Decentralizing Resource Allocation: Early Experiences with District Health Boards in New Zealand

Background to the 2001 reforms

The various rounds of re-structuring of the New Zealand health system have been described and discussed in detail elsewhere.^6-10 The pursuit of neo-liberal economic policies in New Zealand during the 1980s stimulated the introduction of a quasi-market into the public health system in 1993. Fourteen area health boards were abolished, their twin roles of purchasing and providing health services were separated, with four regional authorities established to purchase services from public and private providers. The main objective was to introduce more incentive for efficiency into the system by encouraging providers to compete for contracts. ¹¹ In 1996, following the election of a coalition government, the purchaser-provider split was retained but the four regional purchasing authorities were replaced by a single central purchasing agency (the Health Funding Authority). The thinking behind these changes was that a single purchaser would reduce the costs of contracting (particularly for those providers contracting with more than one regional purchasing authority) and reduce regional inequities. The intention was also to reduce the emphasis on competition between providers and for the ‘principles of public service to replace commercial profit objectives’. ¹²

The somewhat legalistic and at times contentious contracting system that existed during the 1990s was seen to impose high administration costs, exacerbated by short-term contracts and (initially) by multiple purchasers. There were improvements in accountability but little evidence of efficiency gains, at least within the public hospitals.^6,13 It has also been argued that the competitive approach to purchasing increased fragmentation of services, led to more acrimonious relationships and undermined quality where attention focused on financial rather than clinical performance. ¹⁴

The latest round of re-structuring into 21 DHBs (with members mostly elected) in 2001 was initiated by a Labour-led coalition which was keen to remove any remaining vestiges of a market, and to replace it with a system oriented towards meeting health care needs. Structured around existing public hospitals, the DHBs are responsible not only for providing health services directly but also for purchasing services from nongovernment providers for the populations residing within their geographically-defined areas.

Devolution of the responsibility for purchasing or providing health services from a central agency to the 21 DHBs has necessitated the development of numerous processes for allocating resources and for tracking the flow of funds through the system. First, funds are allocated to the DHBs by the Ministry of Health via a population-based formula which takes into account the size and characteristics of the resident population mix (including ethnicity and socioeconomic status) and the national average cost of health services used by each sociodemographic group. The formula includes a weighting for unmet need. Additional adjustments are made for the degree of rurality of the district and for service use by overseas visitors eligible for free care in New Zealand.^15,16

The DHBs decide how to allocate their share of the national funds to government and non-government providers. This requires:

DHB decisionmaking takes place within a national policy framework and must align with a set of national health and disability strategies which specify broad objectives and priorities.^17,18 The Ministry of Health has also developed systems for monitoring and, where necessary, improving the performance of the DHBs as both purchasers and providers. Thus, although responsibility for purchasing services has been decentralized to the 21 DHBs, their activities and decisions continue to be steered from the centre.

This paper describes the processes associated with the allocation of health resources in the decentralized system and considers the extent to which its four objectives are likely to be achieved, based upon the experiences and opinions of personnel within the sector.

This was part of the Health Reforms 2001 Research Project, a three-year project which was undertaken to chart the progress of, and evaluate, the health reforms enacted by the New Zealand Public Health and Disability Act 2000. This component of the project drew on the following methods of data collection:

Interviews were undertaken in 2002-2003 and again in 2004-2005, during the implementation stage of the reforms. All interviews were recorded and transcribed. Thematic analysis identified themes, drawing on the research questions and literature. Responses were categorized according to these themes with the use of NVivo computer software.

Is the new system for allocating funds across the country likely to improve population health and reduce health disparities?

Prior to 2001, funds were allocated to providers via price and volume contracts. Thus, resources were allocated according to where providers were located, rather than according to the health care needs of the local population. Allocating funds to the regions via the population-based funding formula is designed ’… to fairly distribute available funding between DHBs according to the relative needs of their populations and the cost of providing health and disability support services to meet those needs’. ¹⁵ Funding according to the formula was phased in from July 2003, with DHBs being moved progressively towards their target level of funding. This required a re-allocation of money away from the nine DHBs that were funded above their target level towards those that were under-funded. The transition could potentially have been very difficult for the districts that were previously over-funded. However, the move to population-based funding was accompanied by an increase in overall health expenditure which effectively mitigated the need for any significant contraction of services. This also allowed regional equity in funding to be achieved for most DHBs over a relatively short period (three years). Regional equity in funding is expected to improve equity of access to services, and equity of access in turn is an important factor contributing towards reducing inequalities in health between districts.

