APPROACHING THE AUDIT OF THE VICTORIAN HEALTH SECTOR

Keynote address to the
Australian Health Services Financial Management Association (AHSFMA) Conference
Lorne, November 2006

By Des Pearson
Auditor-General of Victoria

Thank you for the opportunity to address the conference. I personally value the opportunity to engage with key players within the health sector. I hope you find some of my observations and insights informative.

Today, I would like to take you through a number of perspectives as I share with you my thoughts as I develop my approach to leading the public sector independent external audit function in Victoria. By circumstance, the health sector is going to figure prominently in audit planning and operations as it represents a very significant proportion of outlays, both recurrent and capital, and is a central issue for the community as a whole.

I will start by providing some background and context to give an insight into my motivation and approach in undertaking the audit role for parliament. I will then draw on my previous exposure to the audit of the health sector and the Western Australian public sector, before relating my thoughts to the Victorian experience.

Finally, I propose issuing some challenges to you as financial management practitioners as, notwithstanding significant progress over the past decade or so, I see an even greater role for the profession in optimising health service delivery.

Personal context

I bring to the audit task a background mix of program delivery, corporate support and external audit experience obtained across a number of jurisdictions. I have also been actively involved in the governance of professional bodies at national and state level. Combined with my previous experience as an Auditor-General, I like to think that I bring an applied and practical perspective to undertaking the external audit task.

Victorian context

The Victorian Auditor-General’s Office mandate has evolved and expanded over time, so that in addition to assurance on financial matters, performance audits are conducted into the efficient and effective use of public funds, and whether the public funds given to a non- government organisation have been used for the purpose for which they were given.

These powers are enshrined in legislation, resulting in arguably the most “independent” powers for an Auditor-General in Australia.

The relationship between the Victorian Auditor-General’s Office and the Victorian Parliament is also more formal than equivalent relationships in other jurisdictions. There are statute-based protocols for “consultation” between the Victorian Public Accounts and Estimates Committee and our Office. For example, formal consultation takes place on the Office’s Annual Plan, and on the scope and specification of each performance audit.

Complementing this, there is a provision for an exacting independent, external performance audit of our Office once every 3 years. This is a very demanding requirement and comparatively very much more stringent that the likelihood of a performance audit of any other agency or program in the public sector.

Public sector audit principles

In other respects, as public sector auditors, the Victorian Auditor-General’s Office is not discernibly different from audit offices in other jurisdictions. The independence and professionalism of the Office are underpinned by the standard “Westminster-model” which respects the 3 fundamental principles identified by the United Kingdom’s Public Sector Forum (a consultative mechanism of the UK National Audit Office and the Audit Commissions of England, Wales and Scotland):

1. The independence of public sector auditors from the organisations being audited.

2. Wide scope of public audit, namely, the audit of financial statements, the audit of legality (or compliance), probity and value-for-money:

• That is – in addition to the question: “How Much?”

• We examine the question: “How well?”

Unlike commercial enterprises, public bodies do not have the “marketplace” disciplines automatically applied whereby overall performance is assessed through reporting a profit or loss to shareholders. Public sector audit fills this gap by providing for performance audits. This is notwithstanding that hospitals have frequent feedback from interest groups, and though the media, which can focus attention on aspects of performance.

3. The ability of public sector auditors to make the results of these audits available to the public and to democratically elected representatives.

The resources that are used by public bodies, such as public hospitals, are extracted “by force” from the community in the form of taxes and charges. The challenge that we face, as public administrators, is to equitably and cost-effectively “ration” their application to meeting, on a priority basis, excess demand.

Role of the Auditor-General

In reporting to parliament about the performance of public sector agencies, my role is most definitely one of assurance about past performance and, to a less definitive degree, one of contributing to improving future performance.

The first leg of the mandate, our assurance role, is the core and fundamental aspect of our business and must be predominant. The value of this core attest audit function in providing assurance about the reliability of periodic financial (and increasingly performance) reports cannot be underestimated. It underpins the ‘trust’ in our system of government and the stability of our democracy.

The second leg of the mandate requires more consideration in terms of how we undertake this component of our work, to contribute to improving future performance.

• Should we provide constructive advice?

