Health ReportDHB Sector Year to Date Financial Performance for the eight months to 29 February 2020

Date due to MO:

N/A Action required by: N/A

Security level: IN CONFIDENCE Health Report number:

20200490

To: Hon Dr David Clark, Minister of Health

Copy to: Hon Grant Robertson, Minister of Finance

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

Performance, Support and Infrastructure

021 572 584

Fergus Welsh Chief Financial Officer, Corporate Services

021 550 410

Action for Private Secretaries

Return the signed report to the Ministry of Health.

Forward copy of report to the Minister of Finance.

Date dispatched to MO:

DHB Sector Year to Date Financial Performance for the eight months to29 February 2020

PurposeThis report provides an overview of the financial performance of the district health board (DHB) sector for the year to date to 29 February 2020. 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 29 February 2020 show the following: A sector wide deficit of $306 million after seven months of the financial year, or a $34

million (or 12.5 percent) unfavourable variance to the draft budget. At the same period last year, the sector reported a $221 million deficit ($45 million or 25.6 percent unfavourable), ending the year on a net deficit of $1.248 billion including one-offs, or $432 million excluding one-offs.

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

DHBs are forecasting a $564 million deficit to 30 June 2020 against the draft year end planned deficit of $497 million (and were provided before any impact of additional COVID-19 costs). The forecast only includes additional provisions required for Holidays Act remediation in 2019/20 for 8 DHBs and includes financial benefits from savings initiatives. The Ministry is working with those DHBs that are not currently providing for additional Holidays Act remediation costs to gain a fuller picture of the impact.

The sector’s unfavourable variance to budget is mainly due to outsourced personnel costs, clinical supplies and outsourced service costs; totalling $129 million.

This unfavourable, variance is offset by a favourable revenue variance against the draft budget of $74 million (mainly due to higher than budgeted revenue from MoH Funding Sub-contracts) and a favourable variance to budget for personnel costs of $11 million.

While eighteen DHBs reported year to date deficits, four DHBs achieved a result favourable to budget.

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Overall, across the sector Full Time Equivalents (FTEs)1 are lower than planned by 510, but this is 2,573 higher than the same period last year.

DHBs’ capital expenditure for the year to date was $347 million against budgeted expenditure of $494 million. The sector forecast for the full year is an underspend of $51 million.

Seventeen DHB 2019/20 annual plans have been approved as at 29 February 2020. We have submitted final plans for Auckland, and Nelson Marlborough for your approval. Canterbury DHB’s plan still has issues that are required to be resolved.

The latest sector cash flow forecasts show that thirteen DHBs will be in overdraft by 30 June 2020, with three of these forecasting to breach their Operational Policy Framework overdraft limits during 2019/20. However, please note that these forecasts do not factor in the likely impact of additional COVID-19 costs and any associated funding, which started to be incurred from March.

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

Ministers of Health and Finance, of the current financial performance and arising issues of the DHB sector to 29 February 2020.

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

Yes / No

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

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

Date:

Fergus WelshChief Financial OfficerCorporate Services

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

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

29 February 2020. Table one below shows the following:

i. A sector wide deficit of $306 million after eight months of the financial year, or a$34 million (12.5 percent) unfavourable variance to budget. At the same period last year, the sector reported a $221 million deficit which was $45 million or 25.6 percent unfavourable, ending the year on a net deficit of $1.248 billion, with an operational deficit of $432 million excluding one off costs such as Holidays Act provisions.

ii. The net deficit comprised a favourable revenue variance against budget, of $74 million, offset by unfavourable expenditure against budget, of $108 million.

iii. The average monthly actual spend to date is $1.544 billion per month, compared to a year to date average budgeted spend of $1.530 billion for the first eight months of last year. To meet the full year expense target budget, expenditure would need to reduce by $14 million per month for the remainder of the year. Based on past trends this is unlikely to be achieved.

