Less to government move than meets the eye

The Government yesterday moved to cover the capital charge that District Health Boards have to pay the Government.

But the proposal contains a number of catches which may mean there is less to it than meets the eye, and a long-promised review of the whole concept of the capital charge is still underway, well over a year after it was first announced.

In effect, the boards have had to refund grants they were given by the Government according to how much new investment they undertook.

Health Minister David Clark said the Government had set aside a contingency in the Budget to support DHBs with their capital charge costs as a result of building new facilities.

“The Wellbeing Budget included $1.7 billion for capital investment in our hospitals and other health facilities over the next two years,” said Dr Clark.

“As it stands, DHBs are required to pay back 6 per cent of the cost of any Government capital investment in the form of a capital charge each year.”

Clark told POLITIK IN April last year that the charge was being reviewed; that work, apparently is still ongoing.

However, in the meantime, he is making some concessions.

“In the interim, the Government has decided to directly fund DHBs for their capital charge costs for new facilities,” he said

But there are two catches. First, the move announced yesterday does not cover the vast bulk of investment already underway at DHBs.

“The change will apply only to DHBs which receive Government funding for capital investments from 1 January 2019. It does not apply to capital charges relating to earlier investments,” said Clark.

And second, DHBs will be penalised for having deficits.

In an explanatory note on the decision, the Minister’s office said DHB deficits would be a factor when calculating how much capital charge relief is provided.

“If, for example, a DHB has a $30 million dollar deficit, that will be subtracted from the value of the new capital asset as part of the calculation,” it said.

“So, in effect a new $300 million asset being transferred to the DHB would be treated as a $270 million asset, meaning the DHB would receive $16.2 million. This will further encourage sustainable financial management.”

Last week, the Auditor General, John Ryan, in a letter to Chief Executives of District Health Boards, summarising the main matters arising from the 2017/18 audits of the boards said they had paid the Crown over $323.6 million in capital charge – more than the sector deficit of $257.3 million.

“Some of this was funded by the Crown because it arose as a result of revaluations increasing the value of assets,” he wrote.

“But increases in capital charge for new capital, such as for new hospital buildings, are not funded.

“DHBs clearly feel the impact of the sudden increase in capital charge in these circumstances.

“As we have noted previously, it is not clear what the capital charge is actually achieving in the health sector.

“I look forward to the findings of the Ministry of Health’s review of the health capital funding system.”

Ryan said there was an ongoing concern over the national hospital estate and its ongoing viability.

“Significant proportions of the estate have reached an age where buildings need to be replaced, and updated facilities are needed for a population that is increasing and getting older.”

That view was echoed in Treasury’s 2018 Investment Statement which  estimated that over 19 per cent of hospital assets (by book value) were rated in poor or very poor condition

“In the Southern region over 16 per cent of assets are in very poor condition, which is a major driver for redevelopments in Christchurch and Greymouth and planning for the replacement of Dunedin Hospital,” the statement said.

“A 2017 report by the Treasury found that scheduled maintenance performance required improvement.

“A number of DHBs reporting underspends in maintenance also had net deficits, suggesting that some DHBs may be deferring repairs and maintenance to redirect operational expenditure to other areas.”

The charge has been under criticism for some time now.

In 2016, the-then Auditor General, Lynne provost said: “Among the many costs contributing to financial pressure on DHBs is the capital charge that the Government places on DHBs’ net equity. It is not clear to me what the capital charge regime is actually achieving in the health sector. If anything, it appears to be giving DHBs an incentive to use debt funding.”

The problem, as the Association of Salari3ed Medical Specialists, pointed out in a study last year, is that the DHBs have limited cash resources with which to pay the capital charge and so must resort to borrowing to cover it.

The report said their options were limited because DHBs have little surplus assets to make a capital repayment (such as cash) and their larger capital assets (such as hospital buildings or clinical equipment) cannot be easily reduced in size or value.

The ASMS also says the capital charge opens the door to private funding of hospital assets.

“The capital charge on DHBs is creating inefficiencies in capital management leading to significant additional costs and safety risks in service delivery,” their report said.

“The capital charge is also leading DHBs to turn to private funding to either partially or fully finance impending capital projects such as through public-private partnerships (PPPs) or private finance initiatives (PFIs), which have been shown overseas to lead to crippling long-term costs to public health services.

“To avoid these additional costs to health services which are already struggling to meet increasing health needs, the capital charge should be abolished, and loan funding from the Crown reinstated.’