Major healthcare reform is underway

The Health and Disability System Review, chaired by Heather Simpson, has now published its Final Report (HDSR Report) which makes significant recommendations for reform to the governance and planning of the health and disability system.  This follows the release on 10 June 2020 of the first National Asset Management Programme report (NAMP Report) by the Ministry of Health on the current state of district health board (DHB) facilities.

The HDSR Report recommends an overhaul of governance:

  • two new independent agencies to sit alongside the Ministry of Health (Health NZ, responsible for health service delivery, and a Māori Health Authority, to advise and report to the Ministry on all aspects of Māori health);
  • only 8-12 DHBs (reduced from 20), with members appointed rather than elected; and
  • the creation of new planning instruments.

This is a direct response to last year’s Interim Report, which identified that stronger leadership, greater integration and more long-term planning are needed across the healthcare system.

The NAMP Report is the first comparable nationwide report on the condition and clinical fitness of DHB facilities and buildings.  The findings of the NAMP Report are not unexpected, however it is an important first step in developing a national framework to improve capital funding decisions, capital investment plans and asset management, and as a result, healthcare outcomes.

Although the Government has had a renewed focus on our healthcare system over the last few years, these reports are timely as the Covid-19 crisis has put the capability and capacity of our healthcare sector front of mind and illustrated the social and economic importance of having a robust and responsive healthcare system that also embraces and invests in new technologies.

We discuss below the key findings of the HDSR Report and NAMP Report, next steps, and provide our view on other tools that could help to improve our healthcare sector, including:

  • an alternative funding model for Crown assets;
  • changes in the planning and consenting space which could make it easier to progress new and upgraded healthcare facilities; and
  • supporting the increasing role of the private healthcare sector.

Challenge of capital investment and operational demand

A growing and ageing population is creating an increased demand for both hospital and community services.  Increased clinical complexity due to an ageing population, and keeping up with ongoing developments in health and digital technologies, are adding further cost pressures.

However, many DHB buildings are approaching the end of their life, IT assets are hosted on an ageing infrastructure with limited network capacity and many clinical facilities are not fit for purpose.  The HDSR Report found that the “state of current assets and the lack of integrated forward planning for investments has left the system with a significant challenge”.

In 2018 the need for a national evidence-based prioritisation framework for investment in DHB assets was identified.  The NAMP Report is the first deliverable and is to be followed by a full National Asset Management Plan with investment scenarios by 2022.  The key objective is to have a consolidated picture of DHB asset management plans to improve the quality of capital funding decisions, asset management, and long-term investment outcomes across the country.

The NAMP Report shows that there is significant work to be done…

“Average” means buildings or assets have deteriorated to a degree where maintenance is obviously due, but not to the extent that the building’s function is significantly impaired.

“Poor” or “very poor” mean the facilities or assets are inadequately sized, have a poor layout, may pose health and safety issues and require repair or renewal – urgently, in the case of facilities ranked “very poor”.

The HDSR Report notes “the design and construction of the hospital buildings that the health system is currently undertaking, and planning for the next 10 years, will be the largest and most complicated vertical construction programme that New Zealand has ever undertaken”.  The National Asset Management Plan will be an important tool to identify, prioritise and cost these projects.

In terms of IT assets and technology, the NAMP Report notes that limitations in funding, infrastructure and legacy applications, and the slow adoption of national data standards for interoperability, have prevented DHBs from embracing rapid changes in health technologies and meeting the expectations of modern clinical staff. Of the 20 DHBs assessed:

The NAMP Report highlights an estimate that DHBs currently spend 2.3% of their operating budgets on IT, with 90% spent on supporting aged and outdated systems and infrastructure. According to Deloitte (2015), this should increase to 4.6%, with 75% spent on maintenance and 25% on new technological investments.

Given the recent threat to the New Zealand healthcare system posed by COVID-19, and the concern that hospital facilities and systems would be overwhelmed, there has never been a more important time to invest in new technologies that are fit for purpose, that drive efficiency and enhance patient experience.

Changes to healthcare funding is needed

The HDSR Report notes the system is significantly underfunded and changes to both the level of funding and how the system is funded are needed.

In 2018 it was estimated that $14 billion investment in DHB buildings and infrastructure, and $2.23 billion investment in DHB’s information technology, would be required over the next decade. Although the Budget 2020 provided funding of $750 million for priority capital projects this still falls short.

The HDSR Report found that the DHBs’ current funding framework makes long-term planning difficult. DHB funding varies on a year-by-year basis, and changes can be volatile. The HDSR Report recommends that a new agency Health NZ be established to develop a long-term investment plan and pipeline for prioritised nationally significant investments, and be supported by a new specialised Health Infrastructure Unit. The HSDR Report also recommends that DHBs should be required to develop local investment plans, and a change made to how DHBs’ funding is calculated to take into account population (including ethnicity mix), needs, and costs.

