Policy - Report

Health Report

DHB Sector Year to Date Financial Performance for the eleven months to 31 May 2020

Date due to MO:

20 July 2020

Action required by:

N/A

Security level:

IN CONFIDENCE

Health Report number:

20201011

To:

Hon Chris Hipkins, Minister of Health

Copy to:

Hon Grant Robertson, Minister of Finance

Contact for telephone discussion

Name

Position

Telephone

Michelle Arrowsmith

Deputy Director-General, DHB Performance, Support and Infrastructure

021 572 584

Fergus Welsh

Chief Financial Officer, Corporate Services

021 550 410

Action for Private Secretaries

Return the signed report to the Ministry of Health.

Forward copy of report to Minister of Finance.

Date dispatched to MO:

Health Report: 20201011

Health Report: 202010116

DHB Sector Year to Date Financial Performance for the eleven months to 31 May 2020

Purpose of report

This report provides an overview of the financial performance of the district health board (DHB) sector for the year to date to 31 May 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].

Summary

DHB financial results for the year to date 31 May 2020 show the following:

•A sector wide deficit of $572 million after eleven months of the financial year, or a $118 million (25.9 percent) unfavourable variance to budget. In the same period last year, the sector reported a $423 million deficit ($99 million or 30.5 percent unfavourable), ending the year on a net deficit of $1.248 billion, or $432 million excluding one-offs such as Holidays Act provisions.

•The increase in deficit from April is $92 million and is driven by a monthly cost impact of $44 million resulting from the COVID-19 pandemic response, increases to Holidays Act provisions of $4 million and $44 million of above budget expenditure across other operational areas.

•The latest forecast for DHB deficits for 2019/20 based on DHB’s 31 May 2020 results is $807 million, or $310 million higher than plans. Of this, DHBs operating deficits are forecast to be around $500 million against a budget of $497 million. The overall forecast year end results are driven by a number of elements, including forecast additional unplanned expenditure incurred as a result of COVID-19 of $140 million and changes from 30 June 2019 related to Holidays Act liabilities incurred by the DHBs of $167 million. The actual year end results will be included in each of the DHBs audited Annual Reports for the year ended 30 June 2020.

•Overall, across the sector, Full Time Equivalents (FTEs)[footnoteRef:1] are higher than planned by 239 and 2,732 higher than the same period last year. [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.]

DHBs’ capital expenditure for the year to date was $477 million against budgeted expenditure of $669 million, an underspend of $192 million (or 29 percent). The sector forecast for the full year is an estimated underspend of $130 million.

•There will be additional capital project operating expenditure arising from COVID-19 impacts which DHBs are currently in the process of assessing (e.g. extension of project time claims, and additional Health and Safety related costs).

•Nineteen DHB 2019/20 annual plans have been approved as at 31 May 2020.

•The latest sector cash balances at the end of June show that six DHBs are in overdraft. However, only two DHBs (Canterbury and Taranaki) are currently forecasting to potentially breach their Operational Policy Framework overdraft limits during the 2020/21 financial year. Canterbury and Taranaki are also likely to be the only DHBs requiring advanced cash funding over the first quarter of 2020/21.

Recommendations

We recommend that you:

a. Note this report is specifically for the purpose of informing the Ministers of Health and Finance of the current financial performance and arising issues of the DHB sector to 31 May 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 Chris Hipkins

Deputy Director-General

Minister of Health

DHB Performance, Support and Infrastructure

Date:

Fergus Welsh

Chief Financial Officer

Corporate Services

DHB Sector Year to Date Financial Performance for the eleven months to 31 May 2020

DHB Operating results

1. The Ministry has received the DHB financial performance results for the year to 31 May 2020. Table one below shows the following:

i. A sector wide deficit of $572 million after eleven months of the financial year, or a$118 million (25.9 percent) unfavourable variance to budget. The increase in deficit from April is $92 million which includes a net $44 million DHB reported adverse impact from the COVID-19 pandemic response.

ii. At the same period last year, the sector reported a $423 million deficit ($99 million or 30.5 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.

iii. The net deficit comprised a favourable revenue variance against budget of $207 million ($100 million of this for additional COVID-19 funding for External Provider payments), offset by unfavourable expenditure against budget of $325 million ($219 million of this reported by DHB’s to be additional net COVID-19 spend).

iv. The average monthly actual spend to date is $1.567 billion per month, compared to a year to date average budgeted spend of $1.538 billion.

