Health NZ’s $1.4b overspend: Who knew what, when?

Thursday, 1 August 2024

ANALYSIS: No overnight doctor at Dargaville Hospital. Porirua’s Kenepuru Hospital on the brink of shutting overnight. Thames Hospital 20 full time nurses short.

But it was not the ongoing symptoms of an ailing health system that caused the Government to step in and appoint a commissioner to Health NZ last week. It was a claimed $1.4 billion blowout in spending - described by Prime Minister Christopher Luxon as “unacceptable”.

When a government deals with a crisis, key to its political management is setting the public narrative.

Since last week, the Government has held firm: it was Health NZ first, and then its board, which failed in sufficient financial oversight. Luxon went as far as accusing the board - which the Government fired last week - of lacking the required financial literacy.

“There's been a lack of financial control and there's actually been no great understanding or literacy around cash flow analysis whatsoever. To even get an understanding of cash flow from the system has been incredibly difficult,” Luxon said on Monday.

The jobs of senior Health NZ management now appear to be on the line, as the commissioner, Lester Levy, attempts to eliminate the deficit and bring the health agency back in line.

But some issues or seeming contradictions in the story are being picked at. Labour leader Chris Hipkins on Tuesday questioned whether Health Minister Dr Shane Reti had a grasp on the issue as it unfolded.

“I'd certainly be asking him why he doesn't seem to be able to provide consistent answers about the financial position of Health New Zealand? Why he doesn't seem to have been getting or asking for the right information, why he seems content to blame everybody else rather than accepting responsibility as a minister?”

The answer to these questions depends on who knew what, and when.

December 19, 2023 - Reti appoints Crown Observer to Health NZ

Less than a month after being sworn in as health minister, Reti appoints a “Crown Observer” to Health NZ.

The observer, Ken Whelan, has a lengthy career in health system administration in NZ and Australia. He is tasked with working with the organisation’s board to “address a lack of oversight from the previous government”.

“Very early on in the piece I placed a crown observer, because they actually wanted a closer look as to what was happening,” Reti said on Tuesday.

“I was concerned that the board wasn't receiving information and more particularly … they weren't sharing it with Treasury and with others. So I placed a Crown observer to help me with that.”

At this point, Health NZ is almost 18 months into the job of merging the country’s former 20 District Health Boards.

In its annual report for the 2022/23 year, the organisation reported a $1.013 billion deficit, but this required “careful interpretation”, as there were some “one-off” transactions which impacted its book.

Two in particular: a substantial pay equity settlement for nursing, and a $284 million write-down in Covid-19 inventory it had received from the Ministry of Health as part of the reforms.

“Our good financial management was also against a backdrop of many unexpected expenses … We have also learnt a lot about our cost structure and cost pressures in a fast moving first year; this will really benefit our financial management ahead,” said Health NZ chief executive Margie Apa in the report.

February 9, 2024 - Auditor-General writes to Minister Reti

The Auditor-General’s office wrote to Reti on February 9 detailing the findings of the first audit of Health NZ for the year ending June 30, 2023.

Reti characterised this audit as showing the health provider lacked effective oversight of it financial management.

“There was no internal performance monitoring framework. They couldn't watch. They couldn't see. There wasn't good reporting,” he said on Tuesday.

The auditor-general’s office, in the letter, said Health NZ was relying on the systems of the 20 DHBs it was in the process of amalgamating while trying to create new systems to run an integrated agency.

It had “made progress in made areas but, naturally, a lot remains to be done”. The strongest commentary it provided the minister about financial information systems and control was that it needed “major improvements … at the earliest reasonable opportunity”.

“Policies, procedures, and practice in relations to sensitive expenditure are not in line with current good practice.”

On performance monitoring, the auditor-general did not say there was no framework, but instead a “clear performance framework and an overall summary of where the system is performing well” would allow the organisation “to tell its performance story well”. Again this needed “major improvements”.

While the auditor-general’s audit of Health NZ is not publicly available, the many briefings the office provided Parliament’s Health Select Committee about what it uncovered are.

While there’s a caveat, the audit provides “a high but not absolute level of assurance” that Health NZ’s financial statement “present fairly its financial position” - there is a signal of what might come.

“None of the Board sub-committees are reviewing the service performance against the targets set. It would seem appropriate for the Finance and Audit Committee to do so and also exercise scrutiny over management judgements applying accounting policies and making estimates,” the auditor-general told the MPs.