My response is “to a degree”. Government sets the directions and policy framework - management is there to manage. Our primary role is to comment on how well the implementation is managed. In principle, I see the primary responsibility for provision of advice as resting with executive government through central agencies, and in your program sphere through the Department of Human Services.

• Should we provide guidance?

My response is that it is not our primary role to create better practice guides. If they are a spin-off from an audit or inquiry, then certainly we should disseminate that information. But there are others who I consider are more directly responsible and better placed to provide that better practice information and guidance.

• Should we provide critical analysis?

This is our central role as parliament’s auditor. In the commercial sphere, the market provides an immediate feedback loop on performance to companies and their shareholders through market analysis and share prices etc. The same responsiveness is not available to public sector organisations. We operate in a very different context with much longer “feedback loops”. Through our audits, we strive to provide impartial, independent analysis and feedback about agencies to parliament.

Environmental influences

I will now turn to the environmental influences on auditing in the Victorian public sector. In 2006-07, the Victorian public sector has a Consolidated Fund budget of over $30 billion, making it arguably the third largest “business” in Australia (after the Australian Government and the NSW Government, and larger than the biggest of the BRW’s list of large corporations).

Added to this, today’s community is the most articulate and informed, and their expectations and ability to advocate these add to the complexity of our role as administrators, and reinforce the imperative for us to communicate effectively about what we are doing and why.

In order to implement their policies, governments are progressively developing new methods of working with the private and non-government sectors. Public-private partnerships, or PPPs, are an example of this. These initiatives require operational relationships and accounting policies to be reviewed and, where necessary, new standards developed. While it is not audit’s role to develop accounting policy, we have a complementary role in this process as ultimately we have to form an opinion regarding the appropriateness of the accounting treatments adopted.

Accounting and auditing standards today have the force of law, being issued as instruments of corporations law, and with our financial and audit legislation requiring the application of these standards.

Further, there has been a significant development, in my mind, akin to the magnitude of the initiative of adopting accrual accounting in the public sector. That is the integration of accounting and statistical frameworks via the GAAP/GFS harmonisation project and the resulting accounting standard AASB 1049. This heralds the alignment of economic and financial management principles and promises a more integrated approach to resource management in the public sector as we go forward.

This unequivocally demonstrates an opportunity for accountants to make an even greater contribution to economic management in today’s evolving environment.

Jurisdictional differences

In taking up my new position, I am mindful of the jurisdictional differences between the Auditor-General’s role in Western Australia and Victoria. The population of Victoria is nearly 2.5 times the population in Western Australia (5 million to 2 million) and the total state Consolidated Fund budget is in about the same proportion ($32 billion to $15 billion).

The number of audit clients is significantly higher in Victoria – just over 650 – compared with around 210 in Western Australia. The geography and the underlying economies are distinctly different, as are the governance approaches, notably in the health sector.

By contrast, the sophistication of governance processes is noticeable from the short time that I have been in Victoria.

Health sector differences

In relation to the Victorian and Western Australian health sectors, there are differences and some striking similarities.

I understand that, after a period of major structural change in the late 1990s, the current structure of metropolitan health services in Victoria has been relatively stable, having been in place since 2000. For major metropolitan and regional health services, recent governance reforms have built upon this underlying structural stability.

In contrast, Western Australia has been through a period of reform. The state recently appointed one chief executive for the whole of health in Western Australia to lead a decade-long implementation program, following a major review and restructure which sought to achieve bipartisan political support for the reforms recommended.

I am aware that Victoria has a long history of community involvement with public hospital services, and there are a large number of independently governed entities – the Victorian Auditor-General’s Office audits over 150 entities in the health and human services sector. As a result, our Office needs to maintain constructive relationships with key stakeholder groups that represent the interests of the sector.

The size of the health budget is also substantial in Victoria, representing about one-third of total government outlays. The Victorian Human Services budget for 2006-07 was $11.6 billion, of which $6.2 billion was for Health and $2.8 billion was for Aged Care. The turnover of the Department of Human Services is comparable with leading commercial companies.

Regarding similarities, both states have been involved in major hospital redevelopments and associated capital works. In WA, major capital works programs have been under way, such as the construction of a new Fiona Stanley Hospital in Murdoch and the proposed relocation of Royal Perth Hospital from its current site.

