A.5 Management discussion and analysis

Management discussion and analysis for the Health Directorate for the financial year ended 30 June 2013

General overview

Operations and principal activities

The Health Directorate aims to achieve good health for all residents of the Territory by planning and providing quality community based health services and hospital and extended care services, managing public health risks, and promoting health and early care interventions.

The Health Directorate’s objectives are grouped around the following seven key performance areas:

  • consumer experience
  • sustainability
  • hospital and related care
  • prevention
  • social inclusion and indigenous health
  • community based health, and
  • aged care.

Changes in administrative structure

The Directorate did not gain or lose any functions in the 2012‑13 financial year.

There was however, a change to funding arrangements. The ACT is a signatory to the National Health Reform Agreement, which changed the way hospitals are funded nationally. As a consequence, the ACT Government created a new Local Hospital Network (LHN) Directorate for receiving funding for both activity-based services and block-funded services from a national pool of funds that was contributed to by Commonwealth, States and Territories. The changed funding arrangement meant that the Health Directorate is no longer funded by the Government directly for hospital services.

The ACT Local Hospital Network Directorate purchases hospital services from the following ACT public hospitals:

  • the Canberra Hospital
  • Calvary Public Hospital
  • Clare Holland House, and
  • Queen Elizabeth II Family Centre.

Risk management

The Directorate’s management has identified the following potential risks that may influence the future financial position of the Directorate:

  • abnormal rates of staff separation
  • the cost of medical malpractice indemnity
  • ability to attract and retain health professionals
  • rising costs of pharmaceuticals, medical and surgical supplies
  • demands on replacing systems and equipment, and
  • growth in demand for services.

The Government and the Directorate have responded to these risks in a number of ways, including:

  • implementation of strategies for the retention and recruitment of doctors, nurses, midwives and allied health professionals
  • strengthening our patient safety and clinical practice review framework
  • establishing the Medical School in cooperation with the Australian National University
  • enhancement of procurement processes to maximise benefits from contracting
  • a significant investment in infrastructure replacement and growth
  • a significant investment in clinical systems and recording systems, and
  • the Government introduced growth funding into the Health Budget in 2006–07. This was based on activity projected through clinical services planning.

The above risks are monitored regularly throughout the year.

Financial performance

The following financial information is based on audited financial statements for 2011‑12 and 2012‑13, and the forward estimates contained in the 2013‑14 Budget Paper Number 4.

Total net cost of services

  Actual 2011‑12
$m
Budget
2012‑13
$m
Actual 2012‑13
$m
Forward Estimate 2013‑14
$m
Forward Estimate 2014‑15
$m
Forward Estimate
2015‑16
$m
Total Expenses 1,177.8 1,063.3 1,083.8 1,109.7 1,174.0 1,252.7
Total Own Source Revenue 255.9 666.8 679.9 840.7 890.3 950.8
Net Cost of Services 921.9 396.5 403.9 269.0 283.7 301.9

Comparison to budget

The Directorate’s net cost of services for 2012‑13 of $403.9 million was $7.4 million or 1.9 per cent higher than the 2012‑13 budget.

This reflects a combination of factors that resulted in higher than budgeted expenses ($20.5 million). The main variations are:

  • depreciation and amortisation ($17.1 million)—due to accelerated depreciation for the old Women and Children’s Hospital, Tuggeranong Community Health Centre, Level 5 Building 1 at the Canberra Hospital and the old Psychiatric Services Unit as a result of extensive refurbishment works
  • grants and purchased services ($6.0 million)—due to higher payments to Calvary Public Hospital for cost pressures and emergency department refurbishment works, and
  • salary and superannuation expenses ($6.4 million)—due to the difference between the long service leave discount rate of 92 per cent used in budget calculations and the actual rate of 101.3 per cent, and a slower than anticipated decline in the number of employees leaving the higher cost CSS, PSS and PSSAP superannuation schemes.

The higher than budgeted expenses were offset by lower than budgeted expenses for:

  • cost of goods sold ($4.9 million)—as a result of ACT private hospitals purchasing some medical and surgical supplies directly from suppliers, and
  • other expenses ($4.1 million)—due to this expense category including the budget for blood products and the actual expense being reported in the supplies and services expense category.

These expenses were offset by a combination of higher than budgeted own source revenue ($13.0 million).

The main variations for higher than budgeted revenue are:

  • non-ACT Government user charges ($12.4 million)—following acquittal of prior year cross border activity
  • other revenue ($2.7 million)—for grants received from Health Workforce Australia and prior year reimbursements such as workers’ compensation, and
  • gains ($0.9 million)—mainly from increased general donations.

