DECADESOLD FUNDING DEBACLE

“Unique and significant financial challenges” apparently caused one independent rural Otago hospital to be bailed out by Te Whatu Ora. But the reality is all the region’s trust hospitals report large-scale issues born from a funding formula called the Price Volume Schedule.

Oamaru Hospital was just one of several trust hospitals struggling to keep up with the ever-increasing cost pressures.

Speaking before Te Whatu Ora’s decision to reacquire Oamaru Hospital was made, Corporate Services Director Andrea Cairns told The Specialist, “We are in dire straits.”

“We are spending $2 million a year on locums to keep services running. This is costing us dearly and we are worried we can’t even keep the lights on.”

Oamaru Hospital faced closure before in 1998 after Southern Health decided it was no longer “financially viable” to maintain the hospital. This followed cuts in 1991 when hospital surgical services were threatened and 13,500 residents participated in a street march.

In 1994 surgical procedures were cut for inpatients, and in 1997 all surgical operations requiring anaesthesia were cut. Then the maternity annexe was closed.

So in 1999 Waitaki District Council set up a holding company, took ownership of the hospital and started to run services itself. The site of the hospital was moved down the hill into the township. Since then, grounds kept by volunteers have helped save costs, and donations from the community have allowed the purchase of new equipment and the expansion of services.

The model worked for nearly 20 years. Oamaru’s 22,000 residents had access to care. In the year of 2023/24 the emergency department saw 8,713 patients through its doors, up from 7,507 the year previously. It also welcomed 65 new residents in its maternity ward.

Dark maths of the Price Volume Schedule

As the population of Oamaru has increased, so too has the demand for health care services.

So called “trust hospitals” like Oamaru traditionally received central government funding through a system called the Price Volume Schedule. This essentially outlines what services each hospital will provide and the amount of money each hospital will receive from Te Whatu Ora to deliver them.

The issue is these contracted arrangements hail from the days of the former DHBs and locally arranged rates.

There is a lack of consistency. Speaking to different trust hospital heads reveals they all receive differing amounts to provide similar services.

“There is not enough funding for the rural hospitals,” Cairns said.

“Te Whatu Ora provides about 85 per cent of our income. We get some through ACC and private patients from time to time.”

But the Price Volume Schedule has never allowed for increases to staff salaries.

As a result hospitals have been expected to face year-on-year, real-terms pay reductions. This only creates issues for staff retention. Nurses and doctors can earn more living in more populous areas and get better entitlements.

To combat the issue, Cairns says Oamaru committed itself to pay parity, but it came at a much higher cost than expected.

“In Oamaru we dedicated ourselves to ensuring that everyone received pay parity,” she says.

“We have to recruit staff, and we cannot recruit staff if they can easily earn more money working in non-rural hospitals. If we did not give pay parity to nurses, we would risk them leaving. We are already short of nurses and doctors.”

But shortages had already led to a greater reliance on locums and a subsequent ballooning in the costs associated with using a contractual workforce. Those costs started a cycle that saw Oamaru Hospital become increasingly financially unviable.

Other rural hospital leaders say the Price Volume Schedule is not fit for purpose.

“The Price Volume Schedule is an absolute dog’s breakfast,” says Clyde-based doctor Jonathan Wills.

“It is wildly inconsistent across the country. It is never adjusted for increased demand and the increased costs that have occurred over the years. It has starved rural hospitals out.”

Requests from The Specialist to Te Whatu Ora to view the Price Volume Schedule, and to engage about the rationale behind it, have gone unanswered.

Official Information Act requests to view the relevant documents have not been particularly fruitful either. There is too much complexity, and unpicking the data is too costly.

What is known are the total amounts each rural hospital in the Southern region receives.

Clutha Health received $8.2 million, Gore Health received $9.6 million, and Central Otago Health (Dunstan) received $16.4 million, as did Oamaru.

The rationale behind why some receive more than others is not known.

Equally, what is also known is the demand, complexity, age and expectations of the community have all increased.

“Over the last 15 months presentations have increased month on month,” Wills said.

“The funding needs to grow in line with our population. We have more over 65s who have complex needs and are living longer with those needs. It is just the world we live in now, and the Price Volume Schedule should reflect that.

“As a trust hospital, if we ran over budget we could not just say sorry and ask the Government for more money.

“If we run out, we have to declare bankruptcy.”

The issues at the rural hospitals show that public health care does not work well if treated as a business. So on May 28 this year, Oamaru Hospital had to be bailed out after the books no longer balanced.

Te Whatu Ora stepped in and announced it would not renew the hospital’s annual contract due to “unique financial and clinical challenges”.

Oamaru Hospital was sold back to Te Whatu Ora for about $1 million, including the clinical equipment (some bought by the community), leases, service agreements, and $250,000 for hospital supplies.

“For staff, the decision to roll back into Te Whatu Ora is good,” Cairns says.

“It means they will no longer have to fight to get pay increases and terms and conditions other staff at city hospitals get.

“But our community will be a bit more apprehensive. They have seen this model before and they have long memories. We have received a letter from Chief Executive Margie Apa stating they do not intend to close the hospital. We will have to see how the community reacts.”

The letter from Apa states, “I can confirm there is no plan to close Oamaru Hospital or withdraw any of the current services.”

But the letter also states that Te Whatu Ora needs to “ensure future health service provision is clinically and financially sustainable. This means looking at models of care that enable better access for Waitaki communities and reduce the inconvenience of travel that many experience with care.”

