30. Almost half (some 46% by value in 1997/98) of New Zealand's publicly-funded health and disability support services are delivered by private, voluntary and not-for-profit providers which include GPs, Plunket, and community organisations together with numerous Maori and disability support service providers.

31. District Health Boards will be responsible for funding health and disability support services that are provided for the populations they serve by non Crown-owned providers.

32. My expectation is that the establishment of District Health Boards will yield significant improvements in the interfaces between primary/community and hospital-based services. Specifically, the Boards' ownership role in respect of the latter will facilitate more effective integration of services for individuals and communities.

District Health Board Committees

33. In recognition of potential conflicts between the District Health Boards' role as owners (of hospitals) and funders (of primary/community health services), I propose that each Board should be required to set up a Hospital Governance Committee and a Primary Care Advisory Committee.

34. The Hospital Governance Committee will be responsible for governance of the hospital and related services and its function will be to advise the Board on the efficient and effecive operation of its hospitals and related service. The Chief Executive of the hospital will remain, as currently, responsible for all aspects of its management.

35. The Primary Care Advisory Committee will provide advice to the Board on, and a liaison role with, community based health care and disability support services.

36. These committees' detailed functions and exact relationships with the District Health Board will be the subject of further analysis.

37. While the Hospital and Primary Care Advisory Committees will focus clearly on specific components of service, they will also be expected to foster integration across the primary/secondary interface and act as a brake on any initiatives that are prejudicial to the wider interests of the Board.

38. District Health Boards will be able to establish other Committees or Advisory Groups should they wish to do so, and will be able to co-opt representatives onto any Committee or Group if required.

Risks

39. This approach is not without risks:
    1. District Health Boards might allow their ownership interest (in hospitals) to compromise their performance in arranging access to efficient and appropriate non-hospital services (where typically the District Health Board will have no ownership interest) - this could be particularly prejudicial to the further development of disability support services.
    2. As a minimum the Government will need to ensure adequate Maori presence on Boards and any committees or advisory groups that they establish.
    3. District Health Boards may focus excessively on seeking innovation in hospital services and, as a result, may stifle the further evolution of primary care organisations.

40. Even if the risks described above do not eventuate, there is a danger that the perception that they might do so may cause disquiet among some providers and professional groups.

41. I anticipate that by defining appropriate performance objectives for District Health Boards, which are based primarily on health and disability outcome objectives drawn from the NZHS, and by establishing Committees and Advisory Groups these risks will be mitigated; and be shown to be mitigated.

42. Accountability arrangements will focus primarily on aligning the performance of the District Health Boards to outcomes sought by the Government, and articulated in the New Zealand Health Strategy. They will guard against District Health Boards placing their ownership interests above their responsibility for achieving broader health and disability outcome objectives. Indeed, a Board which inappropriately favoured its hospital services over primary and other community-based care would undoubtedly struggle to meet those objectives, and be held accountable accordingly.

43. Officials will report back to the Ad Hoc Ministerial Committee in more detail on matters arising from the proposed role of District Health Boards including accountability arrangements and other methods of risk management within the framework described

Governance of District Health Boards

44. The establishment of District Health Boards will enable more decisions about health and disability support services to be made at the local level, rather than being referred to central Government. In order to ensure that the community is adequately involved in such decision-making I propose that Boards should include a majority of locally elected representatives and be subject to consultation requirements.

45. The inclusion of locally elected members on District Health Boards will allow choices about health and disability services to be openly debated and will provide a local mandate to make the necessary decisions. It is not without risks however. Election of Board members does not guarantee representative community perspectives (in particular, adequate representation of some groups such as Maori). Nor does it ensure that Boards have members with the experience and expertise commensurate with the size and importance of the Crown's broader ownership and funding interests.

46. In order to mitigate these risks I propose that the Government should be able to appoint a minority of Board members to ensure that all relevant perspectives are represented and to address any specific skill gaps, including ensuring equitable Maori or tängata whenua representation on District Health Boards

47. I recommend that the new legislation will provide for Ministerial powers to replace the Board or introduce a Commissioner in defined circumstances.

