1. With this paper, I seek Cabinet Social Policy and Health Committee decisions on the most appropriate organisational form and governance arrangements for District Health Boards (DHBs) with the aim of ensuring sound governance.

EXECUTIVE SUMMARY

2. I propose that DHB Boards are to be unambiguously accountable to the Minister of Health for achieving health and disability outcomes for their populations. The governance arrangements for DHBs should then be based on this line of accountability. While recognising that the Board will have a combination of elected and appointed members this single accountability is necessary for the Board to be clear about its duties, and to be able to manage the tension inherent in the proposed structure.

3. I will also expect DHBs to establish close and strong links with communities and will hold them to account for doing so.

4. It is proposed that DHBs are established as Crown Entities (Statutory Corporations) with a flexible range of powers, tempered by accountability arrangements and other mechanisms which allow DHBs an appropriate degree of freedom to manage their affairs, while enabling the Minister of Health to exercise control where necessary and desired.

5. The role of the DHB Boards in providing strategic oversight of the organisations will be crucial in ensuring that the Government's objectives for the health and disability sector are achieved, and that fiscal risk is managed. Commensurate with the nature of the Board's task, the responsibilities and accountabilities of individual Board members are significant.

6. While DHB Boards would be held collectively accountable for the performance of the DHB, Board members would be held individually accountable for the care and skill they use in performing Board duties. An appropriate range of sanctions is necessary to address performance concerns and it is recommended that the most serious sanction (dismissal of an individual or the entire Board) is only able to be applied by the Minister of Health.

BACKGROUND

7. On 31 January 2000 Cabinet directed the Ministry of Health, in consultation with the Health Sector Development Officials Group, to report to the Ad Hoc Ministerial Committee on options for the organisational form of DHBs . This includes the role, accountability and reporting requirements of the Hospital Governance Committees and Primary Care Advisory Committees in order to minimise bias in DHB decisions toward hospital services (CAB (00) M2/4 gg (iv) refers).

8. This report has been considered by the Ad Hoc Ministerial Committee on Health Sector Change and has been approved for submission to the Cabinet Social Policy and Health Committee.

9. With regard to the governance of DHBs a number of parameters have been set by Cabinet. These are that DHBs will:
   1. have a majority of elected board members, but will not be part of local government
   2. not be Crown companies, but be publicly owned
   3. fulfil purchase, ownership and regulatory roles
   4. be subject to Ministerial powers, which will include removal of boards and replacement with a commissioner
   5. produce a health and disability sector in which greater emphasis is given to local community involvement
   6. will be able to merge with other DHBs on a voluntary basis.

10. Governance, as executed by the DHB Board, is strategic oversight of the management of the entity to ensure it delivers on its fundamental objective of working within allocated resources to improve, promote and protect the health of a defined population, and to promote the independence of people with disabilities within a defined population.. The operational management of the DHB is undertaken by executive managers who are accountable to the Board.

11. The structure of the health and disability system proposed by Government deliberately blends different forms of governance through elected and appointed members, forms of control (central vs. local) and forms of accountability (to communities and central Government).

12. The Boards of DHBs, and elected members in particular, will be placed in a position where they feel a dual accountability - to both Ministers, and the community which elected them. Reconciling this tension, managing the necessary trade-offs and meeting expectations will be a constant challenge for the Boards of DHBs. This needs to be managed by creating a strong accountability to the Minister of Health.

13. A DHB Board needs to be in a position where often competing interests can be objectively considered. Central to the achievement of this objective is clarifying the role of elected members on DHB Boards, and the collective responsibility of the Board as a whole.

14. It will only be possible for the Board to achieve its overall objective of improved health and disability outcomes for the population if the Board is collectively responsible for decisions and accountabilities. It is, therefore, proposed that elected Board members, like the other Board members, are legally accountable to the Minister of Health for the responsibilities agreed by the Minister of Health for DHBs (which will include considering community priorities and Maori aspirations). Elected members will bring the community's perspective to Board deliberations and will provide a voice which emphasises the responsibility to the community.

