C.1 Financial management analysis

Management Discussion & Analysis for the Health Directorate for the Financial Year Ended 30 June 2016

General Overview

Operations and Principal Activities

ACT Health partners with the community and consumers for better health outcomes by:

  • delivering patient and family centred care;
  • strengthening partnerships;
  • promoting good health and wellbeing;
  • improving access to appropriate healthcare; and
  • having robust safety and quality systems.

We aim for sustainability and improved efficiency in the use of resources, by designing sustainable services to deliver outcomes efficiently, and embedding a culture of research and innovation.

ACT Health continues to strengthen clinical governance of its processes, and strives to be accountable to both the government and the community.

ACT Health aims to support our people and strengthen teams, by helping staff to reach their potential, promoting a learning culture and providing high-level leadership.

Changes in Administrative Structure

ACT Health did not gain or lose any functions in the 2015-16 financial year.

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;
  • 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; and
  • a significant investment in clinical systems and recording systems.

The above risks are monitored regularly throughout the year.

Financial Performance

The following financial information is based on audited financial statements for 2014-15 and      2015-16, and the budget and forward estimates contained in the 2016-17 Health Directorate Budget Statements.

Total Net Cost of Services

  Actual
2014-15
$m
Budget
2015-16
$m
Actual
2015-16
$m
Budget
2016-17
$m
Forward
Estimate
2017-18
$m
Forward
Estimate
2018-19
$m
Forward
Estimate
2019-20
$m
Total Expenditure 1,195.3 1,253.7 1,295.0 1,320.3 1,352.2 1,390.5 1,418.6
Total Own Source Revenue 898.1 942.7 960.3 987.9 1,006.6 1,031.1 1,056.8
Net Cost of Services 297.2 311.0 334.7 332.4 345.6 359.5 361.8

 

Comparison to Budgeted Net Cost of Services

The Directorate’s net cost of services for 2015-16 of $334.7 million was $23.7 million or 7.6 per cent higher than the 2015-16 budget.

A combination of factors resulted in higher than budgeted expenses ($41.3 million). The four main higher expense variations are:

  • Supplies and Services ($14.0 million) – mainly due to higher than budgeted pharmaceuticals expense due to Hepatitis C medications becoming available under the Commonwealth’s ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016. This increased expense is offset by an increase in revenue in User Charges;
  • Employee Expenses ($11.7 million) – due to higher long service leave as a result of an increase in the rate used to estimate the present value moving from 104.2% to 114.7%;
  • Grants and Purchased Services ($4.6 million) – largely due to additional elective surgery services at Calvary John James Hospital; and
  • Other Expenses ($6.0 million) – largely due to expensing of various computer software projects that were discontinued in 2015-16.

The higher than budgeted expenditure was partially offset by higher than budgeted own source revenue ($17.6 million). The main higher revenue variation is:

  • User Charges ($17.9 million) – largely due to increased high cost drugs reimbursements from the Commonwealth mainly due to Hepatitis C drugs becoming eligible for reimbursement under the S100 High Cost Drugs Scheme. This is offset by an increase in supplies and services expense.

Comparison to 2014-15 Net Cost of Services

There was an 12.5 per cent increase in net cost of services or $37.5 million more when compared to the 2014-15 actual cost of $297.2 million.

This increase in net cost of services was due to higher expenses ($99.7 million), partially offset by higher revenue ($62.2 million).

