In Confidence
Office of the Minister of Health
Cabinet Business Committee
REVIEW OF THE POPULATION-BASED FUNDING FORMULA 2015
Proposal
1.
The Minister of Health asks Cabinet to note that a recent review of the Population Based
Funding Formula (PBFF) 2015 has been completed and recommends no changes to the
structure of the PBFF.
Executive Summary
2.
The PBFF is a technical tool that is used every year to distribute the bulk of the district
health board (DHBs) funding share of Vote Health. The PBFF does not determine the
total annual funding provided for DHBs or Vote Health overall as this is determined by
the Budget process, which this paper does not cover.
3.
Cabinet agreed that the Ministers of Health and Finance should approve any changes to
the cost weights or adjustments of the PBFF as a result of five yearly reviews. Any
changes to the structure of the formula, or any material changes to the methodology
used to calculate the cost weights, should be approved by Cabinet [CAB Min (02) 32/14
refers].
4.
A Technical Advisory Group (TAG) has completed the 2015 PBFF review. It
recommends no structural changes to the PBFF model and Cabinet is asked to note this.
It does however recommend technical updates to each of the components of the PBFF
model, which the Ministers of Health and Finance have agreed.
5.
The 2015 PBFF model will be used to allocate funding to DHBs for the 2016/17 year.
Whilst the full impact of the new PBFF model is not yet known, as that depends on the
new population projections which are due in late November, it is important to note that
individual DHB funding allocations are increased year on year. What will change,
however, for a very small number of DHB’s is their percentage share of overall funding.
This means that for a few DHBs their respective annual growth rate in funding will be
less than under the previous PBFF model.
Background
What is the PBFF?
6.
7.
The PBFF is a technical tool that is used every year to distribute the bulk of the DHB
funding share of Vote Health, not the total amount as this is determined by the Budget
process. In 2015/16 the PBFF distributed a total amount of $11.4 billion among the
DHBs.
The PBFF has been used to allocate funding to DHBs since 2003/04. It was last updated
in 2007/08 with the results coming into effect in the 2009/10 financial year. Census 2013
is the basis of the current PBFF review which will come into effect in 2016/17.
1
8.
The PBFF covers the devolved health services that DHBs fund. It covers primary care,
hospital and community care services, health of older people and mental health. It does
not cover younger Disability Support Services and Public Health. The PBFF does not:



require Boards to expend a specific amount in any service area
compensate for additional costs of providing inter-regional/tertiary services, or
set service level expectations ie, require average intervention rates.
Overview of the model
9.
The PBFF comprises two parts: the core model that determines relative health need; and
the adjusters that modify the funding allocations between DHBs that take into account,
unmet need, rurality and overseas visitors and refugees.
The core model
a.
The most important factor in the model is the number of people in each DHB. In
addition to the number of people, the PBFF share is adjusted for the demographic
profile (age, socio-economic status (currently NZDep06), ethnicity (Māori, Pacific
or Other), and sex).
b.
The PBFF cost weights in the core model (cost of providing health care services)
are then applied to each DHB population grouping, which gives the estimated
PBFF share the DHB needs to provide for the range of healthcare services to its
local population.
The adjusters
c.
In addition to the demographic variables the model also includes three adjustments
to the costs of providing health services: in rural areas, for non-resident populations
and a policy adjustment for the unmet health needs of populations with poor health
status.
i. Unmet need
This is a policy based adjustment to target funding at population groups with access
issues to health services. The current target groups are Māori, Pacific people and
those living in areas of high deprivation.
ii.
Rural adjuster
This compensates DHBs for having to provide services in more rural areas. The
current adjuster is designed to top up funding based on diseconomies of scale for
smaller facilities, community services, inter-hospital transfers, travel &
accommodation costs.
iii.
Overseas eligible and refugees adjuster
This adjusts for unavoidable costs of providing services to eligible overseas visitors
and is derived from recent costs. It includes an allowance to meet the high health
costs of new refugees to New Zealand (NZ).
It also includes cover for NZ citizens domiciled overseas who return to NZ for
treatment, and patients for whom there is a reciprocal arrangement (United
Kingdom and Australia and some Pacific Islands).
2
Benefits of PBFF
10.
