New Zealand Government Executive

MEMORANDUM TO CABINET SOCIAL POLICY AND HEALTH COMMITTEE

THE DIVISION OF ROLES BETWEEN DISTRICT HEALTH BOARDS AND THE MINISTRY OF HEALTH

Costly and unpredictable services

Boards.

Small DHBs could find it difficult to manage within budget if an exceptional need arose for a very costly service. Examples include multiple organ transplants or epidemics. A past specific example is the Overseas Treatment Fund which was centrally held for Area Health Boards: eventually this fund was distributed (through the population-based funding formula) to the six specific Area Health Boards affected, and these Boards were expected to manage it. The main options are that either DHBs or the Ministry of Health manages these types of financial risks.
DHBs manage the risk of exceptional needs
Regardless of whether or not responsibility for all services is allocated to DHBs, DHBs will have to set up risk-reserves, like the HFA has now. DHBs could set up arrangements to manage financial risk individually or jointly - for example, by managing a risk reserve, by borrowing, or by buying insurance. DHBs could be compelled, through the operating environment, to have an appropriate risk-management strategy in place for exceptional needs.
Advantages of DHBs managing financial risks are that: it is consistent with DHB accountability for funding the best mix of services within its budget, and avoids cost-shifting to the centre. It ensures that DHBs are aware of both the human and the financial benefits and costs of all services. That would encourage DHBs to fund the most effective services to prevent, manage, or address disease and disability. It also reduces the potential that local prioritisation and clinical issues are escalated to the Minister.
A key risk is that DHBs may run deficits and force Government to top up funding. Such behaviour can be mitigated by monitoring and credible sanctions. Very small DHBs may find it hard to establish a risk-reserve if the risks are large relative to its budget; by working together, DHBs could spread the risks and so reduce individual costs.
Ministry of Health manages risks of exceptional needs
The Ministry of Health could manage the risks instead, by funding specific services directly when they occur. This means that, in effect, the Ministry is the insurer, reimbursing DHBs when clearly defined, exceptional instances arise. The Ministry would fund such services from Vote Health either on a pay-as-you-go basis or from a risk reserve. This is a credible option only if it is unambiguous whether an exceptional instance arose and if DHBs have no control over exceptional cases.
The advantage of direct central funding of defined services is that it may reduce the Crown's fiscal risk because, through 'pooling risk', it makes planning for rare and unpredictable services more actuarially sound, and makes it easier for DHBs to manage their remaining budgets. The administration may also be cheaper and convenient than DHB-based options.
Disadvantages are that, because DHBs would not face the costs directly, the separate risk-fund would create potential for cost-shifting, as often it will be difficult to be sure whether a service is an exceptional case. It may reduce DHB awareness of, or incentives to reduce or seek innovative solutions to, the incidence of these conditions. It may also encourage inappropriate escalation of local prioritisation and clinical decisions to Ministerial level.
On balance, I recommend that DHBs be responsible for managing the financial risk of services which are costly and unpredictable, recognising that and under specific circumstances risks would need to be managed by the Crown. The Ministry of Health will design detailed risk management requirements on DHBs as part of their operating environment (which is the set of policy rules and non-legislative regulations that circumscribe what a DHB can, must or must not do). This would also define specific circumstances in which risks would be managed by the Crown. The funding report-back will consider the practicalities of risk-adjustment techniques as part of the population based funding formula, particularly for small DHBs.

