Administration of the agreements for the management, operation and funding of the Mersey Community Hospital

Australia Tasmania
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This audit assessed the effectiveness of the administration, by Department of Health and Ageing and the Commonwealth partners, of the 2008 and 2011 Heads of Agreement for the management, operation and funding of the Mersey Community Hospital.

Overall conclusion

In November 2007, the Australian Government purchased the MCH from the Tasmanian Government in response to local community concern over proposed service changes at the hospital. Since 1 September 2008, the Tasmanian Government has managed and operated the MCH under two HoA with the Commonwealth, established in 2008 and 2011. Under the two HoA over the six years from 2008 to 2014, direct Commonwealth funding to Tasmania for the management and operation of the MCH totals $367.3 million.

As the only Australian Government owned and funded hospital within a health care system where the delivery of public hospital services falls within the responsibilities of the states and territories, the MCH is uniquely placed. As such, the operation of the MCH necessitates arrangements that sit outside the general approaches adopted by the Australian Government to fund the delivery of health services by state and territory owned public hospitals. The establishment and ongoing management of these arrangements have presented a range of additional costs and challenges for DoHA, representing the Australian Government as the hospital owner, and the two state government entities—DHHS and the THO-NW—which have responsibility to operate the hospital within the broader Tasmanian health care system.

The recently expanded mandate of the Auditor-General, which provides for performance audits of Commonwealth partners under s18B of the Auditor-General Act 1997, has facilitated the ANAO’s examination of these unique arrangements. As the first performance audit involving a Commonwealth Partner, this report provides the governments and legislatures in both the Commonwealth and Tasmanian jurisdictions with our assessment of the administration of the arrangements governing the operation of the MCH. The audit does not, however, extend to commenting on the merits of the Australian Government’s decision to acquire the MCH from the Tasmanian Government in 2007 and its ongoing ownership as this decision reflects government policy.

In general, the administration of the 2008 and 2011 HoA by DoHA and DHHS has been effective in facilitating delivery, at the Commonwealth-owned MCH, of a range of agreed clinical services, including those specified under the HoA. Under the day-to-day management of DHHS, and more recently, the THO-NW, MCH clinical services have generally been delivered within an effective clinical governance framework. In addition, the majority of these services met or exceeded established national targets and benchmarks, particularly for the emergency department, elective surgery, inpatient management and the High Dependency Unit. Notwithstanding these achievements, the cost of service delivery at the MCH, while better than other Tasmanian acute hospitals, is significantly higher than comparable mainland hospitals—primarily driven by higher staff counts per units of weighted activity, more costly medical and surgical supplies, dependence on locum medical staff and higher administrative overheads.

The decision to assume ownership and continue existing service delivery at the MCH has come at an additional direct cost to the Commonwealth of $367.3 million over the six years to 30 June 2014 and resulted in greater risk exposure as hospital owner. These additional costs and risks, which arise from the unique arrangements adopted for the MCH, underline the need for effective and ongoing monitoring. At present, system limitations make it difficult for DHHS to readily provide assurance regarding the use of some Commonwealth funds, while weaknesses in the MCH performance framework mean that DoHA is not well positioned to assess whether its ownership and funding of the MCH is effective and whether the Commonwealth is receiving value for money from the arrangements. There remains scope for:

  • DHHS, in conjunction with the THO-NW, to improve existing systems to provide greater assurance regarding the use of Commonwealth funds;
  • and DoHA to expand its existing performance measurement framework for the MCH program and to strengthen its analysis of reported performance information collected under the framework to better demonstrate the extent to which the program is achieving its objectives.

While DoHA’s and DHHS’ administration of the HoA has facilitated the continuation of service delivery at the MCH, the differing objectives for the hospital held by the Commonwealth and Tasmania have not been fully reconciled: the Commonwealth’s objective primarily relates to the delivery of a set of core clinical services in place at the time the hospital was acquired, while Tasmania has sought to rationalise the delivery of hospital services in the state’s North West between the MCH and the NWRH at Burnie in line with the state’s health plan. To support the achievement of its objective, the Commonwealth has invested a substantial amount of direct funding, with the benefits to Tasmania extending beyond this amount, as it also receives a range of indirect financial benefits. Although the Commonwealth has retained the range of clinical services at the MCH outlined in the HoA, where it is safe to do so, Tasmania has also advanced the implementation of its health plan objectives for the state’s North West, with the MCH moving during 2012–13 from a 24 hour/seven day a week surgery facility to a mixed day and short stay surgery facility.

Notwithstanding a generally sound working relationship, which has supported the ongoing administration of the arrangements governing the operation of the MCH, the differing government objectives has meant that DoHA and DHHS have expended significant time and resources revisiting issues relating to service changes and hospital costs. In particular, the mechanism specified in the HoA for changing its provisions—a Clinical and Financial Services Plan—has not been effective. In addition, while the HoA recognise the need to manage the MCH as part of Tasmania’s health network in the North West, how this principle should apply in practice to the integration of services between the MCH at the NWRH at Burnie has not been settled between the parties. There also continues to be disagreement between the Commonwealth and Tasmania over responsibility for funding capital works at the hospital above the threshold of $250 000, and a compromise on this issue struck to enable the 2011 HoA to be agreed has not resolved this disagreement. The negotiation of any new HoA from July 2014 presents an opportunity to address these issues and establish a clear and agreed strategic direction for the MCH.