The PBFF provides a number of advantages for both DHBs and the Government, which
include that it:







11.
allows for an equitable allocation of DHB funding based principally on local
population needs
maintains per head level of service
allows for greater responsiveness to changing population needs
allows for specific adjustments to reflect some of the unique costs of providing
health services across the country
it is a technical model that avoids protracted individual bidding and negotiation and
lobbying
promotes efficiency and fiscal control for the government, and
places responsibility for managing within the Vote on the Minister of Health and
frees up Cabinet to consider the major strategic issues facing Health.
In order to maintain confidence in the system, regular updates to the model are required
so it is important to use new Census information as soon as practicable. While all DHBs
would like additional funding on balance they are supportive of the PBFF approach.
Social investment
12.
Recently there has been a shift to cross-agency social investment with an emphasis on
improving the commissioning of core services. The PBFF capitation funding approach
already allows for flexibility in DHB commissioning and gives DHBs a strong incentive to
invest early (for example, where DHBs invest in primary care to avoid hospital
admissions, the savings are retained by the DHB).
13.
For more targeted initiatives PBFF funding can be easily top sliced1 to create separate
funding pools.
The PBFF review
14.
Cabinet agreed that the Ministers of Health and Finance should approve any changes to
the cost weights or adjustments of the PBFF as a result of five yearly reviews. Any
changes to the structure of the formula, or any material changes to the methodology
used to calculate the cost weights, should be approved by Cabinet [CAB Min (02) 32/14
refers]. This was reconfirmed in 2008.
15.
The current review was delayed to account for the delay to the 2011 Census, deferred
to 2013 due to the Canterbury earthquake. The TAG recently completed the PBFF
review with members from DHBs, the Ministry and Treasury. A brief overview of the
review is included in Appendix Two. An independent review of both the tertiary and rural
adjusters was undertaken and is attached as Appendix Three.
Review findings
16.
The TAG recommended no structural changes to the model, but recommends updates
to each of the components of the model.
17.
The core model has been retained with updated inputs. The revised costs per person
are very similar to the current model reflecting the robustness of the model. There has
1
Refer the diagram in Appendix One for an understanding of the top slice
3
been a slight increase in relative costs at the older age groups. The rural adjuster has
been changed to distribute funding more in line with rural populations and reflecting DHB
geography. Table One summarises the PBFF 2015 review findings.
Table One: Summary of review of PBFF core variables and adjusters
Component
Review recommendation
($ in 2013/14 values)
Core variables
Approximately $10.8 billion)
Retain with updated inputs (age, sex, NZDep2013
and ethnicity (Māori, Pacific, Other))
Unmet need adjuster
Retain but update the current model with excess
unmet need, variables are Māori and Pacific and
people living in areas of high deprivation
Retain but change to the rural population index
model
(approximately $165 million)
Rural adjuster
(approximately $169 million)
Overseas eligible and refugee
adjuster
(approximately $30.4 million)
Tertiary adjuster (not part of PBFF)
Retain with updated inputs and review the
overseas eligible portion in one year with a report
back as part of the 2017/18 DHB indicative
funding advice
Retain.
(approximately $120 million)
Note - not part of PBFF, to be reviewed by
National Pricing Programme with a report back as
part of the 2017/18 DHB indicative funding advice
Land Adjuster (not part of PBFF)
Retain.
(approximately $9.2 million to
Auckland DHB)
Note - not part of PBFF, officials will provide
recommendations in the 2016/17 indicative
funding advice for that year with a review process
for the longer term
Impacts of the review
18.
The PBFF is used every year to distribute the bulk of the DHBs funding share of Vote
Health. Individual DHB funding allocations are never reduced and are increased year
on year. What will change however for a very small number of DHB’s is their percentage
share of overall funding. This means that their respective annual growth rate in funding
will be less than under the previous model.
19.
The 2015 PBFF model will be used to allocate funding to DHBs for the 2016/17 year.
The full impact of the new model will depend on the new population projections (due in
late November), DHB starting points, the level of new funding for DHBs (unknown until
later in the year), implementation rules and any changes to funding streams arising from
the Health Strategy review processes.
20.
As an example of how the model works in practice the 2015/16 funding shares have
been reworked using the proposed model. Table two shows the current and proposed
model alongside what the respective growth rates for the 2015/16 year would have been
under each. The proposed and current models for this analysis use the same
populations allowing for a direct comparison.
