Main matters arising from the 2017/18 audits of district health boards

Letter sent on 28 June 2019 to chief executives and board chairs of district health boards by John Ryan, Controller and Auditor-General giving a brief summary of the main matters arising from the 2017/18 audits of district health boards.

28 June 2019

Tēnā koe

MAIN MATTERS ARISING FROM THE 2017/18 AUDITS OF DISTRICT HEALTH BOARDS

District health boards (DHBs) play a vital role in New Zealand’s social and economic wellbeing. Every DHB is one of, if not the, largest employer in its district. Therefore, there are high expectations for DHBs to perform well. These expectations are getting more difficult to meet as the population increases and gets older and the range of available treatments expands. Ensuring that DHBs have the capability and infrastructure to meet these expectations is a significant challenge.

New Zealand’s health system delivers an extraordinary amount for the investment collectively made into it. As a country, we have made progress on several health outcomes, outperforming many OECD countries that invest far more.

However, the worsening financial position of DHBs is a concern. In just a few years, we have seen one or two DHBs experiencing financial difficulties to almost all of them budgeting for deficits (and many struggling to achieve those budgets).

In 2017/18, DHBs collectively paid the Crown over $323.6 million in capital charge – more than the sector deficit of $257.3 million. Some of this was funded by the Crown because it arose as a result of revaluations increasing the value of assets. But increases in capital charge for new capital, such as for new hospital buildings, are not funded. DHBs clearly feel the impact of the sudden increase in capital charge in these circumstances. As we have noted previously, it is not clear what the capital charge is actually achieving in the health sector. I look forward to the findings of the Ministry of Health’s review of the health capital funding system.

An ongoing concern is the national hospital estate and its ongoing viability. Significant proportions of the estate have reached an age where buildings need to be replaced, and updated facilities are needed for a population that is increasing and getting older. It is encouraging to see more integrated planning taking place, such as the recently completed Northern Region Long Term Investment Plan and the proposed National Asset Management Plan that the Ministry of Health is preparing. I also note the funding in the 2019 Budget for the establishment of a health infrastructure unit within the Ministry of Health. These changes should help to address a long-standing gap in nation-wide planning for investment in health sector assets. This is a matter that we are also interested in. We are proposing work in 2019/20 that will look at the system for prioritising and investing in assets supporting health care delivery.

A key part of good governance in any complex organisation is having an effective finance, risk, and audit committee. This is especially important when times are tough. It is a good idea to regularly review the scope, composition, and processes of your committee to ensure that they continue to serve the changing needs of your DHB. There is information about effective audit committees in the good practice section of our website.1

Maintaining the separation between governance and management is critical. Problems emerge when this line gets blurred and governors become too involved in operational developments before they are presented to the Board for consideration and approval. Maintaining the separation between governance and management enables you to consider risks appropriately and exercise judgement objectively.

The Appendix contains more details on our observations from the audits of all 20 DHBs and our recommendations for improvement. The main matters are:

  • Asset management: Although DHBs have made some improvements to their asset management in 2017/18, they need to better manage the assets that are critical to the delivery of health services. We expect to see a more strategic approach, which would include using clinical service planning to inform asset planning, more co-ordination at a regional and national level, and effective long-term investment planning.
  • Procurement and contract management: Procurement remains important for DHBs because of the significant amount of products and services they procure to support their own delivery of services, and their reliance on other providers to deliver health services in the community. Robust contract management is particularly vital in this context.
  • Fraud awareness and prevention: We received some reports of suspected fraud from DHBs in 2017/18. DHBs are most vulnerable when cash is handled or when there is insufficient segregation of duties. Effective controls are critical to reduce the risk of fraud taking place. It is also important that staff understand their role in preventing and reporting fraud.
  • Holidays Act 2003 compliance: We have commented, in the last three annual audits, on the difficulties DHBs have ensuring that they comply with the Holidays Act 2003. Although we understand that there are complex issues to address, DHBs need to urgently resolve this issue and ensure that they are able to pay staff their legal entitlements.
  • Statements of performance expectations: The Crown Entities Act 2004 sets out clear obligations for DHBs to provide Parliament and the public with information on what they plan to achieve in the coming year and what they plan to spend. In 2017/18, 18 DHBs did not meet this obligation within the required timeframe.
  • Asset valuations: Because of the number and value of the assets they hold, and the rapid change in land values in some areas, valuations can be challenging for DHBs. Another complicating factor is the effect of changes to the Building Act 2004 and requirements to carry out seismic assessments on buildings, which led to one DHB’s audit opinion being qualified in 2017/18. DHBs need to frequently consider whether a revaluation is needed and ensure that all relevant information, such as seismic assessment, is available to valuers.
  • Information systems and technology: Because of the scale of DHBs’ financial transactions, it is essential that the information systems and technology supporting financial management are secure and well managed. We noted the need for several DHBs to continue improving security and disaster preparedness.

I encourage you to talk to your chief executive about the progress your DHB is making with the matters discussed in the Appendix. I also encourage you to discuss this letter with your appointed auditor and/or the health sector manager, Greg Goulding.

Nāku noa, nā

Signature - JR

John Ryan
Controller and Auditor-General


1: See www.oag.govt.nz/good-practice.