The higher than budgeted own source revenue was offset by lower than budgeted revenue for:

  • ACT Government user charges ($3.2 million)—mainly due to reduced funding from the ACT Local Hospital Network Directorate in line with a reduction in the Commonwealth specific purpose funding based on population adjustments.

Comparison to 2011‑12 actual expenses

Total net cost of services was $518.0 million or 56.2 per cent lower than the 2011‑12 actual cost. This is due to decreased expenses ($94.0 million), mainly comprising lower:

  • grants and purchased services ($164.6 million)­—from Calvary Public Hospital payments that are now being paid through the ACT Local Hospital Network Directorate.

This was offset by increased expenses for:

  • salary and superannuation expenses ($34.8 million)—as a result of a larger workforce and pay increases in line with enterprise agreements
  • depreciation and amortisation ($24.1 million)—due to accelerated depreciation for the old Women and Children’s Hospital, the Tuggeranong Community Health Centre, Level 5 Building 1 at the Canberra Hospital and the old Psychiatric Services Unit having extensive refurbishments works and the Commissioning of the new Gungahlin Community Health Centre and the Centenary Hospital for Women and Children, and
  • supplies and services ($15.9 million)—from increased computer costs for additional ICT project staff, increases in floor space for the Health Directorate which results in higher cleaning/utilities costs, the introduction of the carbon tax levy, running costs associated with a new patient transport vehicle, including wages for a Paramedic team, and an increase in the demand for high-cost blood products.

Increased own source revenue ($423.9 million) also contributed to the lower net cost of services. The main contributors to this reduction are:

  • ACT Government user charges ($542.7 million)—as a result of the changes to how payments are received from the ACT and Commonwealth Governments and this has a direct correlation with the reduced Government Payment for Outputs, which is $540.0 million lower than in 2011‑12, and
  • gains ($1.2 million)—from increased general donations and the profit from sale of a larger number of motor vehicles.

These were offset by reduced:

  • non-ACT Government user charges ($115.9 million)—from a change in funding arrangements for interstate residents, and
  • other revenue ($4.1 million)—as a result of receiving a large one-off grant from Health Workforce Australia in 2011‑12 for the purchase of student accommodation properties and training equipment.

Comparison to 2011‑12 actual expenses

Total net cost of services was $518.0 million or 56.2 per cent lower than the 2011‑12 actual cost. This is due to decreased expenses ($94.0 million), mainly comprising lower:

  • grants and purchased services ($164.6 million)­—from Calvary Public Hospital payments that are now being paid through the ACT Local Hospital Network Directorate.

This was offset by increased expenses for:

  • salary and superannuation expenses ($34.8 million)—as a result of a larger workforce and pay increases in line with enterprise agreements
  • depreciation and amortisation ($24.1 million)—due to accelerated depreciation for the old Women and Children’s Hospital, the Tuggeranong Community Health Centre, Level 5 Building 1 at the Canberra Hospital and the old Psychiatric Services Unit having extensive refurbishments works and the Commissioning of the new Gungahlin Community Health Centre and the Centenary Hospital for Women and Children, and
  • supplies and services ($15.9 million)—from increased computer costs for additional ICT project staff, increases in floor space for the Health Directorate which results in higher cleaning/utilities costs, the introduction of the carbon tax levy, running costs associated with a new patient transport vehicle, including wages for a Paramedic team, and an increase in the demand for high-cost blood products.

Increased own source revenue ($423.9 million) also contributed to the lower net cost of services. The main contributors to this reduction are:

  • ACT Government user charges ($542.7 million)—as a result of the changes to how payments are received from the ACT and Commonwealth Governments and this has a direct correlation with the reduced Government Payment for Outputs, which is $540.0 million lower than in 2011‑12, and
  • gains ($1.2 million)—from increased general donations and the profit from sale of a larger number of motor vehicles.
  • These were offset by reduced:
  • non-ACT Government user charges ($115.9 million)—from a change in funding arrangements for interstate residents, and
  • other revenue ($4.1 million)—as a result of receiving a large one-off grant from Health Workforce Australia in 2011‑12 for the purchase of student accommodation properties and training equipment.

Future trends

 

Figure 1 - Net cost of services

Figure 1: Net cost of services

The reason for net cost of services decreasing in 2013‑14 is that this year is the first whole year that the change in funding from Government appropriation to own source revenue as a result of implementing the National Health Reform Agreement from 2012‑13 is in operation. Net cost of services is then planned to increase slightly over the following years.

