The Population-Based Funding Formula (PBFF) is a technical tool used to help equitably distribute the bulk of district health board funding according to the needs of each DHB’s population.
The formula takes into account the number of people who live in each DHB catchment, their age, socio-economic status, ethnicity, and sex. It also has mechanisms to compensate DHBs who service rural communities and areas of high deprivation.
The funding covers a range of health services including primary care, hospital and community care, health of older people, and mental health.
The latest five yearly review of the PBFF was completed in December 2015 and will be incorporated into DHB’s 2016/17 Funding Advice.
The review recommended no structural changes to the overall model but proposed several changes, including to the rural adjuster to better reflect DHB population and geography.
In 2015/16 the PBFF distributed a total of $11.7 billion to DHBs. DHBs will not receive less funding as a result of the review.
The latest review is based on 2013 Census data and was overseen by a Technical Advisory Group (TAG) with members from DHBs, the Ministry of Health, and Treasury. Sapere Research Group was also commissioned to undertake an independent review of the adjustment mechanisms in the formula.
An independent audit was undertaken into the review and found no issues with the accuracy of the work. A full technical report will be released in early 2016.
Background to Population-Based Funding Formula
Structure of the model
The PBFF is a formula that determines the share of funding to be allocated to district health boards (DHBs), based on the population living in each district. The PBFF does not determine the overall level of funding to DHBs
The aim of the PBFF is to equitably distribute available funding between DHBs according to the relative needs of their populations and the cost of providing health and disability support services to meet those needs. The PBFF gives each DHB the same opportunity, in terms of resources, to respond to the needs of its population. According to the PBFF, each DHB’s share of health and disability funding is determined by:
- its share of the projected New Zealand population, weighted according to the national average cost of the health and disability support services used by different demographic groups
- an additional policy-based weighting for unmet need that recognises the different challenges DHBs face in reducing disparities and access to health services between population groups
- a rural adjustment and an adjustment for eligible overseas visitors and refugees, each of which redistribute a set amount of funding between DHBs to recognise unavoidable differences in the cost of providing certain health and disability support services to these population groups.
The PBFF consists of a set of DHB populations, a set of service-based cost weights for each age, sex, ethnicity and socio-economic groups as defined by NZ index of deprivation  (NZDep) quintile group, plus the rural and overseas and refugee adjustments. The cost weights are based on historical average expenditure per group with further adjustments for unmet need.
The rural and overseas and refugees adjusters have been based on the Ministry’s best estimates of current costs. The rural pool is distributed to DHBs partially by way of a rural population index with the remainder distributed reflecting diseconomies of scale. The population is the most important factor in determining any board’s funding level.
Development and history
The use of a PBFF was an integral part of the health reforms that led to the establishment of DHBs in 2001. The PBFF was developed in 2000, and based on then-available data and population projections. Cabinet approved the formula in November 2002 and directed that the PBFF be reviewed every five years, to incorporate updated population projections following each New Zealand Census. The first review in 2003 did not reconsider any structural issues. Instead, changes were restricted to the recalculation of cost weights and adjusters.
Due to time constraints, the 2003 review did not review the rural adjuster; the review of this component was instead carried out in 2004.
The interim version of the PBFF was introduced on 1 July 2003 and used to set PBFF target funding for each DHB. In the first year of implementation DHBs were all under and over target and have been moved towards target over-time. The results from the 2003 review of the PBFF were implemented on 1 July 2004. The results of the rural adjuster review were implemented on 1 July 2005.
In 2006 the model was updated to adjust for over $800 million in new initiatives funding that was brought into PBFF for 2007/08 financial year.
The formula was next reviewed over 2007 and 2008 and included extensive consultation with DHBs. The feedback received was overwhelmingly supportive of most aspects of the PBFF model, and consequently only minor changes to the formula were proposed. Cabinet approved the proposals in November 2008 and the results of the subsequent technical update were approved by the Minister of Health and Minister of Finance in December 2008.
PBFF was next due to be reviewed after Census 2011 however this was postponed until 2013 due to the Christchurch earthquakes. The review began in 2014 and was completed December 2015. For the 2014/15 review a Technical Advisory Group (TAG) was set up with members from DHBs, the Ministry of Health and Treasury. Overall, the changes in the formula were minimal and the consistency between results with respect to the new cost weights highlighted the robustness of the model over time.
The changes include the revised NZDep (NZDep2013), the recalculation of the cost weights and the redevelopment of the rural and overseas eligible and refugees adjusters. Due to the structure of the model remaining unchanged the results of the review were approved by the Minister of Health and Minister of Finance in November 2015 and noted by Cabinet in December 2015.