Part 3: Components of the Health Funding Package

Allocation of the 2002-05 Health Funding Package.

In this Part, we look in more detail at the four components of the funding package. In particular, we discuss:

Forecast Funding Track

The FFT introduced a mechanism to enable the Ministry and DHBs to manage the increased costs associated with inflationary pressures and technology improvements.

The FFT is an automatic increase for inflation that is distributed to DHBs and to Ministry directorates for health initiatives that are funded nationally.

Inflationary pressures occur in the health sector for various reasons, such as increases in labour and other costs, and the FFT includes an adjustment to account for these pressures. The formula for calculating the adjustment is based on the Consumer Price Index (35%) and the Labour Cost Index (65%). However, we note that extra funding for increases in labour costs was provided outside the funding package.

Amount of funding package allocated to the Forecast Funding Track

Figure 3 shows the forecast and actual allocations from the funding package for the FFT. The differences between forecast and actual amounts are because of changes in the rate of inflation after the forecast had been made.

Figure 3
Allocations from the Health Funding Package for the Forecast Funding Track

Forecast 148.000 340.940 513.271
Actual 161.499 369.552 556.188

Source: Ministry of Health (2005).

Figure 4 provides a detailed summary of actual FFT allocations.

Figure 4
Forecast Funding Track allocations from 2002-03 to 2004-05

Appropriation Description 2002-03
District Health Boards (DHBs)
DHBs Forecast Funding Track (FFT) 101.310 205.052 308.853
DHBs FFT – Technology Hospitals - 41.388 62.082
Total District Health Boards 101.310 246.440 370.935
Ministry of Health co-ordinated services
Disability Support Services FFT 20.867 51.957 83.230
Health Services Funding FFT – Tagged 15.000 15.000 15.000
Health Services Funding FFT – Non-DHB Provider Technology Adjustment 13.498 28.612 42.918
National Services FFT – Clinical Services directorate 0.123 0.306 0.490
National Services FFT – Māori Health directorate 0.398 0.991 1.587
National Services FFT – Mental Health directorate 1.283 3.952 6.330
National Services FFT – DHB Funding and Performance directorate 5.480 13.480 21.578
Public Health Services Purchasing FFT 3.540 8.814 14.120
Total Ministry of Health 60.189 123.112 185.253
Total Forecast Funding Track allocations 161.499 369.552 556.188

Source: Ministry of Health (2005).

The FFT also comprises adjustments in funding for technology and a nominal reduction in funding for efficiency savings.

Technology adjustment

The technology adjustment is an additional 0.5% of eligible baseline funding1 to provide for changes arising from new technology. DHBs were initially required to show how the adjustment had been spent on new technology.

The adjustment is for changes that allow the health sector to:

  • increase service quality;
  • lower costs without reducing quality; and
  • provide a new service not previously available.

Efficiency adjustment

The purpose of the efficiency adjustment was to encourage DHBs to improve their efficiency by not fully compensating them for cost increases. The efficiency adjustment was initially set at zero which required improvements in efficiency to be reported, while allowing for all funding package money to be retained if the required improvements were made. The efficiency adjustment has subsequently been adjusted to 0.5% of eligible baseline funding for 2006-07, meaning that DHBs have their funding reduced on the assumption that efficiency or productivity improvements will compensate for this reduction in funding. DHBs were required to report on improvements in efficiency (but not those specifically related to funding package money) through the annual planning and reporting process.

Reporting requirements for technology improvements and efficiency adjustment

Each DHB was required by the Operational Policy Framework component of its Crown Funding Agreement with the Crown to report in its DAP and Annual Report how it achieved these technology and efficiency adjustments. The Crown Funding Agreement is one of the documents that set out DHBs’ accountabilities.

The Ministry did not enforce the reporting requirements for the technology adjustment or the efficiency adjustment after 2002-03. We did not see evidence of such reporting in DHB DAPs and Annual Reports we reviewed. None of the DHBs we interviewed had had their funding reduced for failing to meet reporting requirements for the technology or efficiency adjustments.

Demographics funding

Demographics funding provides for changes in the total number and structure of the population.

When demographics funding was introduced, the main demographic changes were population growth and an increase in the average age of the population. Older people tend, on average, to have a greater need for health services. Both these demographic changes, therefore, increase the demand for health services.