The three main increases in expenses are:

  • Employee Expenses ($51.6 million) – largely due to:
  • an increase in staff numbers related to growth in services in acute services including emergency department and additional elective surgery, mental health, outpatient, community and primary care services and women and children’s health ($6 million);
  • the impact of collective agreement pay rises ($17 million);
  • an increase in the rate used to estimate the present value of long service leave from 104.2% to 114.7% ($11.7 million);
  • leave earned exceeding leave taken ($9.7 million); and
  • the impact of pay rises on employee leave ($6.1 million).
  • Supplies and Services ($36.5 million) – largely due to increased costs for:
  • pharmaceuticals due to increase in Hepatitis C medications which became available under the Commonwealth’s ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016.
  • contractors and consultants ($8.0 million) mainly due to costs associated with the implementation of the Directorate’s new initiative to improve operational efficiency. Expensing of Information and Communication Technology contractor costs that were incorrectly accounted for as prepaid expenses in prior years has also contributed to this increase;
  • increased computer costs ($2.6 million) due to a combination of factors, including inflation, increased Microsoft licensing cost, increase in staff numbers and additional support charges for new projects such as Faster Access to ICT Systems, Intensive Care Unit Clinical System and Patient Master Index upgrade;
  • general administration ($1.9 million) due to a combination of factors including inflation, increase in staff numbers, costs related to the implementation of the comprehensive transformational reform across ACT Health and additional advertising promoting health prevention and early intervention;
  • visiting medical officers ($1.9 million) due to cover for staff specialist vacancies and an increase in elective surgeries; and
  • operating lease rental ($1.8 million) from a full year effect of the change of motor vehicle leases from finance leases to operating leases from 23 April 2015.
  • Grants and Purchased Services ($11.5 million) – mainly due to new initiatives including specialised drug treatment services, community mental health services, expansion of community and home based services, end of life care at home and expanded community-based women and children’s options, and an increase in elective surgery services at Calvary John James Hospital.

Total Own Source Revenue increased by $62.2 million due to higher:

  • ACT Government User Charges ($51.1 million) largely due to funding for growth in activity and new initiatives, salary increases and cost escalation in supplies and services paid by the ACT Local Hospital Network Directorate; and
  • Non-ACT Government User Charges ($17.0 million) due to an increase in the Commonwealth High Cost Drug reimbursements.
Future Trends
 
Figure 1: Net Cost of Services

Net cost of services is planned to reduce slightly in 2016-17 and then increase steadily over the future years consistent with funding provided in the 2016-17 Budget and the forward estimate years for growth in public health services including acute services, critical care, cancer services, rehabilitation, aged and community services and mental health services. 

Total Expenditure

Components of Expenditure

Figure 2 below indicates the components of the Directorate’s expenses for 2015-16. The three largest components of expense are employee expenses which represents 53.7 per cent or $694.8 million, supplies and services which represents 27.8 per cent or $360.4 million, and grants and purchased services, which represents 6.9 per cent or $89.8 million.

 
Figure 2: Components of Expenditure

Comparison to Budget

Total expenses of $1 295.0 million were $41.3 million, or 3.3 per cent higher than the original 2015‑16 budget of $1 253.7 million.

Higher expenditure was due to higher:

  • Supplies and Services ($14.0 million) – due to higher pharmaceuticals expense due to Hepatitis C medications becoming available on the ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016;
  • Employee Expenses ($11.7 million) – due to higher than budgeted long service leave largely from the increase in rate used to estimate the present value moving from 104.2% to 114.7%;
  • Grants and Purchased Services ($4.6 million) – largely due to additional elective surgery services at Calvary John James Hospital;
  • Other Expenses ($6.0 million) – largely due to expensing of various computer software projects that were discontinued in 2015-16;
  • Superannuation ($4.1 million) – largely due to the impact of staff collective agreement pay rises and an increase in staff numbers; and
  • Depreciation and Amortisation ($3.2 million) – due to additional amortisation flowing from new computer software packages introduced in 2015-16.