Prior to implementation of funding via the formula there was concern among the chief executives and chairs about perceived inequities in the construction of the formula, and about the quality of the data used in the formula. For example, outdated population statistics were used for the initial formula and the domicile information for patients was sometimes incorrect. Some respondents - particularly those from larger DHBs -also expressed concern that the formula did not take into account adequately differences in the costs of service provision across districts (e.g. due to higher levels of morbidity in some districts). However, once the re-allocation had commenced, concerns about perceived inequities in the formula seemed to diminish. As one senior manager put it,’…the formula's accepted now as being the formula’. The weighting in the formula for unmet need was especially welcomed by those DHBs with high proportions of deprived populations. Even so, the quality of some of the data remains poor and concerns remain about unavoidable cost differences between DHBs. If there are inherent differences in the cost of service provision which are not compensated for by the formula, regional inequalities in access to services may be perpetuated.

Regional inequalities will also be perpetuated if DHBs are not appropriately compensated for treatments provided to patients who live in other districts. Most DHBs do not provide a full set of services within their districts and so around one in six admissions are for patients from other districts. Payments must therefore be made for interdistrict flows. Prices for these interdistrict flows are set nationally and the majority of payments are based on pre-agreed volumes. The Ministry of Health has undertaken an extensive work programme for improving information about the types and volumes of interdistrict flows and developing more accurate payment processes. Notwithstanding this work, some respondents expressed concerns about deficiencies in payments for interdistrict flows. Reported deficiencies included poor quality data on the numbers and types of flows, inaccurate pricing and late payments.

DHBs are required by statute to assess the health status of their populations and their health service needs as part of their strategic planning. They are also required to consult with their communities, with respect to their strategic plans. Respondents (particularly chief executives) reported that they found that needs assessment was useful in identifying population health needs and gaps in their services, and in guiding their strategic direction. However, our research revealed that the needs assessment processes were sometimes not rigorous, in part because many DHBs had neither the skills nor the capacity to undertake this work. ¹⁹ There was also some ambivalence among board members and senior managers about the effectiveness of community consultation. Although a number of instances were reported where input from communities had made a real difference to how or where the money was spent, these were mostly related to specific service issues rather than to broader spending priorities. ¹⁹

The ability of DHBs to re-allocate funds on the basis of local needs is constrained by other factors. A majority of funds are locked into existing services or contracts so that, in the short term at least, DHBs do not have the flexibility to re-allocate a significant proportion of their budgets. In addition, significant proportions of the new funding allocations have been ear-marked by the Minister for spending on specific services, especially primary health care and mental health services. ²⁰ This means that any re-allocation of funds at the local level usually requires some cuts to existing services. However, in trying to re-prioritize, some DHBs found themselves exposed to the politicization of their decisions. For example, a decision by one DHB to suspend temporarily weekend and after-hours surgery at a small district hospital because staff shortages were threatening patient safety was reportedly met by ‘a wide spectrum of local and national government politicians [who] wanted to have their say on the matter’. ²⁰ A loud public outcry, together with the involvement of the Minister in talks between the DHB and local interest groups, eventually resulted in the decision being reversed. This proved costly for the DHB and resulted in some surgical procedures at their main hospital being cancelled. In another case, in an effort to reduce its financial deficit, a DHB developed a disinvestment strategy based upon an explicit set of criteria. However the main proposal that came out of this process (a disinvestment in fertility services) was vetoed by the Minister. This encouraged the DHB management to recommend to the Board that, in the interests of national equity, any major disinvestment decisions should be undertaken at a national rather than at a district level.