In addition, the population is becoming more ethnically diverse. There are increasing numbers of Māori and Pacific Islanders, who tend, on average, to have greater health needs than other New Zealanders.

Demographics funding is designed to enable funders to manage the increased demand these changes place on the health system. The Ministry and the Treasury expected the funding would be used to increase the volume of services provided, in response to the greater demand.

Who receives demographics funding?

Figure 5 summarises the actual allocation of demographics funding for the three years 2002-03 to 2004-05. We note that the Disability Services directorate received an additional $8 million in demographics funding annually from 2003-04, to address financial difficulties.

Figure 5
Demographics funding allocations from 2002-03 to 2004-05

Appropriation Description 2002-03
District Health Boards (DHBs)
DHBs Demographics funding – DHBs 69.138 166.494 270.443
Ministry of Health co-ordinated services
Disability Support Services Demographics funding – Disability Services directorate 19.103 38.813 64.117
Health Services Funding Demographics funding – Corporate and Information directorate 7.000 - -
National Services Demographics funding – Clinical Services directorate 0.065 0.181 0.314
National Services Demographics funding – DHB Funding and Performance directorate 2.648 8.122 14.132
National Services Demographics funding – Māori Health directorate 0.212 0.588 1.017
National Services Demographics funding – Mental Health directorate 0.683 2.344 4.012
National Services Demographics funding – Clinical Training Agency - - 0.215
Public Health Services Purchasing Demographics funding – Public Health directorate 1.884 5.227 9.518
Total Ministry of Health 31.595 55.275 93.325
Total demographics funding 100.733 221.769 363.768

Source: Ministry of Health (2005).

How is demographics funding calculated?

The Ministry calculates the average cost of health services by age and gender. This allows health expenditure to be expressed according to the number of people in different population groups and the amount spent for each person in these groups.

The average cost is applied to the average annual population by age and gender using population projections revised each year by Statistics New Zealand. The predicted population changes allow the Ministry to calculate the growth in cost from one year to the next. The existing level of funding from Vote: Health is multiplied by the percentage growth factor to determine the required increase in funding.

Revenue catch-up

In 2002-03 and each subsequent year, $120 million was allocated to DHBs to resolve all “outstanding hospital pricing and volume issues” (that is, to address historical issues about the amount of services that hospitals had to provide and the funding given to provide those services). We consider that the revenue catch-up was compensation for historic underfunding of hospitals.

In 2002-03, $4.05 million of the $120 million was used to correct errors in the previous year’s DHB funding, and $15.4 million was set aside to cover the diseconomies of scale in small DHBs. The remainder of the $120 million was allocated to DHBs according to their existing shares of hospital funding.

Funding for new policy initiatives

The Ministry received a significant part of the funding package to fund new policy initiatives (see “Other allocations” in Appendix 1). The largest part of that funding (more than $500 million over three years) was allocated to the Primary Health Care Strategy, for which it was the major source of funding.

The Primary Health Care Strategy is the Government’s major programme to improve New Zealanders’ health and to reduce inequalities in health services for Māori, Pacific Island, and low-income groups. The Primary Health Care Strategy is implemented by Primary Health Organisations (PHOs). A PHO is a group comprising doctors, nurses, and other health care professionals.

The Primary Health Care Strategy received a significant proportion of the total funding package (about 10% in 2002-03, 14% in 2003-04, and 17% in 2004-05). Funding for the strategy was “ring-fenced”, which meant that the funds could be spent only on the strategy. The Ministry distributed the money to DHBs, and they distributed it to PHOs. The Ministry calculates and tracks the payments to PHOs based on their enrolled populations and various performance measures.

Figure 6 shows the amounts allocated from the funding package to the Primary Health Care Strategy. Appendix 4 shows in greater detail where the Primary Health Care Strategy funding was allocated.

Figure 6
Allocations from the Health Funding Package to the Primary Health Care Strategy

53.820 167.127 300.996

Source: Ministry of Health (2005).

Funding for the Primary Health Care Strategy from the funding package was subsequently increased to advance its implementation.

Cabinet also approved $20 million for existing contracts that had no ongoing funding, $35 million during the three years for aged residential care, and $14 million for pharmaceutical and laboratory services in 2002-03 only.

We note that some new health initiatives, such as the meningococcal vaccine programme, were funded separately from the funding package.

1 In 2002-03, the hospital share was incorporated in the revenue catch-up.

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