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Critical Letter - Healthcare Hawke's Bay

6 March 2000


Mr Lloyd Falck
Senior Advisor
Office of Minister of Health
Parliament Buildings
WELLINGTON


Dear Lloyd

Mark Flowers and I appreciated the opportunity to talk with you briefly on Wednesday last. We were concerned to ensure that the climate in which decisions were made for both Napier and Waipukurau Health Centres are understood, and to do that we welcome the opportunity to provide information that will hopefully allay the Minister's concerns.

You will no doubt have access to a transcript of the Select Committee hearing which also took place last Wednesday. That hearing provided an opportunity to cover, at a high level, the information contained herein and I would hope that it would go some considerable way in modifying the negative perception that some have as to this decision.

I also took the opportunity to ensure that the Select Committee was aware of inaccuracies in information provided by CCMAU in their report to the Minister. Steve Anderson understood the need for this view to be expressed, was present during the hearing, and later commented that he believed the representations were reasonable.

Healthcare Hawke's Bay did therefore take the opportunity at the Select Committee hearing to ensure that members of that committee were able to address matters which had been raised in the House and elsewhere.

I would ask that you note the following:

 Healthcare Hawke's Bay (HCHB) was required to deal with two hospitals 20 km apart for a population of 140,000, neither of which were able to satisfactorily meet clinical needs and were inefficient - and resolve this in a climate of intense parochialism. Arguments had gone back as far as the 1930's, and previous health administrations, health officials and Governments had recognised the problem but for a variety of reasons had not implemented a solution.

 An exhaustive analysis by HCHB with assistance from appropriately qualified external consultants, and an extremely comprehensive review by Government agencies and their external advisors, concluded that one hospital with outlying health centres at Wairoa, Napier and Central Hawke's Bay, and the provision of comprehensive community services, was the appropriate long term solution for the region.

 From HCHB’s perspective, the principal driver was the need to ensure that the publicly provided services were delivered in a manner which was clinically sound; that facilities were appropriately sized with sufficient flexibility to meet the needs of the region for the foreseeable future; and that the implementation of the change process was undertaken as a complete package so that the level of community disruption could be reasonably managed.

 Although the process of reorganisation has been litigious and acrimonious at times, Hawke's Bay has now resolved the long-standing problem of having dysfunctional hospital buildings on four sites. The delivery of public funded services is now provided from modern facilities that are specifically designed to meet the delivery needs now and into the foreseeable future. Furthermore, the complex transition process was completed simultaneously with major re-engineering projects which modernised the functioning of the entire organisation. By any measure that achievement is significant.

 With the decision to site the regional hospital at Hastings, the Napier community was understandably concerned to ensure that the range of services identified by the Health Funding Authority as being required in Napier were in fact delivered appropriately and on a sustainable basis. Ministers of the Crown, the Health Funding Authority in its various iterations and HCHB all made a commitment to the Napier community to achieve such a solution. It was on the basis of this commitment that Geoff Braybrook vigorously campaigned, being concerned that his constituency may find a diminution of the range and volume of services to be purchased in Napier in favour of an increased utilisation of the Hawke’s Bay Hospital in Hastings. His concerns were echoed by the Napier City Council and a number of Napier community groups.

 The cost of providing the services specified by the HFA from the Napier facility involved a premium over the cost of providing those same services from the Hawke’s Bay Hospital. The premium was originally estimated at $900,000 per annum when the decision on the regional hospital location was made in 1994/95. Negotiations around the premium in terms of price and the duration of contracts were material. HCHB, as the publicly funded provider, needed therefore, to ensure that it was able to deliver the services that the HFA was to purchase, and needed to do so through facilities and delivery standards which were appropriate for the future. HCHB was certainly committed to do so in a way which was consistent with the commitment made to the Napier community. While the solution was always going to be less than optimal for those who advocated that the Regional Hospital should be in Napier, the fact that these commitments were made, and the new health centre now established, is something the local community leaders and Geoff Braybrooke can take some credit for.


SALE AND LEASEBACK

 As part of the funding options considered during the establishment of the Hawke’s Bay Hospital, HCHB, CCMAU and Treasury investigated the possibility of a sale and leaseback of the new theatre block. We were encouraged to do so to establish whether these arrangements were able to be structured and, if so, at what cost and under what terms and conditions. The mechanism for a core facility within a regional secondary hospital was considered to be unwise. What did emerge from that discussion was that where land and buildings could be leased for the establishment of health centres or other stand-alone facilities, then such arrangements may represent an opportunity for the Crown to redirect its health investment into health technology and health skills where alternative sources of funding may not be available.

 HCHB had numerous discussions with its bankers, who are the Bank of New Zealand, and discussions separately with WestpacTrust. At the time both banks indicated that while they were happy to manage the transaction business, they were unwilling to invest to support substantial capital development where there was uncertainty in future cash flow. Added to that was the situation that HCHB was up to its borrowing ratio limits in terms of its covenants with RHMU, it was in the middle of a substantial capital development plan which obviously had a potential risk around its implementation, and in particular it had a short term approval of its business plan from shareholders.

 Recognising these limitations, a proposal was put by HCHB to officials that a mandatory convertible note should be contemplated. This had particular advantages in that the borrowing would be done at a modest margin above Crown rate; would be able to be redeemed at any time from the date of issue through to the maturity in what was then 1997 dollars; and the Crown would retain ownership of the buildings and be fulfilling an appropriate objective in ensuring that there was a sensible level of capitalisation of the business. That proposal was rejected by the shareholding ministers.