February 23, 2024 - Treasury officials meet with Health NZ board

Finance Minister Nicola Willis, speaking earlier this week, said Treasury officials met with Health NZ’s board on February 23 and - according to her telling - this was the first whiff of the financial problem.

Officials reported back to her that: “The board did not seem across the detail on this issue”.

“It's my view that the board didn't even know what questions to ask to get the information that New Zealanders had a right to have,” Willis said on Monday.

“I don't think the board was asking the right questions or getting the right information. And that's why it took some months for us to get the real story out.”

February 28, 2024 - Reti releases ministerial advisory report into health reforms

This first report from the six-strong ministerial advisory group on the ongoing health reforms was finished in November, but Reti made it public in February. The report, Reti said, showed “a few benefits, but overall once again demonstrates a lack of leadership by the previous Labour Government”.

He does not make public any concerns about Health NZ’s finances at this point.

While the financial performance of Health NZ was not a focus of the November report, it noted “inflationary impacts exacerbate the existing operating financial pressures”, and a roadmap for a single financial management system had been developed.

“This enabled the reconciliation of separate financial systems into a single consistent national operational financial view for the delivery organisations, which was not possible prior to the reform.”

March 19, 2024 - Willis writes to Reti

Willis sends Reti a letter to “record in writing my concern” about Health NZ’s performance, after a meeting with the health minister eight days earlier about the coming Budget, to be delivered on May 30.

'The understanding we had at that time was that we may be on track for a small deficit. But only over time did it become clear how bad the problems were,“ Willis said on Monday.

'We had a situation where the board wasn't getting accurate financial information. The minister wasn't getting accurate financial information, and only by our officials pushing very, very hard, did the full picture emerge.“

According to the letter, an expected Health NZ surplus of $650 million for 2023/24, due to the timing of a pay equity settlement payments and writing off Covid-19 stock, was diminishing. Health NZ was forecasting a surplus “of only $507 million”, Willis writes. But this really meant, without the one-off transactions already described, a deficit of $150m for the year.

“Treasury officials met with the Board of Health New Zealand on 23 February 2024 and report the Board did not seem across the detail of the issue.

“While $150 million is small in the context of the baseline, I am concerned that the deficit could accumulate over time … I know we agree on the need for Health New Zealand to fully internalise the message that any operating deficit is unacceptable.”

The solution: a capable board to meaningfully monitor and control financial performance.

Willis said she endorsed Reti appointing Ken Whelan as Crown observer to the board. While there were “more direct interventions available”, Willis said her sense was “on balance, it is worth giving a stronger, more capable board a chance to turn the situation around”.

“If you agree, then our monthly Joint Ministers meetings with the Board (and without management in attendance) will be an important means of monitoring process.”

But, according to pro-actively released diaries, it does not appear these meetings occurred monthly. Willis and Reti next met with health officials on March 25.

For his part, Reti has said he was receiving regular financial reports from Health NZ and the Ministry of Health, and a “deterioration” in financial outlook was “first signalled” to him by officials and the Crown observer during March.

March 23, 2024 - Margie Apa delivers Reti a ‘significant update’

Reti has said on March 23 he received “one particularly significant update” from Apa by writing. This letter has not been released.

A day after Reti received this letter, the Health NZ board met. According to its public meeting notes, the board noted the financial performance for February and discussed a “number” that was redacted. The chief financial officers was asked to “clarify this number for accuracy”.

March 25, 2024 - Reti calls meeting with Willis, Health NZ board

Two days after receiving Apa’s letter, Reti said he was “sufficiently concerned to have called Health NZ’s Board to a meeting with myself and the Minister of Finance, and to announce the appointment of a specialist financial expert”.

This expert was Roger Jarrold, a business consultant and former chief financial officer of Fletcher Construction. He would have a job on the board for four months.

Reti has said, despite this, Health NZ’s finances worsened.

Reti’s next meeting with Willis, without health officials or the board, was on May 1.

The Health NZ board held a public meeting on May 24, but finances weren’t discussed.

May 31, 2024 - Reti appoints Lester Levy as chairperson

A day after the Budget, Reti announces the appointment of Levy as the new chairperson of the Health NZ Board, after Dame Karen Poutasi resigned in April.

He signals that while hiring medical staff has been going well, with more than 1000 full time nurses hired in 2024, and 80 more full time senior medical office staff, this had “resulted in shifting cost areas which Health NZ needs to meet on an ongoing basis”.

