Section 7 of the South Australian Health Commission Act 1976 (the Act) establishes the South Australian Health Commission (the Commission) as a body corporate. Amendments to the Act which significantly change the functions and powers of the Commission were enacted in May and July 2000. The changes are discussed more fully below.
The primary role of the Commission in the year to 30 June 2000 was to provide for the administration of hospitals and health services. In particular, it was responsible for ensuring health service delivery units were operated in an efficient and economical manner and that there was a proper allocation of resources between these units.
In exercising its functions, the Commission is subject to the control and direction of the Minister for Human Services.
The Act provides for the Commission to have five members. The Commission has entered into Memoranda of Understanding (MOU) with the Department of Human Services. The MOU require the Department to provide such financial, administrative, management and other services as are required to enable the Commission to perform its statutory duties and functions and associated activities. In return, the Commission pays a Service Fee to the Department inclusive of all outgoings incurred by the Department in the provision of services in respect of that agreement. Note 1 to the Commission’s financial statements refers.
The following chart depicts the Commission structure and relationship with the Department of Human Services:
The Act was subject to significant amendment in May and July 2000.
In May 2000 the Act was amended to explicitly provide that hospitals and health centres incorporated under the Act are subject to the direction of the Minister of Human Services. The Minister’s capacity to direct is limited by the Act which also requires any directions to be in writing and particulars of any directions to be included in relevant hospital or health centre’s annual report.
The Minister previously had a capacity to direct some hospitals and health centres based on provisions of their respective constitutions.
In July the Act was further amended to transfer many of the functions and powers which were previously exercised by the Commission to the Minister of Human Services. The Commission’s functions and powers following the amendments to the Act are essentially to advise and assist the Minister in the performance of functions assigned to the Minister. It also retains responsibility for functions relevant to public and environmental health.
The July amendments also provided for the repeal of subsection 19A(2) of the Act which provided that the Chairperson of the Commission will not be a Public Service employee. This amendment is in response to matters raised by Audit in previous Reports concerning the appointment of the Chairperson of the Department of Human Services as Chairperson of the Health Commission.
The amendments to the Act which transfer the functions and powers previously performed by the Commission to the Minister were effected to ensure the allocation of functions and powers under the Act are consistent with current administrative arrangements. They were also intended to remove the necessity for the preparation of separate financial statements for the Commission and the Department of Human Services.
To achieve this objective the Minister, in accordance with section 17 of the Act, has delegated powers and functions pursuant to the Act to the Chief Executive of the Department of Human Services. Audit in conjunction with the Department will review the effect of the amendments to the Act upon financial accounting and reporting arrangements in the coming financial year.
Health Units, responsible for the provision of direct health care services, are either established as incorporated units under the Act or as administrative (unincorporated) units of the Commission.
Health Units consist of hospitals and health centres based in metropolitan and country regions. The Act stipulates that an incorporated hospital and incorporated health centre is to be established as a body corporate and to be administered by a Board of Directors. The powers, responsibilities and functions of all Health Units are embedded within the Commission approved constitutions of the Health Units. In addition, the Commission provides financial assistance to health bodies incorporated under the Acts.
The Commission’s financial operations were accounted for through a Deposit Account at the Department of Treasury and Finance. The account records receipts of monies (mainly comprising appropriation of funds from the Consolidated Account and receipt of Commonwealth Specific Purpose Funds), and disbursements of funds associated with the costs of the activities of the Commission and Health Units.
The funds allocated from the Commission to Health Units represent net fund allocations. Net funding represents the difference between the gross operating costs of the Health Units and their revenue collections. Net funding provides Health Unit managers with greater autonomy to manager their finances by allowing them to retain all revenues generated from their operations (largely from patient and other service charges).
Since 1994-95, casemix funding has formed the basis for determining fund allocations to hospitals.
Health Units maintain separate accounts to record and control their respective financial operations.
The Commission and Health Units prepare their financial statements on an accrual basis of reporting. The financial statements of the Commission included in this section of the Report reflect the financial operation of the Commission (excluding Incorporated Health Units) and certain Unincorporated Health Services. Whole-of-Health Sector financial statements reflecting the consolidation of the financial statements of the Commission (ie Chief Entity) and Incorporated Health Units are submitted to the Auditor-General subsequent to the preparation and conduct of the audit process in relation to the Chief Entity’s financial statements.