 In the letter attached you will see that reference is made to the fact that the final instalment of capital to be provided by the Crown was indeed final, and that no further money was to be provided. You will also see that there is specific encouragement to the board “to fully investigate options for private development and ownership of facilities”, and there is a statement that the funding provided by the Crown to that date should enable the completion of the regional plan to be implemented. The media release attached to this letter makes reference to the $41 million that the Government has already made available for the new regional hospital development. Given that this had been a combination of both RHMU debt and equity, HCHB viewed this as a further confirmation that there was no more capital funding, both equity and RHMU debt.

 There can be no argument that HCHB had been quite specifically informed that no further capital money would be provided by the Crown. HCHB then proceeded with an appropriate understanding from officials to explore the opportunity of leasing facilities at Napier and Central Hawke's Bay in order to complete its reconfiguration plan. It is important to note that this was not an exercise done in isolation. It was a complex project which was, along with everything else that HCHB did, very much in the public eye, was subject to significant review by agencies, and ultimately of course was only sanctioned by those agencies and the Minister.

The process undertaken by HCHB and the acceptability of the terms and conditions of leaseback have been independently examined by Audit New Zealand and found to be appropriate.

 Had the Crown actually agreed to fund these developments then there would have been a capital charge of 11% in respect of the Crown's contribution, HCHB's operating costs would have been the quantum of the capital charge plus depreciation. Given the evidence that no further debt was available, the combination of capital charge plus depreciation would have been a charge of approximately $1.81 million per annum. This, of course, is significantly higher then the lease costs of $1.21 million.

 During the whole of this period, HCHB was endeavouring to gain officials’ understanding that with significant capital expenditure programmes, efficiencies could be expected but the level would not necessarily cover the costs of capital and depreciation since, amongst other things, there was inevitably an increase in the quality of facilities also. This is now recognised as being so, and indeed a national HFA/HHS technical group has acknowledged that this particular factor is not appropriately recognised in current pricing. Had that recognition been implemented earlier, then the deficit position faced by HCHB would not have existed. A consequence of that would have been that HCHB would have been placed in a position where it could have obtained private sector finance and saved almost $1 million on interest as a consequence of the premium rates being paid to RHMU.

 In summary then - HCHB has operated strictly in accordance with the environment for decision making at that time, it has done so with a primary focus on clinical outcomes and an appropriate delivery mechanism for the public funded provider, and it has only proceeded after appropriate external examination by agencies and with appropriate shareholder approval. In that context, criticism of HCHB on the matter of leasing facilities should be reviewed.


WHAT IS THE HEALTH CENTRE?

Attached is a brochure which will enable the reader to get a better perception of the nature of the centre. It is really a comprehensive “one stop shop” or “super clinic” that adopts a single integrated health delivery model. It is conveniently placed for the citizens of Napier, it is new and has the flexibility that is required for the future, and it has delivered on the undertakings given to the community and its representatives over the last five years. It is unlikely that Napier would have been served by such an excellent facility had the advocacy not been so strong. HCHB would hope that its acknowledgement of others advocacy would be recognised.


CCMAU REPORT TO MINISTER

The information contained in the CCMAU report was in some respects incorrect.

 Appended to this letter is a schedule of actual performance against budget for the period to date. You will observe that the differentials are in fact exceedingly modest and represent an excellent performance given the $100 million plus operating budget.

 HCHB undertook a capital development plan involving some $65 million of expenditure (including the Napier and Central Hawkes Bay facilities which were funded through an operating lease). This entailed major new building and upgrading of the Hawke’s Bay Hospital, new health centres in Napier and Central Hawke's Bay, complete refurbishment of the Wairoa health centre, and disposal of some 30 surplus properties. It delivered within budget and on time.

 The transition and logistical challenge of implementing a large-scale development plan while continuing to provide services and then managing a transition to a single site was successfully accomplished.

 Not only was this successfully accomplished but the Hawke’s Bay Hospital and the community services gained accreditation in 1999, which reflects enormous credit on the dedication and commitment of its staff.

 HCHB committed to operating cost reductions of $19.1 million (although some of this involved service exits, resulting in net efficiencies of approximately $16 million) and reductions of 369 staff. Of this the 94% of the efficiencies were successfully achieved. Long term targets for occupancy levels, day case rates and length of stay were established at the outset of the project, based on international research of best practice facilities. The targets established were considered aggressive by our clinical staff, however these have now substantially been met, with a number of areas exceeding targets. This is despite the fact that initial planning suggested that these targets would not be achieved until 2006. Extensive process re-engineering was undertaken. Hawke’s Bay probably has by far the most up to date service both in terms of facilities and processes, which are regularly visited by other HHSs.

 In conjunction with CCMAU and HFA, HCHB has just completed a wide ranging performance analysis to identify what additional opportunities for further efficiencies or improvements in general performance are available. This study has shown HCHB’s performance is by all accounts within the top quartile of HHSs, and established that any further opportunities are indeed insignificant. The potential has been assessed at approximately $0.5 million which was already factored into the 1999/00 business plan.

 HCHB has therefore performed very well indeed in comparison to its business plans, it has achieved 94% of the efficiencies it identified in 1994, it has successfully completed the implementation of a complex regional reconfiguration and has its major facility and community services accredited.

This all adds up to a good outcome for the community, the government as funder and shareholder, and for the future of public health provision. As indicated to you, I believe that the team at Healthcare Hawke's Bay are deserving of encouragement and recognition for their performance.


Yours sincerely

(signed)

P D Wilson
CHAIRMAN

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