Disability support services

A major concern raised by parts of the disability sector is that DHBs will not be an appropriate funding agency, because DHBs with a medical focus will be preoccupied with health issues. It is feared that this would result in disability support services being given a low priority in planning, funding, or service development, and that funds may be diverted inappropriately to health services (particularly if the ring-fence is removed). A related concern is that DHBs would not understand disability issues, and may not have the skills to respond to the diverse needs of people with physical, sensory, intellectual, psychiatric and age-related disabilities, particularly for some groups of people with highly complex special needs.
Some of these concerns arise from a misunderstanding of the role of DHBs - DHBs will in fact be required to focus on the broader determinants of health and independence, recognising the importance of linkages with other social services (such as housing, transport, income support, education, employment, as well as vocational and child protection services). Such linkages are particularly important in removing the barriers to independence and participation. The concerns about disability support being given low priority are similar to those raised in relation to primary care and Mäori health services. The reports on DHB governance, Mäori issues, and DHB accountability arrangements set out the means that will be used to mitigate the risks.
Other concerns raised are that some regional and national non-government organisations may have to enter into complex agreements with many DHBs, and that there could be a detrimental dilution of service planning and funding expertise. The means to mitigate those concerns are addressed in the sections on 'single services that cover populations of more than one DHB' and 'developing capability'.
Other potential means to ensure that DSS has an appropriate identity are:
1. DHB accountability mechanisms
2. central funding through the Ministry of Health
3. alternative local arrangements, such as a community board.
DHB Accountability mechanisms
Ministers will use accountability arrangements to make clear what is expected of DHBs in relation to DSS, and ensure that DSS has an appropriate identity in DHBs and that the DHBs carry out their responsibilities to improve independence of, and/or enable participation by, people with disabilities in their districts, as set out in the funding agreements.
The advantages of this approach are that it makes DHBs clearly accountable for improving both the health and the independence of a given population, and keeps DSS funding integrated with health funding. This integration (although protected by ring-fences) has helped integration with health services, although more progress can still be made. It has reduced confusion in accountability that existed particularly between health and social welfare, with implications for service fragmentation and gaps.
Using the accountability arrangements allows concerns to be mitigated by:
1. establishing clear goals and objectives for DSS
2. placing clear accountability and reporting requirements on DHBs, including specific funding requirements
3. monitoring the performance of DHBs.
For example, the Minister would expect DHBs to demonstrate how they will contribute to the goals and priorities for disability services identified in the New Zealand Disability Strategy, such as how DHBs would forge strong local links with income support, employment, education, housing and transport services.
Where necessary, the Minister would also require DHBs to work within national service specifications, guidelines, protocols, targets and bench-marked performance standards, to be consistent with the DSS framework and the New Zealand Disability Strategy. The Ministry of Health would play a strong role developing frameworks, and facilitating and working with DHBs to plan for DSS services; the Ministry would not need to fund disability services directly. DHB funding agreements could also contain specific funding requirements so that DSS funds are protected from diversion to health services.
The enhanced HHS Boards will be reporting to the Minister of Health in September with proposals for how the (transitional) DHBs plan to address the concerns around service coordination and administration costs. Proposals should also discuss how specific concerns around DSS would be addressed, which may well include DSS subcommittees and regional DSS planning/funding alliances. The Minister of Disability issues will write (with the Minister of Health) to the HHS Boards to ensure disability issues are addressed in proposals.
Central funding through the Ministry of Health
Disability support could also be funded separately by the Ministry of Health (or another central agency). Under this approach, both planning and funding for disability support services would be separated from health services which will be funded through DHBs.
Advantages of separate central funding would be that it could help give disability support a stronger identity at the central-agency level, and could strengthen efforts to achieve a nationwide consistent philosophy for, and approach to, the funding of DSS services. It could help strengthen intersectoral linkages, and save some costs by combining planning and funding expertise. It would protect DSS funds from diversion to health services (although it would also inhibit desirable prioritisation of funding between health and disability support services). However, all these advantages could also be secured through using DHB accountability mechanisms.
The major disadvantages of separate central funding are that it would confuse accountability, and inhibit coordination with health services. Some groups of people with disabilities do not require health services any more than other healthy people. Others, however, require an ongoing mix of health and disability support services which need to be coordinated. This applies particularly to the frail elderly, people with complex disabilities requiring regular medical interventions and people with degenerative medical conditions. In such situations health services and DSS are complementary and integrated services are vital for consumers' wellbeing. Consumers could experience barriers and delays in their movement between health and disability support services (for example following discharge from hospital), if funding for DSS is administered by a separate agency. This coordination can be better achieved at a local level rather than nationally.
A related option would be to separate age-related disability and mental health disability from other disability groups, and fund age-related and mental health disability support services through the DHBs (because of the linkages with health) and services for other disability groups via the Ministry of Health or other agency. However, as 51% of DSS spending is in relation to older people (and this proportion is growing), there would be a question about the effectiveness of the residual funding function, given the small size of the budget, the need to link to health services, and the inflexibility of national organisations.
Alternative local arrangements, such as a community board for disability issues.
A third option would be to fund disability support services through a local structure parallel to DHBs. The advantage of this option is that it recognises that service planning and funding is best done close to the consumer. A longer-term scenario may see such an arrangement develop into a one-stop social services shop for people with disabilities. The disadvantages, however, are similar to those set out for separate central funding by the Ministry of Health. Significant additional disadvantages of this option would be the additional administrative costs of duplicating local arrangements, and the risk that it would make DSS funding ineffective (particularly in brokering effective links with health organisations) because of the small size of the operation.
Regardless of the approach, Ministers have a number of governance and accountability levers available to give a clear identity to disability issues and to drive national consistency and performance in DSS. These are:
1. the New Zealand Disability Strategy, to articulate priorities and expectations
2. DHB funding agreements, to set down specific performance accountabilities for disability issues that DHBs are monitored on
3. appointments to the Boards, to ensure the board has knowledge of disability issues where this is lacking
4. the provision to set up additional advisory committees of DHB boards, to give disability issues a clear identity by setting up a disability issues committee
The Minister for Disability Issues, and the Minister of Health as the shareholding Minister, will write to the enhanced HHS boards to ensure that the boards' transition plans will include proposals for how they would address disability issues.
To be able to assess a wide range of funding options that reflect the nature of disability issues, I have directed the Ministry of Health (following consultation with other officials) to submit a further report to the Minister for Disability Issues and Minister of Health, on funding options for disability support services.

