Unexpected success hiring nurses drives Health NZ deficit

Analysis: The health system’s massive recruitment drive for new nurses was far more successful than expected, with the hiring of thousands of new nurses in the past year driving much of the deficit at Health NZ, chief executive Margie Apa says.
That statement is notably different from Health Minister Shane Reti’s diagnosis of the cause of the $130 million per month deficit, which he blamed on financial mismanagement and the hiring of too many non-frontline workers, though the two are not necessarily mutually exclusive.
“It’s a combination of things. It is back-office staff, as we mentioned. It is also outsourced personnel. We have had an increase in full-time staff and it eludes me why, in some areas, outsourced personnel have also gone up,” Reti said on Monday afternoon.
Pushed further on whether the entire $130 million-a-month deficit could be blamed on contractors and back-office staff, Reti elaborated further.
“It’s also consumables, procurement, workforce not in the right place and not of the right type. I think I mentioned that we don’t have enough nurses in mental health, in maternity and in critical care as well. We’ve also outsourced a large number of people. So it’s workforce in the wrong place of the right type,” he told Newsroom.
He later said the supplies and procurement cost increases were managed and had not contributed to the deficit.
Apa, who fronted a press conference at North Shore Hospital with incoming Health NZ commissioner Professor Lester Levy on Tuesday, provided a slightly different answer to Newsroom. She didn’t mention back-office staff and focused her comments on nurses, when asked what specifically had been “overspent” on.
“If we go back a few years, we were facing into a workforce shortage, particularly in clinical staff. Some of the things that we did early to try to grow both internationally trained nurses as well as take in new grads, over the last six or seven months, we found ourselves overcorrecting much quicker than we expected,” she said.
“Our vacancy rate for nurses is about 6 percent. When I started this role, it was at about 12 to 15.”
Levy said that “some” of the overspend “is in the clinical area, but a lot of it is in the way the organisation has been sized. So we need to address, we need to optimise the size of the structure.” He added that Health NZ is “thousands of FTEs ahead of Budget”.
The additional context further complicates the question of how much of Health NZ’s sudden deficit is a result of financial mismanagement and how much is simple underfunding.
To attempt to answer this question, three periods of surplus and deficit need to be separated out from one another.
The first is the 2022/23 financial year, which was Health NZ’s first year in existence. The department’s annual report states it ran a $1 billion deficit that year, but that this was mostly an accounting deficit rather than a real one. The vast majority of the deficit was due to costs incurred in relation to pay equity, when the revenue to cover those costs was due in the next financial year. The remainder was Covid-19-related, with additional funding also supplied to cover this the next year.
In Reti’s own Cabinet paper on the Health NZ financial crisis, he wrote the department “delivered a financial break-even result in its first year after establishment”. But in comments on Tuesday, he called that into question.
Both he and Prime Minister Christopher Luxon suggested the financial issues began under Labour’s watch due to this accounting deficit and he later told Newsroom he believed it would be fair to say Health NZ ran a $500 million “real” deficit for the 22/23 year. That directly conflicts with his own comments to Cabinet just a few weeks ago.
For this year, then, there’s disagreement over whether there even was a deficit – mostly between Reti’s verbal comments to the media and his written ones to Cabinet.
Then there’s the 23/24 year, in which Health NZ was on track to make a surplus until February 2024, when costs suddenly spiked. What caused those cost spikes? This is the question that Apa, Reti and Levy all provided slightly different answers for.
It’s clear that all of the extra nurses make up at least some of the additional costs. Reti said it was good to see more nurses hired, but that they had not been placed correctly so some areas were now overstaffed while mental health and maternity wards, for example, were still facing shortages.
Even if redistributed, however, the nurses would still cost the Government the same amount of money. It’s hard to argue that hiring nurses to close workforce shortages is an issue of financial mismanagement. Insofar as Health NZ is tracking ahead of budget on workforce, as Levy suggested, that would imply the department needs more funding to be able to meet health needs.
This would therefore seem to be at least partly an issue of underfunding. The opacity of Health NZ’s financial reporting may have contributed to the unexpectedness of the deficit, but its existence is due to the success of health worker recruitment policies that everyone supports.
Finally, there’s the current financial year, 2024/25, begun on July 1. This is the year where Health NZ is projected to run a $1.4 billion deficit. It’s also the first year where the department is operating under a Budget set by the coalition Government, rather than Labour.
The cost increases in this year are unlikely to be significantly different in source than those in the final months of the 23/24 year. In other words, new nurses, plus other workers, supplies and procurement.
Reti was confident on Tuesday that the Government in Budget 2024 funded Health NZ to the degree it needed to deal with these cost pressures while also beginning to achieve new health targets. Labour’s health spokesperson Ayesha Verrall wasn’t so sure.
The latest public estimate of Health NZ’s cost pressure needs in the 24/25 year was produced as part of the pre-election economic and fiscal update (Prefu) in September 2023. After the election, health officials told MPs at a select committee hearing that the cost pressures had worsened and they would need more money.
In Budget 2024, however, Health NZ received only the amount indicated by the Prefu estimates. That clearly demonstrates, Verrall said, that the department is underfunded as it is receiving less than it needs – though the specific quantum is not available.
Reti refused to say on Tuesday whether Budget 2024 provided Health NZ with the funding it had actually asked for, to address increased costs due to inflation and population growth. Questioned repeatedly, he said that detail was Budget-sensitive and he couldn’t reveal it.
Apa, too, declined to say whether the Budget was sufficient, but she did suggest Health NZ would have to stem clinical recruiting to stay within the funding they’d been given.
“We operate with the resources that we have. The issue over the last few months has largely been about Health New Zealand really keeping an eye on our costs and recruitment. Although we love to have the clinical workforce that we’ve got, that is part of the internal controls we need to look at and monitor that much more closely,” she said.
In other words, with a higher budget, Health NZ would be able to continue recruiting medical staff and resolving the massive workforce shortage. That would seem to be a clear-cut case of underfunding, even if a smaller portion of the ongoing deficit is still fallout from historic financial mismanagement.
The exact degree to which Health NZ’s deficit is due to underfunding or poor financial management will be in the eye of the beholder. But suggestions the cause is entirely the latter are clearly not correct, given Health NZ’s own chief executive has suggested nurse recruitment has driven the deficit and that this will have to be reined in to remain within future Budgets.