Table One: DHB Sector Financial Results YTD to 31 May 2020 - Consolidated Revenue, Expenditure, Net Result, FTEs

2. Total expenditure was unfavourable to budget by $325 million (1.9 percent) mainly due to unfavourable variances for personnel costs/outsourced personnel costs, and payments to other provider costs. The variance to budget of $325 million, includes $222 million of costs identified by DHBs as being due to the impact from the COVID-19 pandemic response. Against the prior year to date, total expenditure has increased by $1,101 million or 6.8 percent.

3. Personnel costs were unfavourable to budget by $68 million (or 1 percent) across fifteen DHBs, with Auckland and Waitemata DHBs having the largest variances. These were mainly due to:

i. Auckland - COVID-19 related payroll expenses including leave adjustments, rate per FTE being 0.6 percent higher than budgeted overall and security services being brought in-house. Note: Security Costs were originally budgeted under Infrastructure and Non Clinical Supplies budget; and

ii. Waitemata - COVID-19 related payroll costs including leave adjustments.

4. Personnel costs were $513 million or 8.2 percent higher than the equivalent period last year. This was due to a combination of more FTEs, particularly in nursing, average pay rates higher than plan, and COVID-19 impacts especially for increased leave provisions due to the cancellation of scheduled leave.

5. Outsourced personnel costs were unfavourable to budget by $90 million (or 69.2 percent) across the sector. 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 $9 million or 4.3 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.

6. Across the sector, FTEs are 239 higher than planned and are 2,732 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.

7. Most categories of personnel numbers were favourable to budget. The key exceptions are nursing personnel and support personnel which are higher than planned. Medical personnel were 194 FTEs favourable, nursing personnel were 668 FTEs unfavourable, allied health personnel were 257 FTEs favourable, support personnel were 52 FTEs unfavourable and management/administration were 30 FTEs favourable.

8. Outsourced services costs (excluding outsourced personnel) were unfavourable to budget by $21 million (or 4 percent) across thirteen DHBs with MidCentral and Northland DHBs having the largest variances; mainly due to:

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

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

Note the marked trend reduction in costs in April in the graph below is primarily due to lower activity levels arising from COVID-19.

9. Clinical supplies costs were unfavourable to budget by $16 million (or 1.1 percent) across thirteen DHBs, with Counties Manukau and Waikato DHBs having the largest variances. This is 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. We note that direct costs associated with treating people injured during the Whakaari/White Island eruption will receive additional funding.

ii. Waikato DHB – Mostly due to lab tests costs re: COVID-19. It also includes the unbudgeted costs relating to Whakaari White island eruption victims and the spending on blood products, which are covered by additional funding so while impacting on increased operating expenditure have not contributed to the deficits.

10. Clinical supplies costs have increased by $55 million or 3.9 percent against the equivalent period in the previous year. The significant fluctuations in March and April were mainly COVID-19 driven.

11. Infrastructure and Non Clinical Supplies costs were favourable to budget by $9 million (or 0.6 percent). Mainly driven by an underspend in facilities and interest and financing costs offset by an overspend in other operating costs:

i. Canterbury DHB had the largest underspend due to favourable capital charge and depreciation expenditure due to the delay in the handover of the Hagley Facility.

ii. Waitemata DHB had the largest overspend; primarily due to unallocated savings being budgeted under 'Other Operating costs'- whilst actual savings achieved YTD are shown under other expenditure categories.

12. Against the same period in the previous year, costs have increased by $58 million or 4 percent.

13. Payments to other provider costs were unfavourable to budget by $139 million (2.1 percent) across seventeen DHBs. The deterioration in variance to budget of $54 million from April includes unplanned costs of $44 million related to the COVID-19 pandemic response. This was offset by an associated increase in COVID-19 funding revenue paid to DHBs.

14. When comparing to the same period last year, payments to providers have increased by$441 million or 7 percent. The March to May movements include COVID-19 related funding payments made to the external Providers in the Primary Care sector that is offset by increased revenue funding also provided to DHBs.