Developing capability

The capability in funding and providing health and disability support services is still developing in relation to Mäori, Pacific and mental health, and disability support services. Development requires co-ordinated and sustained action, and this may be at risk if scarce skills and resources, such as the Mäori provider development fund, are spread among all DHBs. (The Mäori provider development fund is a separate fund for the funding of Mäori delivered services.)
The issues are how to maintain a viable funding capability (that is, how to manage a temporary shortage of skills), and how to ensure progress on provider/service development.
A shortage of skills would be perpetuated if the function is taken away from DHBs. DHBs need a mandate to understand the total health and disability needs of their populations. A preferred strategy, therefore, would be that DHBs are expected to develop the necessary capability. This would complement the requirement that DHBs do a comprehensive needs analysis for their districts. DHBs could work with other DHBs in their region that have the capability.
With respect to Pacific people's health, there are already encouraging signals that the Auckland HHSs are working together in preparation for their DHB role. It is expected that the Ministry of Health will facilitate development of Pacific capability in other key areas through information sharing, its relationships and accountability arrangements.
Development of DHB capability in the key areas of mental health, disability support, Mäori health and Pacific health will be managed primarily through accountability arrangements. DHBs could be supported by the relevant Ministry of Health branch during the developmental stage. The accountability arrangements enable the Minister of Health to temporarily take on a more hands-on role where there are performance concerns.
An issue is who should administer the Mäori provider development scheme, currently administered by the HFA. In principle, DHBs have the best local information and incentives to administer the provider development scheme appropriately. It is also important that DHBs take responsibility for ongoing development. However, dividing this small fund of approximately $10m among 22 DHBs will leave each DHB with little dedicated resources to seed new Mäori providers. For this reason, it is likely that the Ministry of Health will administer this fund, to which DHBs with aspiring providers can apply with their proposals for Mäori initiatives, according to well-established criteria for the use of grants, although this should not detract from DHBs' role in provider development.