The Commission recorded a reduction in Net Assets resulting from Operations of $80.7 million for the year ended 30 June 2000. This loss on Operations is attributable to:
a net loss resulting from changes to the Commission’s insurance arrangements of $27.1 million. This matter is further discussed below;
Bad and Doubtful Debts expense of $34.6 million associated with a provision against amounts receivable from Health Services for Budget Over-runs.
Recurrent funding to Health Units increased by $92.8 million with the increased funding being provided to Incorporated Health Units.
Capital funding to Health Units increased by $24.8 million.
Section 25 of the Act requires the Commission to maintain proper accounts of its financial affairs and that the Auditor-General audit the accounts.
During 1999-2000 the following areas were the subject of audit attention:
receipts
payroll
trade accounts
general ledger
assets
information technology developments
capital works
grants and loans to Health Units
Internal Audit.
As mentioned earlier, the Commission has entered into MOU with the Department of Human Services. The MOU, among other things, required the Department to provide administrative and financial management services to the Commission to enable the Commission to discharge its statutory functions and duties.
Systems operations and processes and activities undertaken by the Department of Human Services on behalf of the Commission pursuant to the MOU have been audited as part of portfolio wide reviews.
Audit findings and relevant recommendations arising from the review and testing of Commission activities and financial systems and records have been communicated in letters to the Department of Human Services.
The arrangements implemented for performance of Commission functions by the Department of Human Services under the MOU has a significant impact upon the control environment relevant to the Commission’s discharge of its statutory responsibilities. The administrative and financial accounting functions of the Commission have increasingly been integrated into the Department’s organisational, administrative and accounting arrangements.
As a consequence the features of the Department’s control environment and particularly its effectiveness in implementing the prescribed elements of the Financial Management Framework are relevant to the Commission. Audit comments regarding the Department’s control environment are included in the section of this Report relevant to the Department of Human Services.
The reviews of the specific auditable areas of coverage, involved where relevant, an assessment of the adequacy of accounting, record keeping and control, and the test verification of financial transactions processed and recorded during the year. The reviews undertaken identified some instances where internal control procedures either required improvement or were not applied consistently over the year.
As indicated above audit reviews of systems and records and of matters which effect the general control environment relevant to the Commission were undertaken in conjunction with the audit of Department of Human Services. Specific matters arising from these reviews which are more fully discussed in the section of this Report relevant to the Department include:
control evaluation with respect to the arrangements for processing Accounts Payable transactions for the portfolio;
processing of advance payments relevant to acquisition of equipment and other capital projects for Health Units. This matter is commented on in the section of this Report relating to the Department of Human Services;
the documentation of policies and procedures;
arrangements for provision of risk management and internal audit services.
The Commission’s liability with respect to a range of risks has been addressed by obtaining insurance cover through SAICORP, the Government’s captive insurer. Arrangements for provision of insurance were revised during the year as the level of deductibles, which is the amount of any claim which must be met by the Commission before the insurer meets the cost of claims, was increased from $50 000 to $1 million.
The change to the deductibles was negotiated between the SAICORP and the Department of Human Services, on behalf of the Commission, in late 1999 and the final arrangements were approved by the Treasurer in February 2000. The revised deductible was applied to medical malpractice claims, which involve the largest liability, with effect from 1 July 1994 and with effect from 1 July 1999 for other claim types.
The submission to the Treasurer in support of the proposed changes identified the following reasons for the changes:
To provide greater administrative and financial responsibility to the Commission for claims received.
To reduce the administrative input of SAICORP in reviewing claims which have already been investigated by the Commission and SAICORP’s insurance broker.
The annual insurance premium payable by the Commission to SAICORP will reduce although this benefit is offset by the future cost of meeting the increased deductibles.
Financial benefits would accrue to SAICORP through reduced liability for claims.
A link was also identified between the greater responsibility to be taken by the Commission and the need to implement improved clinical risk management practices and procedures throughout the South Australian public health system.
As part of the changes to the deductible amount SAICORP paid to the Commission an amount of $12.6 million. This represented a part refund of medical malpractice premiums paid for the period 1 July 1994 to 30 June 1999 and a refund of overpaid premiums for the 1999-2000 year following adjustment to the premiums for the revised deductibles.
