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Recent developments in the funding and organisation of the New Zealand health system

Recent developments in the funding and organisation of the New Zealand health system During the 1990s, the New Zealand health sector went through a decade of turbulence with a series of major structural changes being introduced in a relatively short period of time. The new millennium brought further change, with the establishment of 21 district health boards and the restoration of a less commercially-oriented system. The sector now appears to be more stable. However many incremental changes are in train and there has been considerable turbulence below the surface as key players jostle for position. This paper reports on some of the recent changes that have occurred in the restructuring of the New Zealand health system. Three issues are discussed: the devolution of funds and decision-making to district health boards, developments in primary health care, and the position of the private health insurance industry. Introduction tion government. The general direction of change this The New Zealand health system has gone through a series time around was towards a more planned and commu- of fairly radical structural changes over the past decade or nity-oriented system, with 21 district health boards so. Most notable – and most radical – were the 1993 so- (DHBs) being responsible for meeting the health and dis- called "health reforms" in which an attempt was made to ability service needs of the people living within their dis- introduce market-like incentives into the system by trict. The aims of the restructuring into DHBs are set out requiring public and private providers to compete for in the New Zealand Public Health and Disability Act service contracts from public purchasers. Although it was 2000. In addition to providing appropriate health and probably too early to expect any major improvements in disability services for all New Zealanders, the objectives health sector performance, the general consensus that are to reduce health disparities (especially by improving emerged from policy analysts was that the new system was the health outcomes of Mäori); to foster community par- unlikely to achieve any significant efficiency gains [1-3]. ticipation (via elected representatives, openness of deci- The competitive arrangements were also rather alien to sion-making and community consultation on strategic many of those working within the health system who planning); and to facilitate access to and dissemination of were more accustomed to a public sector style of philoso- information pertaining to service delivery. phy [4]. A strong primary care system is seen as central to improv- The new millennium brought yet another round of ing the health status of the population generally and, restructuring following the election of a Labour-led coali- more particularly, to reducing health inequalities. The Page 1 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 government has therefore given priority to implementing above any subsidy for general practice consultations. A the Primary Health Care Strategy [5]. The strategy is com- dual system of provision also emerged, with most primary plex and multi-pronged, and includes changes to both the services being provided in the private sector but most sec- organisation of primary health services and to the level ondary and tertiary services being provided by public hos- and method of subsidising these services. pitals. As public provision of hospital services expanded, the number of private hospital beds initially declined. As in 1993, the fundamental method of financing health However, the introduction of private medical insurance in care through general taxation has remained unchanged the early 1960s, together with subsidies for the mainte- during this latest round of reform. While the share of pub- nance of private hospitals, eventually reversed this trend. lic spending in total health expenditure declined from a [10,11]. high of 88.1% in 1981/82 to 76.6% in 1992/93, it has since remained fairly stable at around 77% of total health By the 1970s, concern was growing that "the fragmented expenditure [6,7]. However, after increasing steadily from pattern of health care delivery means that New Zealand 2.8% of total health expenditure in 1989/90 to 6.8% in lacks a national health service" [12]. After a series of 1996/97, the share of private health insurance in total reviews and proposals, 30 local hospital boards were funding subsequently declined to 5.7% in 2001/02 fol- eventually gradually replaced by 14 area health boards lowing a series of rises in premiums [6,8]. The lack of between 1983 and 1989. The funding and provision of growth in membership of private health insurance, public health services and public hospital services were together with the subsidisation of private insurance in amalgamated under area health boards. However, pri- Australia, has encouraged the health insurance industry to mary medical services remained separately funded and lobby the government for a greater role for private insur- provided. Thus the vision of a "national health service" ance in financing the health system. remained illusive. We are now three years into the new structure. The DHBs Area health boards had a number of features that were are well-established, with the second round of elections subsequently reintroduced in 2001 as part of the district for board membership having taken place in October health board structure. These features include: 2004. DHBs have been active in working with primary health care providers to establish networks of providers  governance by a locally-based and (mostly) locally- called Primary Health Organisations (PHOs) and by April elected board; 2005, 77 PHOs had been established covering more than 90% of the population [9]. While significant progress has  funding by means of a population-based formula; been made away from the commercially-oriented envi- ronment that prevailed during the 1990s towards a more  a reorientation away from curative services towards pre- community-focussed health system, the path has not vention; always been smooth. This paper describes and discusses three particular issues: the process of devolving funds and  planning of services in consultation with key stakehold- decision-making to the DHBs, developments in the pri- ers; mary health sector, and the private health insurance lobby. To place