ACCOUNTABILITY ARRANGEMENTS: THE MINISTRY AS SERVICE FUNDER

In my paper on DHB accountability arrangements I indicated that there would be further advice on accountability arrangements for the Ministry of Health in respect of its role in direct funding of providers. During the transitional phase the Ministry of Health will have responsibility for funding health and disability support services, for monitoring the performance of providers in relation to these contracts, and for assigning contracts to specific DHBs over time.
After the transition, the Ministry of Health may also continue to have a limited services funding role for specific health and disability support services, to be specified by the Government. For clarity, the New Zealand Public Health Services Bill will need to include a provision for the Ministry of Health to be able to directly fund health and disability support services in such cases.
This services funding role will conflict with the Ministry's policy advice role and its monitoring of DHBs and create a risk that the Ministry will not monitor its own spending on services rigorously enough. To manage this risk, I propose that, as a minimum, there will be a specific output class in the Ministry's estimates. Additional monitoring requirements can best be designed when Government has specified which particular services will be funded by the Ministry of Health on an ongoing basis. If the Ministry's service funding turns out to be of a material amount then there would need to be put in place some separation between the service funding and monitoring functions - for instance, a subsidiary funding group - in order to maintain accountability. It will also be necessary to keep DHBs involved in decisions.
I recommend that Ministry of Health spending on health and disability services will be funded through a separate output class in the Ministry's Estimates of Expenditure. I also recommend that the Ministry of Health, the State Services Commission, and The Treasury report back to joint Ministers on accountability arrangements for each health and disability support service to be funded directly on an ongoing basis by the Ministry of Health, with an initial report back by the end of November 2000, to ensure that:
1. there is a clear definition of the health and disability support service to be funded directly
2. non financial and financial monitoring arrangements are sufficient for the purposes of service delivery and financial control
3. conflicts of interests between the Ministry's planning, policy, funding and monitoring roles and dilution of DHB accountabilities are minimised.
EXCEPTIONS IDENTIFIED TO DATE
1. Pharmaceutical expenditure (for non-hospital pharmaceuticals) is influenced by PHARMACs activities. On behalf of all DHBs it will manage the Pharmaceutical Schedule, which involves: deciding which drugs to list (subsidise); determining criteria for access to subsidy; and negotiating with pharmaceutical companies over prices and subsidies. DHBs may also exert influence over pharmaceutical expenditure through local service mix decisions and the incentives and controls they put in place in contracts with service providers, but historically the impact of these actions has been small.
2. Currently PHARMAC manages the Schedule to meet pharmaceutical budget targets set by the HFA. In future, DHBs would be accountable to manage within their budgets including spending on pharmaceuticals. However, PHARMAC needs to have a clear aggregate expected pharmaceutical budget to work to, particularly when making investment and divestment decisions on the Schedule. DHB accounts would be charged for pharmaceuticals used by their populations, so DHBs would still face the actual costs, and hold and manage their own funds.
3. The process of setting the pharmaceutical budget will be as follows. PHARMAC would consult with DHBs over the general direction of pharmaceutical expenditure management and specific transactions likely to affect expenditure. The Minister of Health would then set the 'notional pharmaceutical budget' to which PHARMAC will work. This target will be based on forecasts from PHARMAC of levels of demand driven growth, likely savings and potential new investments.
4. PHARMAC would inform DHBs of their forecast share of this notional pharmaceutical budget. However, DHBs will be accountable for managing their own actual pharmaceutical budgets. DHBs could adjust their budget for their own financial management purposes - it would not lessen DHBs' ability to adopt their own strategies, subject to the nationally consistent Schedule, for influencing expenditure on pharmaceuticals to get the best health outcomes. Thus each DHB could spend more or less than the forecast amount provided by PHARMAC.
5. Each DHB will therefore face correct incentives to get the best value for money (in terms of health improvement) from the money they spend on pharmaceuticals. It also gives DHBs access to scarce forecasting expertise, so reducing administration costs and forecasting risk in an area that makes up 10-12% of Vote Health. PHARMAC is likely to have the best information on the impact of its activities on spending, particularly as individually DHBs will have little impact on pharmaceutical expenditure. It also ensures that the national pharmaceutical expenditure that PHARMAC is managing to is consistent with DHBs' budgets.
6. I recommend that the Ministry of Health will advise the Minister of Health on the 'notional pharmaceutical budget requirement' to which PHARMAC will work in managing the Pharmaceutical schedule. Setting that budget follows a process of consultation with DHBs and forecasting by PHARMAC. I also recommend that, in future, DHBs will be advised of PHARMAC's forecast of expenditure for their population, but that each DHB will be responsible for managing their pharmaceutical expenditure within their whole population-based funding budget allocated to them, and will be charged for actual pharmaceutical expenditure of their population.

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