Total expenditure

Components of expenditure

Figure 2 below indicates the components of the Directorate’s expenses for 2012‑13, with the largest components of expense being employee expenses (excluding superannuation), which represents 51.3 per cent or $556.5 million, supplies and services which represents 27.8 per cent or $301.3 million and grants and purchased services, which represents 7.7 per cent or $82.9 million.

 

Figure 2 - Components of Expenditure

Figure 2: Components of expenditure

Comparison to budget

Total expenses of $1,083.8 million were $20.5 million or 1.9 per cent, higher than the original 2012‑13 budget of $1,063.3 million.

This increase was predominantly due to higher:

  • depreciation and amortisation ($17.1 million)—due to accelerated depreciation for the old Women and Children’s Hospital, Tuggeranong Community Health Centre, Level 5 Building 1 at the Canberra Hospital, and the old Psychiatric Services Unit as a result of significant refurbishment works
  • grants and purchased services ($6.0 million)—mainly due to higher payments to Calvary Public Hospital associated with cost pressures and refurbishment of the emergency department at Calvary Public Hospital
  • employee expenses (excluding superannuation) ($3.2 million)—mainly due to the difference between the long service leave discount rate of 92 per cent used in budget calculations and the actual rate of 101.3 per cent, and
  • superannuation ($3.2 million)—mainly due to an increasing workforce and a slower decline in the number of employees leaving the higher cost CSS, PSS and PSSAP schemes than had been anticipated.
  • This higher expenditure was partially offset by lower:
  • cost of goods sold ($4.9 million)—due to lower than anticipated supplies bought through the Directorate by private hospitals, who are now purchasing some items directly from suppliers, and
  • other expenses ($4.1 million)—mainly relating to blood products, which is budgeted against other expenses but with the actuals being reflected against supplies and services, which are partially offset by higher miscellaneous expenses, higher legal settlements and higher impairment losses.

Comparison to 2011‑12 actual expenses

Total expenses were ($94.0 million) or 8.0 per cent lower than the 2011‑12 actual result. The decrease reflects a combination of factors:

  • lower grants and purchased services ($164.6 million)­—due to payments made to Calvary Public Hospital now being paid by the ACT Local Hospital Network Directorate.

The lower expenses were partially offset by higher:

  • employee expenses (excluding superannuation) ($28.6 million)—due to a greater increase in the overall workforce to cover growth in services in critical care, acute care, women and children’s hospital, adult mental health, aged care and rehabilitation and cancer and pay increases in line with associated enterprise agreements
  • depreciation and amortisation ($24.1 million)—mainly resulting from accelerated depreciation for the old Women and Children’s Hospital, Tuggeranong Community Health Centre, Level 5 Building 1 at the Canberra Hospital, and the old Psychiatric Services Unit due to extensive refurbishment works. The commissioning of the Gungahlin Community Health Centre and the new Centenary Hospital for Women and Children also increased depreciation costs
  • supplies and services ($15.9 million)—the variations being largely due to increased:
  • – computer expenses—which is a combination of price escalation, increase in staff numbers, and support costs for projects that became operational in 2013. These projects include a Digital Wireless Network at TCH Campus, Digital Intensive Care Unit CIS System, E-Referral & Discharge Summary and Clinical Systems Project
  • – domestic services/food/utilities—as a result of cleaning contract price increases, increases in floor space for new facilities and the carbon tax levy
  • – running costs from the purchase of a new patient transport vehicle, including wages for paramedics, and demand for high cost blood products
  • superannuation ($6.2 million)—as a result of a larger workforce, increase in notional superannuation rates, and a slower decline in the number of employees leaving the higher cost CSS, PSS and PSSAP schemes than had been anticipated.

Future trends

Expenses are budgeted to increase steadily across the forward years to account for price escalation and growth in services.

Total own source revenue

Components of own source revenue

Figure 3 below indicates that for the financial year ended 30 June 2013, the Directorate received 80.3 per cent of its total own source revenue of $543.6 million from ACT Government user charges.

 

Figure 3 - Components of own source revenue

Figure 3: Components of Own Source revenue

Comparison to budget

Own source revenue for the year ending 30 June 2013 was $677.5 million, which was $12.2 million or 1.8 per cent higher than the 2012‑13 budget of $665.3 million.

