MidCentral and Whanganui District Health Boards

Financial Review briefing to the Health Committee 2008/09 Financial Year 17 March 2010 MidCentral and Whanganui District Health Boards 1

2 Assistance to the Committee The Health Committee is conducting a financial review of the performance in the 2008/09 financial year and the current operations of the MidCentral District Health Board (MidCentral DHB) and the Whanganui District Health Board (Whanganui DHB) in accordance with Standing Order 335. The Controller and Auditor-General provides Parliament with assurance on the performance and accountability of public entities. The Office of the Auditor-General typically assists select committees with their financial reviews by providing further details on the results of the annual audit in Part A of our written briefings, and by suggesting lines of enquiry and questions relevant to the particular public entity under review in Part B of our written briefings. Our financial audits provide a high, but not absolute, level of assurance about whether a public entity s financial statements comply with generally accepted accounting practice (GAAP) in New Zealand and fairly reflect its financial position and its financial performance for the period audited. Due to the volume of transactions, audit work is planned and performed to obtain evidence on a sample basis. Auditors use professional judgement to assess the evidence and ensure there is reasonable assurance that there are not material misstatements in the financial statements (that is, differences or omissions that would affect someone s overall understanding of the financial statements). We report, in our audit opinion, only material differences or omissions that we find. The lines of enquiry we suggest are informed by the Auditor-General s mandate under the Public Audit Act 2001. This mandate covers matters of performance, accountability, waste, probity, and authority within public entities. To identify lines of enquiry, we: analyse the results of the annual audit and the accountability documents; refer to any relevant performance audit or inquiry work; and use our specific knowledge of the entity gained during the audit process and by ongoing contact with the entity. In developing the advice within this briefing document, the Office of the Auditor-General consulted with such parties as was necessary to ensure that the advice was correct. This process involved providing factual information of audit interest to the parties concerned (in either oral or written form), and obtaining confirmation of those facts, before giving advice to the Committee. The process did not involve providing to the parties concerned any contemplated or actual advice. Contact for further explanation If any member of the Committee would like further explanation or elaboration of any aspect of this briefing document, please do not hesitate to contact Colleen Pilgrim, Sector Manager, Parliamentary Group on 04-917-1541 or e-mail colleen.pilgrim@oag.govt.nz at the Office of the Auditor-General.

Summary of key issues 3 The Committee has decided to review MidCentral DHB and Whanganui DHB together. The details of the results of the 2008/09 audits of the two entities are separately provided in Part A of this briefing paper. We have aggregated the suggested lines of inquiry in Part B. Where appropriate, we have suggested addressing the question to the particular DHB. Part A: Results of the 2008/09 audit MidCentral DHB (pages 7-12) We issued an unqualified audit opinion on MidCentral DHB s financial statements with an explanatory paragraph in relation to the valuation of buildings. MidCentral DHB was concerned that the buildings values had not been fully optimised to reflect future models of health care provision. The Board requested that further work be carried out, and decided to reduce the independent valuation by five percent to reflect this. In our view, the reduction is not supported by financial reporting standards. However as the reduction is not material to the financial statements as a whole, we were able to issue an unqualified opinion. We assessed and graded MidCentral DHB s management control environment as good, and its financial information systems and controls as needs improvement. We assessed and graded its service performance information and associated systems and controls as poor/needs improvement. 1 The main matters arising out of the audit were: - procurement and revaluation issues; and - the timeliness of the review of MidCentral DHB s District Strategic Plan, which is in the process of being reviewed, along with those across the sector. Part A: Results of the 2008/09 audit Whanganui DHB (pages 13-18) We issued an unqualified audit opinion with an emphasis of matter related to serious financial difficulties on Whanganui DHB s financial statements (detailed in paragraphs 7.2 to 7.5). We assessed and graded Whanganui DHB s management control environment as good. We assessed and graded its financial information systems and controls as needs improvement, and its service performance information and associated systems and controls as poor/needs improvement. The main matters arising out of the audit were: - deteriorating financial position; - changes in senior management; - consent of the Minister of Health for, and review of, the District Strategic Plan; and - compliance with the requirements of the Crown Entities Act 2004. 1 We have provided a grade for the service performance information and associated systems and controls for the first time in 2008/09. We did not grade this aspect in our 2006/07 and 2007/08 audits (see paragraph 2.3). We took the following factors, evident across the District Health Board (DHB) sector, into account in giving a grade of poor/needs improvement : - lack of delineation between outcomes, impacts, outputs, demand, and the community health profile information; - lack of coverage of the range of DHB services beyond those focused on in the national health targets; and - lack of direct measures of service delivery, especially the lack of service quality measures.

4 Part B: Advice to the Committee The key points we cover for the Committee, and suggest questions on, are: Financial sustainability. Both MidCentral DHB and Whanganui DHB are on close watch for 2009/10 by the Ministry of Health (the Ministry) for deteriorating variance from (negative) forecast financial performance. Both are forecasting relatively large deficits ($9.880 million or just under 2% of revenue and $7.798 million or 3.8% of revenue respectively) for 2009/10. In MidCentral DHB s case, this is almost three times the deficit that was originally anticipated. The Minister of Health has required both DHBs to produce recovery plans. The Committee may wish to: - consider the respective plans of the two DHBs for managing financial pressures and to work toward financial sustainability and whether or not the recovery plans are interdependent; and - ask MidCentral about the current feasibility of its plans for funding deficits out of prior year surpluses. Governance. During 2007/08 issues were raised about the quality of obstetric and gynaecological services in Whanganui DHB. There were governance/management issues as well. In response, Whanganui DHB had two Crown monitors in place from 2008 until December 2009. The Minister has also appointed Board members in common to MidCentral and Whanganui DHBs over the last two years. The Committee may wish to discuss: - the issues which gave rise to the governance intervention by the Minister at Whanganui DHB, how they have been addressed and what effect that had; and - what other changes have been made or are being considered to the governance arrangements between the two DHBs, and how these have been reflected, subsequently, in improvements in service delivery. Collaboration and sustainability of services. MidCentral DHB and Whanganui DHB have a Foundation Agreement which sets the terms of reference for the centralalliance, which resembles the Southern Alliance between Otago and Southland DHBs. The collaboration between the two DHBs was to a large extent prompted by issues of access to quality obstetric and gynaecological services in Whanganui DHB (see above). There has also been a major regional clinical initiative, and the CEO of MidCentral DHB is lead CEO on a central region project on vulnerable services. We suggest that the Committee explore the future plans of the two DHBs, along with their regional colleagues, for maintaining quality services and full service coverage for the region. We also suggest some questions responses to quality and safety issues at each DHB; and on regional health services planning and provisions for vulnerable services such as obstetrics and gynaecology. Primary health care initiatives. MidCentral DHB s four PHOs are engaged in one of the nine Better, Sooner, More Convenient PHO initiatives. The Committee may wish to discuss with the DHB the efficiencies and improvements that are expected, and whether or not the initiative reflects the plans and approaches of the centralalliance and the regional planning group. We also cover, in Part B, achievement of targets for service delivery, with particular emphasis on diabetes management by Maori, services for older people, prevalence of smoking, and oral health of Maori children.

Overview of MidCentral DHB 5 Financial review history MidCentral DHB is the successor (2001) of MidCentral Health Limited. Some time before that, Palmerston North and Wanganui Hospitals were once under a single Area Health Board. MidCentral DHB has previously appeared before the Committee for financial review for the years 1999/2000, 2001/02, and 2006/07. DHBs objectives The DHB is responsible for the provision of health and disability services for the district. DHBs are Crown agents under the Crown Entities Act 2004, and must therefore give effect to Government policy. Governance Details about the governance structure of MidCentral DHB Board and its committees are on pages 52-64 of the 2009 annual report. Statutory information on Board members remuneration, higher salaries, termination payments and related party transactions has been disclosed on pages 88-90 of the 2009 Annual Report. MidCentral DHB has a 16.7% participatory interest in Central Regional Technical Advisory Services Ltd, a DHB joint venture with the other central region DHBs; a 100% interest in a dormant company, Enable NZ Ltd; and a 25% interest in associate company Allied Laundry Services Ltd. Size MidCentral DHB is medium-sized, being 9th out of 21 DHBs in terms of size of population served (166,350). 2 At 30 June 2009, it employed an FTE total of 2100 staff. 3 MidCentral DHB had operating revenue of $475.553 million in 2008/09 (up from $447.426 million in 2007/08), an increase of $28.127 million (6.3%). It had a net deficit of $9.949 million against an original deficit budget of $4.699 million. Services The 10 priority areas for the DHB are listed on page 2 of the Annual Report, and in more detail on pages 16-40. Key achievements against these are on pages 16-40 of the Annual Report. MidCentral DHB operates the Palmerston North Hospital and rural health centres in the Tararua, Kapiti (Otaki ward), and Horowhenua districts. There are 4 PHOs. Major projects A new women s surgical unit was opened at Palmerston North Hospital on 24 July 2009, and a new acute Medical Assessment Unit was opened on 25 August 2009. 2 3 According to figures provided by the Ministry of Health 30 June 2009. MidCentral Annual Report, page 12.

