GUEST BLOG: Ian Powell – A very bureaucratic coup: Part One

Previously (9 February) I wrote about how business consultants Ernst & Young were used to do a hatchet job on the former senior management team at Canterbury District Health Board (CDHB).

While this hatchet job was planned in 2019 its gestation was much longer. Its underlying causes involved differences in leadership culture (managerial versus distributed clinical engagement) and the situation where determined senior managers focus on the health needs of their geographically defined population come into conflict with a national bureaucratic centralist leadership culture and its agendas. Personalities were important but the intensifying conflict was much more than this.

This is the first of a two-part series. Part 1 covers the period leading up to the 2017 general election and consequential change of government. Different leadership cultures between the Ministry of Health (supported by Treasury’s health section) led to widening and escalating conflict with CDHB (during this period CDHB meant both the Board and its senior management team).  Public statements from the Labour Party leading up to the election encouraged many to believe and hope that the Ministry’s behaviour would be required to improve. Part 2 discusses this hopeful aspiration and how and why things unfolded.

Seeds of conflict: leadership culture clash

In mid-2008, when the far-sighted Gordon Davies was chief executive, CDHB commenced an innovative initiative called Vision 2020 which arose out of comprehensive engagement of a great number of health professionals working in primary, other community and hospital care. This was picked up and accelerated by incoming Chief Executive David Meates in January 2009.

This created what became known as the ‘Canterbury Health System, based on putting patients at the centre of a better connected health system with an objective of not wasting their time.  It led to the formation of the Canterbury Clinical Network in 2010 to support this community-hospital integration that built on new ways of working, health pathways, and the ‘Canterbury Initiative’. In early 2009 there were 12 health pathways; by 2012 there were hundreds.

Canterbury’s developing new leadership culture initiated by Davies and accelerated by Meates, which was opposite to the managerialism that was pervasive in DHBs generally and remains so today, gave oxygen to this initiative thereby contributing greatly to success. Instead of overly contractual and structural it recognised that leadership was more effective when it put relationships at the centre – between the DHB and non-government organisations in the community (including the influential Pegasus Primary Health Organisation), between these bodies and their health professionals, and between health professionals working in community and hospital care. Further, leadership for design and implementation needed to be distributed to health professionals at or close to the ‘clinical coalface’.

It was a relational culture (underpinned by “alliancing”) of which one big benefit was that it was low transaction cost (ie, less bureaucratic). There was recognition that the DHB had a specific statutory status being responsible for the funding and provision of care across its defined population. Canterbury had come from a very fragmented past, based on distrust but with clinicians across both primary care and hospitals wanting to be part of creating a better way of working.

This new approach to leadership didn’t mean that CDHB was perfect and inevitably, given its size and responsibilities, there were internal tensions and some unevenness in its application. But it was a ‘best endeavours’ effort to introduce a more effective leadership culture that was patient-centred and successful both clinically and financially.

Successive Association of Salaried Medical Specialists surveys of senior doctors and dentists employed by DHBs ranked Canterbury, including its chief executive, as the most committed to clinical leadership and engagement. Overall it could be described as work in progress with much emphasis on the extent of its progress. Unfortunately CDHB’s developing direction was at odds with the leadership culture within the Health Ministry and the proponents of narrow contractualism.

Emerging leadership dynamics

Like many other DHBs CDHB had been in deficit over its operational spending in the mid to late 2000s although not on the same magnitude of today. However, in the 2010-11 financial year, CDHB was on track to breakeven until the devastating earthquake in February 2011.

By this time there was a new Director-General Kevin Woods recruited from Scotland. Scotland had pioneered excellent work developing effective clinical networks across the country based on a relational culture that resonated with the new culture emerging in CDHB.

Woods understood and was empathetic to Canterbury but operationally the response to CDHB’s submissions was delegated to the National Health Board (NHB) which was a creation of Health Ministry Tony Ryall. There were two elements to the NHB which meant that it had considerable autonomy.

