GUEST BLOG: Ian Powell – From financial illiteracy smear to understanding healthcare complexities; history repeating or rhyming?

When Prime Minister Chris Luxon and Health Minister Shane Reti announced that the government-appointed Board of Health New Zealand (Te Whatu Ora) was to be disestablished and replaced by a Commissioner, the justification was that the Board was financially illiterate.

The catalyst for this ‘justification’ was the assertion that there was a projected deficit of $1.4 billion (for context the total HNZ spend is around $28 billion).

The calculation was based on a monthly loss of $1.3 million. However, there is a view expressed privately that this monthly loss may have been embellished by being extrapolated from on a couple of financially worse months.

Unfortunately this financial illiteracy claim was a nasty politically motivated smear based on poor diagnosis. I discussed this in my 26 July Newsroom opinion piece: Feudal baron and politically motivated smear.

The Board did have some weaknesses although not of its own making. There was a focus on diversity in the selection of Board members.This was a good thing but, with only eight members, some necessary skills were missing. A larger board could have helped overcome this.

Specifically the Board did not have enough of two critical ingredients –clinical literacy and literacy in how the most complex part of the health system (hospitals) functions, including its funding.

This restricted the Board’s capability to sufficiently probe senior management on ongoing performance.

Underfunding and poor government budgeting

In a macro context, underpinning this reported fiscal situation were two connected factors, both beyond the control of the former HNZ board (and also its operational leadership).

First, there are the increasing cost pressures which are driven by rising acute hospital demand. This rise is due to factors such as population growth, aging population and increasing impact of poverty.

Acute demand has been increasing at a higher rate than population. It was primarily behind the DHBs increasing deficits from the early 2010s to their disestablishment in 2022.

The second critical factor was underfunding reinforced by poor government budgeting. This has been exposed in two subsequent reputable analyses, each considering it from different angles.

The first exposure was by Sapere health economist Peter Huskinson (Sapere). Looking at spending on health per person, he revealed that it had actually decreased in the latest Budget. This was discussed in my above-mentioned Newsroom opinion piece.

Controlling for inflation and population, the per person spend by the previous Labour government was an annual average of 4.6% on the Health Budget. Under the new government Huskinson projected a 3% reduction.

As reported by NZ Doctor (27 June), Huskinson concluded that the Government’s spending on health has declined and is actually “well below anything achieved this century in New Zealand or comparable countries.”

The second exposure was provided by Auckland and Otago University academics. Their analysis was published by The Conversation (13 August): New Zealand underspends on health; need proper funding, not crisis management.

They reported that:

…by far the biggest local factor contributing to New Zealand’s stressed health system is historical and current underfunding. Rather than overspending, it has been incredibly frugal for a long time.

And:

Throughout the 2010s, just over 9% of the country’s GDP was spent on health, when most comparable countries were spending between 10% and 12%. According to OECD data, in 2020 New Zealand spent the equivalent of US$3,929 per capita on health – far less than Canada (US$6,215) and Australia (US$5,802).

Dual complexities

Former health minister Ayesha Verrall right about a manufactured crisis, however…

Former health minister and Labour health spokesperson Dr Ayesha Verrall is among those who have described the Government’s argument for replacing the Te Whatu Ora board with a Commissioner as a ‘manufactured crisis’.

She is right to assert this but the Government does have a valid point with its argument that the health system has become over-centralised. This has contributed to poorer performance.

While the Board was not financially illiterate, overall HNZ was dysfunctional and specifically lacked sufficient expertise in hospital  funding and operational functioning (discussed further below).

Former Health Minister Andrew Little’s linear thinking led to poor health system design

Health New Zealand was created by former Health Minister Andrew Little. Overall responsibility rests with former Prime Minister Jacinda Ardern and her ‘kitchen cabinet, which included her successor Chris Hipkins. But Little was their ‘baby’s midwife’.

More than any of his predecessors that I knew over more than 30 years, Little is a linear thinker who preferred to take his advice primarily from business consultants instead of those with much greater operational and strategic health system experience.