The Commission’s provision for insurance claims as at 1 July 1999, reflecting its estimated liability for claims incurred to that date, was increased to reflect the impact of the changed deductible and to reflect the impact of a change to the method of determining the provision. The increase in the provision was $38.2 million and the net loss arising from the changes to insurance arrangements was $27.1 million which is a component of Insurance expense in Note 3 to the Commission’s financial statements. Note 2(k) to the financial statements provides further discussion of this matter.
As part of the Casemix funding arrangements between the Commission and Health Units budget over-runs by Health Units have been funded by the Commission but recognised as amounts owed to the Commission by the Health Units in accordance with relevant funding agreements. The value of the receivables at 30 June 2000, before provisioning, was $39.6 million. The Commission has provided an amount of $34.6 million against receivables due to the Commission from incorporated Health Units.
The recognition of the provision reflects an acknowledgement that while the Commission is entitled to receive the monies they are unlikely to be repaid in full by Health Units. The provision was approved by the Chairperson of the Commission.
In 1998-1999 Audit undertook a review of Health Unit financial statements. One outcome of the review was an understanding that different Health Units were achieving different rates of return on funds invested. Audit wrote to the Commission in February 1999 recommending that the Commission and the major metropolitan and regional health units review their arrangements for investing surplus funds. The objective of the review would be to ensure arrangements were risk return effective.
Audit have received a response to this recommendation which indicated that it was not proposed to undertake the review recommended by Audit. The response noted that the Health Units are separately incorporated statutory authorities, that there was sensitivity surrounding the identification and ownership of the funds and that the funds invested included amounts which were not part of recurrent appropriations. On this basis it was considered unlikely that the consensus agreement required to effect the Audit proposal could be achieved.
The Commission’s management of foreign exchange risk associated with the purchase of equipment for hospitals was commented upon in last year’s Report. This matter was followed up with the Department of Human Services who have responsibility for the Commission’s financial management.
The Department has advised that all Commission expenditure is subject to portfolio control mechanisms which includes review of all acquisitions of goods or services valued at over $100 000 by the Department’s Accredited Purchasing Panel. Further, each agency in the Human Services portfolio is required to prepare an acquisition plan which draws the agency’s attention to the requirements of Treasurer’s Instruction 23 and the management of Foreign Exchange Currency Exposures. The acquisition plans are required to be reviewed by the Accredited Purchasing Panel.
Previous Reports have commented upon the development by the Commission of a Condition Based Asset Information System (CABS) which, amongst other features, was proposed to incorporate a capacity to provide updated valuation information for financial statement reporting of Health Unit Infrastructure Assets. The development of CABS has not resulted in the development of this valuation capability for implementation by Health Units as at 30 June 2000. To enable compliance with requirements that fixed assets are revalued on a timely basis the Health Units have been advised to engage independent valuers to prepare updated valuations and to enable revaluation of Health Unit assets as at 30 June 2000.
Last year’s Report included comment on the scheme of administration and enforcement associated with the Food Act 1985. The comments were drawn from Audit enquiry made during 1997-98 of the statutory obligations of the Commission and local government authorities under that Act.
Last year’s Report indicated that:
Reform to the State’s food legislation had yet to be effected in consideration of developments still in progress at the national level, directed to achieving national uniformity and enhancement in food legislation and safety standards across Australian states and territories.
The Commission had initiated action to improve information collected of inspection activity of food businesses undertaken in local government council jurisdictions. Further, the Commission had written to councils in June 1999 advising appropriate levels of frequency of inspections for food businesses.
Regarding the first matter, Cabinet approved in early July 2000, the release for consultation of a draft Food Act and draft Food Safety Standards. The Cabinet submission proposed a further submission to Cabinet for approval to introduce legislation later in the year following the consultation and assessment period.
In reference to the second matter, the Commission forwarded in early August 2000, it’s annual request to local government councils to obtain various information that would enable it to submit a report to Parliament on the activities of the Commission and local councils under the Food Act. Part of that information request, enquires of councils particulars concerning the type and scope of inspection activity and the process used by councils to determine an appropriate frequency of inspection. Audit is to follow up on the analysis of information received from local government councils to the Commission’s August 2000 request.