6 Overview of Whanganui DHB Financial review history Whanganui DHB is the successor (2001) of Good Health Wanganui Limited. Palmerston North and Wanganui Hospitals were once under a single Area Health Board. The DHB has previously appeared before the Committee for financial review for the financial years 1999/2000, 2000/01, 2005/06, 2006/07 and 2007/08. DHBs objectives The DHB is responsible for the provision of health and disability services for the district. DHBs are Crown agents under the Crown Entities Act 2004, and must therefore give effect to Government policy. Governance Details about the governance structure of Whanganui DHB s Board and its committees are on pages 16-19 of the 2009 Annual Report. Statutory information on Board members remuneration, higher salaries, and related party transactions has been disclosed in pages 60-65 of the Annual Report. The DHB has a 16.7% participatory interest in Central Regional Technical Advisory Services Limited, a DHB joint venture with the other central region DHBs, and a 25% shareholding in Allied Laundry Services Limited. Size Whanganui DHB is a small DHB, being 17th out of 21 DHBs in terms of size of population served (63,328). 4 At 30 June 2009, it employed an FTE total of 811 staff. Whanganui DHB had operating revenue of $194.500 million in 2008/09 (up from $179.625 million in 2007/08), an increase of $14.875 million (7.6%). It had a net deficit of $9.868 million against an original deficit budget of $9.790 million. Services The district health needs assessment was updated in conjunction with the District Strategic Plan 2005-2010. Strategic directions and health gain priorities are set out on pages 51-53 of the 2008-2011 Statement of Intent (SOI), and the output targets are on pages 54-70. Key achievements against these are on pages 68-88 of the Annual Report. Population characteristics are described on pages 10-12 of the 2008/09-2010/11 SOI. Whanganui DHB operates Whanganui hospital and three rural health centres Rangitikei, Taihape and Waimarino. It has two PHOs Te Oranganui Iwi Health Authority PHO, and Whanganui Regional PHO. Major projects The major Health Services Redesign project was due for completion in April/May 2009, with an estimated budget overrun of $3.75 million. The project commenced in 2003, and was completed in the 2009 financial year. 4 According to figures provided by the Ministry of Health 30 June 2009.

Part A (MidCentral DHB): Results of the 2008/09 audit 7 1 Audit opinion 1.1 We issued an unqualified audit opinion on MidCentral DHB s financial statements with an explanatory paragraph in relation to the valuation of buildings. 2 Environment, systems and controls for measuring financial and service performance 2.1 Our conclusions on MidCentral DHB s management control environment, systems, and controls for measuring financial and service performance, for the year ended 30 June 2009, are set out in the table below. 2.2 We made our conclusions in the context of our work in forming an opinion on the financial and service performance statements. The purpose of commenting on the underlying environment, systems, and controls is to highlight areas for improvement identified during the audit. The grades assigned for 2008/09 reflect our recommendations for improvement as at 30 June 2009. This is not an assessment of overall management performance or of the entity s effectiveness in achieving its financial and service performance objectives. (See Appendix 1 for an explanation of the grading scale and underlying assumptions.) 2.3 We have provided a grade for the service performance information and associated systems and controls for the first time in 2008/09. We did not grade this aspect in our 2006/07 and 2007/08 audits because we have been updating the standards and methodology our auditors apply in auditing this area in response to the Crown Entities Act 2004, and carrying out reviews of public entities current performance information frameworks and reporting. We wanted to give public entities time to respond to the recommendations for improvement we have made resulting from our reviews and updated expectations of auditors. Management control environment 2008/09 - Good Improvements would be beneficial and we recommend that MidCentral DHB address these. 2007/08 - Good Deficiencies identified in 2007/08 have been resolved in part. Comment Significant improvements have been made by MidCentral DHB in 2008/09 to resolve the following issues we noted in 2008: While improvement had been made, the finance teams of the Funder and Provider Divisions continue to be run independently, with limited review by a central finance function. The group finance function did not appear to have a detailed understanding of material accruals made by each division, and some accruals lacked supporting

8 documentation. We identified a number of errors in payroll accruals that were due to a misunderstanding of payroll information between the payroll division and the finance division. We also believe that there is room for improvement in the quality of information provided and the level of review performed. Other than the issue mentioned above, we found no deficiencies in the areas we reviewed during 2008/09. Financial information systems and controls 2008/09 Needs improvement 2007/08 Needs improvement Comment Payroll Improvements are necessary and we recommend that MidCentral DHB should address these at the earliest reasonable opportunity. Deficiencies identified in 2007/08 have not been resolved. Changes can be made directly to the payroll database using a query analyser. We have recommended that, if the query analyser continues to be used as a tool and to update payroll master files, then an exception report or audit trail needs to be activated and any changes made should then be reviewed. Change Control We recommended that MidCentral DHB always: performs a full go-live test on the development/test environment of large implemented systems before migration into the production environment; and develops a roll-back plan in case of unexpected exceptions during migration and early production runs. We understand that there are cost and logistical constraints that must be overcome in order to implement this recommendation, but adherence to best practices could potentially save MidCentral DHB from dealing with major problems in the future. Procurement During 2007/08 there were two in-depth reviews completed on MidCentral DHB s procurement processes. One was done by Ernst & Young and we performed the other. The findings were largely in agreement and indicated a number of deficiencies, including: no current central database of contracts, which has resulted in the following weaknesses: lack of rigour in contract management; contracts not able to be located when requested as part of a sample reviewed during this phase of project; lack of tracking of amendments to contracts; lack of understanding of how invoices issued match contractual arrangements; contracts in place that may no longer be required or should be amended due to changes in MidCentral DHB; no review of open-ended contracts that roll over as a matter of course; no formal vendor review process to ensure performance for key contracts; and unclear terms and conditions for roll-over contracts, with no pricing formula written

into long-term contracts. no clear procurement or supplier strategy; lack of formal contract management systems and a silo nature of procurement arrangements; and potential large amount of expenditure with external suppliers that is not under formal contractual arrangement, (relatively light justifications for some of these arrangements). Other than the issues mentioned above, we found no deficiencies in the areas we reviewed during 2008/09. Service performance information and associated systems and controls 2008/09 - Poor/needs improvement Major improvements are necessary across the sector and should be addressed at the earliest opportunity. 2007/08 Not graded Deficiencies we identified in 2007/08 have not been resolved. Comment The following comments are based on our review of the 2009 2012 Statement of Intent (SOI) and forecast non-financial performance reports and their supporting systems and controls, and our audit of the 2008/09 Statement of Service Performance (SSP) and its supporting systems and controls. 9 Statement of Intent We have performed a detailed review of the 2009-2012 Statement of Intent (SOI) focusing on: medium-term outcomes (including the relationship between these and overall national health goals, priorities and strategies); measures and standards of these outcomes; outputs (third party services supplied by the DHB and other service providers to meet the medium-term outcomes); measures and standards of these outputs; and systems in place for developing the SOI and measuring forecast SSP. We note the following: outcomes do not always identify what change in state or condition is being sought by MidCentral DHB; the performance story is not unified as there is no clear linkage between the inputs, outputs, impacts and outcomes; there is no reconciliation between the outcomes, overall health priorities, Minister s priorities, national health targets and local communities specific health profiles, needs assessments and initiatives; and there are no performance measures, targets or baseline data included to measure and monitor the overall performance of MidCentral DHB in relation to these outcomes and/or priorities. The outputs of MidCentral DHB have been grouped together in four output classes which differ from the three output classes used in previous years. We noted the following: there is an inconsistency between the output classes used for financial and nonfinancial information;

