieved a result close to budget (under $0.2 million unfavourable to budget), or an improved result to budget, as at 31 October 2019.

Forecast Sector Result13. DHBs are forecasting a $540 million deficit to 30 June 2020 against a draft budgeted

year end-result of $534 million. DHB annual plans, including planned deficits, are being agreed.

14. All draft budgeted result numbers as shown in Table Two are as submitted by the DHBs and are under review by the Ministry.


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

DHB

YearTo Date

Result 2019/20

Unfavourable / favourable to budget - Oct

2019

Variance from

previous month

2019/20 Plan

Approved

Draft Budgeted

Result 2019/20

Forecast Year End

Result Oct 2019

$M $M $M $M $MAuckland DHB (17,562) 916 97 No (56,968) (51,967) Bay of Plenty DHB (2,544) (580) (730) No (10,500) (10,500) Canterbury DHB (45,928) 172 101 No (180,470) (180,470) Capital & Coast DHB (11,136) (4,929) (1,755) No (15,900) (20,900) Counties Manukau DHB (12,717) 79 99 No (38,594) (38,614) Hawke’s Bay DHB (5,539) (1,590) (485) No (12,900) (15,851) Hutt Valley DHB (5,207) (1,359) (408) No* (8,142) (8,142) Lakes DHB (4,450) (1,474) 128 No (10,130) (10,130) MidCentral DHB (3,889) 212 143 No* (12,100) (12,100) Nelson Marlborough DHB (3,189) (335) 930 No (6,042) (7,454) Northland DHB (4,223) (494) (137) No (12,800) (12,806) South Canterbury DHB (802) (719) (498) No* 27 23 Southern DHB (12,699) (1,310) (506) No (38,512) (38,512) Tairawhiti DHB (4,109) (373) 246 No (12,000) (13,024) Taranaki DHB (9,331) 192 105 No* (18,023) (18,023) Waikato DHB (27,021) (147) 337 No (72,425) (72,872) Wairarapa DHB (1,968) 783 426 No* (9,527) (9,538) Waitemata DHB (4,660) 104 38 No 0 0 West Coast DHB (2,603) (271) (236) No* (6,613) (6,662) Whanganui DHB (6,156) (965) 10 No (12,597) (12,597)

Total (185,733) (12,088) (2,095) (534,216) (540,140)

* Annual plans for these DHBs were submitted in Tranche One and have been signed post October 2019.

Capital Expenditure15. DHBs’ capital expenditure for the year to date was an actual expenditure of $160

million against a budgeted expenditure of $252 million. The total $92 million underspend largely consists of underspends of $17 million in land, $31 million in buildings and plant, $36 million in clinical equipment and $12 million in information technology and software.

16. 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 underspends of $6 million in buildings and plant, $38 million in clinical equipment and$23 million in information technology and software.

Liquidity17. The DHBs manage a shared banking and treasury service through a cash offset

arrangement with 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.

18. 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


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

Monitoring19. 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- Auckland DHB, 31 October- Counties Manukau DHB, 1 November- Waikato DHB, 13 December- Hawke’s Bay DHB, 19 December

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- Bay of Plenty and Lakes DHBs' visits 29 November.

20. The Deputy Director-General, DHB Performance, Support and Infrastructure has been in contact with the Chief Executives of all 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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