In a letter to Levy, made public by Reti, he told the new board chair he is “deeply concerned that the health system is in crisis” and not providing timely or sufficient care.

Among his priorities are the Government’s five health targets. Under “financial measurement expectations”, Reti said he expected to see “improvements in financial performance reporting”, including greater visibility of financial forecasts and financial risks, and the “delivery of commitments within budget whilst achieving break-even position”.

While he does not specify the “current financial performance of Health NZ”, he said he wanted Levy to make sure “costs are well understood and controlled”.

June 18, 2024 - Parliament’s Health select committee question Reti and Apa

Parliament’s Health select committee, a cross-party panel of nine MPs, meets to question Reti and Apa about the year ahead. Much of the questions related to Health NZ’s finances relate to whether it has enough funding to deliver the required services.

Reti and Apa gave no hint that Health NZ face runaway costs. Reti only mentioned the word “deficit” in relation to the number of medical staff, but he did talk of ensuring the organisation’s financial sustainability.

“There are several things that we have done to make the health system more financially sustainable so that we’re truly able to deliver a greater clinical care to New Zealanders. What we have done is we have changed the direction of Health New Zealand with a new chair, appointed a new chair, and we will have new board members soon to come into Health New Zealand board as well,” he said.

Also on this day, Reti and Willis meet with the board chairperson, Levy.

More than a week later, on June 27, Apa and Health NZ chief financial officer Rosalie Hughes attend a public meeting of the board. Apa was asked by a board member: “What’s keeping you up at night? What’s not tracking? Well, what do we need to be focused on?”

'Staying our financial performance over the next few months as we enter the year and look into the new year. That's a really important accountability for us that we're focused on,“ Apa said.

June 29, 2024 - Former National Party Minister Amy Adams leaves the board

Former National Cabinet Minister Amy Adams leaves the Health NZ board, having earlier advised the Government she would not be available for reappointment as “it had become clear to me that I was not able to advance the changes that I believe need to be made”.

Board members Naomi Ferguson, a former Inland Revenue chief executive, and Dr Jeff Lowe, a GP, would resign within weeks.

July 4, 2024 - Health NZ publishes positive quarterly financial statement

Health NZ published its quarterly performance report to March 31, giving no indication of the looming financial troubles and continuing to show a surplus.

“The operating result for the month of March was a $196 million surplus, which was $220 million favourable to budget. The year-to-date result as at 31 March was a surplus of $299 million, which was $300 million favourable to budget,” the report said.

However, it did point to nurse hires being “greater than budget by 2,079 in the month and 878 year-to-date”. Paying nurses for higher-than-budgeted hours, for unbudgeted demand, would be “the largest risk to achieving the desired surplus”.

Since last week, Labour has questioned how Health NZ could report a surplus in March, only for the Government to discover $130 million-a-month cost overruns just weeks later.

“We should not have to take such an important issue at face value. It may well be possible that that quarterly report is correct. And yet problems started to show up in March. We can only understand that if they release all of their monthly financial statements,” said Labour Party health spokesperson Dr Ayesha Verrall, on Tuesday.

“The structures are not mature and I fear that the removal of a board, that had a deep appreciation of the health sector and the transition that Health New Zealand needed to make, destabilises the health system at a challenging time.”

Apa, speaking last week after the Government was appointed the commissioner, said Health NZ found itself “actually over correcting much quicker than what we expected”.

Levy said the organisation was thousands of full time staff ahead of budget.

July 22, 2024 - Levy appointed Commissioner; $1.4b overspend revealed

Reti takes a paper to Cabinet, and then dismisses the Health NZ board and appoint Levy as commissioner, Reti expounding on a worsening financial position having reached a $130m overspend each month.

On Tuesday, former Health NZ board member Dr Curtis Walker challenged the Government’s allegations the board failed, in an interview with NZ Doctor, and confirmed he learned of overspending in March - largely due to the number of nurses employed.

“It’s interesting that as the political pressure has come on the Government and the prime minister, they have sought to up the ante on their disinformation frankly,” he said.

“… they haven’t got their facts straight and they weren’t sitting around the board table and they also don’t work in the front line of the health service like I do,”

Luxon, on Wednesday, continued to assert the board wasn’t across the details.

“I expect governors and boards to understand what's going on in those entities. I expect action and things to happen.”