This favourable variance is due to higher:

  • user charges—non-ACT Government ($12.4 million)—due to the accrual of cross border revenue related to prior years’ activity for residents of New South Wales
  • other revenue ($2.7 million)—mainly relating to Health Workforce Australia grants and additional prior year expenditure reimbursement for workers’ compensation claims, and
  • gains ($0.9 million)—due to increased general donations and profit from the sale of motor vehicles.
  • The higher revenue was offset by lower than budgeted:
  • ACT Government user charges ($3.2 million) – mainly due to reduced funding from the ACT Local Hospital Network Directorate in line with a reduction in the Commonwealth specific purpose funds based on population adjustments.

Comparison to 2011‑12 actual income

Own source revenue was $423.9 million or 165.7 per cent higher than the 2011‑12 actual result of $254.7 million.

The result reflects an increase in:

  • ACT Government user charges ($542.7 million)—due to a change in the way payments are received from the ACT and Commonwealth Governments, and has a direct correlation with Government Payments for Outputs, which is $540.0 million lower than the actual 2011‑12 result, and
  • gains ($1.2 million)—due to increased general donations and profit from the sale of motor vehicles, which due to the cyclic nature of motor vehicle leases more cars were due to be sold in 2012‑13.

This was partially offset by a reduction in:

  • non-ACT Government user charges ($115.9 million)—mainly due to the changed funding arrangements for the treatment of interstate patients in ACT hospitals following the implementation of the National Health Reform Agreement (these revenues are now collected through the ACT Local Hospital Network Directorate), and
  • other revenue ($4.1 million)—due to the receipt, in 2011‑12, of a large one-off grant from Health Workforce Australia for training and education of the health workforce in the ACT and surrounding regions, including purchase of student accommodation and training equipment.

Future trends

Total own source revenue is expected to increase by $160.9 million in 2013‑14, mainly due to the first full year of changed funding arrangements following the implementation of the National Health Reform Agreement, under which the funding for hospital services, which was previously paid as Government Payment for Outputs, will now be paid as user charges by the new ACT Local Hospital Network Directorate. It will then trend upwards steadily across the two forward years.

Financial position

Total assets

Components of total assets

Figure 4 below indicates that, for the financial year ended 30 June 2013, the Directorate held 63.8 per cent of its assets in property, plant and equipment.

 

Figure 4 - Total assets

Figure 4: Total assets as at 30 June 2013

Comparison to budget

The total asset position as at 30 June 2013 is $1,110.9 million, $74.6 million lower than the 2012‑13 budget of $1,185.5 million.

The variance reflects the timing associated with the acquisition and completion of various assets over the 2012‑13 financial year including:

  • intangibles ($22.2 million)—mainly due to delays with ICT projects such as e-Health and Identity Access Management
  • capital works in progress ($59.7 million)—due to the deferral of capital works projects from 2012‑13 into future years as a result of prolonged lease negotiations for decant space, procurement delays due to structural and manufacturing issues, and operational commissioning delays, and
  • property, plant and equipment ($77.4 million)—mainly due to delays with commissioning of the Belconnen Community Health Centre and accelerated depreciation for buildings undergoing extensive refurbishment work.

This was partially offset by higher:

  • receivables ($76.5 million)—due largely to payments owing from the ACT Local Hospital Network Directorate, which relies on payments from the New South Wales Ministry of Health to then pay the Health Directorate, and
  • cash and cash equivalents ($8.0 million)—mainly due to funding for ICT capital projects and grants received from Health Workforce Australia.

Comparison to 2011‑12 actual

The Directorate’s total asset position is $114.7 million higher than the 2011‑12 actual result of $996.2 million, largely due to increases in:

  • property, plant and equipment including assets held for sale ($80.2 million)—mainly due to completed new building capital works projects, including the Centenary Hospital for Women and Children, the Gungahlin Community Health Centre and the Cancer Patient Accommodation property
  • receivables ($68.6 million)—due largely to cross border revenue not yet received from the New South Wales Ministry of Health, and
  • capital works in progress ($23.4 million)—as a result of works progressing on the new facilities, including the Community Health Centres in Belconnen, Tuggeranong and Gungahlin, the Canberra Region Cancer Centre, the Centenary Hospital for Women and Children, for Clinical Services Redevelopment, the Canberra Hospital Emergency Department Intensive Care Unit, e-Health, Digital Mammography, Identity Access Management and various capital upgrades.

The above increases were partially offset by a reduction in:

  • cash and cash equivalents ($59.8 million)­—due to an increase in receivables associated with the timing of cross border payments by the New South Wales Ministry of Health.

Total liabilities

Components of total liabilities

Figure 5 below indicates that the majority of the Directorate’s liabilities relate to employee benefits 66.3 per cent and payables 30.2 per cent.