A final point to note is that resource allocation decisions made at the local level must reflect the priorities set out in the national health and disability strategies. Most respondents considered that their local priorities were generally aligned with these national strategies and that the strategies provided a useful framework for shaping their planning processes. However, some expressed concerns that national strategies may create expectations on the part of the public that cannot be met at the local level. Potential limiting factors identified included insufficient funding, organizational boundaries and occupational work practices.

Have the reforms restored a non-commercial system which focuses on the provision of quality services?

Under the quasi-market arrangements of the 1990s, there was a perception that purchasing decisions were commercially-oriented, and that consequently contracts were being let more on the basis of price rather than quality. While measures of the quality of services were specified in the contracts, there was some scepticism among providers about whether important dimensions of the quality of services could actually be measured and monitored. ² Thus providers felt that they needed to compete on the basis of price to retain their contracts. This resulted in a shift in attention towards the cost of service provision which had not traditionally been a strong focus in earlier models of organization. The establishment of the DHBs was expected to shift attention away from cost and back towards quality.

From 2001, the DHBs were required to operate in a financially responsible manner. This was defined in terms of each DHB endeavouring to maintain its long-term financial viability, to cover all its annual costs from net annual income, to act as a successful going concern and to prudently manage its assets and liabilities. Most DHBs inherited a deficit and the need to reduce these deficits tended to dominate DHB decisionmaking in the early years. As one respondent very aptly put it: ‘It's sort of like the elephant in the middle of the living room really, sometimes we manage to step around it but it's just there hugely’. Others commented that the existence of deficits tended to ‘very much constrain any innovation’, to induce short-term thinking’, and ‘divert attention from higher order health goals’. In some cases, potential strategies for achieving long-term efficiencies (e.g. the development of nurse practitioner posts) could not be pursued because the DHBs were unable to allocate the additional resources required for such innovations in the short term.

A strong focus by central government in encouraging DHBs to reduce their deficits, moves by DHBs to reduce costs within their own hospitals, and the injection of additional funds from 2002 allowed all DHBs to reduce, if not abolish, their deficits by 2005, with the combined DHB deficit falling from NZ$287 million in 2001-2002 to $15 million in 2004-2005. ²⁰ While the elimination of systematic deficits released some of the constraints on DHB spending decisions, the need to work within budgets still appeared to dominate purchasing decisions. One well-publicized example occurred in 2006 when the three DHBs covering the greater Auckland region invited tenders for the provision of community laboratory services. The tender resulted in the contract being moved away from the incumbent provider - which had been providing pathology services in the region for 70 years and which had a reputation for an excellent quality of service - to a new provider which did not have any infrastructure in the area. The DHBs claimed that the move would save them NZ$15 million each year and that this money could be used to purchase more health services. The decision resulted in an outcry from health professionals who were concerned about a reduction in the quality of service, ²¹ a petition being presented to the DHBs signed by 52,000 people, ²² a street protest ²³ and a request for a judicial review. ²⁴ The court upheld the request on the grounds of a conflict of interest on the part of a DHB board member who was associated with the new provider and a lack of consultation in the decision process, and the contract was invalidated.

More generally, for many services there has been a shift away from individually negotiated contracts towards the development of standardized agreements. This has provided non-government providers with greater clarity and certainty about the services that the DHBs wish to purchase from them and thus has reduced the potential for conflict between the two parties. So, while some elements of a non-commercial system have been restored, there is little evidence to suggest that the focus of contracting has shifted away from the cost (or price) of services towards the quality of services.

Has competition among providers been replaced by collaboration and is routine contestability of funding for hospital services being avoided?

The move from price and volume contracts to population-based funding, together with payments for out-of-district patients being based on pre-agreed volumes, have effectively removed any financial incentive for hospitals to compete for patients. Many senior managers commented on efforts being made to collaborate with neighbouring DHBs in planning and purchasing services. Following government guidelines, DHBs nationally very soon established four regional shared services agencies’ with all DHBs in each region being joint shareholders. The purpose of these regional agencies was to support the DHBs and achieve economies of scale by providing expertise in specialized areas of planning and purchasing. Senior managers of the 21 DHBs also met regularly and this facilitated a coordinated approach to both national and local activities. The government endorsed such moves by introducing requirements for collaboration into funding agreements between the Ministry of Health and DHBs.