Recent years have seen the implementation of certain administrative and financial management reforms by government directed to improving the prudential and accountability standards applying to public resources (eg funds) under the management of public sector agencies. Some of these have included the introduction of accrual-based accounting and financial reporting and the more recent introduction of the new Treasurer’s Instructions and the Financial Management Framework. In addition, taxation changes have occurred (Fringe Benefits Tax and Goods and Services Tax).
The nature of these types of changes are such that they effect the governance and accountability regimes being applied to the various funds operations undertaken within the confines of the Health Units, whether they be controlled or not controlled by the respective Health Units.
Both the Commission and Audit consider it an opportune time for Health Units to revisit the financial management and accountability principles and processes being applied to the various funds operations within Health Units.
To assist in the Health Unit review process Audit, in conjunction with the Commission, updated a financial accounting policy issued on this matter in the 1980’s. The updated policy was forwarded to the Chairpersons and Chief Executives of all Health Units under covering letter of the Chairperson of the Commission. The letter and policy reflect on the importance of Health Unit management considering the high level accountability and auditability principles and processes to apply to the various funds operations within Health Units.
The Modbury Hospital Contract was first signed on 3 February 1995. It was substantially amended and re-executed on 19 August 1997. Under the Contract the private health care operator is required to build Torrens Valley Private Hospital.
On 28 August 2000 Cabinet approved deferral of the private health care provider obligations regarding the construction of the private hospital on the basis of a number of conditions. The Cabinet submission was requested and received by Audit at the time of finalising this Report. It will be the subject of review by Audit.
As required by subsection 36(1)(a)(iii) of the Public Finance and Audit Act 1987, the audit of the South Australian Health Commission included an assessment of the controls exercised in relation to the receipt, expenditure and investment of money, the acquisition and disposal of property and the incurring of liabilities. The assessment also considered whether those controls were consistent with the prescribed elements of the Financial Management Framework as required by Treasurer’s Instruction 2 ‘Financial Management Policies’.
Audit formed the opinion that the controls exercised by the South Australian Health Commission in relation to the receipt, expenditure and investment of money; the acquisition and disposal of property; and the incurring of liabilities, except for the matters outlined under ‘Audit Findings and Comments’, were sufficient to provide reasonable assurance that the financial transactions of the organisation were conducted properly and in accordance with the law.
Sections 34 and 55 of the Act require incorporated hospitals and health centres to maintain proper accounts of their respective financial affairs and require those accounts to be audited in respect of each financial year. The accounts of the major metropolitan hospitals and some health centres are subject to audit by the Auditor-General. Other hospitals and health centres are audited by auditors approved by the Auditor-General.
In general, audit of Health Units would include review coverage of the following auditable areas:
patient billing and receipts
cash holdings
salaries and wages
trade accounts
general ledger
inventory
pharmacy
asset register
building services
non-Commission funds
specific purpose funds
financial statements.
Issues arising form the reviews of the auditable areas are referred to Health Unit management for consideration and comment regarding action proposed or taken.
In respect of the audit verification of financial statements of Health Units, audits are generally in progress, at the time of presentation of this Report to Parliament. In recognition, however, of the general importance of providing at the time of publication of this Report some useful financial information concerning health services’ operations, albeit unaudited and on a cash basis, tabular data on Health Unit financial activity is presented at the end of this section of the Report.
The financial statements and notes thereto, reflect a summary of all transactions on an accrual basis of accounting.
Specifically, in relation to the accrual financial statements of the Commission, the statements reflect the following:
Expenditure of the Commission was $1.9 billion ($1.7 billion) which was met by contributions from the State and Commonwealth Governments of $1.8 billion ($1.7 billion).
Funding to Incorporated Health Services was $1.6 billion ($1.5 billion).
A decrease in Net Assets Resulting from Operations of $80.6 million compared with an increase of $9.8 million in the previous year.
An increase in the provision for insurance claims for the Commission which was $60.3 million ($12.2 million) and an increase in the workers compensation liability related to the Commission from $25.5 million to $33.1 million.
Separate tabulated unaudited financial information relating to Health Service Unit activity prepared on a cash basis of accounting is provided later in this section of the Report.