First, the NHB had a governance board appointed by Ryall whose Chair, banker and former Treasury head Murray Horn, reported directly to the Minister instead of the Director-General. Second, a NHB business unit was established within the Ministry comprising around half its staff. Over time the NHB was effectively run by Horn and the business unit with a leadership culture opposite to that emerging in CDHB (Ryall’s successor as Minister, Jonathan Coleman, subsequently disestablished the Board). Woods more relational approach was never going to get sufficient oxygen in this environment.

The operational head of the NHB was former Hutt Valley DHB chief executive Chai Chuah. Chuah was a good chief executive popular with its staff including health professionals. But the developing culture in Canterbury wasn’t his. For much of his time in Hutt Valley the chief executive of neighbouring Wairarapa DHB was David Meates before he succeeded Davies after the latter’s retirement. However, Chuah was previously employed by Canterbury DHB but resigned in 2002 well before Meates and his senior management team arrived.

The escalating tension with CDHB did not involve the whole Health Ministry. Instead it involved the half of the Ministry that was the NHB business unit. CDHB’s relationship with the rest of the Ministry was good on a range of matters including its successful health pathways between community and hospital.

Responding to the earthquake

In 2010 CDHB had submitted a facilities masterplan and business case for the development of Burwood (outpatient facility) and Christchurch Hospitals (acute services block labelled for some years as Hagley). Their importance was compounded by the subsequent earthquakes. Six weeks after the February 2011 earthquake the Ministry (NHB business unit) met and advised CDHB that it would be facing a $140 million funding reduction due to a claimed population decrease resulting from the earthquakes.

When CDHB asked how the Ministry had arrived at the $140 million it was told that its Canterbury’s population had dropped by over 70,000. What was the Ministry’s evidence for such a bold claim? Demonstrating a preference for sloppiness’ rather than analytical rigour the answer given was the front page of the Press where Mayor Bob Parker had said that over 70,000 people had left Christchurch.

An incredulous CDHB wasn’t prepared to let this rest. It commissioned research consultants Sapere to complete a full review of disaster recovery internationally. Sapere had two important conclusions. First, where populations were declining before a major disaster (ie, New Orleans) then after the event their population declines at a faster rate. Second, where populations were increasing before a major disaster (ie, Canterbury) then their population increases at a faster rate. CDHB and Sapere proved to be right (and the Ministry’s wrong) when year after year Statistics New Zealand’s forecasts were updated to reflect Canterbury’s faster population growth.

Annual operational costs of DHBs are funded through the Population Based Funding (PBF) formula which is based first on DHB populations but then adjusted by qualifiers such as deprivation. While PBF was an acceptable mechanism to ensure distribution of funding across the country, it was never designed to respond to rapidly changing population impacts brought about by such events as a large natural disaster (bearing in mind that the Canterbury earthquakes is the only nationally declared disaster in New Zealand).  CDHB was concerned that PBF might not be suitable for funding the earthquake recovery and commissioned the Martin Jenkins consultancy to investigate.

Martin Jenkins confirmed that PBF (ie, through operational debt management) was unsuited and instead recommended that a special formula be devised recognising the recovery costs from a natural disaster. Unfortunately, while endorsed by CDHB, Health Minister Ryall, presumably on the advice of the Ministry, rejected this recommendation. Instead he required CDHB to manage recovery costs through normal debt management under PBF. Had Ryall accepted this recommendation then CDHB would not have a deficit today and probably not in preceding years.

Again CDHB (and Martin Jenkins) were proven correct. Deprivation almost disappeared as if the population had magically become wealthier! If so, this would have been internationally unprecedented after a national disaster. The reality was that the virtual disappearance of deprivation was associated with the demolition of 11,000 homes which impacted on the most deprived populations in Christchurch. They were moved to different addresses in less deprived areas and, hey presto, they became healthier!