In Victoria, there is a major program of hospital capital works with the Austin redevelopment, Mercy relocation and Casey hospital - completed; Royal Women’s redevelopment - in progress; and Box Hill and the Royal Children’s - announced. Major health IT redevelopment projects are underway in each state.

In terms of real health outcomes, specifically mortality rates and life expectancy, WA has very slightly better rates than Victoria, possibly reflecting demographic characteristics.

Health sector trends

The broad environmental factors and trends affecting the health care system appear similar in both Victoria and Western Australia:

• Increasing longevity, ageing of the population, population growth and geographic shifts combine to contribute to quite marked changes in the demand for health services.

• Clinical advances and new technology results in improving outcomes for some diseases, such as heart disease, but lifestyle-related diseases such as diabetes are on the increase.

• Mental health and chronic conditions are receiving greater recognition, and services are required to reflect this.

• Overall, the focus of the health system is inevitably shifting towards managing the demand for acute care services through the promotion of good health and keeping people well in the community. There has been a major program in this area in Victoria – Hospital Demand Management.

• As a result, hospitals are being required to be more flexible in the provision of services – looking for ambulatory care options to substitute for, or to complement, inpatient care.

The budget environment for Acute Health and Aged Care has included growth in funding of 81 per cent since 1999-2000. So, what are the implications of this environment for health sector CFOs?

There is clearly an ongoing focus on demonstrating efficient and effective service delivery while maintaining quality of care within an expanding range of service delivery models.

Health services will increasingly look to CFOs to provide relevant financial data and business planning support in order to implement and evaluate new models of care to meet changing requirements. Hospitals will also need to identify and work towards funding arrangements that facilitate more flexible service delivery in order to meet the growing demand for acute care in their community.

Health service CFOs

Just as the health care environment is changing, as you know only too well, the role of CFOs is also progressively changing focus. In larger health services, the CFO role necessarily includes a significant involvement in business planning – assisting program managers to consider the resource implications of new policy initiatives and to develop the most effective financial approach to the delivery of services.

In major metropolitan and regional health services, CFOs are supported by accounting staff, though I appreciate that in smaller health services, CFOs are circumstantially required to be self-sufficient. This can be an impost and an opportunity. Your contribution to the assessment of risks and management of those risks is also critical to the successful operation of the organisation.

At the executive level of the organisation, the CFO needs to go beyond the traditional role of ensuring that financial policies and guidelines are complied with. I see a need for CFOs to be even more involved in the development of performance management systems that link both qualitative and quantitative measures.

Our Office has recently released a report recommending the inclusion of performance measures in public hospital reports and that they be subject to audit.

That report on performance reporting by public health services was the third in a rolling program of reports on performance reporting in different sectors, the first being the water sector and the second being the technical and further education sector (TAFE). I understand that following the release of our Office’s report on performance reporting in the water sector, the Department of Sustainability and Environment and the water sector responded positively to the challenge, resulting in the issue in 2004 of a directive of the Minister for Finance for the industry to include a set of non-financial performance measures in their annual reports (as part of their annual performance reporting requirements), and that the measures would be subject to audit. That now occurs.

In June 2006, the Victorian Auditor-General’s Office released a report about performance reporting of health services and concluded that the performance information published in health services’ annual reports had a logical and consistent relationship with the organisation’s objectives and with government outcomes. However, concern was expressed that there had been little stakeholder consultation in the selection of indicators and little explanation was provided about the technical terms used, thus making it difficult for a member of the public to understand the meaning of some performance measure.

The report recommended that the Department of Human Services (in conjunction with stakeholders) determine which are the most important performance indicators for health services, and mandate that performance against these indicators is reported in annual reports. In its response, the Department partially agreed with this recommendation. While the department supported the inclusion of indicators, it considered that it was not appropriate to mandate a fixed set of indicators on an ongoing basis. The department indicated that it plans to discuss the recommendation for the audit of performance information in annual reports with the Department of Treasury and Finance and our Office.

So, I expect that CFOs will be more involved in performance measurement issues in the future, arising from the progressive implementation of key elements of the report.

No matter what size the organisation, your core role is financial management – to provide financial information, cost data and financial analysis to help develop budgets, monitor operational performance and control costs.

That is, you have a central role in ensuring that across the health service, decision-making is based upon comprehensive and reliable information – both financial and non-financial.