Comparison to 2014-15 Actual Expenses

Total expenses were $99.7 million or 8.3 per cent higher than the 2014-15 actual result. The increase was predominantly due to higher:

  • Employee Expenses ($51.6 million) – largely due to:
  • an increase in staff numbers related to growth in services in acute services including emergency department and additional elective surgery, mental health, outpatient, community and primary care services and women and children’s health ($6 million);
  • the impact of collective agreement pay rises ($17 million);
  • an increase in the rate used to estimate the present value of long service leave from 104.2% to 114.7% ($11.7 million);
  • leave earned exceeding leave taken ($9.7 million); and
  • the impact of pay rises on employee leave ($6.1 million).
  • Supplies and Services ($36.5 million) – largely due to increased costs for:
  • pharmaceuticals ($15.7 million) due to an increase in Hepatitis C medications which became available under the Commonwealth’s ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016;
  • contractors and consultants ($8.0 million) mainly due to costs associated with the implementation of the Directorate’s new initiative to improve operational efficiency. Expensing of Information and Communication Technology contractor costs that were incorrectly accounted for as prepaid expenses in prior years has also contributed to this increase;
  • increased computer costs ($2.6 million) due to a combination of factors, including inflation, increased Microsoft licensing cost, increase in staff numbers and additional support charges for new projects such as Faster Access to ICT Systems, Intensive Care Unit Clinical System and Patient Master Index upgrade;
  • general administration ($1.9 million) due to a combination of factors including inflation, increase in staff numbers, costs related to the implementation of the comprehensive transformational reform across ACT Health and additional advertising promoting health prevention and early intervention;
  • visiting medical officers ($1.9 million) due to cover for staff specialist vacancies and an increase in elective surgeries; and
  • operating lease rental ($1.8 million) from a full year effect of the change of motor vehicle leases from finance leases to operating leases from 23 April 2015;
  • Grants and Purchased Services ($11.5 million) – mainly due to new initiatives including specialised drug treatment services, community mental health services, expansion of community and home based services, end of life care at home and expanded community-based women and children’s options, and an increase in elective surgery services at Calvary John James Hospital.
  • Superannuation ($4.5 million) – largely due to pay rises under collective agreements and and an increase in staff numbers.

The increase in expenditure from prior year was partially offset by reduced costs for Depreciation and Amortisation ($3.6 million) due to 2014-15 included additional depreciation for the psychiatric services unit building at the Canberra Hospital which was demolished in that year.

Future Trends

Expenses are budgeted to increase steadily across the forward years to account for inflation 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 2016, the Directorate received 84.6 per cent of its total own source revenue ($812.9 million) from ACT Government user charges.

 
Figure 3: Components of Own Source Revenue

Comparison to Budget

Total own source revenue of $960.3 million was $17.6 million or 1.9 per cent higher than the 2015‑16 budget of $942.7 million.

This favourable variance is due to higher:

  • User Charges Non-ACT Government ($17.1 million) – largely relates to higher Commonwealth reimbursements for high cost drugs due to the inclusion of additional drugs to the ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016;
  • User Charges ACT Government ($0.9 million) – largely due to revenue from Chief Minister Treasury and Economic Development Directorate for food inspection staff salaries; and
  • Other Gains ($0.8 million) – due to higher donations than estimated.

The higher revenue variance is partially offset by underachievement against budget for:

  • Other Revenue ($1.1 million) – due to lower grants revenue.

Comparison to 2014-15 Actual Revenue

Total own source revenue of $960.3 million is $62.2 million or 6.9 per cent higher than the 2014-15 actual result of $898.1 million.

The increase compared to last financial year is due to:

  • ACT Government User Charges ($51.1 million) – largely due to funding for growth in activity and new initiatives, salary increases and indexation for non labour expenses paid by the ACT Local Hospital Network Directorate; and
  • Non-ACT Government User Charges ($17.0 million) – largely relating to higher Commonwealth reimbursements for high cost drugs due to the inclusion of additional drugs to the ‘S100 High Cost Drugs’ reimbursement scheme from 1 March 2016.

The above increases in revenue were partially offset by reductions in:

  •  Other Gains ($5.4 million) – largely due to 2014-15 including a one off gain from de-recognition of lease vehicle liabilities; and
  • Other Revenue ($0.7 million) – due to:
  • less special purpose grants for medical research;
  • lower Comcare reimbursements related to prior year; and
  • lower insurance claims revenue.