It is astonishing that the Ministry never took advantage of this ‘discovery’ by changing the addresses of all deprived populations in the country thereby ridding New Zealand of the effects of social determinants of health. With this innovative thinking half our doctors and nurses could be made redundant.

Public Private Partnership

Concurrently there was a sharp difference over the use of the controversial Public Private Partnerships (PPP) which the National-led government was actively encouraging in DHBs. Canterbury’s bad luck was that it was the first DHB in line to be caught up with this. On behalf of the Government the Health Ministry promoted a PPP for post-earthquake building. The attraction of PPPs to the Government was that it removed capital expenditure from its fiscal books at least for a while. But for DHBs it meant increased repayment costs to be paid for out of operational spending higher than normal government procurement.

The CDHB had included a ‘greenfield’ approach adjacent to the existing Christchurch Hospital as part of its business case submitted in 2010. Following the earthquakes the Ministry supported a greenfield site in Harewood near the airport. However given the significance of Christchurch Hospital to the economic case to rebuild the city centre, it was determined that a ‘brownfield’ approach would be taken on the existing Christchurch Hospital site due to the costs associated with a new greenfield site (estimated at that time to be in the order of $2.2 billion).  While the Health Ministry Health strongly advocated a PPP approach, CDHB continued to raise significant issues about ongoing affordability based on overseas experiences of PPPs in health.  While a ‘brownfield’ approach made more practical sense from a capital cost containment perspective, private profit maximisation essential for a PPP favoured ‘greenfields’. The Ministry failed to demonstrate how a PPP would impact on the fiscal sustainability of the DHB.

After unpleasant conflict, the ‘brownfield’ approach was adopted thereby leading to the PPP falling away (although there was a questionable backdoor attempt to slip it in with the Hagley acute services block). But the relationship scar got bigger.

Mental health denial

The disputes over earthquake recovery widened to what appeared to CDHB to be a four-year campaign from the Ministry to dispute the existence of serious mental health illness in Canterbury. This was despite both international evidence and the assessment of the Government’s Chief Science Adviser Sir Peter Gluckman to the contrary. It quickly became a lightning rod.

The Ministry maintained that Canterbury’s mental health was average for the country failing to comprehend its different mental health model in Canterbury with much of care that would be provided in hospital-based facilities being provided by non-government organisations in the community in other DHBs.  This led to CDHB being accused of overstating the seriousness of its population’s mental health issues and using the earthquakes to “rort” the system despite what was blindingly obvious to both the DHB and the community of Canterbury. This was a wonderful example of a failure of leadership from the centre to comprehend the significance of post-disaster recovery on communities despite many international examples.

Major capital works and insurance escalation

Conflict escalation then widened to insurance. CDHB reached an insurance settlement of $320 million (the maximum able to be claimed despite the fact that the DHB had stopped counting damage at $540 million as the maximum payable at the time was $320 million – this highlighted just how woefully under-insured the whole New Zealand health sector was).

The Ministry and Treasury believed that the insurance settlement should be treated as “new” capital and should be shifted into the national capital pool but CDHB successfully challenged this arguing that it should be ring-fenced to Canterbury as the purpose of insurance was to ‘put right’ or replace damaged buildings as a result of the earthquakes rather new capital for use outside Canterbury.

The unhappy central agencies then required that the capital charge (on major capital works government funding) be applied to the insurance settlement. That is, they treated the insurance money as if it were for new capital when it wasn’t.

Upping the tension was Ministry rhetoric to other DHBs that over the past decade, almost all the national capital works funding went to Canterbury. The truth was the opposite. Burwood was funded out of CDHB cash reserves and other earthquake recovery developments from the $320 million insurance settlement – it is worth noting that CDHB lost 44 buildings that it used to operate out of as well as having over 13,000 hospital rooms damaged. In fact, of the $700 million capital works spending by CDHB up until the end of 2017, only $50 million had been provided by the Government. Given the relatively low approved major capital works in the other DHBs the question has to be asked; where did the other $650 million go?