Performance indicators

Increasingly, CFOs need to pay attention to non-financial performance indicators as well as financial KPIs. The Budget Papers for 2005-06 for Victoria and WA provide some interesting comparisons in terms of the performance measures that are used for the health portfolio.

The basic program performance measures in the Victorian Budget Papers refer to quantity, quality, timeliness and cost. While these are commendable, I regard them as “input” and inferior to “outcome” indicators which are more likely to address the more challenging issue of “to what extent and how well did we deliver?”.

For example, in relation to Victorian public hospital admitted patient services, the performance measures include targets for the number of patient separations, casemix WIES, hospitals accredited, emergency patients admitted within 8 hours, Urgent (Category 1) patients admitted within 30 days – and other similar indicators for semi-urgent patients.

There is no specific reference to health outcomes, except in an appendix of the Victorian Budget Papers 2006-07 which refers to progress in achieving the directions identified in Growing Victoria Together.

As you are no doubt aware, Growing Victoria Together is a vision for Victoria to 2010 that was first launched by the government in 2001. It articulates the issues that are important to Victorians and the priorities the government has set to “make Victoria a better place to live, work and raise a family”.

One of the visions contained in Growing Victoria Together is “Quality Health” and one of the goals is “High quality, accessible health and community services”.

The Budget Papers include trend data on progress towards achieving this goal, from 1999 as the base year. Some of the indicators relating to health include recent statistics for self-rated health status; emergency and elective treatment within ideal times; average life expectancy in Victoria; and public satisfaction with Victorian hospitals.

However, this report on progress towards achieving the goals of Growing Victoria Together is presented in a descriptive part of the Victorian Budget Papers separate from the statements of departmental outputs. As a result, targets for the performance indicators are generally not included (unless the statistic is already used for a departmental output). Hence, performance measures and targets for the goals of Growing Victoria Together have, from an audit perspective, been only been partially developed.

This contrasts with Western Australia where the Budget Papers include performance measures and targets relating to outcomes and efficiency.

For example, in relation to Western Australia’s admitted patient services, key efficiency indicators include:

• average cost per casemix adjusted separation for teaching hospitals

• average cost per casemix adjusted separation for non-teaching hospitals

• average cost per bed day for admitted patients in selected small rural hospitals

• average cost per Hospital In The Home bed day.

Outcomes focus

More importantly in terms of effectiveness and outcomes, in terms of the overall health of people in Western Australia (which is the ultimate outcome of any health system) data is presented annually in Western Australian Budget Papers on a number of outcome indicators, including, for example, Years of Life Lost due to Preventable Factors.

This is a chart from the Western Australian Budget Papers for 2005-06 showing Years of Life Lost per ‘000 population due to preventable disease or injury in Western Australia. The light blue columns present the data for Western Australia compared with the data for Australia represented as dark blue columns. For the 7 years shown, Western Australia consistently shows a better “health outcome” than the national average as fewer years of life are lost.

While there are necessarily lags in the collection of this data, with the latest being 2003 for this report, it provides a very relevant performance measure for an overall outcome of the health system.

Health sector audits – Western Australia and Victoria

In preparing for this presentation, Alan Drews, the President of AHSFMA suggested that I may like to reflect on some of the audits that have recently been conducted in the health sector in Western Australia.

Health sector audits – WA

• Under the Microscope – Support for Health and Medical Research in Western Australia (2004)

• Patients Waiting – Access to Elective Surgery in Western Australia (2003)

• Contracting Not-For-Profit Agencies for the Delivery of Health Services (2003)

• Management of Hospital Special Purpose Accounts (2002)

• Procurement of Hospital Medical Equipment (2002)

• Lifting the Rating – Stroke Management in Western Australia (2001)

• Private Care for Public Patients – A Follow-on Examination of the Joondalup Health Campus Contract (2000)

When I compare performance audits in the last 4 years, I note only one clear commonality that is in relation to Hospital Medical Equipment – with a similar audit to the 2002 Western Australia audit being conducted in Victoria in 2003.

The other areas of value-for-money audit activity in Western Australia have not been covered recently by audits in Victoria.

I must take “presenter’s” prerogative and assert that the Western Australia approach was “strategically” and “comprehensiveness” motivated! The decision behind the Under the Microscope research audit in 2004 was influenced by recognition of the benefit of a prioritised and coordinated approach to health and medical research, sector-wide.