10 outputs and output measures do not appear to cover all significant services of MidCentral DHB or the majority of MidCentral DHB s budget; output measures noted for outputs are all quantitative, with no qualitative measures; and output measures noted for outputs included in the SOI do not appear to cover the full output service being provided. DHB systems No significant weaknesses were noted with MidCentral DHB s systems for managing the accountability information except for inconsistencies between MidCentral DHB s accountability documents (District Strategic Plan, District Annual Plan and SOI). These inconsistencies relate to the timing of reviews and updates of the documents, and will be corrected in due course. Consistent with the previous year, the SOI does not fully comply with the requirement by the Crown Entities Act 2004 (CEA 2004) for the medium term component (s 141(1)(f)) and forecast SSP (section 142(2)(a)) given the weaknesses in the document noted above. In addition, the SSP does not fully comply with NZ generally accepted accounting practice in that MidCentral DHB s annual financial statements have not described and disclosed the outputs as well as the cost of the output, the outcomes to which the output intends to contribute, and the projected and actual service performance of the output. We recommend that MidCentral DHB continues to work on implementing a formal performance reporting framework to address the major weakness noted above. The main areas to be focussed on within this framework would be the outputs or service relating to third parties, and the performance measures and targets used to assess the output delivery performance of MidCentral DHB to ensure that services are being delivered as intended. The framework should include good linkage and relationships between the outcomes, priority areas, operating activities, and outputs of MidCentral DHB. Other than the issues mentioned above, and based on the areas we reviewed during 2008/09, we found that appropriate policies, systems, and controls were in place and appeared to be operating effectively. 2.4 In respect of recommended improvements to MidCentral DHB s financial and service performance information, the Committee may wish to ask: We note the Auditor-General s recommended improvements to MidCentral DHB s management control environment, financial information systems and controls, and service performance information and associated systems and controls. What action has been taken and/or is planned to be taken to address recommendations in these areas?

3 Significant matters of audit interest 11 3.1 We noted the following significant matters of interest from our audit of MidCentral DHB. Valuation of Land and Buildings 3.2 The land and buildings of MidCentral DHB were revalued as at 30 June 2009 by Colliers International NZ Limited. The fair value was estimated to be $138.4 million, $25.1 million higher than the carrying value prior to revaluation. MidCentral DHB engaged a second valuer to peer review Collier s valuation to ensure that the valuation was reasonable and had considered all the factors. The high level review performed by the second valuer identified a number of areas that need to be revisited. MidCentral DHB was concerned that the buildings values had not been fully optimised to reflect future models of health care provision. As a result, MidCentral DHB decided to reduce the independent valuation performed by Collier s by five percent to reflect this. In our view, the reduction is not supported by financial reporting standards. However, as the reduction is not material to the financial statements as a whole, we were able to issue an unqualified opinion. Procurement - Update on 2008 findings 3.3 Further to our observations on procurement above, at 2.3, we note that MidCentral DHB has taken over implementing the procurement strategy from its consultants. A steering committee has been formed, which meets on a monthly basis to discuss the status and implementation of the procurement strategy. 3.4 The implementation process has four key areas: Contract management system: This was expected to go live on 3 November 2009. This will ensure that a system is in place that will see all contracts centrally administered, which will enable oversight of contract management and procurement processes. Policy: This relates to delegations of authority which are being reviewed. Completion was expected by 4 September 2009. Procurement and inventory management: This process involves reviewing all material (that is stock on hand) and ensuring that related data is appropriate and accurate. Completion was expected by 31 December 2009. Requisition self service: All purchase requisitions will be completed online and will be automatically forwarded on to the appropriate individuals for approval. Hence, the approval process will be automatic. Completion was expected by 31 December 2009. 3.5 Overall, procurement strategy was still a work in progress as at 30 June 2009, with the strategy expected to be fully completed by 31 December 2009.

12 Collaboration with other district health boards 3.6 MidCentral DHB is working with five other DHBs in the central region to address concerns over the clinical and financial sustainability of hospital services. In 2007/08 an overarching regional clinical services plan (RCSP) was established to guide the DHBs efforts over the next 10-15 years. The central region DHBs have been collaborating regionally for some time. The first regional structures were the CEO group, Regional General Managers Planning and Funding Steering Group, and the shared service agency, Central TAS. The main functions were oversight of regional and tertiary contracts. 4 Legislative compliance 4.1 We reviewed the systems and procedures employed by MidCentral DHB to identify and comply with legislative requirements. No issues arose that need to be drawn to your attention other than the two matters noted below. 4.2 Section 38(1)(c) of the New Zealand Health and Disability Act 2000 requires the District Strategic Plan (DSP) to be reviewed every three years. We understand that all DHB DSPs are due for their three-yearly review and are in the process of being reviewed. However, changes under way in the sector are such that DHBs are unable yet to make the changes to their DSPs that may be necessary. The Ministry has advised us that the sector is working through the change process, and that the reviewed DSPs should be available in about October/November 2010. In the meantime, no change has been made to MidCentral DHB's DSP. 4.3 Section 156(1)(a) of the Crown Entities Act 2004 requires DHBs to forward their financial statements to the Auditor-General for audit within three months after the end of each financial year. While MidCentral DHB s financial statements were received within the three month period, having to resolve the building s valuation issue resulted in the financial statements not being finalised within the four month period required by section 156(2)(b).

Part A (Whanganui DHB): Results of the 2008/09 audit 13 5 Audit opinion 5.1 We issued an audit report that contained an unqualified opinion with an emphasis of matter related to serious financial difficulties. These are detailed in paragraphs 7.2 to 7.5. 6 Environment, systems and controls for measuring financial and service performance 6.1 Our conclusions on Whanganui DHB s management control environment, systems, and controls for measuring financial and service performance, for the year ended 30 June 2009, are set out in the table below. 6.2 We made our conclusions in the context of our work in forming an opinion on the financial and service performance statements. The purpose of commenting on the underlying environment, systems, and controls is to highlight areas for improvement identified during the audit. The grades assigned for 2008/09 reflect our recommendations for improvement as at 30 June 2009. This is not an assessment of overall management performance or of the entity s effectiveness in achieving its financial and service performance objectives. (See Appendix 1 for an explanation of the grading scale and underlying assumptions.) 6.3 We have provided a grade for the service performance information and associated systems and controls for the first time in 2008/09. We did not grade this aspect in our 2006/07 and 2007/08 audits, as we have been updating the standards and methodology our auditors apply in auditing this area in response to the Crown Entities Act 2004, and carrying out reviews of public entities current performance information frameworks and reporting. We wanted to give public entities time to respond to the recommendations for improvement we have made resulting from our reviews and updated expectations of auditors. Management control environment 2008/09 Good Improvements would be beneficial and we recommend that Whanganui DHB address these. 2007/08 Good Deficiencies identified in 2007/08 have been resolved in part. Comment No significant deficiencies have been noted in this area during our 2008/09 audit. We have identified minor improvements that should be made as follows: Annual leave There are a large number of employees with high annual leave owing at year-end. We recommended that leave owing should be subject to regular monitoring, and employees should be encouraged to take the leave available. We understand that this is