Table Two: Current and proposed model shares and example results
4
DHB
Auckland
Bay of Plenty
Canterbury
Capital & Coast
Counties Manukau
Hawkes Bay
Hutt Valley
Lakes
MidCentral
Nelson Marlborough
Northland
South Canterbury
Southern
Tairawhiti
Taranaki
Waikato
Wairarapa
Waitemata
West Coast
Whanganui
Total:
2015/16 DHB
Funding
Package
Starting Point
$ million
1,074
615
1,258
678
1,246
435
357
278
458
378
488
164
775
144
304
995
122
1,309
119
202
11,401
PBFF
Share
Current
Model
9.31%
5.55%
10.94%
5.76%
10.81%
3.96%
3.09%
2.48%
4.05%
3.42%
4.50%
1.46%
6.78%
1.26%
2.79%
8.91%
1.12%
11.25%
0.89%
1.69%
100.00%
PBFF
Share
Proposed
Model
Percentage
Growth
Rate
Current
Model
Percentage
Growth
Rate
Proposed
Model
9.12%
5.62%
10.81%
5.73%
10.87%
3.95%
3.05%
2.54%
4.08%
3.40%
4.63%
1.44%
6.81%
1.30%
2.73%
8.96%
1.11%
11.23%
0.93%
1.69%
100.00%
3.17%
2.88%
1.49%
1.49%
1.51%
3.69%
1.50%
1.63%
1.50%
3.82%
4.22%
1.50%
1.50%
1.50%
4.24%
4.16%
4.23%
2.07%
1.50%
1.48%
2.41%
1.51%
4.25%
1.49%
1.49%
1.51%
3.75%
1.50%
4.24%
1.66%
3.32%
4.22%
1.50%
1.99%
4.21%
2.65%
4.16%
3.76%
2.14%
1.50%
1.48%
2.41%
21.
The following paragraphs describe how these changes impact Auckland, Canterbury and
Southern DHBs under the proposed model.
22.
Auckland DHB has seen a reduction in their PBFF share. The NZDep2013 shows an
improvement in the socio-economic status of the population of the Auckland DHB and
this has reduced their share of funding. There has been a further drop in share due to
the changes to the rural adjuster. If the proposed model had been used for the 2015/16
year Auckland DHB’s funding increase would have been 1.51% instead of the 3.17%
they did receive. Based on likely population data the decrease in Auckland DHB’s PBFF
share is likely to be off-set by very strong migration growth for the 2016/17 funding round.
23.
Like Auckland DHB, Canterbury DHB has also seen a reduction in their PBFF share.
This is largely due to the NZDep2013 which shows an improvement in its socio-economic
status and the updated inputs to the core variables. However, the impact of this change
has been partially offset by changes to the rural adjuster. Despite the reduction in their
PBFF share, if the proposed model had been used for the 2015/16 year Canterbury’s
funding would not have reduced, in fact its increase would have remained the same
(1.49%) due to the implementation rules. Based on likely population data Canterbury
DHB continue to have strong projected population growth which may partially offset the
decrease in PBFF share in the 2016/17 funding round.
5
24.
I recently announced an additional $16 million will be provided to Canterbury DHB in
2015/16 to reflect Canterbury’s unique circumstances and the need to maintain
momentum on the hospital redevelopment, earthquake repairs, and the delivery of high
quality services.
25.
Southern DHB on the other hand has seen an increase in its PBFF share. The changes
to the rural adjuster have had a strong positive impact on their PBFF share. Conversely
the updated inputs to the core variables and the inclusion of the NZDep2013 have had
a negative impact on their PBFF share but these were not strong enough to fully offset
the changes to the rural adjuster. If the proposed model had been used for 2015/16,
Southern DHBs funding increase would have been 1.99% instead of the 1.50% that they
did receive. Based on likely population data, Southern DHB also have some population
growth which may further improve their PBFF share in the 2016/17 funding round.
26.
Overall the changes in the formula are minimal and the consistency between results with
respect to the new cost weights indicates the robustness of the model over time. The
key drivers of change in the model are due to the inclusion of NZDep2013, the
recalculation of the core model cost weights and the redevelopment of the rural and
overseas eligible and refugees adjusters.