15. All DHBs are now reporting year to date deficits, with only two DHBs achieving a result favourable to budget.

Forecast Sector Result

16. The latest forecast for DHB deficits for 2019/20 based on DHB’s 31 May 2020 results is $807 million, or $310 million higher than plans. Of this, DHBs operating deficits are forecast to be around $500 million against a budget of $497 million. The overall forecast year end results are driven by a number of elements, including forecast additional unplanned expenditure incurred as a result of COVID 19 of $140 million and changes from 30 June 2019 related to Holidays Act liabilities incurred by the DHBs of $167 million. The actual year end results will be included in each of the DHBs audited Annual Reports for the year ended 30 June.

17. The forecast year end position worsened by $17 million compared to the forecast based on 30 April results from a forecast net deficit of $790 million. The deterioration in forecast of $17 million from April includes additional provisions forecast at $62 million required for Holidays Act remediation for five DHBs offset by underlying forecast improvements of $45 million by four DHBs (Auckland, Counties Manukau, Waitemata and MidCentral).

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, nineteen DHBs have provided $32 million and forecast $145 million for additional remediation cost. There is high risk that the provision cost will increase further following the external review of the remediation process and year end audit work.

19. Approved budgets for 2019/20 are shown in Table Two reflecting approval of nineteen of the DHB Annual Plans.

Table Two:DHB Financial Results YTD to 31 May 2020 Net Surpluses / (Deficits)

Capital Expenditure

20. DHBs’ capital expenditure for the year to date reported actual expenditure of $477 million against a budgeted expenditure of $669 million (or 29 percent underspent). The total $192 million underspend against the plan largely consists of timing delays and underspends of $115 million in Buildings and Plant, $37 million in Clinical Equipment and $47 million in Information Technology and Software, offset by a $7 million overspend on motor vehicles.

21. 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 $222 million from underspends of $58 million in Buildings and Plant, $111 million in Clinical Equipment and $53 million in Information Technology and Software.

22. The impact of COVID-19 has been to initially delay most capital projects by at least six weeks and to add higher costs to projects which may not be able to be mitigated by project contingencies. The true impact on Capital projects from COVID-19 is still currently being assessed by DHBs.

Liquidity

23. 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 was 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 $141.9 million equity deficit support in June 2019. A further request for $430 million equity deficit support was approved by Ministers and paid to ten DHBs at the end of April which was forecast to maintain DHBs and overall sector liquidity through to December 2020.

25. The latest sector cash balances at the end of June show that six DHBs are in overdraft. However, only two DHBs (Canterbury and Taranaki) are currently forecasting to potentially breach their Operational Policy Framework overdraft limits during the 2020/21 financial year. Canterbury and Taranaki are also likely to be the only DHB’s requiring advanced cash funding over the first quarter of 2020/21.

26. DHBs report that the adverse impacts on their cash flows, compared to prior month forecasts, are due to COVID-19 impacts, and the Government directive to change supplier payment terms to settle within 10 working days. DHBs are still assessing these impacts although most DHBs have now factored in the increased Budget 2020/21 funding changes into their cash flow forecasts. The DHBs cash forecast positions and requests for deficit equity funding are currently being assessed as part of the review of DHB Plans for 2020/21.

27. We will continue to work with DHBs and New Zealand Health Partnerships to improve overall cash flow forecasting and monitor DHBs forecast cash positions as they are updated on a fortnightly basis.

Monitoring

28. The DHB strategic discussions in May and June were cancelled due to COVID-19. These discussions will be rescheduled.

29. Performance discussions are continuing between Ministry officials and DHB executives. Formalised engagements scheduled include:

i. Regular COVID-19 Zoom calls between the Director-General, Deputy Director-General DHB Performance, Support and Infrastructure, other Ministry officials and all DHB Chief Executives. These calls were held twice weekly during May and June.

ii. Regular COVID-19 Zoom calls between the Acting Group Manager, DHB Performance, Support and Engagement and all DHB Chief Operating Officers. These calls were held twice weekly during May and June.