The Patients Waiting audit in 2003 of access to elective surgery was motivated by an absence of comprehensive and reliable information about waiting lists. Similarly, the 2003 audit entitled Contracting Not-For-Profit Agencies for the Delivery of Health Services was directed at optimising the leveraging of this program delivery option, in the public interest.

Health sector audits – Victoria

By way of comparison, I also provide a summary of the recent audits in the Victorian health care sector.

Health sector audits – Victoria

• Nurse work force planning (May 2002)

• Mental health services for people in crisis (October 2002)

• Managing medical equipment (March 2003)

• Managing emergency demand (May 2004)

• Managing patient safety (March 2005)

• Health procurement in Victoria (October 2005)

• Access to specialist medical outpatient care (June 2006)

• Performance reporting in public health services (June 2006)

• Condition of public sector residential aged care (August 2006)

• Access to public hospitals - In-patient flow and bed management (Planned 2006-07)

Performance audits in Victorian public hospitals have focused on risks associated with maintaining capability (such as work force planning and medical equipment); quality of care; and meeting the needs of the community in relation to critical areas such as mental health, and access to emergency and outpatient services.

I encourage CFOs to review the findings in these performance audit reports as they include reference to financial and performance management matters affecting the business of the health service.

For example, the June 2006 audit of specialist medical outpatient care included an examination of internal hospital business case planning and referred to problems associated with identifying and recovering costs associated with MBS clinics.

Issues for CFOs

This afternoon, the conference program includes a forum about “year-end accounts” which will include a presentation by Craig Burke, our Financial Audit Director responsible for on this year’s health sector financial audits.

Obviously, I am not familiar with that level of detail, but I would like to touch upon some key issues that I personally identify with, and others that have been identified nationally through audit processes in the health sector.

Our Office monitors the financial performance of health services and reports on key financial sustainability measures, including the extent of deficits across the sector, among other matters.

Substantial additional funding has been provided to public hospitals in recent times and we will continue to monitor the impact of this funding and the financial sustainability of the sector.

There are financial management strengths evident in the sector:

• through established governance arrangements and committee structures

• the level of performance monitoring

• the extent of internal audit functions

• evidence of rolling programs for fraud risk assessment

• the focus on risk management plans.

At a personal level, I am inclined to be provocative and suggest that advances in these areas, while commendable, warrant further attention before they can truly be heralded as better practice.

As our audit reports have indicated, further attention is required on fundamental control weakness such as:

• asset management

• revenue collection

• EFT systems

• expenditure and payroll controls.

This is essential and a prerequisite for harvesting the dividends of more sophisticated “financial management” as without these fundamental underpinning controls system integrity cannot be assured.

Auditor’s dispositions

To conclude, I would like to summarise some of my own personal dispositions, if they have not already become apparent so far. As managers delivering services to the public, we need to balance attention to process with clear attention to delivering the “right” outcomes.

That is, we need to establish and retain a greater focus on identifying, and leveraging, KPIs from an outcome perspective. I believe that this is the only practical way to demonstrate we are delivering the right results at the right time, first time.

It will never be enough to measure inputs and throughput; we need to look at our contribution in efficiency and effectiveness terms, which will usually involve collective performance as much as individual performance.

Again a “language” is required to enable us to align and coordinate our efforts and deliver value-for-money outcomes that are recognised, if not appreciated.

To this end, league tables or benchmarking data on efficiency and effectiveness indicators need to be developed and communicated. I should put on notice, without threatening, that if sectors such as the health sector do not, then audit is likely to do so, if I get my way.

We need to be sure that decision-making is based on comprehensive and reliable information - and for that to happen, it is important to have an appropriate investment in information systems. In health services there also needs to be a focus on the integrity of systems to protect personal information while at the same time servicing the business needs of the sector.

Through the audit process, we seek to know whether agencies are doing the best with the available resources to achieve the specified outcomes. We know that even such a simple task requires well-trained and motivated staff. Accordingly, availability of good financial staff is clearly important.

This is where, I know, AHSFMA plays an important role in providing a network of support and training for financial staff, particularly those in more remote locations.

Accordingly, I thank the AHSFMA conference organising committee for the opportunity to speak today, and I wish you all well with your program of activities here at Lorne.