We consider that more innovative funding mechanisms will also be required. One option is to recognise and take advantage of the fact that many funders in the private sector are looking for long-term stable government-risk investment opportunities. Many funders are willing to lend on the effective security of a government-risk payment obligation. This can take the form of a direct leasing structure utilising a special purpose vehicle (SPV) intermediary as a funding solution for healthcare projects. This structure can:

  • Retain full long-term ownership by the Crown, the DHB or iwi of the land on which the relevant healthcare facilities are built. The relevant land can be leased by the Crown, the DHB or the iwi to the SPV and the completed healthcare facility can then be leased to the DHB or other operator. At the end of the lease term, the two leases expire and can be removed from the title (if they have been registered).
  • Access private sector financing at the best possible rates – by way of a fixed rate, inflation adjusted rental payable by the Crown/DHB to the SPV for the completed healthcare facility. That rental receivable can be structured to fit the amount and term of the funding utilised by the SPV to pay for the construction of the relevant facilities, and can be secured by the SPV in favour of the financing bank.
  • Enable the Crown and/or DHBs to procure experts to deliver different parts of the relevant healthcare project focused on their areas of expertise and risk, thereby bringing more resilience into the procurement process and reducing overall procurement costs.

In essence, the structure enables builders to build, banks to finance and DHBs to deliver key health services.  Other appropriate experts can also be engaged to provide their skills and expertise, e.g., property management services, etc.

We have seen new innovative ways to finance infrastructure in the last few years, and our experts think public health capital projects offer an attractive investment using similar mechanisms.

Changes in the planning and consenting space could make it easier to progress new and upgraded healthcare facilities

The HDSR Report comments that health capital planning needs to be integrated with other national and local government planning. The recommended Health NZ pipeline for nationally significant investments is intended to bridge this gap and support integrated planning.

We have acted for a number of healthcare sector clients and been involved in making submissions on their behalf on the reform of the Resource Management Act 1991 (RMA), and both national and local policies and plans, to support and enable the development of healthcare facilities.

Most of our public healthcare facilities are appropriately recognised in district plans by special purpose hospital zones. These zones recognise and provide for the changing needs of healthcare services and facilitate the development of these sites over time. However, planning constraints can arise where a new hospital location is required or an existing hospital seeks to expand.

Under the RMA, DHBs do not have the ability to be approved as a requiring authority and must rely on the Minister of Health if any land is to be publicly acquired. As a result, many hospital sites are not subject to designations and need to rely on zone provisions or obtain resource consents for development to proceed. In seeking resource consent, the RMA framework has long been criticised for the time and cost of the process, and that the decision-making criteria fails to provide sufficient weight to regional or national benefits of a project.

We agree that a coordinated and consistent approach should be taken to planning for healthcare projects, and the following planning initiatives could help:

  • The National Planning Standards (which took effect in May 2019) explicitly recognise the appropriateness of including enabling “Special Purpose – Hospital zone” in RMA district plans. As this Special Purpose – Hospital zone is rolled out across the country it can provide a zone for hospitals that recognises development and operational needs.
  • The COVID-19 Recovery (Fast Track Consenting) Bill recently introduced to Parliament, is to introduce a process to fast track consents for projects with a ‘significant public benefit’, including employment generation and social wellbeing benefits. This process is intended to be quicker than the normal RMA consenting path, and under the current wording of the Bill it is considered that healthcare projects would meet the gateway criteria.
  • The Resource Management Review Panel is due to report back to the Minister for the Environment by the end of June 2020, and then Cabinet will make decisions on how to progress the Panel’s recommendations. It is likely that a wholesale review of the RMA will occur, which could give DHB’s greater powers to acquire land or more certainty to progress development projects.

Supporting the private sector’s growing role in the provision of healthcare could be part of the solution

The number of surgeries DHBs outsource to private healthcare providers increased by 50% from 2013/14 to 2017/18. The HDSR Report recommends DHBs consult with private healthcare providers to provide for more efficient collaborative planning going forward.

Currently, DHBs outsource 5-7% of elective and arranged surgeries. Elective surgery has a significant impact on social and economic wellbeing, as it often involves treatment of a disability that can enable a person to return to employment sooner. Elective surgery rates are also steadily increasing, particularly for the 65+ age group.

While outsourcing elective surgery to the private sector was developed as a short- and medium-term response to DHBs’ capacity issues, there will be an ongoing need for private healthcare providers to meet the shortfall in public healthcare capacity. The importance of a strong private healthcare sector also comes to the fore when an emergency or crisis hits. The critical role of the private sector should be recognised and its ability to help meet healthcare demand supported.

This can also be achieved by the appropriate zoning of private healthcare facilities to Special Purpose – Hospital zone, projects being advanced under the proposed fast track consent process, and appropriate recognition of the role and benefits of private healthcare sector in any review of the RMA.

Next steps in healthcare reform

Hon David Clark, Minister for Health, has stated that Cabinet will begin making decisions on HDSR Report recommendations over coming months, while recognising that change will take several years. The Prime Minister, Minister for Finance, Minister for Health and Associate Minister for Health will be responsible for driving these changes.

However, the NAMP Report has highlighted that capital investment is required now, and in our view it is important that priority capital projects are not delayed while waiting for wider reform.

If you wish to discuss any of the matters in this article in more detail, please contact one of our Healthcare Sector experts.

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