How did Health NZ go from $500 million of savings to a $1 billion hole?

A watchdog said Health New Zealand's financial reporting had improved significantly just weeks before a huge deficit came to light, documents show.

Further documents are set to be released on Monday that may shed more light on how Te Whatu Ora lurched from an expected $500 million of savings, to a $1 billion deficit - described just last week as even worse than expected.

In January, a monitoring report said: "There has been a significant recent improvement in the quality of reporting on financial performance and non-financial performance by HNZ."

Six weeks later, the monitors at the Ministry of Health said they had found out for the first time about a "significant and unexpected overspend".

By June 2024, the watchdogs had concluded: "Financial transparency issues impacted the ability to appropriately enquire on performance and hold the organisation to account."

Yet in preceding months, the ministry had been in charge of giving monthly financial reports about HNZ to the minister.

It told RNZ it would make those reports public "soon".

In addition, HNZ was preparing information for proactive release "which will likely include key documents provided to the ministry and the Minister of Health relating to HNZ's financial performance", the ministry told RNZ.

It is possible this will be among the documents that Labour said it expected would be released to MPs on the health select committee when it meets on Monday morning at Parliament.

In the run-up, Health NZ put out its its latest quarterly report last week, showing its deficit growing in just three months by almost $700m to $934m.

The ministry was charged with keeping tabs on Health NZ. But documents show it was still grappling with how to do this in late 2023.

This job was "substantively different" from its monitoring 20 district health boards prior to July 2022, the ministry was "considering its role" and it needed "greater clarity", a report to the minister said.

The ministry had at least half a dozen boards, groups or initiatives to call on for help, yet said it was surprised in March this year to find out that HNZ was leaking $130m a month.

The checks-and-balances system included:

• A joint leaders group
• An operational performance committee of the executive leadership team set up in October 2023
• A new performance framework at HNZ
• A new quarterly monitoring cycle at the ministry
• A system reform integration office, and a system reform assurance office set up in December 2023
• A new reform roadmap issued in October 2023
• A new finance management programme.
• A lot of time and money was spent establishing this framework, including on many consultants' fees dating back to 2020 when work on Te Whatu Ora began.

From the start, one of the five core objectives was "sustainability - to prevent, reduce or delay health need wherever possible, and ensure a more financially sustainable system".

In mid-2023 a report said: "Significant investment was made in Budget 2022 to meet this government's commitment to ensuring Te Whatu Ora began operations on a sound financial footing."

A little later, by October 2023, HNZ was reporting a $19m surplus.

Yet internal reports show there was reason for doubt.

"With regards to financial reporting, the Ministry of Health Regulation and Monitoring directorate and Treasury position is that the [HNZ] board needs greater visibility around managing cost pressures within budget and protecting the expected operating surplus and underlying 'breakeven position'," a monitoring report in late 2023 said.

In January, the monitors said "we need to understand further HNZ financial forecasts" and "we are working with HNZ to further understand the assumptions behind their forecast."

In December, the system reform assurance office (SRAO) took over where a ministerial advisory committee (MAC) had left off.

Yet though this office was charged with safeguarding the entire reforms, it did not look at the financials.

"The work being undertaken by the SRAO has not included reviewing the financial performance of Health New Zealand," the ministry told RNZ.

SRAO was part of meetings that talked about finances, but these discussions "did not delve into matters concerning potential financial deficits" because that was beyond its remit, the ministry said.

In early 2024, the final report of the now-defunct MAC listed some pluses and minuses: A new finance management programme was "on track; and priority had been put on finalising back-office structures, including finance - HNZ "has entered 2024 with these structures in place and key roles filled".

Yet the MAC also urged Health NZ to "rapidly" improve its internal performance monitoring to enable the board to know what was going on.

At this stage, HNZ was still talking about making $540m in savings against baselines for 2023-24.

In May, this had changed drastically to an expected $528m deficit, the newly released documents show.

By last week, HNZ had reported a $934m deficit for the year to July.

The ministry had not seen this coming, even though the major contributor - at least initially - was the well-signalled and publicised recruitment of an extra 3500 nurses in 2023.

March 2024 marked the first time that detailed HNZ board papers had gone to the ministry and Treasury, it said.

"The ministry ... is reliant on the flow of financial reporting from the agency," it told RNZ.

The monitors by mid-2024 concluded: "Indications of risk in the hospital sector and nursing recruitment were not evident to the board in advance.

"This reflected a lack of granular information, disconnected systems, and limited financial expertise on the Health NZ Board. Focus should have moved to understanding monthly activity performance and financial performance."

Some critics have questioned if the board and some of HNZ's senior leaders have been scapegoated.

The newly released monitoring reports said overall financial performance was reported to the board as being "better than planned" in routine briefings, but "there was a lack of information to support this" and a lack of risk assessment.

The lack of reporting extended to Budget 2024, according to a 'direction-setting' report in June.

Prior to May's Budget, Treasury had expected the Ministry of Health and HNZ to provide advice on "cost pressures, and connect this across Budget advice" to set and test policy.

But "the agencies did not fully achieve this in Budget 2024".

"Not enough financial information was available from Health New Zealand to cost" policy scenarios, documents showed.

HNZ had tried hard, all the agencies agreed.

"We formed the impression that Health New Zealand had worked actively to improve the quality of financial information ... approaching this through the implementation of a new financial system, a more consistent approach ... and driving a better understanding of how costs and activities relate to one another."

It had evidently needed more time

Belatedly, the officials agreed on a "refreshed set of expectations" between HNZ, the ministry and Treasury "on how accountability will be set and managed, and how progress will be proactively monitored and assurance will be gained".

A 27 June monitoring report said, "Health NZ is developing a plan for financial sustainability that will set out the pathway to break even, and the options for the necessary savings and trade-offs to deliver a balanced budget."

Yet by July, the ministry was still saying it was "yet to be apprised of the key underpinning assumptions" behind the big health deficit.

However, it was clear that making savings on staffing costs were part of it: "Health NZ has confirmed that this forecast is based on a gradually improving trajectory through the year as the controls and mitigations they are working on, or have put in place, take effect on the financial results," the ministry told the minister on 3 July.

The documents show the elaborate system of checks and balances had not worked properly since 2022.

These are now being altered and supplemented by the same watchdog, the Ministry of Health, that for two years had not discerned the financial hole at HNZ.

"We are enhancing our financial monitoring for the coming year, underpinned by a clear monitoring framework and information requirements, and a set of measures that allow for the tracking of key risks. We will develop this further as Health NZ's plans are refined, together with the Treasury," the ministry said in June.