Future Trends

Total own source revenue is expected to increase steadily across the forward years consistent with funding provided to the ACT Local Hospital Network to purchase increased activity from the Canberra Hospital and Health Services in 2016-17 and the forward estimate years.

Financial Position

Total Assets

Components of Total Assets

Figure 4 below indicates that, for the financial year ended 30 June 2016, the Directorate held  72.5 per cent of its assets in property, plant and equipment.

 
Figure 4: Total Assets as at 30 June 2016
Comparison to Budget

The total asset position at 30 June 2016 is $1,303.5 million, $13.4 million lower than the 2015-16 budget of $1,316.9 million.

The variance reflects the timing associated with the acquisition and completion of various assets over the 2015-16 financial year resulting in lower:

  • Property, Plant and Equipment ($19.2 million) – largely due to delays with current capital works projects from lengthy contract negotiations, construction delays, and a flow on effect of delays between projects;
  • Capital Works in Progress ($37.8 million) – mainly due to project delays for the construction of new buildings, upgrades of current buildings and computer software development; and
  • Intangible Assets ($12.5 million) – largely due to delays with computer software projects.

Partially offset by higher:

  • Cash and Cash Equivalents ($45.8 million) – due to an increase in payables largely associated with delayed invoicing and payments for capital works;
  • Receivables ($9.2 million) – largely due to growth in chargeable services and the level of Goods and Services Tax owing; and
  • Inventories ($1.9 million) – due to the greater volume of high cost drugs held as inventory to cater for the increased demand.

Comparison to 2014-15 Actual

The Directorate’s total asset position is $115.2 million higher than the 2014-15 actual result of $1,188.4 million, largely due to increases in:

  • Property, Plant and Equipment ($58.6 million) – largely due to completed building capital works projects including Building 15 at the Canberra Hospital, the Canberra Hospital Emergency Department expansion and the Calvary Public Hospital Car Park; and
  • Capital Works in Progress ($36.4 million) – as a result of the ongoing construction of new buildings including the Secure Mental Health Unit, the University of Canberra Public Hospital and the Ngunnawal Bush Healing Farm;
  • Receivables ($11.5 million) – the increase mainly relates to a combination of factors including:
  • a new billing system implemented during 2015-16, as a result a higher level of invoices were raised towards the later part of the financial year;
  • higher medicare ineligible patient debts which takes longer to collect;
  • timing of amounts receivable from the Local Hospital Network Directorate for providing health services;
  • higher private patient debt due to some patient accounts having to be resubmitted to Medical Insurance Funds for payment as problems were encountered with the implementation of a new billing system; and
  • an increase in amounts receivable from the Commonwealth for high costs drugs reimbursement.
  • Intangible Assets ($5.6 million) – The increase is due to completed internally generated operational software projects including Clinical Portal Suites, Patient Master Index, Radiology Information System Upgrade, Queue Flow Management Solution, Intensive Care Unit Metavision, new Cardiology Systems, Order Entry, Positive Patient Identification System and GP Healthnet.

Total Liabilities

Components of Total Liabilities

Figure 5 below indicates that the majority of the Directorate’s liabilities relate to employee benefits  71.4 per cent and payables  28.1 per cent.

 
Figure 5: Total Liabilities at 30 June 2016

Comparison to Budget

The Directorate’s liabilities for the year ended 30 June 2016, of $337.7 million, is $54.9 million higher than the 2015-16 budget of $282.8 million.

This was largely due to higher:

  • Payables (including Borrowings) ($51.9 million) – due to more accruals than budgeted for capital works, visiting medical officers, pharmaceuticals and medical and surgical supplies; and
  • Employee Benefits ($10.2 million) – largely due to the impact of the rate used to estimate the present value of long service leave increasing from 104.2% to 114.7%.