The Ministry wanted to control the necessary rebuilds at CDHB and advised Government, without consulting CDHB, that it was more competent to run large capital works despite CDHB’s long track record of large-scale successful facility developments. It led to the creation of the Ministry dominated Hospital Rebuild Partnership Group which, to adapt a successful whiskey advertisement around three decades ago, was the kind of partnership you have when you aren’t having partnership.

Pricewaterhouse Coopers

In 2015 Pricewaterhouse Coopers (PwC) were commissioned by the Health Ministry (with the agreement of CDHB) to review CDHB’s financial position. Two reports were completed. Its first report published in December 2015 led the then Health Minister Jonathan Coleman to conclude that CDHB was in a “relativity stable financial position.”

PwC noted that CDHB was operating at a $50 million surplus before having to consider its earthquake rebuild. Capital charge costs generated by the rebuild were likely to increase by 85% over the next six years which would drive bottom-line financial performance. PwC also acknowledged the financial impact of increased mental health demand.

When PwC were undertaking their review, they provided some preliminary advice to the Ministry and Minister that they had a range of recommendations that would improve the fiscal performance of the DHB. However, in fact, there were no recommendations. Its 2015 report had four suggestions called recommendations (there were none in the second report in November 2016). Further, most were more in the realm of government responsibility and beyond the authority of CDHB to proceed with without changed policy settings. Several of its suggestions could not be implemented by CDHB. They required new government policy settings: For example:

• Restricting the price growth for aged residential care.
• Increasing the client contribution rate in residential care.
• Reducing depreciation rates from 2.6% to 2.0% (this was also not allowed by CDHB’s auditors).

There were also errors in the reports that were subsequently corrected by CDHB’s Quality, Finance, Audit & Risk Committee in areas such as depreciation levels, leasing, capital charge assumptions, timetable for the Hagley acute services block, and slowing down staff costs.

The two PwC reports were not dodgy. But it is not surprising that in some highly technical and complex matters genuine mistakes occurred. What should have happened is that CDHB should have been allowed to work through and correct them with PwC. But the Ministry prevented this. Instead it used the report to allege to the Health Minister that CDHB was not complying with the review’s ‘recommendations’. The Secretary of Treasury ended up having to apologise to then Board Chair Sir Mark Solomon for perpetuating this false narrative.

Ironically, given the Ministry’s negative use of the PwC review, in 2015 while it was underway CDHB received some significant awards under the ambit of the Institute of Public Administration. Specifically:

• The Treasury Award for Excellence in Improving Public Value.
• The State Services Commission and Leadership Centre Award for Improving Performance through Leadership Excellence.
• The Victoria University of Wellington School of Government Award for Excellence in Public Sector Engagement.
• The Prime Minister’s Award for Public Sector Excellence.

The main problem with the PwC review was that it didn’t give the Health Ministry the answers that they wanted and the report did not match their belief system that CDHB was inefficient – in fact, it demonstrated the complete opposite.

Health Benefits Ltd

Until the mid-2000s Health Benefits Ltd (HBL) was a crown-owned company responsible for dispersing government funding to general practices. Then this responsibility was shifted to DHBs as part of their responsibility for community as well as hospital health services. In 2009 new Health Minister Tony Ryall resurrected HBL to become a shared services agency to prepare national programmes supposedly in partnership with the health sector to reduce finance, procurement, and supply chains.

In concept it had potential and there were some gains including in more standardised banking arrangements. But there were two main problems. First, HBL with a private sector influenced governance board was very top-down in its approach. It was situated above the DHBs and sought to direct them. Partnership was generally only part of the vocabulary. One of the consequences was that HBL often got it wrong.