14 a management priority. Payroll cycle Payroll exception reports need to be reviewed by a person independent of the payroll system. Currently, these reports are being reviewed by personnel who can make changes to the system. We recommended that payroll exception reports should be reviewed by personnel independent of the payroll process, to ensure that all changes are valid and accurate. Expenditure cycle Some improvements relating to segregation of duties need to be put in place; in particular, concerning the review and approval of payments and changes to the supplier masterfile. Accounts payable personnel have access to make changes to the supplier masterfile and the ability to review and approve payments. We recommended that appropriate segregation of duties be maintained. Reconciliation review Although reconciliations for the funder division are prepared, they are not always being reviewed. We recommended that the funder reconciliations should be reviewed by a person independent of the process to ensure that key reconciliations are prepared, and that all differences are investigated in a timely manner. Other than the issues mentioned above, we found no deficiencies in the areas we reviewed during 2008/09. Financial information systems and controls 2008/09 Needs improvement 2007/08 Needs improvement Comment Payroll control deficiency Improvements are necessary and we recommend that Whanganui DHB should address these at the earliest reasonable opportunity. Deficiencies identified in 2007/08 have been resolved in part. Consistent with our previous year s finding, we identified a significant control deficiency in the payroll processing environment run by MidCentral DHB for Whanganui DHB. Changes can be made directly to the payroll database using a query analyser. These changes are not recorded or included in any exception reporting, and are therefore not monitored by management. We have recommended that, if the query analyser continues to be used as a tool to update payroll masterfiles, then an exception report or audit trail needs to be activated by the system to highlight any changes made. We also recommend that these should then be reviewed by a person independent of the payroll system, including making sure that changes made agree with supporting documentation. Lack of independent review of reconciliations is also evident in some other areas. Other deficiencies We have continued to note minor weaknesses in the financial information systems and controls areas, and we recommended that the following areas be addressed: there is currently little evidence of review of the IT work that the contractor is carrying out regarding the new server implementation; access to key computer infrastructure locations needs to be restricted, with passwords aligned to the IT policy; and

there are a number of IT policies that are outdated and need to be reviewed on a regular basis. We also recommended improvements to the system for analysing sensitive expenditure. The current general ledger system (Olympic) used by Whanganui DHB has been replaced with JDE, which is aligned with MidCentral DHB s system. The Olympic system was very old, with limited functionality (reporting tools). The new system came into effect on 1 July 2009. A number of the issues we have identified should largely be resolved once the new system is operating. Service performance information and associated systems and controls 2008/09 Poor/needs improvement Major improvements are necessary across the sector and should be addressed at the earliest opportunity. 2007/08 Not graded Deficiencies identified in 2007/08 have been resolved in part. Comment The following comments are based on our review of the 2009 2012 Statement of Intent (SOI) and forecast non-financial performance reports and their supporting systems and controls, and our audit of the 2008/09 Statement of Service Performance (SSP) and its supporting systems and controls. We have performed a detailed review of the 2009 2012 SOI focusing on: medium-term outcomes (including the relationship between these and overall national health goals, priorities, and strategies); measures and standards of these outcomes; outputs (third-party services supplied by Whanganui DHB and other service providers to meet the medium-term outcomes); and measures and standards of these outputs. Further work is required by Whanganui DHB on its performance reporting framework to address the major weakness noted below. We have provided recommendations for improvement to Whanganui DHB as part of this review. Medium-term outcomes measures and standards There are three overall strategic goals and four medium-term desired outcomes included in the SOI that the DHB seeks to achieve. We have noted that: the performance measures for the medium-term outcomes need to be clarified to ensure that they cover the overall performance of Whanganui DHB as opposed to just part of it; there is no reconciliation between the outcomes to overall health priorities, Government priorities, and local communities specific health profiles, needs assessments, and initiatives; and there are no targets or baseline data included against which to measure and monitor the overall performance of Whanganui DHB in relation to the outcomes. Annual component outputs, measures, and standards Various parties working in the health sector proposed four new output classes for 2009/10. Whanganui DHB has not used those output classes, but the forecast SSP section does include sub-output classes where Whanganui DHB has further aggregated the outputs into, in effect, the four new output classes. We noted: the SOI does not explain clearly and unambiguously the services that Whanganui DHB delivers directly, the services it funds and is responsible/accountable for, and the services it funds but has little or no responsibility for the standard of delivery; outputs and output measures do not appear to cover all significant services of 15

16 Whanganui DHB or the majority of its budget; output measures noted for outputs are all quantitative, with no quality measures; there is no linkage between the intervention logic described in the SOI and the outputs or output classes; and output measures noted for outputs included in the SOI do not appear to cover the full output services being provided. DHB systems No significant weaknesses were noted with the DHB systems in this area. Whanganui DHB has identified several areas that it is actively improving, including implementing clinical indicators to regularly report against, collecting more relevant data in the primary and community care areas, and improving its programme of review and evaluation to help determine its future strategy. Conclusion Consistent with the prior year, the SOI does not fully comply with the requirements of the Crown Entities Act 2004 for the medium-term component (section 141(1)(f)) and forecast SSP (section 142(2)(a)), given the weaknesses in the document noted above. The SOI also does not fully comply with generally accepted accounting practice in New Zealand and, in particular, NZ IAS 1: Presentation of Financial Statements. Paragraph 126.1 of this standard requires the outputs to be described and disclosed in the annual financial statements, as well as the cost of the output, the outcomes to which the output intends to contribute, and the projected and actual service performance of the output. 6.4 In respect of recommended improvements to Whanganui DHB s financial and service performance information, the Committee may wish to ask: We note the Auditor-General s recommended improvements to Whanganui DHB s management control environment, financial information systems and controls, and service performance information and associated systems and controls. What action has been taken and/or is planned to be taken to address recommendations in these areas? 7 Significant matters of audit interest 7.1 We noted the following significant matters of interest from our audit of Whanganui DHB: Financial challenges: 7.2 We issued an audit report that contained an unqualified opinion with an emphasis of matter related to serious financial difficulties. The financial position of Whanganui DHB has deteriorated over the past few years, and, as anticipated in the District Annual Plan (DAP), it incurred a deficit of $9.9 million in the year ended 30 June 2009. Whanganui DHB continues to run at a deficit as costs continue to rise; particularly personnel-related costs. Personnel costs exceeded $68 million in 2008/09. The cost of funding the health services redesign project has also affected the financial performance of Whanganui DHB.

7.3 Whanganui DHB s DAP continues to forecast a deficit for the next three years. The DAP for 2009/10 was signed off in August 2009. However, the sign-off did not signal approval for the assumptions of the forecast figures over the next three years. The Minister emphasised that he would like to see a financial recovery plan demonstrating how the DHB will achieve a breakeven position in 2012/13. The Minister has approved a financial recovery plan as Whanganui DHB s pathway to break even, and as the basis for its 2010/11 DAP. 17 7.4 Equity support is provided from the Crown Health Financing Agency, and a letter of support has been obtained from the Ministers of Finance and Health to ensure that Whanganui DHB can continue to operate as a going concern for the next 12 months. 7.5 Whanganui DHB does not have a Ministerially-approved District Strategic Plan (DSP) in place. This is important, as the DAP (and subsequently the SOI) need to be consistent with the DSP; especially the health needs assessment component of it. Whanganui DHB is working with the Ministry of Health (the Ministry) towards completing the DSP by October/November 2010. We have been told by the DHB that it is discussing with MidCentral DHB the possibility of preparing joint strategic documents. Changes in senior management: 7.6 During the course of the 2008/09 year, there have been several significant changes in senior management as noted below: Memo Musa (CEO) resigned on 26 March 2008, effective 31 July 2008. Julie Patterson (CEO) commenced as Interim CEO on 4 August 2008, and was appointed CEO on 6 October 2008. The Acting Chief Financial Officer resigned on 5 December 2008. The General Manager - Corporate Services commenced in this role on 8 December 2008. The General Manager Public Hospital and Health Services resigned as of 1 August 2008, and the new General Manager Public Hospital and Health Services commenced on 7 July 2008. The Quality and Risk Manager position was made redundant on 13 February 2009, and a new position of General Manager Patient Safety and Service Quality established. 8 Legislative compliance 8.1 We reviewed the systems and procedures employed by Whanganui DHB to identify and comply with legislative requirements. No issues arose that need to be drawn to your attention other than the three matters noted below. 8.2 During the course of our audit, we identified that the DHB did not fully comply with the requirements of the Crown Entities Act in its reporting of service performance (see the table above) and also noted the following legislative breaches:

18 Board fees are not being paid in accordance with the fees framework, as required by section 47(1)(a) of the Crown Entities Act 2004 (we noted instances where board members were paid for meetings they had not attended). Whanganui DHB has not obtained the consent of the Minister of Health for its District Strategic Plan, nor reviewed it every three years, as required by sections 38(3)(c) and 38(1)(c) of the New Zealand Public Health and Disability Act 2000. We understand that all DHB DSPs in the sector are due for their 3-yearly review and are in the process of being reviewed. However, changes under way in the sector are such that DHBs are unable yet to make the changes to the DSP that may be necessary. We are advised by the Ministry that the sector is working through the change process, and that the reviewed DSPs (and in this case, the consented DSP), should be available in about October/November 2010. Whanganui DHB has amended targets in its SSP without approval from the Board. This is, however, disclosed in the Annual Report.