This letter was also received before the appointment of Commissioner

Funding falls flat in other centres

Oamaru may be the first to falter, but every private or trust hospital visited by The Specialist had similar issues.

Cairns says health, and rural health, has been underfunded for years.

“We were underfunded in 1924 and have been struggling for finances for more than 100 years.

“Rural health is always, to an extent, reliant on the community and the goodwill of the medical staff to push through. It needs to change.”

In Balclutha, chief executive Gary Reed echoes the sentiment.

“The short answer is, it [funding] does not keep up,” Reed says.

“There are many additional costs, and the Health New Zealand contracts do not cover their way or, at best, are cost neutral.

“All the staff require pay parity, and that means we will face a significant trade deficit. Unless we see additional funding, it is unlikely we will be here in 12 months.”

Reed says the big concern is what happens when that money does run out as expected.

“We will come to a point where we will run through our reserves and then face closure,” he says.

“The question is, can we even do that? It is irresponsible to run a company into financial ruin. Our shareholder is the community, and they will expect better.

“We need pay parity and the cost of delivering services to be reflected in the Price Volume Schedule, and for that schedule to be fair.”

Chief Executive of Gore Health Karl Metzler goes further and says the funding discrepancies are creating a “financial apartheid” in the rural regions.

“The average life expectancy of a Māori male in Mataura is 50 years old,” Metzler says.

“The average life expectancy for a man in Queenstown is 85. That’s not fair.

“I believe the affluent Pākehā populations and impoverished populations deserve proper access to health care regardless of their financial status.”

Metzler says Gore ran at a $300,000 deficit last year, and this year it will likely be the same mainly due to matching urban pay rates that have not been funded for.

“We should be looking towards a Ministry of Education system where all the wages are handled in Wellington to remove regional fluctuations,” he says.

“Or move away from the Price Volume Schedule and into specific purchasing of the services Te Whatu Ora wants to provide. Last year we had a 22 per cent uplift in ED presentations but not a 22 per cent increase in funding.

“All our services and capability come from this Price Volume Schedule, and it is different for all the hospitals. We need consistency across the regions.”

Rural Sustainability Project

Te Whatu Ora National Clinical Director for Primary and Community Care Sarah Clarke says the sustainability of rural hospitals puts the practice of using the Price Volume Schedule in a new light.

“There are currently 26 rural hospitals in New Zealand, and eight of those are privately owned trust, charitable or limited liability organisations,” she said.

“The Price Volume Schedule is the way that some of them are funded, some are contracted differently, and it does vary really greatly between regions. It’s a mosaic.”

“I guess this reflects the District Health Board priorities and approaches that also varied across the country. So, the Price Volume Schedule is a mosaic at the moment, and we are trying to figure out its current state and then work on what long-term sustainability and maximising rural hospitals looks like.

“There is amazing work being done in the communities right now. But rural hospitals always say they are at the end of the drip line in terms of resources, be that human resources, clinical resources or funding. They have not been allowed to maximise their opportunity.”

The Rural Sustainability Project is set to look at the current state of play of rural hospitals and make them sustainable for the 2024/25 year.

“The next piece of the puzzle is to determine what future sustainability looks like and sort that mosaic out with a national commissioning approach.”

Clarke says the difference in funding does relate back to the former 20 DHBs, and she hopes a core part in unifying Te Whatu Ora into one organisation is to create more consistency across the rural hospital networks.

One area casting doubt on the project is the recent announcement from Commissioner Lester Levy about financial insolvency and potential cuts across Te Whatu Ora.

“This is a tricky space for rural hospitals,” she said.

“We know some hospitals prioritised paying their staff the same rates as Health New Zealand or close to the same rates where they could, because they are competing for staff.

“But we do not have the funds to be able to fund pay equity separately. There does need to be another carrot, another incentive, as attracting staff to work in rural places has always been a challenge.”

Clarke is aware only too well what happens if there are cuts to services on the front line. She says in her hospital role there are often beds closed when roster gaps cannot be covered, and this means patients miss out.

Seeing this happen across rural regions is not a scenario she wants to see.

“For people, that means having to travel to another hospital for treatment,” she says.

“Often that is not even an option. They may not have a car, they may not have petrol, or they have both but no registration, and public transport is terrible in the regions.”

Clarke is optimistic good changes are on the horizon. “It is an exciting time,” she says. “We have a team and we have a rural health strategy, which we have not had before.”

How do rural hospitals respond?

Andrea Cairns says the Rural Sustainability Project is a positive move for rural health in Aotearoa.

“I believe this will help, and it is certainly a step in the right direction; however, as with anything, this piece of work will take time to achieve the flow-on effect.

“For Oamaru Hospital, it did miss the boat, but hopefully the other NGO rural hospitals will benefit from it soon.”

Gary Reed says Clutha Health has received a revised offer of contract from Health New Zealand with some increased funding provisions to put the hospital into a “cost neutral” position.

“The caveat to this is there is no surplus or ‘profit’ provision to what is being paid, which means the company has no revenue beyond the cost of service delivery for sustainability, service development or maintenance.

“This will have to be addressed in the 2025/26 contract provision.

“To date, Clutha Health has had no engagement or seen any terms of references [for the Rural Sustainability Project], timelines or principles. It may have hit somewhere, but to date it remains an unknown entity in my neck of the woods.”