Table One: DHB Sector Financial Results YTD to 29 February 2020 - Consolidated Revenue, Expenditure, Net Result, FTEs

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

REVENUE 12,044 11,970 74 0.6% 11,384 17,972 67.0%

Operating CostsPersonnel (4,794) (4,805) 11 0.2% (4,431) (7,290) 65.8%Outsourced Personnel (162) (94) (68) (71.8%) (150) (142) 114.0%Total Personnel (Including Outsourced) (4,956) (4,899) (57) (1.2%) (4,581) (7,432) 66.7%Outsourced Services (399) (382) (17) (4.4%) (374) (570) 69.9%Clinical Supplies (1,094) (1,058) (36) (3.4%) (1,015) (1,599) 68.4%Infrastructure & Non-Clinical Supplies (1,066) (1,076) 10 0.9% (1,027) (1,626) 65.5%Total Operating Costs (7,515) (7,415) (100) (1.3%) (6,996) (11,227) 66.9%

Payments to ProvidersMoH - Personal Health (3,143) (3,132) (12) (0.4%) (3,007) (4,699) 66.9%MoH - Mental Health (348) (355) 7 2.1% (328) (534) 65.2%MoH - Public Health (22) (26) 3 12.5% (22) (38) 58.6%MoH - Disability Support Services (1,288) (1,282) (5) (0.4%) (1,222) (1,924) 66.9%MoH - Maori Health (34) (32) (2) (5.0%) (31) (47) 71.1%Total Payments to Providers (4,835) (4,827) (8) (0.2%) (4,609) (7,242) 66.8%

TOTAL EXPENDITURE (12,350) (12,241) (108) (0.9%) (11,605) (18,469) 66.9%NET RESULTS: Surplus/(Deficit) (306) (272) (34) (12.5%) (221) (497) 61.5%

Average FTEs YTD 69,455 69,965 510 0.7% 66,882 70,234

Year to Date

Previous Year to Date

Full Year Target Budget

Spend Against

Budget after 66.66% of Year Gone

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2. Total expenditure was unfavourable to budget by $108 million (0.9 percent) due to unfavourable variances for outsourced personnel costs, outsourced clinical services costs, clinical supplies costs and payments to other provider costs. Against the prior year to date, total expenditure has increased by $745 million or 6.4 percent.

3. Personnel costs were favourable to budget by $11 million across the sector mainly due to lower than planned FTEs, although these were augmented by lower than expected pay rates and higher outsourced personnel costs (refer below). Personnel costs were $363 million or 8.2 percent higher than the equivalent period last year, due to a combination of more FTEs, particularly in nursing, and the impact of average pay rates higher than plan.

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4. Outsourced personnel costs were unfavourable to budget by $68 million (or 71.8 percent) across the sector. This more than offsets the favourable variance to budget for personnel costs discussed above. 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 $12 million or 8 percent higher in 2019/20 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 510 lower than planned, but this is 2,573 higher than the same period last year. The increase in FTEs is driven by a range of factors, such as collective agreements and associated roster changes for nurses and junior doctors, increased demand from demographic growth, mental health services, national bowel screening, filling of vacancies and bringing outsourced functions back in house.

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6. Most categories of personnel numbers were favourable to budget. The key exception is nursing personnel which is higher than planned. Medical personnel were 337 FTEs favourable, nursing personnel were 459 FTEs unfavourable, allied health personnel were 453 FTEs favourable, support personnel were 5 FTEs favourable and management/administration were 175 FTEs favourable.

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

8. Outsourced service costs (excluding outsourced personnel) were unfavourable to budget by $17 million (or 4.4 percent) across fourteen DHBs with MidCentral and Northland DHBs having the largest variances; mainly due to:

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

ii. Outsourcing of radiology reads and send away pathology tests due to vacancies in these services in Northland DHB.

9. Costs associated with outsourced services have increased by $25 million or 6.7 percent against the equivalent period in the previous year.