Part A: Results of the 2008/09 audit general finding 19 9 Health sector accountability arrangements 9.1 In carrying out a review of public sector accountability documents, we have reached the view that the 2009 2012 SOIs of DHBs are not as well developed as similar accountability documents in other parts of the public sector. As a consequence, we have ranked DHB SOIs at the lower end of the assessment scale (with a grade of poor/needs improvement). 9.2 We recognise that DHBs are working across the sector to improve the quality of SOIs. However, the quality of SOIs is also affected by the complexity of the DHB accountability framework. DHBs are required to produce more accountability documents than other Crown entities, notably the District Strategic Plan, District Annual Plan, and SOI. An intention of the Crown Entities Act 2004 (the Act) was that Crown entities would produce good quality general purpose information for Parliament and the public. In their current form, it is our view that none of these DHB accountability documents (individually or collectively) fulfil this intention of the Act. 9.3 Our particular concerns about MidCentral and Whanganui DHBs service performance reporting are set out in detail in the two tables above (2.3 and 6.3). We have provided the Ministry and the central agencies with a summary of our general findings on common features and areas for improvement in DHBs SOIs. In our view, the Ministry also needs to give attention to health sector accountability arrangements generally, in order to assist the sector in moving towards a simplified and more focused accountability framework.

20 Part B: Advice to the Committee 10 Financial sustainability 10.1 Both MidCentral DHB and Whanganui DHB have been in deficit for some time: Whanganui DHB for the whole of the period 2002-2009, and MidCentral DHB for 2002-2003 and 2007-2009 (see Appendix 3). 10.2 Both DHBs had a sizeable deficit as at 30 June 2009 which in both cases was more than double those in 2007/08. However, the 2008/09 deficit represents a different proportion of total revenue, in each case: In MidCentral DHB s case, the deficit was $9.949 million (that is, 2.1% of revenue) against a budgeted 2008/09 deficit of $4.699 million. The 2007/08 deficit was $4.089 million. 5 Whanganui DHB has an underlying operating deficit (see 10.3). Its deficit as at 30 June 2009 was $9.868 million (that is, just over 5.0% of revenue), against a budgeted deficit for 2008/09 of $9.790 million. The deficit for 2007/08 was $4.654 million. 6 10.3 Whanganui DHB had a poor working capital situation and an overdraft of $3.5 million at year end. A letter of comfort was obtained from the Ministers of Health and Finance to support the assumption that Whanganui DHB is still a going concern. 10.4 MidCentral DHB did not require a letter of comfort for 2008/09: although forecasting a deficit of $3.5 million in its signed off 2009/2010 DAP, MidCentral DHB had cash of $17.6 million and current investments of $8.5 million at year end which it could access to cover any deficits. 10.5 As at 31 December 2009, the monitoring regime for the DHBs was as follows: MidCentral DHB was on standard monitoring by the Ministry. However, there is a deteriorating position relative to its original forecasts; and Whanganui DHB was on intensive monitoring 7 by the Ministry, and there were two Crown monitors through 2008/09 and until 31 December 2009. We are aware that the Crown Health Financing Agency regards Whanganui DHB as being at risk because of its negative operating cash flows and its reliance on deficit support in the medium term. 10.6 We understand that DHBs regard personnel costs as being critical to their financial performance, with multi-employer agreements a major cost-driver. 5 6 7 MidCentral DHB Annual Report page 42. Whanganui DHB Annual Report page 26. See Appendix 2.

10.7 Both MidCentral DHB and Whanganui DHB are currently on close watch by the Ministry of Health (the Ministry) for deteriorating variance from forecast financial performance for 2009/10: 21 As at 31 December 2009, MidCentral DHB was forecasting a 2009/10 deficit of $9.880 million or just under 2% of anticipated revenue. This is almost three times the $3.539 million deficit that was anticipated for 2009/10 in the 2009-2012 SOI. 8 As at 31 December 2009, Whanganui DHB was forecasting a 2009/10 deficit of $7.798 million or 3.8% of anticipated revenue, against the originally anticipated $7.634 million deficit for the year. 10.8 The Minister of Health has required both DHBs to produce recovery plans: We understand that Whanganui DHB produced a remediation plan in late 2009 which it calls Safely Reducing Costs, and which forecasts a return to break-even in 2012/13 in line with the current District Annual Plan. We also understand that MidCentral DHB has more recently developed its recovery plan. In its 2009-2012 SOI, MidCentral DHB budgeted for an operating deficit of $3.539 million, which it intended to cover out of previous surpluses, returning to break even in 2010/11. 9 However, the DHB is currently performing well below this (see 10.7 above). 10.9 The Committee may wish to consider current performance and the respective plans of the two DHBs to manage financial pressures and work toward financial sustainability. 10.10 The Committee may wish to ask each of the DHBs: How is the DHB performing against budget for 2009/10 year to date, and what is the current forecast for the DHB s financial performance in 2009/10 and out years? What are the key drivers of the deficit performance of each of the two DHBs? What plans do MidCentral DHB and Whanganui DHB have for recovery to breakeven financial performance, and when will break-even be reached? How sustainable is the planned recovery? Please outline to what extent, if any, the financial recovery of the two DHBs are interdependent? If so, to what extent have the two DHBs worked together on their recovery plans? Have MidCentral DHB and Whanganui DHB considered in their recovery plans options for efficiencies from merging of operations and, if so, what are those options? 8 9 MidCentral DHB SOI page 33. MidCentral DHB SOI pages 5 and 33.

22 10.11 The Committee may wish to ask MidCentral DHB: We note that MidCentral DHB anticipated achieving break-even in 2008/09 and 2009/10 before using prior year surpluses in order to fund planned expenditure in areas such as mental health services. However, the deficit in 2008/09 was well above that anticipated and we understand that MidCentral DHB is tracking negative to budget for 2009/10. Does MidCentral DHB still anticipate using prior year surpluses to achieve breakeven in 2009/10, and possibly out years? If not, does the DHB have cash and investments sufficient to cover the deficit(s) that are now anticipated? Is MidCentral DHB on track for meeting its commitment to spend its ring-fenced mental health funding? 11 Governance Crown Monitors Whanganui DHB 11.1 In April 2008, in response to quality and safety issues at the DHB, 10 the Minister took intermediate governance action to complement the intensive monitoring already in place, by appointing two Crown Monitors (Phillip Meyer and Dr Robert Logan) to the Whanganui DHB Board. 11 The Crown Monitors brought governance and clinical experience to the Board. 11.2 The appointments of the Crown Monitors ceased at the end of December 2009. The DHB, however, remains on the Ministry s intensive monitoring list. 11.3 An exacerbating factor in governance/management relationships was that the CEO resigned 31 July 2008, and subsequently took legal action against the Board and one particular member of it in respect of breach of his settlement agreement. 12 11.4 The Committee may wish to ask Whanganui DHB: What improvements were hoped for as a result of the intermediate governance action at Whanganui DHB, by appointing two Crown Monitors, and were these achieved? What else has Whanganui DHB done to ensure that improvements are maintained? In what ways does the Ministry s intensive monitoring regime support the required governance improvements at Whanganui DHB, and what other improvements does it support? 10 11 12 Particularly certain obstetric and gynaecological patient safety issues (see 12.1 ff). Whanganui DHB Annual Report page 12. See http://www.nzherald.co.nz/whanganui-dhb/news/article.cfm?o_id=348&objectid=10545187.