30. Monthly performance meetings (formally MIF meetings) where the Deputy Director-General, DHB Performance, Support and Infrastructure continues to engage with the Chief Executives of DHBs where their latest monthly forecast template reflects a position that is a deterioration, were held for:

i. Canterbury DHB – 8 May

ii. Southern DHB – 14 May

iii. Hawke’s Bay - 3 June

iv. Waikato - 8 June

v. Counties Manukau - 11 June

31. Further DHB bi-monthly performance meetings were held between two Relationship Managers, the finance lead from the Ministry and the Chief Executives of DHBs. The below meetings were held in June, with remaining DHBs in the process of being scheduled.

i. Nelson Marlborough - 25 June

ii. Bay of Plenty - 25 June

iii. Northland - 26 June

iv. Mid Central - 30 June

v. Lakes - 30 June

32. Discussions between the Minister of Health and Crown Monitors were held in May between:

i. Counties Manukau

ii. Waikato

33. Discussions between the Minister of Health and all DHB Board Chairs were held during May.

34. A National Chairs Zoom meeting took place on the 7 May to discuss innovations and opportunities arising from COVID-19 response. In attendance was the Deputy Director-General DHB Performance, Support and Infrastructure, other Ministry officials and four DHB Board Chairs, feeding back to all other Board Chairs.

35. The National Hospital Response Group has held weekly Zoom meeting during May and June. Attendance includes the Chairperson - Deputy Director-General DHB Performance, Support and Infrastructure, senior officials at the Ministry of Health and a mixture of DHB Senior Executive representatives

36. Due to COVID-19 no on-site visits have taken place during the months of May or June.

Equity

37. Improving equity of health service and outcomes is a priority. DHBs are all expected to develop and implement plans for improving equity for their populations. DHBs are expected to quantify costs and benefits as part of their planning, with input feeding into their annual and outyear financial plans.

Next steps

38. The Ministry will continue to monitor the financial performance of DHB’s and, in particular, the key issues of:

i. the ongoing implications of Holiday’s Act Liability provisioning and the impact on 30 June 2020 financial performance

ii. the impact of COVID-19 on 30 June 2020 financial performance

iii. forecast cash positions and the potential requirements for DHB deficit equity funding

iv. Ongoing DHB financial sustainability, especially in the context of DHB 2020/21 annual and outyear plans.

ENDS.

DHB

YearTo Date

Result

2019/20

Unfavourable

/ favourable

to Budget -

May 2020

Variance from

previous

month

2019/20 Plan

Approved

Targeted

Budgeted

Year End

Result

Forecast Year

End Result

May 2020

Forecast Year

End Result vs

Budget

$M$M$M$M$M$M

Auckland DHB(18,306) (9,763) 13,216

Yes

(20,000) (74,848) (54,848)

Bay of Plenty DHB(18,075) (7,440) (1,665)

Yes

(10,500) (24,520) (14,020)

Canterbury DHB(148,029) 13,234 (8,591)

No

(180,470) (223,679) (43,209)

Capital & Coast DHB(33,648) (19,162) (469)

Yes

(15,900) (47,500) (31,600)

Counties Manukau DHB(42,546) (8,237) (1,592)

Yes

(38,594) (56,574) (17,980)

Hawke’s Bay DHB(31,301) (19,933) (5,829)

Yes

(12,900) (30,090) (17,190)

Hutt Valley DHB(15,217) (7,884) (2,104)

Yes

(8,142) (15,639) (7,497)

Lakes DHB(12,444) (3,052) (515)

Yes

(10,130) (14,520) (4,390)

MidCentral DHB(13,910) (3,534) 543 Yes(12,100) (16,916) (4,816)

Nelson Marlborough DHB(10,171) (5,417) (1,654)

Yes

(6,042) (12,692) (6,650)

Northland DHB(17,500) (6,240) (1,535)

Yes

(12,800) (19,872) (7,072)

South Canterbury DHB(1,187) (1,240) (140)

Yes

27 (1,100) (1,127)

Southern DHB(44,022) (9,575) (3,447)

Yes

(38,512) (49,413) (10,901)

Tairawhiti DHB(12,475) (1,720) 413

Yes

(12,000) (13,698) (1,698)

Taranaki DHB(23,918) (5,896) (1,924)

Yes

(18,023) (28,205) (10,182)

Waikato DHB(66,114) (121) (274)

Yes

(72,425) (72,425) 0

Wairarapa DHB(6,206) 1,584 (119)

Yes

(9,527) (8,088) 1,439

Waitemata DHB(35,447) (19,668) (2,552)

Yes

0 (64,445) (64,445)

West Coast DHB(6,910) (846) 13

Yes

(6,613) (17,459) (10,846)

Whanganui DHB(14,463) (2,904) (2,792) Yes(12,597) (15,701) (3,104)

Total (571,889) (117,814) (21,017) (497,249) (807,384) (310,135)