 

Figure 5 - Total liabilities

Figure 5: Total liabilities as at 30 June 2013

Comparison to budget

The Directorate’s liabilities for the year ended 30 June 2013, of $291.0 million, were $43.7 million higher than the 2012‑13 budget of $247.3 million.

This was largely due to higher:

  • payables ($31.2 million)—mainly due to invoices for capital works projects being received late in June, and
  • employee benefits ($15.5 million)—mainly due to the long service leave discount rate changing from 92 per cent to 101.3 per cent shortly after the original budget was set.

This was offset by lower:

  • other liabilities ($3.2 million)—other liabilities mainly relates to revenue received in advance. Most of the grants and donations received during the year were brought to account as revenue earned even though conditions attached to those were not yet fulfilled. The variance is due to budget assumptions not being in line with the type of actual revenue received.

Comparison to 2011‑12 actual

Total liabilities were $24.5 million higher than the actual results as at 30 June 2012 of $266.5 million.

This was due to increases in:

  • employee benefits ($13.7 million)—mainly due to the impact of collective agreement pay rises and an increase in staff numbers for growth in services and the growth in liability due to leave consumption not in line with leave earned
  • payables ($7.8 million)—due to receipt of invoices for contractual capital works to be paid to Shared Services Procurement being received late in June 2013
  • other liabilities ($1.6 million)—mainly due to payment in advance for services provided to the Department of Veterans’ Affairs, and
  • finance leases ($1.4 million)—due to the cyclic nature of the motor vehicles, which are generally on a three year lease. In 2012‑13 the Health Directorate acquired 185 new motor vehicle leases and disposed of 164 old motor vehicle finance leases.

Territorial statement of revenue and expenses

The activities whose funds flow through the Directorate’s Territorial accounts are:

  • the receipt of regulatory licence fees, and
  • the receipt and on-passing of monies for capital works at Calvary Public Hospital.

Total income

Figure 6 below indicates that 59.5 per cent of Territorial income is regulatory licence fees, with the balance being the receipt, for on-passing, of monies for capital works at Calvary Public Hospital (expenses on behalf of the Territory).

 

Figure 6 - Sources of territorial revenue

Figure 6: Sources of Territorial revenue

Total Territorial income for the year ending 30 June 2013 was $1.8 million, which was $0.4 million higher than the budget figure of $1.4 million. The variance was due to higher regulatory licence fees revenue ($0.4 million).

Total Territorial income for 2012‑13, of $1.8 million was consistent with the 2011‑12 income of $1.8 million.

Total expenses

Figure 7 - Territory expenses Figure 7 below indicates that 40.6 per cent of expenses incurred on behalf of the Territory relate to the on-passing of monies for capital works to Calvary Public Hospital, with the other 59.4 per cent being the transfer, to Government, of regulatory licence fees.

 

Figure 7: Sources of Territorial expenses

Total expenses were $1.8 million, which was $0.4 million higher than the budget of $1.4 million due to higher regulatory licence fees received.

Total expenses were $0.3 million higher than for the same period last year of $1.5 million.

Other disclosures

Audit qualification/matters of emphasis

In September 2013, the Auditor-General completed the financial audit of the Directorate and provided an opinion. The Auditor-General’s opinion of the Directorate’s financial statements concluded that the statements were prepared in accordance with the Financial Management Act 1996 and fairly represented the financial performance of the Directorate for the year ended 30 June 2013.

Attachment A—Comparison of net cost of services to budget 2012‑13

  Original Budget Plus AAO Transfers Total Funding Less Actual Variance to be Explained
Description $’000 $’000 $’000 $’000 $’000 %
Expenses            
Employee and Superannuation 622,396 622,396 628,781 –6,385 –1.03
Supplies and Services 301,234 301,234 301,333 –99 –0.03
Depreciation and Amortisation 35,882 35,882 53,014 –17,132 –47.75
Purchased Services 76,920 76,920 82,888 –5,968 –7.76
Other Expenses 11,461 11,461 7,299 4,162 36.32
Cost of Goods Sold 15,394 15,394 10,475 4,919 31.96
Total Expenses 1,063,287 1,063,287 1,083,790 20,503 1.93
             
Own Source Revenue
User Charges 647,533 647,533 656,783 –9,250 –1.43
Interest 278 278 250 28 9.96
Resources Free of Charge 758 758 1,010 –252 –33.30
Gains 1,524 1,524 2,377 –853 –56.00
Other Revenue 16,746 16,746 19,425 –2,679 –16.00
Total Own Source Revenue 666,839 666,839 679,845 13,007 1.95
             
Total Net Cost of Services 396,448 396,448 403,945 7,497 1.89