Offset by lower:

  • Finance Leases ($6.6 million) – due to a new whole-of-Government contract for motor vehicle leasing the Directorate no longer has any finance leases. All motor vehicle leases are now operating leases.
Comparison to 2014-15 Actual

Total liabilities of $337.7 million are $37.6 million higher than the actual results at 30 June 2015 of $300.1 million. This is due to increases in:

  • Payables (including Borrowings) ($40.7 million) – mainly due to an increase in payables for capital works, payment for Calvary Hospital for additional services and an increase in general accruals for other operating expenses including visiting medical officers, pharmaceuticals, medical and surgical supplies and ICT costs.

The above increases were partially offset by a decrease in:

  • Employee Benefits ($3.0 million) – largely due to reductions from 2014-15 including:
  • 9 days accrued salaries compared to one day accrual in 2015-16; and
  • pay rises accrued for Medical staff whose collective agreements were finalised in 2015-16;

Partially offset by increases in leave liabilities due to:

  • the impact of collective agreement pay rises;
  • an increase in staff numbers for growth in services in acute services including emergency department and additional elective surgery, mental health, outpatient, community and primary care services and women and children’s health;
  • leave accumulated exceeding leave taken in 2015-16; and
  • the rate used to estimate the present value of future long service leave payments from 104.2% to 114.7%.
Attachment A - Comparison of net cost of services to budget 2015-16
Description Original
Budget
$'000
Plus AAO
Transfers
$'000
Total
Funding
$'000
Less
Actual
$'000
Variance to be Explained
$'000 %
Expenses
Employee Expense and Superannuation 764,487 - 764,487 780,307 15,820 2.1%
Supplies and Services 346,359 - 346,359 360,359 14,000 4.0%
Depreciation and Amortisation 39,794 - 39,794 42,968 3,174 8.0%
Grants and Purchased Services 85,269 - 85,269 89,823 4,554 5.3%
Other Expenses 6,572 - 6,572 12,564 5,992 91.2%
Cost of Goods Sold 11,237 - 11,237 9,000 (2,237) -19.9%
Total Expenses 1,253,718 - 1,253,718 1,295,021 41,303 3.3%
Own Source Revenue
User Charges 919,782 - 919,782 937,701 17,919 1.9%
Interest 191 - 191 141 (50) -26.2%
Resources Received Free of
Charge
1,708 - 1,708 1,743 35 2.0%
Gains 871 - 871 1,681 810 93.0%
Other Revenue 20,136 - 20,136 19,053 (1,083) -5.4%
Total Own Source Revenue 942,688 - 942,688 960,319 17,631 1.9%
Total Net Cost of Services 311,030 - 311,030 334,702 23,672 7.6%

 

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 56.8 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

Comparison to Budget

Total Territorial income for the year ending 30 June 2016 was $2.8 million, which is $7.7 million lower than the budget
figure of $10.5 million due to delays in capital works projects at Calvary Public Hospital mainly relating to operating
theatre upgrades, expansion of services to enable 8 additional beds and upgrade of medical imaging equipment.

Comparison to 2014–15

Total Territorial income for 2015-16 of $2.8 million is $5.1 million lower than the 2014–15 income of $7.9 million.
The main contributor to this decrease is:

  • Payment for Expenses on Behalf of the Territory ($5.5 million) – this is due to delays in capital works at Calvary Public Hospital mainly relating to operating theatre upgrades, expansion of services to enable 8 additional beds and upgrade of medical imaging equipment.

Total Expenses

Figure 7 below indicates that 42.6 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 57.4 per cent being the transfer, to Government,
of regulatory licence fees.

 
Figure 7: Sources of Territorial Expenses

Comparison to Budget

Total expenses were $2.7 million, which was $7.8 million lower than the budget of $10.5 million due to delays in
capital works at Calvary Public Hospital for the completion of operating theatre upgrades, expanded hospital
services and upgrade of medical imaging equipment.

Comparison to 2014-15

Total expenses were $5.2 million lower than the 2014-15 total of $7.9 million. This is due to delays in capital works at
Calvary Public Hospital mainly relating to operating theatre upgrades, expansion of services to enable 8 additional
beds and upgrade of medical imaging equipment.