27.
The impact of each of these drivers varies from DHB to DHB. While the percentage of
the total funding allocated by the rural and overseas eligible and refugees adjusters did
not change markedly, there are material changes at a DHB level.
Audit
28.
An independent auditor audited the work focussing on whether the technical results are
consistent with the source data and reflective of the decisions from the review. The audit
found no issues with the accuracy of the work.
Consultation
29.
The Ministry has consulted with the Treasury, Ministry of Social Development, State
Services Commission, Ministry of Women’s Affairs, Te Puni Kokiri, and Ministry of Pacific
Island Affairs. The Department of Prime Minister and Cabinet has been informed of the
paper.
Financial Implications
30.
There are no financial implications arising from the proposals in this paper. The PBFF
allocates existing funding: it does not determine the quantum of the funding to be
distributed.
Human Rights
31.
The PBFF, and the proposals outlined in this paper, are not inconsistent with the NZ Bill
of Rights Act 1990 or the Human Rights Act 1993.
Legislative implications
32.
There are no legislative implications.
Regulatory Impact Analysis
33.
There are no regulatory impacts and a business compliance cost statement is not
required.
6
Gender Implications
34.
There are no specific gender implications. The PBFF model does adjust for the different
costs associated with providing health services to males and females.
Disability Perspective
35.
The proposals outlined in this paper will have no specific implications for disabled people,
but the PBFF model does make adjustment for the higher costs associated with age
based on the higher level of age-related disability.
Publicity
36.
There has been media interest in the 2015 PBFF review. A communications plan will be
developed for the Minister of Health.
Recommendations
It is recommended that the Committee:
1. Note that Cabinet agreed [CAB Min (02) 32/14]:
1.1. that the Population Based Funding Formula (PBFF) cost weights and adjustments will
be reviewed no later than every five years
1.2. that the Ministers of Health and Finance should approve any changes to the cost
weights or adjustments as a result of reviews, and
1.3. that any changes to the structure of the formula, or any material changes to the
methodology used to calculate the cost weights, should be approved by Cabinet.
2.
Note there are no structural changes to the PBFF, or any material changes to the
methodology used to calculate the cost weights.
3. Note the Ministers of Health and Finance have agreed to changes to the PBFF including:
3.1. updates to the core model and the unmet needs adjuster, including the use of
NZDep2013
3.2. the move to the weighted rural population index to distribute the rural adjuster, and
3.3. technical updates to the overseas eligible and refugees adjuster.
4. Note that the 2015 PBFF model will be used to allocate funding to DHBs for the 2016/17
year
5. Note that as a result of the 2015 PBFF model review no DHB will receive less funding than
in 2015/16.
Hon. Dr Jonathan Coleman
Minister of Health
___ / ___ / ___
7
Appendix One
Guide to the PBFF and the Budget
Budget overview
Budget allocation to the DHBs
$11,676M (2015/16 funding advice value)
}
Devolved funding to DHBs
PBFF
Top slices
$11,350M (2015/16
funding advice value)
$326M (2015/16 funding
advice value)
Consists of:


Consists of:
Core model (number
of people in the DHB
adjusted for
demographic profile
and cost of service
provision for those
people)
Adjusters: rural,
unmet need,
overseas eligible
and refugees
+






national services
(i.e. forensic
mental health,
heart and lung
transplants)
transitional
funding
temporary (ie
new initiatives)
land adjuster
bad debts
primary
maternity
Inter District Flows (DHB to DHB transfers)
Each DHB pays for the services their population use in other
DHBs plus their PBFF share of the tertiary adjuster
8
Appendix Two
The PBFF review
Scope
1.
The PBFF Review looked at whether the PBFF was still fit for purpose and included:
a.
assessing whether the current core model cost weight variables remain the best
mechanism for determining relative health need
b.
calculating the core model cost weights using the most recently available data
c.
considering if the adjusters (unmet need, overseas eligible and refugees, rural)
remain appropriate mechanisms for adjusting funding allocations between DHBs,
and
d.
considering adding adjusters for land and tertiary services to the model.
Process
2.
