79. PHARMAC is currently a subsidiary of the HFA. PHARMAC negotiates prices and lists the pharmaceuticals that are publicly subsidised. The separate nature of PHARMAC accounts for its relative success to date, and has enabled Ministers to remain outside the detailed decision-making processes and litigation. The case law that has built up to a position where PHARMAC is protected from unnecessary litigation which is endemic in this industry.

80. The New Zealand Blood Service is currently established as an HHS. It differs from other HHSs principally by the range of services it provides and because its primary relationship is with other HHSs and providers and not with the HFA. Under the broad arrangements set out in this paper, there are two key options: NZBS set up as a subsidiary of District Health Boards, or as a Crown entity.

81. The current situation where hospitals face the cost associated with their use of blood and blood products and the clinical choices behind that will continue

82. Health Benefits Limited is a subsidiary of the Health Funding Authority and makes payments principally to GPs and pharmacists for their services.

83. I recommend that Cabinet Business Committee direct officials to report back to the Ad Hoc Ministerial Committee on the appropriate corporate forms to establish PHARMAC, NZ Blood Service, and Health Benefits Ltd as independent entities.

Mental Health Commission

84. The role of the Mental Health Commission within the proposed arrangements also needs consideration. The Mental Health Commission (originally established as a Ministerial advisory committee in 1996) was established under the Mental Health Commission Act 1998. The Act expires on 30 August 2001, in line with the expected completion date for implementation of the Mason Inquiry recommendations. This date is prior to the planned 2004 full implementation of the New Zealand Mental Health Strategy which was planned to take 10 years from its initiation in 1994.

85. I recommend that Mental Health Commission Act 1998 be amended to enable the life of the Mental Health Commission to be extended to a date to be negotiated. This will coincide with expected full implementation of the New Zealand Mental Health Strategy. Note that the costs associated with the extension of the life of the Mental Health Commission will be subject to the budget process.

Further policy work on sector design

86. The Ministry of Health will chair an officials group (to include Treasury, CCMAU, HFA, SSC. TPK, DPMC, and the Minister of Health's office, the 'Health Sector Development officials group') to provide further policy advice on sector design to enable key decisions to be made within the legislative and implementation timetable proposed in this paper.

MANAGEMENT OF CHANGE

Change principles

87. I propose that the following principles guide the change process:
    1. a focus on results - health gain for the population
    2. building forward - building on good initiatives and developments in the health sector
    3. reducing uncertainty as soon as possible - in particular, retaining people and skills within the sector
    4. establishing clear and effective lines of responsibility and accountability
    5. consensus building - working towards widespread sector support for change
    6. leadership - providing a clear view of where the sector is heading
    7. identification and management of risks.

Management of the sector development agenda

88. The sector development agenda consists of completing and implementing the NZHS, the detailed design of the sector, and managing change.

89. The Director-General of Health will be accountable for managing the change process, including working with other agencies and will regularly brief the Chief Executives of central agencies on progress.

90. I plan to convene an Ad Hoc Ministerial Committee who will receive regular briefings on progress, and will be consulted on sector design prior to papers proceeding to Cabinet Business Committee.

Risks and risk management in the change process

91. The key costs and risks in any transition involve: loss of skilled staff and low morale; lack of progress on current service strategies; a loss of direction; and weakened incentives and accountability to perform. Additional risks include possible resistance by some provider or community groups, and difficulties in developing the infrastructure and capability of District Health Boards. This gives rise to potential financial costs and disruption to service delivery.

92. To manage the risks, it is important that the transition period is as short as possible, that agencies have clear responsibilities (including for leading the changes) through the transition period, and that there is certainty about the end point.

93. I propose a change strategy and timeline that allows the Government to obtain some early benefits from the development of the NZHS, the merging of central agencies, and the early development of District Health Board capability, while allowing time for the policy development and consultation.

94. To manage risks, the change management process should also:
    1. ensure that existing contracts are honoured and that contracted services are delivered though the transition period
    2. manage the HFA budget through the transition
    3. build, as far as possible, on existing capability (staff skills and infrastructure).

95. Other means to manage risks will include: rolling over existing contracts to ensure service provision and using the existing accountability framework to manage contract arrangements through the transition; making use of the current HHS structures to establish the District Health Boards; and leadership and close monitoring by the Ministry of Health.

96. Past experience with sector reform has demonstrated the importance of sector buy-in to change. The NZHS will be the vehicle for sector involvement, consensus building and communication on sector changes - it stresses that the focus is on how best to improve the health and disability status of the population, with structural changes being designed to support the NZHS.

Timetable for change

97. I propose that the key changes are introduced as quickly as possible. This timetable weighs the benefits of moving slowly (more time for analysis, consultation, decision-making, and planning to minimise disruption) with the advantages of moving quickly (reduce uncertainty, maintain energy, and quickly refocus the sector on health gain). I have also considered the capability of the sector to change, managing service and fiscal risks, service planning and funding cycles, due process and pressures on the legislative timetable.

98. I propose to establish transitional Boards by November 2000, following the enactment of legislation. In light of my proposal to build District Health Boards out of HHSs the transitional Boards will effectively continue the work of the enhanced HHS Boards in establishing District Health Boards. Some HHSs have already done much to build links with local primary/community providers and I expect that process to continue under the new transitional Boards.

99. It will be important to have District Health Boards and supporting frameworks in place well before the local government elections of October 2001. This then allows for a reasonable expectation that fully constituted District Health Boards will be able to deliver early results.

100. The first step in implementing the change programme was Cabinet's decision to replace the HFA Board with an interim Board from 1 February 2000. The interim Board has been tasked with actively supporting and facilitating the Government's change programme for the sector.