There was no comprehension by Little and the rest of the ‘kitchen cabinet’ of the complexities of the health system. Tragically this has proven to be fatal.

Poor design led to an already centralised health system transferring that centralisation vertically upstairs. The Government is on sound ground in linking this dysfunction to over-centralisation.

Those responsible for the replacement of district health boards (DHBs) with Health New Zealand failed to understate the two overriding complexities of universal health systems – the complexity of healthcare provision and the complexity of healthcare structures.

The more aligned these two complexities are, the greater the efficacy of the health system. The more they are unaligned the greater the opposite outcome.

Aligning complexities through subsidiarity

What affects this alignment is that overwhelmingly healthcare is provided locally, largely by general practices and local hospitals. To give effect to this alignment there needs to be a level of decision-making at this local level.

This is based on the premise that decision-making should be local except where it makes better sense for it to be made nationally.

The underlying principle of this premise is called subsidiarity which underpinned Aotearoa New Zealand’s health system from its inception in 1938 until Little’s linearly legislation took effect in 2022 with the passing of the Pae Ora Act.

I discussed the importance and loss of subsidiarity over two months before the coming into force of this Act in Otaihanga Second Opinion (18 April 2022): Bye-bye subsidiarity.

Lesson from an acute triangle

Universal health systems are like acute triangles

Acute triangles provide a useful image of health systems in the context of subsidiarity and the above-mentioned two complexities.

Overwhelmingly healthcare is provided at the wide base of the triangle. Under subsidiarity this is also where a high level of decision-making also resides.

It is where health professionals, operational management and systems predominate providing the foundation for leadership, innovation and empowerment (subject to the prevalence of an engagement based culture, of course).

This foundation includes financial management. Particularly in respect of hospitals which necessarily incur the biggest part of health expenditure, this financial management is more than financial literacy. It is much more than understanding economics or accountancy.

To the extent that spending in a demand driven health system can be controlled within health systems, it is where the most sustainable fiscal controls can be put in place without compromising healthcare quality and accessibility.

This is where the greatest expertise resides. But it requires three interconnected critical factors – good systems, good relevant information (wider than simply financial) and good data.

When decision-making is transferred from the base of the triangle up to its much narrower apex, as it was under the Pae Ora Act, then its quality declines because the two complexities above of health systems are no longer aligned.

In my view DHB chief executives were better informed over the financial performance of their DHB than the chief executive of Health New Zealand is over its performance. The latter’s Board only became aware of the expected budgetary shortfall at its March meeting.

This is not a reflection of individual performance. Rather it is a direct result of the lack of alignment between the complexities of healthcare provision and healthcare structures.

It is no surprise that the vertically centralised tip of this triangle has had three or four unsuccessful attempts to consolidate systems for supply chains, logistics, and finance in order to save around $60 million savings.

Repeating or rhyming?

There is a lesson to be learnt from an earlier experience from decision-making being shifted upstairs to the apex of an acute triangle.

As with the Government’s decision to appoint a Commissioner, this earlier experience began by demonising staff in misnamed ‘back office’ positions.

Health Benefits Ltd (HBL) was established in 2010 by then Health Minister Tony Ryall. It was tasked with finding $700 million in administrative savings for reinvestment in health.

However, by mid-2014 it had only managed to make direct savings of $71 million.

There was no science in the $700 million figure. It was admitted to me at the time that the figure was literally ‘plucked out of the air’.

HBL deputy chair is now Health New Zealand commissioner

In October 2015 the Auditor-General released a report saying that HBL had tried to run an ambitious and complex programme but its communication with DHBs was inadequate, and its own board lacked timely and accurate information. HBL had no overall project management.

Consequently the agency was quickly closed down by Ryall’s successor Jonathan Coleman. This was reported by Radio New Zealand (13 October 2015): Sacked HBL was flawed.

The deputy chair of HBL was Lester Levy. Does this mean that history will repeat itself or will it just rhyme a lot?

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 Otaihanga Second Opinion