Over the period that the Commonwealth has owned and funded the MCH, there have been persistent allegations reported in the Tasmanian and national media that Commonwealth funds for the MCH have been used outside the MCH contrary to the terms of the HoA. With regard to these allegations, the Tasmanian Government has stated that ‘the MCH operates its funding in accordance with the detailed and publicly available Heads of Agreement’. Further, DHHS informed the ANAO that it has ‘only used Commonwealth funds for the performance of this project [the MCH program]’. The ANAO’s testing of expenditure transaction samples over a four year period found no evidence to indicate that the MCH was using Commonwealth funds outside the HoA requirements in the categories of employee, supplies and pharmaceuticals expenditure, which have been the subject of such allegations.

Nevertheless, the inability of DHHS and MCH systems to readily provide the ANAO with complete transaction listings for MCH expenditure on shared corporate services and cross-charging between the MCH and other hospitals meant that it was not possible during the audit to form an overall judgement on the appropriateness of the use of funds in these categories. There is, therefore, scope for DHHS and the MCH to improve existing systems to better inform hospital management and oversight, provide greater assurance to respective governments, and to more efficiently demonstrate adherence to DHHS’ obligations arising from the HoA.

While the MCH performs well in comparison to other Tasmanian hospitals with regard to the cost of delivered services, it does not perform as well against comparable mainland hospitals. For example, while the MCH’s average cost per weighted separation16 of $5125 was $1550, or 43 per cent, higher than the average cost for its peer group of mainland hospitals17, it was $729, or 12 per cent, lower than the other Tasmanian hospitals. As outlined earlier, the higher cost of MCH clinical services in comparison to its peer group is primarily driven by higher staff counts per units of weighted activity, medical and surgical supplies, dependence on locum medical staff and administrative overheads. Some of these costs reflect structural factors within Tasmania that contribute, in part, to the higher cost of service delivery. However, there would be benefit in further exploring options to improve the efficiency of service delivery at the MCH by reviewing costs in particular areas, such as for locum medical staff.

The Commonwealth’s objectives for ownership of the MCH, which DoHA terms the ‘core outcome’ of the HoA, have been narrowly defined as the continuing provision of the core clinical activities, with existing performance measures not directly addressing the impact of those activities on the community serviced by the MCH. Furthermore, the Commonwealth preferred that the HoA not define the performance or service quality standards—of a kind that would normally be included in a services contract with a private sector provider—that Tasmania is required to meet as the operator of the MCH.

The categories of operational and clinical information reporting that Tasmania is required to provide have not been updated since 2008 and, while there have been some recent improvements in DoHA’s approach to its scrutiny of MCH performance information, the department’s analysis of data reported under the two HoA has not been undertaken in a consistent and structured manner. These factors limit the Commonwealth’s ability to assess whether the MCH is performing effectively, and whether it is receiving value for the significant amount of direct and indirect funding provided for the MCH program.

Commonwealth ownership has resulted in the need to establish unique arrangements for the management and operation of the MCH, which have come at additional cost and complexity as compared to the standard model of providing Commonwealth funding for public hospitals through health care agreements. A range of direct and indirect costs have been borne primarily by the Commonwealth, with the quarantining of funding for the MCH from the CGC’s assessment for the distribution of the GST revenue pool also affecting the funds available for distribution to other states and territories. The ongoing administration of the HoA also necessitates a substantial commitment from administering agencies, relating to ongoing administration and periodic negotiation. Further, the Commonwealth continues to shoulder risk as the owner of the MCH, notwithstanding its day-to-day management and operation by Tasmanian Government entities. In recognition of the additional costs, risks and complexity arising from ad hoc arrangements of this type, it is to be expected that responsible agencies will continue to monitor and keep under review the implementation of desired objectives in order to be in a position to advise governments on the benefits of the current arrangements over alternative options.

While the HoA support the continued delivery of a range of clinical services by the MCH to patients in its catchment, the strengthening of elements of the agreement and improvements in aspects of the responsible entities’ administration have the potential to improve overall hospital performance and contribute to enhanced accountability. In this respect, the ANAO has made five recommendations—two directed to DoHA, one directed to DHHS and two directed jointly to both agencies. These recommendations are designed to enhance the utility of the HoA, provide greater assurance regarding the use of Commonwealth funds and strengthen the measurement of achievements against the MCH program objectives. There are also a number of suggestions made in the report to enhance the administration of the HoA, most notably: resolving the issue of responsibility for funding of capital works at the MCH; clarifying the extent of community engagement necessary to underpin decision-making on the MCH’s service profile; and strengthening arrangements for the management of MCH assets.

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