15. This distinction makes both appointed and elected members equally responsible and accountable for executing the Board's responsibilities to central Government and the community, including managing within allocated resources. The detail of accountability mechanisms are to be determined by the Accountability Workstream due to report to the Ad Hoc Ministerial Committee by 31 March 2000.

Establishing and defining DHBs in statute

Establishment

16. Cabinet has agreed to introduce a New Zealand Public Health Services Bill into the House in May 2000. This Bill will disestablish the Health Funding Authority (HFA) and Hospitals and Health Services (HHSs) and establish DHBs.

17. To ensure flexibility, it is proposed that the individual DHBs are listed in a schedule to the Act by Order in Council. This process provides the ability to amend the schedule if DHBs are merged, dis-established, or divided in response to changes in policy settings, population catchments, or to save administration costs.

18. The move from HHSs to DHBs will be undertaken in two stages. Immediately following legislative change DHBs will be established with transitional boards pending the local body elections of 2001 when the combined board of elected and appointed members will be ready to be put in place. Issues related to transitional boards are discussed elsewhere in this document.

Organisational form

19. The most appropriate organisational form for DHBs is determined by the role of DHBs, the relationship between DHBs and the Crown, and between DHBs and local communities.

20. DHBs will be funded from general taxation, fulfil purchase, and delivery roles, and be subject to certain Ministerial powers. They will be part of a health and disability system in which greater emphasis will be given to local needs, through boards with a locally elected majority. DHBs will be accountable to the Minister of Health, will be expected to give effect to Government policy, and will generally be large and complex organisations.

21. Two of the three broad organisational forms in executive government are clearly inappropriate for DHBs, namely, Departments and State Owned Enterprises. The former because there would be no legal separation from the Crown. This close relationship with the Minister/Crown would not give DHBs autonomy in operational and day-to-day decision making. The latter is inappropriate because SOEs are companies and Cabinet has made clear that DHBs will not be companies.

22. The third category is Crown Entities, as defined by inclusion in the Fourth Schedule of the Public Finance Act. Crown Entities are legally separate from the Crown, but most have a substantial relationship with it. Crown Entities come in four basic legal forms; statutory corporation, corporation sole, trust and company.

23. Trusts, companies and corporations sole are not suitable organisational forms for DHBs given their role and the parameters determined by Cabinet as:
    1. Cabinet has clearly decided that DHBs will not be companies.
    2. Trusts are set up to make grants, or promote certain objectives. As trusts the Crown would cease to own the assets of DHBs, and the capacity for Ministerial direction would be minimal.
    3. Corporations sole are small bodies which are headed by a single statutory officer. This arrangement is unsuitable for DHBs.

24. Therefore, a statutory corporation is deemed the most appropriate legal form for DHBs. The actual autonomy of DHBs under this structure and the distance of the DHB from the Minister of Health will be determined by the confirmed role of DHBs.

25. A statutory corporation would mean that DHBs have:
    1. independence from the Minister of Health which facilitates involvement of the local community, and does not involve the Minister of Health in operational matters
    2. accountability under the Public Finance Act provides consistency in the financial and reporting requirements
    3. their own governing legislation and the accountability arrangements specified within that
    4. a relationship with the Minister of Health which allows the Minister of Health to exert influence over the DHB via accountability arrangements.

26. It is anticipated that, in the future, the work currently underway on Crown Entity governance will lead to legislative change to the classification and typology of Crown Entities which will further define the degree of separation between entities and the Crown. This work is in progress but does not currently consider complex hybrid forms of governance as proposed for DHBs. It is not possible for the organisational form for DHBs to be legislated to reflect the classifications being developed. Officials have been mindful, however, of the potential changes and are aware that the applicability of the new classification to DHBs will need to be considered when the legislation proposed by the State Services Commission is further developed. A consequential amendment to the legislation establishing DHBs may be required in due course.