101. I propose to introduce the New Zealand Public Health Services Bill, which will bring into effect the changes detailed in this Paper, to the House in May 2000.

102. Following the enactment of the New Zealand Public Health Services Bill the HFA will be formally disestablished and its functions assigned to the Ministry of Health and District Health Boards as appropriate. Transitional District Health Boards will be able to formally take up their roles at this time - the focus of the transitional District Health Boards would be to secure the organisational arrangements for the District Health Boards (e.g. committees, financial management systems and processes) and to establish community linkages and provider co-ordination. District Health Boards would be fully established following the 2001 local body elections.

103. To enable early progress towards the new arrangements, prior to legislation being enacted, it is proposed that the Ministry of Health take the following steps over the next 1-2 months, in collaboration with the HFA and CCMAU:
     1. make recommendations on appointment of additional members of HHS Boards to begin the move from HHSs to District Health Boards
     2. facilitate local district involvement convened by the enhanced HHS Boards
     3. establish cross-organisational teams from the Ministry and HFA, focused on the delivery of the Government's immediate goals and priorities and the change management interface between the two organisations.

104. Table 1 sets out the proposed timetable.

105. It is imperative that Parliamentary time is set aside for this Bill and supporting legislation.

FISCAL IMPLICATIONS

106. There are potential fiscal implications arising from both the restructuring of the health sector and the ongoing costs of the new structure. The nature and impact of these will depend on the balance between savings and costs at the centre and in HHSs, and additional costs incurred in setting up and running District Health Boards.

107. Restructuring costs will arise primarily from redundancy costs affecting HFA staff. It is expected that a significant number of HFA staff will ultimately find positions in the Ministry of Health or in District Health Boards without any redundancy costs being involved, although relocation costs will impact on many staff who chose to move to work for these organisations. Other staff would continue to be employed in agencies such as PHARMAC. A Health Reforms (Transfer and Transitional Provisions) Bill can be used to minimise technical redundancies by facilitating the transfer of employees between the HFA and Ministry of Health, and the HFA and District Health Boards. Other restructuring costs will arise from lease commitments for offices which are no longer required and the establishment of District Health Boards including, for example, the development of new information systems.

108. The change programme will eliminate duplication between the Ministry of Health's policy role and the role of the HFA in developing operational policy (policy related to programme implementation/health services purchasing). It will also lead to a reduction in operating costs, particularly corporate services such as financial, human resources and information technology support. Combined Ministry/HFA costs will reduce as a result. District Health Boards will, however, require some additional resource over and above current HHS administration.

109. The ongoing fiscal impact of the structural changes I am proposing will depend on the balance between savings at the centre and in HHSs (the latter as a result of reduced contracting activity) and additional costs incurred in setting up and running District Health Boards.

110. Considerable uncertainty surrounds the net ongoing fiscal impact of the changes and officials will report back to the Ad Hoc Ministerial Committee with more robust estimates as a matter of priority.

COMMUNICATION STRATEGY

111. Following consideration of this paper I recommend that Cabinet Business Committee direct the Ministry of Health to develop a comprehensive communications strategy. I expect the strategy to encompass both initial announcements on the changes planned and arrangements for ongoing communication as implementation progresses. Key audiences will be the general public, health providers and professional bodies.

CENTRAL AGENCIES' COMMENT

General Comment

112. The Treasury, the State Services Commission, Te Puni Kokiri and the Crown Company Monitoring Advisory Unit share concerns about some of the conclusions this paper reaches with insufficient analysis of a number of conceptual and practical considerations. Having due and full regard to the policy statements of the incoming Government prior to the Election, officials need to concentrate on implementation. However to ensure this is successful it does require adequate analysis, reference to relevant experience and clear and consistent interpretation of Government's policy statements. It is possible that there could be trade-offs in terms of the practical application of some detailed or structural elements of policy, (subject to interpretation), and the Government's major health policy objectives. Advice needs to adequately and robustly consider these possibilities.

113. The Government has signaled its broad objectives for health, which include "a non-commercial, collaborative and accountable culture" and to "ensure clear accountabilities". Delivery of health objectives will also require aligned incentives. This paper does not, in our view, adequately deal with the difficult and possibly confused accountabilities, or the competing and opposed incentives, not to mention the significant conflict of interest, inherent in the proposed relationship between the District Health Boards and the public hospitals and other publicly owned provider organisations. We believe the governance and accountability arrangements and the relationship between the DHB and the hospital/community health service need further careful analysis in order to be confident that what is put in place will actually work in practice.

114. There are a number of other assumptions and presumptions in this paper which we believe need to be tested further. There are opportunities in the setting-up of District Health Boards, around such things as mental health and Maori health which could be quickly explored if they are not precluded, at this point in time, by other decisions.

115. In summary, at this stage, decisions on both policy and structures, should be sufficiently flexible and open to facilitate further and early advice on the most practical way in which to confidently achieve the Government's stated objectives for health and disability.

Te Puni Kokiri

116. Maori health providers and Maori communities have consistently advocated for direct resourcing, in the form of an Iwi/Maori Purchasing Authority. The sector changes indicated in the paper do not reflect any movement towards such a model. Nor does it appear to be viewed as a long-term development option. Te Puni Kokiri considers this issue to be an integral component of Maori development, and reflects the principle of partnership explicit within the Treaty of Waitangi. Te Puni Kökiri also notes that direct resourcing of Maori initiatives is also supported in He Pütahitanga Höu: the Labour Party manifesto on Maori Development (HPH, p7).