Board members in common 23 11.5 In late 2007, the then Minister of Health appointed Ormond Stock as a Board member in common between the two DHBs (and Deputy Chair at Whanganui), to help further support collaboration and co-operation between these DHBs. 13 Ormond Stock resigned from the Board(s) in late 2009. 11.6 In November 2009, the Government announced new joint appointments to the two DHBs, among others, as part of its plan to strengthen DHB collaboration and add financial expertise. From January 2010, Dr David Warburton, then Deputy Chair of Whanganui DHB was appointed to MidCentral DHB, and Mr Phil Sunderland, then a member of MidCentral DHB, was appointed to Whanganui DHB, and also became Chair of MidCentral DHB, following the statutory retirement of Mr Ian Wilson. 11.7 It was the Minister s belief that having dual appointees on neighbouring boards would help to break down silo thinking and assist DHBs to have a better knowledge of each others' services and issues. He also said that the Government will not forcibly merge DHBs, however we need them to work a lot more closely together, and cross-board appointments will help achieve that. 14 11.8 The Committee may wish to explore the extent to which changes in governance arrangements has resulted not only in closer working relationships, but also in moreeffectively delivered services across the two DHBs. 11.9 The Committee may wish to ask: We note the initiative of appointing Board members in common to MidCentral and Whanganui DHBs, with the intention that they work more closely together. In what ways have the arrangements been successful in achieving closer collaboration and a better knowledge of each others' services and issues? In what ways has a better knowledge of each others' services and issues been reflected in service improvements? 12 Quality and safety issues Whanganui DHB 12.1 Quality and safety issues have been of considerable concern in Whanganui DHB, resulting in investigation by the Health and Disability Commissioner. 15 12.2 Serious concerns arose at Whanganui DHB about the quality of obstetrics and gynaecology services. The Committee has reported before on these and the related workforce issues. 16 These included: credentialing and supervision, reliance on overseas-trained doctors and locums, excessive work-hours and complaints management. 13 14 15 16 See http://www.beehive.govt.nz/node/31599. See http://www.beehive.govt.nz/release/better+collaboration+between+dhbs+expected. See http://www.hdc.org.nz/files/hdc/publications/whanganui-dhb-feb08.pdf. See also Over the past few years Wanganui Hospital has had a troubled time with paediatrics and obstetrics crises that forced pregnant women to go to other hospitals, and administrative errors that left patients without referrals. In his report into the activities of Dr Roman Hasil, who bungled six tube-tying operations, the Health and Disability Commissioner said that there were problems with hospital management. See http://www.nzherald.co.nz/whanganui-dhb/news/article.cfm?o_id=348&objectid=10545187. 2006/07 Financial Review of Whanganui District Health Board, pages 2-6.

24 12.3 Regional and inter-district planning has also addressed issues of workforce and service availability. The Committee may wish to discuss with the two DHBs what initiatives have been taken, and whether or not they are working effectively to meet the specialist needs in the Whanganui and MidCentral districts. 12.4 Whanganui DHB has put a particular emphasis on patient safety and quality processes, regarding it as its major focus in 2008/09. It has established a new position of General Manager, Patient Safety and Service Quality. 17 12.5 The Committee may wish to discuss the nature and effectiveness of Whanganui DHB s initiatives in this area: We note the establishment of the position of General Manager, Patient Safety and Service Quality. How effective is that initiative proving to be? What other regional and inter-district initiatives has Whanganui DHB taken, and does it intend to take: - to address major quality and safety issues in its delivery of services? - to ensure sustainable access to vulnerable specialist services, and in particular, obstetrics and gynaecology services? Are these proving to be effective? If not, what options are available to address the problem? MidCentral DHB 12.6 Quality and safety issues have also been raised at MidCentral DHB in particular, in respect of facilities for older people. In response to a particular incident, the DHB says that it took a zero tolerance approach to any failure to meet the required standards of care provided in rest homes, and undertook monitoring initiatives. 12.7 The DHB has also commenced an Optimising the Patient Journey initiative, to address its quality aims. 12.8 The Committee may wish to ask MidCentral DHB: What arrangements has MidCentral DHB in place to address quality and safety issues in its delivery of services for older people, and how effective have these been? What other quality initiatives has MidCentral DHB undertaken and does it intend to undertake? 12.9 The Committee may wish to ask the two DHBs: What, if any, joint initiatives have MidCentral and Whanganui DHBs undertaken to improve quality and safety of health and disability services to their respective populations? 17 Whanganui DHB Annual Report, pages 5 and 6.

13 Collaboration and sustainability of services 25 Commitment to collaborative planning 13.1 Collaboration between the two DHBs has to a large extent been prompted by issues of limited access to quality specialist services by people in Whanganui DHB s district. 13.2 In 2008, the Committee was told by Whanganui DHB that the DHB was addressing its serious recruitment problems by collaborating with nearby MidCentral DHB, with some patients receiving treatment in Palmerston North. At that time, the DHB was also looking at "regionalising" other at-risk ( vulnerable ) services in collaboration with MidCentral. 13.3 We understand that merger has been mentioned by Whanganui DHB in its recovery plan options. Such an approach has not, we understand, been mentioned in MidCentral DHB s recovery plan, which involves largely greater working together both nationally and regionally. 13.4 MidCentral DHB and Whanganui DHB now have a centralalliance Foundation Agreement (the Agreement) which sets the terms of reference for a central region alliance (centralalliance). It resembles the Southern Alliance between Otago and Southland DHBs. Under the Agreement, the DHBs: maintain their autonomous status; collaborate further to develop: - a consistent, combined districts approach to planning health and disability services; and - an integrated approach to common strategic and operational responsibilities. 13.5 The aim the Agreement is to achieve improved and equitable health outcomes for all communities of the combined districts. Among the Agreement s intentions are: separate governance of the DHBs, but with the CEOs and Chairs meeting regularly as the Combined Districts Escalation Group; alignment and possible combining of the statutory advisory committees; combined districts management structure; and creation of regional staff roles. 18 13.6 The centralalliance Road Map (the Road Map) provides a medium-term (2009 to 2012) plan for implementation of the four work-streams that comprise centralalliance: clinical, funding and planning, support services, and governance. 18 See centralalliance Foundation Agreement, pages 1 and 8.

26 13.7 In the three years of the Road Map, the focus is mainly on planning, and setting governance and other structures in place. The third year also envisages some implementation of service changes for example: shared elective services; sub-regional service arrangements; joint appointments of regional medical officers, and advisors (e.g. a shared Director of Allied Health); common training programmes; common management of corporate services, and purchasing arrangements; common health management information services; and common health needs assessment and DAP. 13.8 The Committee may wish to ask: What are the key governance, management and clinical elements of the centralalliance? What progress has been made toward achieving service changes in the areas of: shared elective services; sub-regional service arrangements; joint appointments of regional medical officers, and advisors; common training programmes; common management of corporate services; and purchasing arrangements; common health management information services; and common health needs assessment and District Annual Plan? What efficiencies have been gained or are expected to be gained in 2009/10 and out years? Regional health services planning 13.9 The two DHBs are also involved in initiatives across the region, the main one of which is the Regional Clinical Services Plan (RCSP), which involves Capital & Coast, Hawke's Bay, Hutt Valley, MidCentral, Wairarapa and Whanganui DHBs. 19 13.10 A key concern in such planning is to focus on vulnerable services. The CEO of MidCentral DHB is lead CEO on a central region project (through the shared service agency, Central TAS), on vulnerable services. 19 See Regional Work Programme update for Chairs and CEOs Report dated 25 May 2009 prepared in relation to the Regional Clinical Services Programme, MidCentral DHB SOI page 26, and board papers prepared by the General Manager, Corporate Services, MidCentral DHB.

13.11 Based on criteria of service access, quality, sustainability, reducing inequalities and efficiency, the RCSP proposes that the Central Region DHBs: 27 move progressively toward a three centre network service configuration over the next 5-6 years; simultaneously develop clinical networks according to an agreed programme; and invest further into achieving the fully integrated collaborative model over the next 5-6 years. 13.12 Wellington, Palmerston North and Hawke s Bay hospitals are intended to form the backbone of the region s hospital services, acting as major acute hospitals and supporting the smaller hospitals (Wairarapa and Whanganui). Hutt hospital would be designed as a specialist hospital recognising its strength in regional services such as plastics and reconstructive surgical services and rheumatology services. A high level road map for change has been prepared which outlines important milestones to 2020. 13.13 The RCSP is a conceptual document, and sets out the vision for the future. The task now is to develop the concrete implementation steps in order to realise the vision. A series of specialty-focused service reviews have been undertaken, and further detailed work is being undertaken on vulnerable services and regional clinical networks (cardiology, renal, and plastic surgery) including establishment of a regional Clinical Leadership Group. A central cancer network has also been established (and led by MidCentral DHB) which encompasses four other DHBs outside the central region. 13.14 Projects underway are: regional clinical credentialing for SMOs; development of an ICT roadmap aligned to the RCSP; and flight transport. 13.15 The regional planning complements the centralalliance planning. For example, the first subregional joint clinical director role has been established, being the Regional Women s Health Clinical Director. This role leads the combined service established between Whanganui DHB and MidCentral DHBs. A paediatric clinical network is also being established with Whanganui DHB.