While inter-DHB collaboration has not been without its difficulties, the aim of avoiding routine contestability for public funding for hospital services was generally achieved. There was, however, still real competition among private providers and between public and private providers. This competitive environment was no doubt exacerbated by the large initial deficits of many DHBs and the consequent need to reduce, rather than increase, spending. It may also have been affected by the fact that the intentions of DHBs with respect to purchasing services from the private sector in the longer term were not always clear.

Have long-term funding arrangements for organizations that have a history of provision of quality services been secured and partnership relationships been developed with non-government organizations (NGOs)?

Traditionally, funding for the public health system has been provided on an annual basis. However, from 2002-2003, a three-year funding package was approved. This added greater certainty to planning and allowed DHBs to negotiate some longer-term arrangements with providers. ²⁰ Nevertheless, ongoing change, together with the need for all annual plans to be signed off by the Minister, meant that planning remained difficult for DHBs. The development of longer-term contracts was also sometimes inhibited by the need for DHBs to review whether they should provide a service themselves or purchase it from a private provider. This meant that the threat of nonrenewal (and sometimes termination) of a contract remained for many service providers, including some of those who had historically provided a high quality service.

The fact that DHBs were both purchasers and providers meant that they were not as neutral in their purchasing decisions as the previous central purchasing agent (the Health Funding Authority) which did not provide services. The question of whether the model incorporates any inherent bias towards provision of services by the public sector was, perhaps not surprisingly, viewed very differently by DHBs and private providers. DHB staff stated quite clearly that they would not give preference to their own provider when making purchasing decisions. Rather, each decision would be assessed according to factors such as scope of service, safety, cost and quality. There was also acknowledgement by some DHBs that part of the solution for reducing their provider arm deficits was by developing primary care and other services which were provided by nongovernmental organizations. However, our observations at board meetings revealed a more mixed message, with some conflicting opinions among board members regarding the choice of provider. While some members were clearly of the opinion that the DHB provider arm should be treated as just another provider, others expressed the view that being a good employer includes giving preference to the DHB provider arm in order to maintain employment levels.

There were cases of contracts for services being shifted both into and out of the DHB. In one instance, a DHB chose not to renew a contract with a private provider despite evidence that suggested that in-house provision would be both more costly and inadequate in the longer term. A few months later the DHB found that their capacity was indeed inadequate and had to apologise and negotiate a new contract with the same provider. The decisionmaking process was more systematic and transparent the second time around.

From the perspective of non-government providers, there was concern that ‘DHBs can never be neutral in the way that the Health Funding Authority was’ and that DHBs would favour their own provider arm when allocating contracts. One social services organization conveyed widespread concern among their members about this issue. Another suggested that, if the DHBs did not offer non-governmental organizations opportunities to contract for services, then ultimately the issue would be challenged under competition law: ‘If you go around the country now there are a number of boards who have decided to preferentially fund their provider arm in a transitory way or in a supportive way and they have shown no similar regard to other providers whom they contract with’. One NGO perceived a worrying trend’ of DHBs capturing money for their own provider arms ‘in order to get a margin to offset their bottom line’, and that ‘there are more and more examples of Requests For Proposals being put out there, clearly written so that only the provider arm can respond’. A consumer advocacy organization voiced concern that ‘the relationship is still far too strong between the planning and funding arm and the provider arm of the district health boards’ and ‘we're not all on an even playing field at the moment’. A Maori provider expressed the view that: ’… much of the Maori funding which ought to come to Maori, in my mind, is being taken up by a Maori health unit in the [DHB] organization’.

Some non-governmental organizations indicated that they expected any inequities in the selection of providers to decline over time as DHBs became more competent and confident in purchasing and monitoring services, and became more familiar with the type and quality of services that private providers are able to offer. Even so, the widespread perception of unfairness in the selection and treatment of public versus private providers was a matter of some concern.