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10. Clinical supplies costs were unfavourable to budget by $36 million (or 3.4 percent) across seventeen DHBs, with Counties Manukau and Southern DHBs having the largest variances, mainly driven by:

i. Counties Manukau DHB - Whakaari White Island response costs, particularly dressings, skin grafts and surgical instruments, unrealised target savings and projected expenditure increases in pharmaceuticals to support an increase in burns patients (acute and Tahitian), and for non-PCT drugs.

ii. Southern DHB - Higher than budgeted costs for Air Ambulance, blood products and implants and prostheses.

11. Clinical supplies costs have increased by $79 million or 7.8 percent against the equivalent period in the previous year.

12. Infrastructure and Non clinical supplies costs were favourable to budget by $10 million (or 0.9 percent). Mainly driven by an underspend in facilities and interest & financing costs offset by an overspend in other operating costs:

i. Canterbury DHB had the largest underspend due to favourable depreciation relating to delays in the Hagley complex and reduced capital charge related to EQ insurance drawdowns.

ii. Waitemata DHB had the largest overspend due to unallocated savings being budgeted in other operating costs. The additional savings are expected to come from savings within the Funder Arm. The DHB is still confident that it will break-even at year end.

13. Against the same period in the previous year, costs have increased by $39 million or 3.8 percent

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i.

14. Payments to other provider costs were unfavourable to budget by $8 million across thirteen DHBs. Bay of Plenty and Counties Manukau DHBs having the largest variances, mainly due to:

i. Bay of Plenty DHB -Mainly higher than budgeted costs for Health of Older people for support services and residential care, and higher than budget costs for Pharmaceuticals.

ii. Counties Manukau - More GP practices have enrolled with PHO, resulting in higher external Provider expenditure, offset by increased revenue.

15. When comparing to the same period last year, payments to providers have increased by$226 million or 4.9 percent.

16. While 18 DHBs reported a year to date deficit, four DHBs (Canterbury, MidCentral Wairarapa & Waitemata) achieved a result better than budget for the year to date to 29 February 2020.

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Forecast Sector Result17. DHBs are forecasting a $564 million deficit to 30 June 2020 against a draft

budgeted year end-result of $497 million, $67 million unfavourable to budget. This forecast was made prior to COVID-19 and that these forecasts did not factor in the likely impact of additional COVID-19 costs and any associated funding, which really started to be incurred from March.

18. Many DHBs assumed that the Holidays Act remediation work would be completed in 2019/20 thus avoiding the need to provide additional remediation cost for 2019/20. The 2018/19 total Holidays Act remediation provision ($770 million) was for nine years. One ninth of the total provision is around $90 million providing an estimate of the impact in 2019/20. So far this year, eight DHBs have provided for $3.7 million additional remediation cost. Remediation is expected to begin in the 2020/21 year. Allowing for the Holidays Act risk to the forecast year end position this would see the deficit increase to approximately $685 million by year end.

19. DHBs have tended to have higher expenditure in the later months of the financial year due to higher activities and employment agreement wage increases. This is supported by DHBs forecast FTEs of 70,455, an increase of 221 above budget of 70,234. as noted elsewhere in the report, to meet the full year expense target budget, expenditure would need to reduce by $14 million per month for the remainder of the year. Based on past trends this is unlikely to be achieved.

20. Approved budgets for 2019/20 are shown in Table Two reflecting approval of 17 of the DHB Annual Plans. For Auckland, Canterbury and Nelson Marlborough DHBs the budgets reflect their proposed budgets (including the updated Auckland DHB annual plan) and are under review by the Ministry.