28 13.16 We suggest that the Committee explore the future plans of the two DHBs, along with their regional colleagues, for maintaining quality services and full service coverage for the region: What are the main regional health and disability service initiatives under the Regional Clinical Services Programme? How are the regional DHBs assessing the impact of these initiatives on population health in the region, and what trends are currently evident? What are the most vulnerable services in the region, and in MidCentral DHB and Whanganui DHB districts, and how do the DHBs intend to ensure the sustainability of those services? How well do regional clinical plans address the particular needs of MidCentral DHB and Whanganui DHB? What commonality is there in the back office functions and the health information systems between MidCentral and Whanganui DHBs? What regional initiatives are there in back office functions and health information systems? What, if any, efficiencies are there to be had in back office functions and the health information systems across the region? 14 Primary health care initiatives Transforming Primary Health Care in MidCentral 14.1 The four MidCentral PHOs (Tararua, Manawatu, Horowhenua and Otaki) have made a joint proposal for a wide ranging redesign of primary health care services. The proposal was accepted as one on the nine that will be implemented with additional Government support under the Better, Sooner, More Convenient initiative. 20 14.2 The proposal significantly advances the service coordination and wide range of communitybased integrated services that are already delivered to patients and their families. Under it, five integrated family health centres will be established. Features of the model will be: 21 a single point of access; integration with Healthline and afterhours networks; an Integrated Urgent Care and Communications Centre to provide rapid in-home response for acute need; shared and common information management platforms; regional patient centred health records; common clinical pathways; and 20 21 See http://www.moh.govt.nz/moh.nsf/indexmh/phcs-bsmc-proposals. See http://www.moh.govt.nz/moh.nsf/indexmh/phcs-bsmc-proposals.

common clinical governance and leadership structure across primary and secondary care. 29 14.3 Whanganui DHB has two PHOs, which it regards as high performing. 22 Its PHOs are not involved in the primary health care initiative being undertaken by MidCentral PHOs. 14.4 The Committee may wish to discuss the efficiency of creating five centres where there are currently four MidCentral district PHOs, and how this initiative reflects collaboration on clinical services between the two DHBs, and regionally. 14.5 The Committee may wish to ask MidCentral DHB: Currently there are four PHOs in the MidCentral district and two in the Whanganui DHB district. We understand the new primary health care initiative will establish five integrated family health centres in MidCentral. What quantum of improvement in quality, speed and convenience of services has been identified in the business case for the five integrated family health centres in MidCentral, over the services currently provided by the district s PHOs? What efficiencies have been identified in creating five integrated family health centres? How does the MidCentral primary health care initiative reflect the collaborative approach of the centralalliance, and the regional services planning that the central region is undertaking? 15 Service delivery 15.1 Service delivery against the national benchmarks and targets, and the respective contracts of the two DHBs is detailed in Appendices 4a and 4b, 5a and 5b and 6. The Committee may wish to raise questions where targets have been missed. In addition, some lines of inquiry are suggested below. Diabetes management by Maori 15.2 Whanganui DHB has achieved below its targets for diabetes management, especially by Maori. 23 MidCentral is also below its target for diabetes management by Maori. 15.3 The Committee may wish to ask: What initiatives are Whanganui and MidCentral DHBs taking to improve diabetes management by Maori? 22 23 Whanganui Annual Report, page 8. Whanganui DHB Annual Report, page 70. See also MidCentral DHB Annual Report, page 23.

30 Services for older people 15.4 MidCentral DHB set a target of 100% assessments of rehabilitation and support services needs of people aged 65+, within three days of referral. It achieved only 30.5%. Whanganui DHB had no equivalent targets for the improvement of the health of older people, although that is one of its health priorities. 15.5 In our view, the measures of services for older people used by Whanganui DHB were not particularly meaningful in the context of the intended outcome, improvement of the health of older people. For example, MidCentral DHB apparently assumes that timely assessment ensures older people can access care and support. 15.6 The Committee may wish to ask both the DHBs: How does the DHB determine meaningful measures and standards for improving the health of older people? What services does the DHB deliver that will contribute to the outcome of improving the health of older people, and what evidence does the DHB have that it does? Prevalence of smoking 15.7 Both DHBs, like many others, are well below achieving the target for offering advice and support (in the hospital setting) to smokers to quit. 15.8 The Committee may wish to ask: We note the low level of performance against the national target for helping smokers in the hospital setting to quit. Why are levels currently so low, and what initiatives are MidCentral and Whanganui DHBs going to put in place to lift performance against this target? Are there other initiatives that the DHBs have identified that might also be useful in reducing the prevalence of smoking, outside the hospital setting? Oral health of Maori children 15.9 Whanganui DHB s targets for Maori and Pacific have not been met, or are set low compared with other children, for: improving oral health service utilisation by adolescents; for the rate of tooth cavities at five years of Maori children; and for Maori children s rate of missing or filled teeth at Year 8.

15.10 Oral health is also a priority for MidCentral DHB. 24 The DHB reports results for fluoridated and non-fluoridated areas. Results again show that lower targets being set for Maori and Pacific than for other children. 25 31 15.11 The Committee may wish to ask: What initiatives is Whanganui DHB taking for improving oral health service utilisation by Maori and Pacific adolescents? How does the DHB (MidCentral / Whanganui) set the oral health targets for Maori and Pacific children at a level that will optimise improvement in this area? Does the DHB then ensure that these targets are accompanied by oral health initiatives that are sufficient to optimise improvement in these areas? 24 25 MidCentral Annual report, page 4. MidCentral Annual report, pages 30 and 31.

32 APPENDIX 1 Explanation of scope and grades Management Control Environment Financial Information Systems and Controls Service Performance Information and Associated Systems and Controls Indicative Areas This is the foundation of the control environment and may include consideration of the following: clarity of strategic planning/the way the entity manages and reports performance; communication and enforcement of integrity and ethical values; commitment to competence; participation by those charged with governance for example, the involvement and influence of Audit Committee and Board (or equivalent); management philosophy and operating style; organisational structure; assignment of authority and responsibility; human resources policies and practices; risk assessment and risk management; key entity-level control policies and procedures; information systems and communication (including information technology planning and decision-making); monitoring; and legislative compliance arrangements. These are the systems and controls (including application-level computer controls) over financial performance and financial reporting and include the following: appropriateness of information provided; presentation of financial information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. This concerns the quality of the service performance measures selected for reporting against, as well as the systems and controls (including application-level computer controls) over service performance reporting, and includes the following: appropriateness of information provided and reported; presentation of SSP information; reliability of systems; control activity (including process-level policies and procedures); and monitoring. Comments and grades are based on conclusions drawn on the 2009/10 2011/12 SOI and the 2008/09 SSP.