A Technical Advisory Group (TAG) was set up with members from DHBs, the Ministry of
Health (the Ministry) and Treasury. It presented its recommendations to the Ministry’s
Policy Advice Improvement (PAI) Group.
3.
The Ministry used the following principles to apply to PBFF (that the formula be):
4.
a.
robust (developed with sound technical processes based on reliable evidence and
data)
b.
legitimate (based on transparent formulae accessible to the sector and wider
public)
c.
efficient (formulae as simple as possible, with factors only included if they do, or
can be expected to, make a significant material difference), and
d.
effective (provides a workable outcome and minimises perverse incentives).
The review process was broken down into two key categories:
a.
review of the core model
b.
review of adjusters
Results
Core model
5.
The review evaluated the variables in the core model and considered new ones. No
material benefit was found from changing the status quo. The current variables are age,
sex, socio-economic measured by NZDep2006, and ethnicity categorised as Maori,
Pacific and other (other being non-Maori, non-Pacific) The socio-economic variable was
updated to NZDep2013 which is a New Zealand small-area index of relative socioeconomic deprivation which is derived from census data. The NZDep2013 index is
similar to the NZDep2006 index across DHB populations. All the costs per person
calculations were updated with the most recent expenditure data and officials
recommend using the updated model.
9
The adjusters
Unmet need adjuster
6.
The unmet needs adjuster redistributes funding to improve access for high need groups.
There are health disparities experienced by Māori, Pacific and people living in areas of
high deprivation. These disparities suggest that these groups have needs for health
services that are not being met. Basing funding solely on historical expenditure, as
reflected by cost per person, is likely to perpetuate these disparities. Therefore additional
funding is made available to DHBs through the unmet need adjuster. The status quo
unmet need adjuster is approximately $165 million (in 2013/14 values).
7.
Officials recommend a change to the calculation of the unmet needs based on excess
unmet need and a continued use of the current variables for distribution.
8.
The TAG looked at ways to update the current model, including the use of excess unmet
need.2 The figure was very similar to the prior model ($163 million versus the prior $165
million value). It also considered an alternative model using ambulatory sensitive
hospitalisation (ASH) rates which gave a higher figure of $389 million.3 The TAG had
some concerns about the link between the measure and the need for funding as well as
concerns about significant increases to the adjuster.
9.
The current unmet need adjuster is allocated to Maori, Pacific and those living in areas
of higher deprivation, as measured by the NZDep2013 (Quintiles 4 and 5). The TAG
tested that this gave a reasonable distribution of funding between DHBs by comparing
the distribution against that using either ASH or amenable mortality (AM)4 both of which
are strong measures of unmet need. The current variables performed well and TAG
recommended their continued use. The TAG does not recommend using either ASH or
AM rates in the model as they reward system failure and therefore do not meet the criteria
for the variables.
Rural adjuster
10.
The rural adjuster compensates for the extra costs of providing services to small or
dispersed communities. The current adjuster separately estimates the costs to each
DHB for small rural facilities, rural primary care, travel and accommodation, inter hospital
transport, governance, off-shore islands and community services. Some of these
expenditure estimates are based on actual DHB expenditure and other areas are
modelled.
11.
The main problem with the current model is that it is based on existing health services
with no direct link to the rural population and DHB geography. This can give the
impression that it locks in existing cost structures.
2
Excess unmet need is derived from the NZ Health Survey. It is calculated by comparing the average
rate of unmet need reported by non-Māori and non-Pacific peoples that live in NZDep 1 areas (ie,
least deprived quintile) to the average rate of unmet need reported by Māori, Pacific and NZDep 4 and
5 (ie, most deprived quintiles). The difference between the two rates is called the ‘excess’ unmet
need. It is a measure of how much worse off the most deprived populations are.
3 Ambulatory sensitive hospitalisation (ASH) rates measure the number of people who appear in
hospital with conditions that could have been prevented or treated in out-of-hospital settings such as
primary health care.
4 Amenable mortality (AM) rates are deaths that might have been prevented if health services had
been delivered more effectively or if patients had accessed services earlier (either in primary care or in
hospital).
10
12.
The Sapere report about the model therefore recommended developing an alternative
approach to better reflect population and geography. The TAG looked at options to
achieve this and recommended changing to a new model, which officials support, called
the weighted rural population index and is constructed as follows:
a.