Table Two:DHB Financial Results YTD to 29 February 2020 Net Surpluses / (Deficits)

DHB

YearTo Date Result

2019/20

Unfavourable / favourable to Budget - Feb 2020

Variance from

previous month

2019/20 Plan Approved

Targeted Budgeted Year End

Result

Forecast Year End

Result Feb 2020

Forecast Year End Result vs Budget

$M $M $M $M $M $MAuckland DHB 2,222 (6,784) (2,443) No (20,000) (27,000) (7,000) Bay of Plenty DHB (6,108) (1,878) (71) Yes (10,500) (16,534) (6,033) Canterbury DHB (81,393) 15,035 4,200 No (180,470) (180,449) 21 Capital & Coast DHB (17,876) (12,000) (1,326) Yes (15,900) (29,500) (13,601) Counties Manukau DHB (25,209) (3,549) (318) Yes (38,594) (38,591) 3 Hawke’s Bay DHB (15,810) (7,878) (1,018) Yes (12,900) (25,744) (12,844) Hutt Valley DHB (7,894) (2,307) (524) Yes (8,142) (10,390) (2,248) Lakes DHB (6,840) (1,316) (238) Yes (10,130) (11,429) (1,299) MidCentral DHB (6,640) 218 336 Yes (12,100) (12,100) 0 Nelson Marlborough DHB (4,789) (1,053) (379) No (6,042) (8,480) (2,438) Northland DHB (8,351) (2,172) (898) Yes (12,800) (14,072) (1,272) South Canterbury DHB 206 (1,024) 78 Yes 27 (1,100) (1,127) Southern DHB (24,287) (5,997) (723) Yes (38,512) (45,966) (7,454) Tairawhiti DHB (8,575) (1,585) (348) Yes (12,000) (14,279) (2,279) Taranaki DHB (17,043) (603) 34 Yes (18,023) (28,205) (10,182) Waikato DHB (45,595) (2,318) 283 Yes (72,425) (72,425) 0 Wairarapa DHB (3,666) 1,919 (66) Yes (9,527) (8,686) 841 Waitemata DHB (14,703) 294 28 Yes 0 0 0 West Coast DHB (4,690) (604) (148) Yes (6,613) (6,817) (204) Whanganui DHB (8,851) (501) 182 Yes (12,597) (12,597) 0

Total (305,892) (34,103) (3,359) (497,249) (564,363) (67,115)

Capital Expenditure

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21. DHBs’ capital expenditure for the year to date reported actual expenditure of $347 million against a budgeted expenditure of $494 million (or 30% underspent). The total $147 million underspend against the plan largely consists of timing delays and underspends of $82 million in Buildings and Plant, $44 million in Clinical Equipment and $29 million in Information Technology and Software.

22. Historically, the sector has tended to be below budgeted capital expenditure levels, which is mostly driven by delays in projects commencing. In the same period last year, DHBs reported a total underspend of $182 million from underspends of $47 million in Buildings and Plant, $75 million in Clinical Equipment and $50 million in Information Technology and Software.

Liquidity23. The DHBs manage a shared banking and treasury service through a cash offset

arrangement with the Bank of New Zealand. Individual DHBs can become overdrawn on any day provided there are surplus funds held by other DHBs, ensuring the net DHB sector balance is positive. A significant decrease in the total sector cash over several years has resulted in cash balances reducing to a level where there is a risk in 2019/20 of cash offset arrangements being breached.

24. The Ministry and Treasury have been working closely with New Zealand Health Partnerships to develop options to manage forecast breaches over the 2019/20 financial year. After joint advice provided to Ministers (HR20191004 and T2019/1529 refers) the sector received $141.911 million equity deficit support in June 2019. A further request for $430 million equity deficit support was recently approved by Ministers which is expected to maintain DHB’s liquidity through to the latter part of 2020.

25. The latest sector cash flow forecasts show that thirteen DHBs will be in overdraft by 30 June 2020, with three of these forecasting to breach their Operational Policy Framework overdraft limits during 2019/20. However, note that these forecasts do not yet factor in the likely impact of additional COVID-19 costs and the $430 million equity deficit support funding recently approved by Ministers.

Monitoring26. Performance discussions are continuing between Ministry officials and DHB

executives, with both regular DHB Chief Executive calls, performance meetings and onsite visits. Daily engagement with the DHB Chief Executives is currently focused on balancing the response to COVID-19 as well as supporting the ongoing management of service delivery and care for patients.

ENDS.

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