Grade Very good Good Needs improvement* Explanation of grade No improvements are necessary. Improvements would be beneficial and we recommend that the entity addresses these. Improvements are necessary and we recommend that the entity should address these at the earliest reasonable opportunity. 33 Poor* Major improvements are required, and we recommend the entity should urgently address these. * All DHBs were graded poor/needs improvement (see footnote 1 on page 3). 1. The reporting under Part A of this briefing, Environment, Systems, and Controls for Measuring Financial and Service Performance, is a by-product of the underlying audit work carried out to form an opinion on the financial and service performance statements. Its scope is limited to those areas of the management control environment, information systems, and controls the auditor has given attention to during the course of the audit. 2. Recommendations for improvement are generally limited to those findings that the auditor considers are the more notable weaknesses in the design or operation of the management control environment, information systems, or controls. The recommended improvements determine the grade assigned. A single, serious deficiency drawing a recommendation for improvement may, of itself, determine the grade. Similarly, the most serious deficiency among several will draw a stronger recommendation and affect the grade accordingly. 3. Deficiencies in the management control environment, information systems, or controls are the gaps between what auditors observe and what auditors consider, in their professional judgement, constitutes best practice (see below). Auditors professional judgement is informed by many factors, including national and international standards, knowledge of best practice, and standards and expectations for the public sector in New Zealand. 4. To help ensure the relevance to all entities of the auditor s recommendations and grading, the auditor s recommendations are made with reference to what is considered best practice given the size, nature, and complexity of the entity. Thus, notions of best practice will vary among entities because what is considered necessary, sufficient, or beneficial for some entities may not be so for others. There is therefore not a one size fits all standard across the public sector. Rather, recommendations for improvement are based on the auditor s assessment of how far short the entity is from a standard that is appropriate for the entity s size, nature, and complexity of its business. 5. Further, notions of best practice may vary over time in response to change for example, changes in the operating environment, changes to standards, and changes in general expectations. Grades assigned to entities may therefore fluctuate from year to year according to how entities respond to changes in the environment and in best-practice expectations. Grades may also be affected from year to year because of changes in emphases, in accordance with the auditor s risk-based approach to testing systems and controls. 6. Improvements are recommended only when it is considered, in the auditor s judgement, that the benefits of the improvements would justify the costs. 7. Recommendations for improvement are based on the auditor s conclusions about the state of the entity s management control environment, information systems, and controls as at the end of the financial year.

34 APPENDIX 2 Explanation of monitoring and intervention framework used by Ministry of Health Standard monitoring The DHB has supported accountability documents/arrangements in place in a timely manner (DSP, DAP, CFA, SOI). The DHB is performing to all key areas of its supported DAP (i.e., services, financial, and other indicators) and is in a sound financial position. The DHB is complying with timely and accurate provision of information for formal reporting requirements. Intermediate governance action Deteriorating position on intensive monitoring. Serious financial and/or management difficulties that do not appear to be improving sufficiently. Failure to deliver on action plan (as per intensive monitoring actions). Withdrawal of facilities or action to consider sanctions by CHFA 28 or private sector. (At the Minister s discretion, if issues are not addressed and resolved within six months, repositioning on the framework will highly likely occur.) Performance watch Non-compliance with standard monitoring requirements, and/or an emerging deterioration in the DHB s performance against DAP, and/or supported DAP has substantial risks that are not yet fully managed. (If an agreed timeframe for a change strategy is not provided within three months, repositioning on the framework will occur.) 26 Direct governance action At the Minister s discretion, failure of processes in intermediate governance action to address issues; Minister seriously dissatisfied with Board performance. Intensive monitoring A DHB is unable to achieve Minister s support for DAP within agreed timeframes set by the Ministry or, continuing noncompliance and/or deterioration in either standard monitoring requirements and/or performance watch requirements or, a single event that seriously affects planned performance or creates material risk. (If issues are not addressed and resolved within six months, repositioning on the framework will occur.) 27 26 27 28 The timeframes relating to MIF repositioning will be strictly enforced. However, in exceptional circumstances, timeframes may be slightly contracted or expanded. Refer to previous footnote. Crown Health Financing Agency.

APPENDIX 3 35 Surplus (deficit) results 2002-2009 MidCentral DHB Figures based on NZ IFRS ($000) Figures based on previous financial reporting standards ($000) 29 2009 2008 2007 2006 2005 2004 2003 2002 (9,949) (4,089) (2,890) 30 7,571 8,601 3,078 (6,680) (11,404) Surplus (deficit) results 2002-2009 Whanganui DHB Figures based on NZ IFRS ($000) Figures based on previous financial reporting standards ($000) 28 2009 2008 2007 2006 2005 2004 2003 2002 (9,868) (4,654) (2,044) 29 (9,551) (2,062) (2,327) (4,024) (2,552) 29 30 The figures for 2001 to 2006 are not directly comparable to those stated for 2007 and 2008 as they were prepared on the basis of financial reporting standards prior to NZ equivalents to International Financial Reporting Standards. The 2007 results reported above were restated for comparative purposes, upon the first time adoption of the NZ equivalents to International Financial Reporting Standards, from the deficit reported in the 2006/2007 published Annual Report, which was the deficit calculated on the basis of financial reporting standards prior to NZ equivalents to International Financial Reporting Standards.

36 APPENDIX 4a Service delivery against benchmarks and health targets - MidCentral DHB Figure 1: Hospital benchmark targets not achieved 2008/09 MidCentral DHB 31 Benchmark Target Actual Emergency triage 3 rate 75% 68.8% 7 Rank (of 21) Acute readmission rate per 1000 discharges (lower=better) 61.3 64.4 16 Average length of stay (ALOS) (lower=better) 4.4 4.86 18 Figure 2: 2008/09 health targets not met MidCentral DHB 32 Health Target Target Actual SSP Improving immunisation services 82% 77% 77% Improving oral health (adolescent oral health utilisation) 80% 79% N/A Reducing cancer waiting times (<6 weeks) 100% ** 81% Improving diabetes services management 80% 74% 73% Improving in-home support services elderly N/A N/A 30.5% ** Regional results only. Figure 3: 2009/10 (second quarter) health targets not met MidCentral DHB 33 Health Target Shorter stays in emergency departments. 95% of patients will be admitted, discharged or transferred within 6 hours Improved access to elective surgery. Increase the volume of elective surgery by an average of 4,000 per year. Increased immunisation. 85% of 2 year olds will be fully immunised Better help for smokers to quit. 80% of hospitalised smokers will receive advice and help to quit by July 2010 Target % Actual % Rank (of 21) 95% 78% 16 100% 95% 16 85% 82% 12 80% 24% 11 31 32 33 DHB hospital benchmark information April-June 2009, page 76. http://www.moh.govt.nz/moh.nsf/indexmh/healthtargets pages 132-137, and Annual Report (SSP) pages 16-40. http://www.moh.govt.nz/moh.nsf/files/healthtargets-0910/$file/health-targets-quarter-two-results-(numerical).pdf See also Appendix 6.

APPENDIX 4b Service delivery against benchmarks and health targets - Whanganui DHB 37 Figure 1: Hospital benchmark targets not achieved 2008/09 Whanganui DHB 34 Benchmark Target Actual Rank (of 21) Emergency triage 1 rate 100% 83.3% 21 Acute readmission rate per 1000 discharges (lower=better) 61.3 75.9 21 Overall patient satisfaction 88.4% 87.8 13 Did not attends (DNA) rate (lower=better) 8.92% 11.16% 20 Revenue to fixed assets ratio 1.47 1.33 17 Figure 2: 2008/09 health targets not met Whanganui DHB 35 Health Target Target Actual SSP Actual Improving immunisation coverage (for 2 year olds) 88% 84% 84% Improving elective services 10% -8% * Reducing cancer waiting times (<6 weeks) 100% ** 81.5% Improving diabetes services annual check 74% 60% 89% Improving diabetes services management 81% 68% 74% Improving oral health (adolescent oral health utilisation) 85% 58% 60.1 *SSP page 91 says 100% base elective contract delivered, significant improvement in accessing additional elective monies. ** Regional results only. Figure 3: 2009/10 (second quarter) health targets not met Whanganui DHB 36 Health Target Target Actual Improved access to elective surgery. Increase the volume of elective surgery by an average of 4,000 per year. Increased immunisation. 85% of 2 year olds will be fully immunised Better help for smokers to quit. 80% of hospitalised smokers will receive advice and help to quit by July 2010 Rank (of 21) 100% 96% 14 85% 81% 14 80% 31% 8 34 35 36 DHB hospital benchmark information April-June 2009, page 160. http://www.moh.govt.nz/moh.nsf/indexmh/healthtargets, pages 126-131; and Annual Report (SSP) pages 67-93. http://www.moh.govt.nz/moh.nsf/files/healthtargets-0910/$file/health-targets-quarter-two-results-(numerical).pdf See also Appendix 6.

APPENDIX 5a 38

APPENDIX 5b 39

40 APPENDIX 6