Organisational form

48. The organisational form chosen for District Health Boards must provide the desired relationship between Boards and Government in terms of:
    1. control - the degree and style of control the Government wishes to exercise over the Boards' strategic and operational decisions, and the desired proximity of District Health Boards to the community; and
    2. incentives -to motivate District Health Boards to act appropriately at all times.
    3. accountability - ensuring that clear expectations are set and their achievement is monitored.

49. This suggests a governance arrangement which:
    1. closely reflects community preferences - this can be achieved through consultation requirements and having elected representation on the Board.
    2. protects the Government's broader ownership (e.g. hospital assets) and funding interests - this can be achieved by a strong accountability framework, appointing skilled members to the Board, and establishing some separate disciplines on the provider (hospital) and funding arms of the District Health Boards.
    3. ensures high performance - this can be achieved through strong accountability arrangements and comparing performance through benchmarking of both District Health Board performance (population health outcomes and budget management) and its hospital and related service performance (clinical and fiscal measures).

50. The Government will influence the Board through:
    1. establishing at the outset clear objectives for the entity and maintaining consistency in those objectives
    2. the funding agreement between the Minister of Health and the Board and associated monitoring of that agreement by the Ministry of Health
    3. its power to replace the Board with other members or a commissioner
    4. the ability to hold members accountable
    5. escalation processes in the event of slow responses to tackling problem areas
    6. leveraging performance by publishing relevant performance indicators.

51. There are a number of governance models which could be adopted in order to meet the above requirements. Each offers a different balance of strengths and weaknesses.

52. Currently Hospital and Health Services are established as Crown-owned, limited liability companies under the Companies Act. This model could also be adopted for District Health Boards, and would provide a rigorous and robust accountability, incentive and monitoring framework, that is well understood, tested and backed by a substantial body of case-law.

53. It would, however, be possible to capture most, if not all, of the strengths of the Companies Act in new legislation developed specifically for District Health Boards. The key challenge will be to create legislation that can deliver the same results as the Companies Act without imposing those aspects of that Act that are not relevant to, or consistent with, the specific objectives of District Health Boards.

54. Such a model will be able to capture the best features of the company structure while providing Government with the levers to act on poor performance. In particular, the legislation can allow for an operating charter to be gazetted for the hospitals (and related services) that draws on desirable disciplines of the Companies Act.

55. This approach would also provide a clear signal of the collaborative, non-commercial values that should drive the sector and should have beneficial impacts on public confidence in the system. Accordingly I recommend that neither District Health Boards nor hospitals under their control will be established as companies.

56. I recommend that Cabinet Business Committee directs officials to report back on options for the governance of the District Health Boards which:
    1. provide a suitable, proven framework for the necessary financial, reporting and other accountability requirements
    2. provide Government with the necessary control over the Boards' substantial public assets as well as their delivery on agreed outputs and outcomes)
    3. provide Boards with a sense of autonomy and local control, and distance from Government
    4. allow ready implementation

Crown's Relationships with Maori

57. Further analysis will need to be carried out to guide the Treaty partnership between Maori and District Health Boards. Maori service providers have expressed concerns that the establishment of District Health Boards may interfere with significant progress made in Maori Health (particularly on access to primary services, health promotion and protection). Two issues need to be considered in developing appropriate mechanisms for Maori input into decision making. Firstly, the Treaty partnership responsibility with local Iwi and Maori communities and secondly, the views of Maori providers on meeting the service needs of Maori communities. As a minimum the Government will need to ensure adequate Maori presence on the Boards and any committees or advisory groups, plus representative sources of advice on Maori issues and needs.

58. Officials will work through the Treaty implications and other issues, including consultation with Maori, and report back to the Ad Hoc Ministerial Committee on possible options to strengthen the Crown's partnership with Maori and building capacity for by Maori for Maori services.

Regional and national collaboration and consistency

59. To reduce transaction costs and to ensure consistency and nation-wide equity, the Ministry of Health would assist the District Health Boards with analytical and funding arrangement tasks, including the continued development and use of nation-wide frameworks, service specifications, and protocols.

60. For some services it may be more practical and cost-effective for one or more District Health Boards to set up regional or national service agencies; this could include regional mental health services that could span across district boundaries or corporate services common to District Health Boards. To reduce bureaucracy and transaction costs, the legislation will allow for District Health Boards to set up 'common services' agencies and other joint arrangements.

61. Given the requirements for District Health Boards to collaborate with each other, the Commerce Act will not apply to dealings between District Health Boards.

