How a bureaucratic rule cuts hospital budgets
By Richard Harman (author)
The dilapidated buildings at Middlemore Hospital are just the tip of an iceberg of a huge building programme that will be required in Auckland over the next eight years.
But once the buildings are completed a Government accounting rule is going to add over $40 million each year to the bill to the cost of maintaining them.
That $40 million will come from the overall healthcare operating budget for the region.
Auckland DHBs chair, Lester Levy has warned this could make the hospitals unsustainable in the future.
The three Auckland District Health Boards he chairs estimate they will need the extra capital funding of $813 million a year to build new buildings and replace and update existing ones just to keep up with population growth in the city.
They estimate that the population of the three DHBs’ area will rise by 259,000 by 2025 --- a 16% increase.
Answering questions at a February meeting of Parliament's Health Select Committee, Levy, made it clear they were fighting a losing battle against rising population and demand and budgets that were far too tight.
But the situation is made much worse by a Government accounting rule introduced in 1998 which requires that the DHBs pay a levy of six per cent of the value of all of their property each year to Treasury.
The original idea was that the charge would would focus DHB management on the costs of the funds they used.
But the problem for the DHBs is that the charge must come each year out their operating expenditure.
The Northern Region's annual capital expenditure of $813 million would incur an annual
capital charge (at 6%) on a total of $49 million.
And that will be money that could have been spent on running the hospitals.
Counties Manukau DHB (which runs Middlemore) alone told the Select Committee it needed an additional $70 million to break even this year and that was already based on finding $70 million in savings in the system.
And it also assumed that the nurses' pay agreement would not exceed two per cent.
Furthermore, as the Auditor General has pointed out, the rule, the Capital Charge, has perverse effects which include an inbuilt incentive not to update buildings because they will increase in value and therefore incur a greater capital charge..
At the same time, it makes building to keep pace with population growth more costly.
The impact of the charge is so serious that Levy told the Select Committee that it made the delivery of health services in Auckland unsustainable in the long term.
He was being questioned by former Health Minister Jonathan Coleman in February at the Health Select Committee.
Waitemata District Health Board CEO, Dr Dale Bramley, had told the Committee his DHB had plans for around $700 million in capital expenditure; a new elective surgery centre, a rebuild of the Mason Foresnci Psychiatric centre and a rebuild of what he described as the "not fit for purpose" North Shore Hospital.
Coleman asked Bramley how the DHB could maintain that track while carrying the capital charge.
“That is going to create extra pressure on the deficit,” he said.
“Are you going to be able to live within your projections once those capital charges kick in?”
Levy replied: “As you know, the capital charges are a financial construct that can and could induce discipline in the use of capital.
“The problem that we have—and I think this is a sector-wide issue—if you've got inherited facilities that are inadequate or have run their course, and you need to make the investment, then the capital charge is simply something that becomes a real burden and could actually be a barrier to moving forward.
“So the capital charge investment, we’ve raised previously, it really needs much more examination, but it is a real impediment to moving forward.”
Coleman: “So is it fair to say that health services in Auckland will not be sustainable if the current Treasury rules remain in place in the longer term?”
Levy: “Because of the population growth, yes.”
The former Auditor General, Lynn Provost, published a number of reports critical of the impact of the capital charge and noted that it was no longer being used for the health sector in Australia and Britain.
In one report in 2016, she said that it appeared that considerable time was being spent on administering the charge regime.
“Overall, it isn't clear what the capital charge regime is achieving in the health sector,” she said.
“There is also the possibility that changes in regional demographics are making these fixed charges increasingly onerous for DHBs in slower-growing areas, and that this may be affecting their future financial sustainability.”
In a Ministry of Health paper released last year under the Official Information Act, officials blamed the long delay in rebuilding Dunedin Hospital on the capital charge regime.
A Government review of the charge was then announced.
Advice to Health Minister Dr Jonathan Coleman revealed why change was sought.
''The issue of affordability may have adversely impacted the sector's investment decisions," the paper said..
''The sector has managed this adverse impact by pursuing options that may not have provided long-term value, for example, deferral of major investments [such as] Dunedin Public Hospital,'' the paper said.
Labour health spokesman at the time, now Health Minister, David Clark said the capital charge regime had not worked well in the health sector because it assumed DHBs made narrow financial decisions.
That did not fit with the wider reality of the health sector.
''It's transpired the DHBs don't always behave as Treasury might have [expected],''
''The intention is to look at the affordability of major capital investments and what, if any, changes to funding or financing settings might be needed in future.''
But the paper seems to be stalled, and there is no sign that despite Coleman's questions at the Committee that he actually opposed the charge.
POLITIK asked Coleman whether he had advocated removing the charge. He replied simply: “no.”
Finance Minister, Grant Robertson, who would have to make the ultimate decision to scrap the charge, had not replied by late last night to written questions POLITIK put to him about the charge.
What is clear is that it is yet another burden an already overloaded hospital sector has to carry.