In 2015 HBL’s leadership performance was strongly criticised in a review conducted by the Auditor-General. Its management and governance were described as weak. Also criticised was its communications with DHBs. In June Ryall’s successor Jonathan Coleman replaced HBL with a new body called Health Partnerships Ltd which was required to report to the DHBs nationally rather than the other way around. Lester Levy was the Deputy Chair of HBL from its establishment until his resignation not long before Coleman’s decision to disband it.

Second, there was a cultural clash between HBL’s approach (supported by the Health Ministry) – narrowly contractual and high transaction cost – and the South Island DHBs. The South Island was one of four regional groupings of DHBs and adopted a relationship-based networking approach that achieved significant savings. With Canterbury the largest of the five South Island DHBs, inevitably it added to the tension between it and the Ministry.

Canterbury was also negatively affected by HBL’s national finance system called Oracle which became a $140 million debacle. After holding off replacing its aging finance system while waiting for HBL’s new system, Oracle was first implemented in Canterbury (along with West Coast, Waikato and Bay of Plenty) with their fiscal reporting systems being managed out of their finance systems. The result of the debacle was that CDHB had to build its own reporting system.

HBL food and laundry business cases

There was another dimension to HBL’s work that had serious implications for CDHB. There were two HBL national business cases involving laundry and food services (the latter involving Compass). A key driver of these initiatives was Deputy Chair Levy. However, this became a real issue for CDHB who had serious concerns over their financial viability. CDHB would be significantly financially disadvantaged by them.

CDHB already had one of the largest commercial laundry operations and cooked chill food operations in New Zealand. Both operations were very cost-effective delivering food and laundry significantly cheaper than any of the options developed by HBL (CDHB had the biggest DHB laundry outside the Auckland region). CDHB estimated that it would have been negatively impacted by the food business case by approximately $24 million over five years while the three DHBs in metro Auckland (Levy was the chair of two and then became chair of the third) would have benefited by the same amount.

Consequently, CDHB was accused of being difficult despite continuing to say that if HBL could provide a compelling rationale that would deliver benefit (rather than additional costs) to CDHB then it would run with them. No such rationale was provided. Fiscal responsibility meant that CDHB could not support either business case. In fact, for the first three financial years (2017-18 to 2019-20) on food services alone, CDHB realised a $11.8 million financial benefit compared to the Levy promoted Compass cost forecast.

Canterbury wasn’t the only DHB to take this position; several others also found that the HBL businesses cases lacked financial robustness. But, because Canterbury was the largest DHB outside the Auckland region, the financial sustainability of both cases became even more precarious. Canterbury coped much of the flak including reportedly from Levy whose conduct was described to me, from people outside of Canterbury, as “vitriolic”. For the three metro Auckland DHBs that Levy was associated with to make financial gains, Canterbury and others would have to be financially disadvantaged. In a decision that astounded many in the health sector, in 2019 Health Minister David Clark appointed Levy his Crown Monitor for CDHB. This decision had a big bearing last year’s leadership meltdown.

The election of the Labour led government in 2017 suggested to all that the era of tension between the Health Ministry and DHBs (and bureaucratic conflict escalating to warfare with CDHB) was over. In 2015, partly in the context of the PwC review, Labour’s health spokesperson at the time Annette King (herself a former health minister) had accused the National-led government of failing CDHB and was strongly critical of the Ministry’s treatment of CDHB. She had also expressed to me among others her admiration for David Meates’ leadership of CDHB.

Her successor as health spokesperson David Clark was similarly seriously concerned about the Ministry’s relationship with DHBs, especially Canterbury. Labour leader Jacinda Ardern also expressed concern about the Ministry’s behaviour towards DHBs.

With every reason to believe that the new government understood the issues, hope for a much-needed turnaround was high in the health sector. Part 2 of this series discusses how and why things unfolded.

Ian Powell was Executive Director of the Association of Salaried Medical Specialists, the professional union representing senior doctors and dentists in New Zealand, for over 30 years, until December 2019. He is now a health systems, labour market, and political commentator living in the small river estuary community of Otaihanga (the place by the tide). First published at Democracy Project.