DHBs are allocated funding from a combined rural pool to cover the additional
costs of providing access for small and dispersed population groups to small rural
facilities, rural primary care, travel and accommodation, inter hospital transport,
and community services. Each DHBs share of the funding pool is based on the
weighted rural population index which combines measures of rural population
numbers, travel time within a DHB and travel distance to tertiary level services.
b.
DHBs are also funded for the estimated diseconomy of providing full secondary
level hospital services for a small population (i.e. for hospitals like Grey Base in
the West Coast) and for the estimated diseconomy of providing services on
offshore islands. These small hospitals are located in small towns which are not
considered rural populations and therefore are not picked up in the weighted
population index. The cost of services for offshore islands is considered extreme
compared to other rural population costs. Therefore these two diseconomies are
considered unavoidable costs to DHBs that incur them and as such have been
retained in the weighted rural population index model.
13.
The main advantage of the weighted rural population index model is that funding is more
closely aligned with DHBs that have the most rural residents. A further advantage is that
prior spending patterns are less likely to lock DHBs into future funding entitlements with
only a small necessary inclusion of cost structures to account for the diseconomies. The
disadvantage of this model is that the concept is new and DHBs may not easily
understand its inputs and calculations.
14.
The majority of TAG supported the new approach, but some members were concerned
about the impact on DHBs who received less funding and thus abstained or supported
the enhanced status quo. The switch to a model based on rural population and
geography has reduced the rural funding adjuster paid to DHBs with mainly urban
populations. The funding for the diseconomy related to Governance costs was dropped
due to unanimous feedback from DHB interviews and workshops.
Overseas eligible and refugees
15.
This adjuster compensates DHBs for the costs in providing health services to people
from overseas that are eligible for publicly funded healthcare treatment in NZ, and for
refugees. These people are not included in a DHB’s estimated resident population and
therefore would not be accounted for in PBFF without this adjustment.
16.
Following the review, the TAG recommended that the adjustment component for
overseas eligible people be dealt with outside of the model or dropped. This was due to
concerns with the quality of the data used to calculate the component.
17.
Officials believe that the policy of compensating DHBs for overseas eligible patients
however remains valid and support that this component remain in the PBFF for one year
and that further work is done to improve the information. The review of the overseas
eligible component would be conducted alongside a review of bad debts for overseas
ineligible patients due to the overlapping data quality issue.5 The Ministry’s plan is to
look at patient level data for these two groups and look to cross check against
immigration data. Currently the Ministry uses similar methods to check eligibility with
5
Bad debts for overseas ineligible sit outside the PBFF model. It covers payment to DHBs for
overseas ineligible patients for public funded health care.
11
regard to Primary Health Organisation environments, which the review will hope to build
on. Officials will report back on this work as part of the 2017/18 DHB indicative funding
advice at the end of 2017.
18.
Extra funding for refugees was allocated to DHBs based on the estimates of annual
settlement patterns. The extra amount was based on recorded costs per refugee.
Additional adjusters
19.
The TAG considered whether the tertiary adjuster should be included as part of the
PBFF. Currently it sits outside the PBFF and compensates the DHBs with tertiary
hospitals for the extra costs to provide the appropriate level of care (refer Appendix One
– Budget diagram). A solution for the tertiary adjuster within PBFF was not identified.
This adjuster has been referred to the National Cost Collection Pricing Programme
(NCCP). This is a sector group chaired by the Chief Finance Officer of Auckland DHB,
with members that are subject matter experts on hospital pricing and the tertiary adjuster.
The NCCP have completed their first workshop on this and officials will report to Ministers
as part of the 2017/18 indicative funding advice.
20.
The land adjuster also sits outside the PBFF, and covers the additional cost of capital for
Auckland DHB (an extra $9.2 million to Auckland DHB in 2013/14 values). The TAG
recommended that it should stay outside the PBFF as it relates to costs of capital which
they felt required a separate review. Auckland metropolitan DHBs have raised concerns
about ongoing increases in land values and other DHBs have raised concerns about
affordability of new capital developments. As part of the 2016/17 indicative funding
advice officials will provide recommendations for the 2016/17 year with a review process
for the longer term.
12
Appendix Three
Insert Sapere Report, “Review of the Rural and Tertiary Adjusters”.
13