Nationwide, tertiary and quaternary services

62. For some services there is a trade-off between comprehensiveness of access on the one hand and cost effectiveness and safety on the other. For that reason, only a limited number of District Health Boards would be responsible for high cost tertiary and quaternary hospital services. This means that access must be arranged for the population in District Health Boards outside the tertiary centres.

63. There are two ways of addressing this issue:-
    1. District Health Boards could contract among themselves for tertiary services, or
    2. the Ministry of Health could directly fund District Health Boards that offer high cost tertiary services to other District Health Board populations.

64. Officials will provide further advice to the Ad Hoc Ministerial Committee on this issue.

The number of District Health Boards

65. Options for the final number of District Health Boards include building each District Health Board from a current Hospital and Health Service (that is 22 District Health Boards, excluding NZ Blood Service) to a number of other configurations which may incorporate more than one HHS per District Health Board. The decision on the number of District Health Boards will be influenced by a variety of factors and the relative importance that is attached to them.

66. Criteria such as identification with the communities they serve, ability to develop and maintain effective relationships with providers and, in cases such as the West Coast of the South Island, the existence of clearly delineated "Districts" will tend to favour more and smaller District Health Boards, There is also concern that larger District Health Boards may compromise the diverse range of Maori services offered to whanau, hapu, iwi and Maori.

67. On the other hand, establishing Boards to serve larger populations would yield benefits in terms of financial risk management (it is easier to cope with unanticipated fluctuations in demand within a larger budget), reduced administration costs and availability of sufficient skilled management staff.

68. In general, financial considerations considered in isolation would tend to favour fewer, larger District Health Boards while issues of responsiveness would suggest more, smaller District Health Boards.

69. An additional factor to be taken into account is the need to minimise disruption to hospital services and duplication of management roles during the transition from HHSs to District Health Boards, With such a goal in mind, I prefer an approach which sees District Health Boards emerging from HHSs.

70. I recommend that 22 District Health Boards are established, each based on the existing geographical areas served by an HHS (except for the NZ Blood Service which is also an HHS). This will minimise disruption and costs of change, allow building from the existing infrastructure and networks, and recognises existing HHS/community links.

71. As a first step in the transition to the new District Health Boards I intend to appoint additional members to the existing HHSs by the end of February 2000.

72. The enhanced HHS Boards (to be known as Transitional District Health Boards) will be required to engage in discussions with all publicly-funded providers in the districts. This will commence the process of assessing local provision of services and local population needs. The Ministry of Health will facilitate the process, drawing on HFA locality staff.

73. It will be important to ensure that Transitional District Health Boards retain an adequate skill base to enable them to continue to be effective in their governance role in respect of HHSs through the transition period. Risks in this area will be managed by following established processes for identification and appointment of new Directors, defining roles and performance expectations clearly and, possibly, establishing sub-committees to focus specifically on HHS governance.

Funding of District Health Boards

74. I propose to fund District Health Boards using population-based funding formulae that will adjust for such factors as demography, ethnic mix, size, rurality, socio-economic status and other risk indicators (taking account of any inter-relationships among such factors). Issues to consider include the availability of information on the costs and volumes of services, the use of ring fences, and any unbundling of funds for national and district-based funding.

75. The legislation and operating environment will contain a mix of measures to ensure accountability for use of funds and clarity of Government's preferences, while avoiding undue management inflexibility or scope for cost shifting.

76. Officials will report back to the Ad Hoc Ministerial Committee on the detail and implications of funding arrangements.

Central health agencies

Functions of the Ministry of Health

77. The proposed structural changes mean that, in addition to its existing policy, performance management, safety and regulatory functions, and Ministerial servicing roles, the Ministry of Health will also accommodate some of the HFA functions and:
    1. undertake some national purchasing, for example, high cost tertiary services
    2. provide advice to the Government on the appropriate level of health funding across District Health Boards and manage the allocation of funds to the District Health Boards
    3. integrated management of all aspects of the performance of District Health Boards, which will be accountable to the Minister of Health.
    4. support several agencies, such as PHARMAC and the Mental Health Commission.

78. The Ministry of Health will initiate changes to its structure to reflect the additional functions and the particular emphasis the Government places on specific issues, including Disability Support Issues, Population Health, and Mental Health.