the issues into a historical and political  a more strategic approach to health service delivery, context, the paper begins with a brief overview of the New including the use of national goals and targets. Zealand health system and its development. Each of the three issues is then described and discussed in more Establishment of the 14 area health boards had not long detail. been completed before they were abolished in 1991 and the so-called 'purchaser-provider split' was introduced in 1993 following two-years of preparation. In reality the Overview of the New Zealand health system The roots of the New Zealand health system as it is today split only applied to those services that had previously were first formed through the Social Security Act 1938 been provided by the area health boards: that is, public when the (Labour) government of the day outlined its hospital services, public health services, and a limited vision of free health services for all New Zealanders, range of community-based services. The roles had always regardless of ability to pay. However widespread opposi- been separated for most primary health services and no tion from the medical profession meant that the Act was attempt was made to apply the principle to privately- never implemented in full [2,10]. Instead, a dual system funded hospital services. The main objective of separating of funding emerged in which mental health, maternity, the roles of purchaser and provider was to secure effi- and hospital services were fully funded by the govern- ciency gains by introducing market-like incentives into ment, while GPs retained the right to charge a fee over and the health system and requiring a more commercial Page 2 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 approach to health service delivery. The separation also therefore requires some redistribution of funds across the effectively allowed, for the first time, funding for all per- 21 districts. The formula that is now being used for deter- sonal health services (i.e. including primary health serv- mining a district's share of public funding takes into ices) to be amalgamated into a single funding stream. account the demographic make-up of each district, plus Funding for public health services was initially "unbun- additional adjustments for unmet need, overseas visitors dled" and given to a separate purchasing agent so as to and the degree of rurality. Perceived problems with the ensure that these funds could not be spent instead on population-based funding formula mean that many treatment services. However, these arrangements were DHBs remain unhappy with their resultant quotas. These short-lived and from 1996 the same purchasing authori- perceived problems include: systematically inaccurate ties became responsible for both personal and public population forecasts (primarily as a result of rapid inter- health services (although funding for public health serv- nal migration); inadequate adjustment for people who ices remained ear-marked specifically for this purpose). have a high need for services but who historically may Between 1991 and 1997, the formal locus of responsibil- have under-utilised these services; no adjustment for new ity for purchasing health services shifted from local pur- immigrants who often have special health service needs; chasing (under 14 area health boards), to regional and the possibility of 'medical migration' of people with purchasing (under 4 regional health authorities) to cen- on-going special service needs to the larger boards which tral purchasing (under a single health funding authority) are able to provide a more comprehensive service. There [13]. has also been much debate over the speed with which funds should be reallocated away from those boards The nature and impact of these changes have been dis- which are over-funded to those that are under-funded. cussed in detail elsewhere [1,3,10,13]. Of relevance for These issues have created some tensions amongst the this paper is the fact that, while funding for primary DHBs. In the longer term, the aim of achieving equitable health care had effectively been merged with the funding access to services for all New Zealanders may continue to of other services, New Zealand still lacked a coordinated be compromised if there are inherent inequities within national health system. The system was unplanned and the funding formula. often uncoordinated, service delivery was still fragmented, and problems of access to primary medical care due to The initial establishment of the 21 DHBs reportedly went high patient copayments remained. In addition, the relatively smoothly [15]. In part, this was because, in an Labour party, which won the right to lead a coalition gov- effort to minimise disruption, the number and size of the ernment following the 1999 election, was ideologically DHBs were configured to match the services and implicit opposed to "a model which promotes competitive tender- boundaries of the publicly-owned organisations (previ- ing for contracts" [[14], p4]. ously called Hospital and Health Services). This pragmatic approach facilitated implementation of the new model Restructuring commenced once again early in 2000, the and kept the associated costs down. However it also cre- key aim being "the restoration of a non commercial sys- ated a rather large number of boards for a population of tem, with the focus on the provision of quality services" only four million. A large number of DHBs increases [[14], p.4]. Responsibility for purchasing services was transaction costs (for example, of the associated bureauc- transferred from the central purchasing agent (the Health racy and of tracking the flows of patients across district Funding Authority) to the Ministry of Health as a tempo- boundaries) and may result in losses of potential econo- rary measure until the 21 DHBs could be established. As mies of scale. It has also meant that scarce expertise is noted above, DHBs have a number of parallels with area spread very thinly, especially in areas such as Mäori health health boards. However the range of services covered by and public health [[15], p.100]. The size of the 21 DHBs DHBs is wider than those covered by area health boards. varies between about 33,000 and over 430,000 people Most significantly, their responsibilities include primary [16]. The dynamics, management and issues facing these health services as well as secondary and tertiary care. Some 21 organisations therefore vary significantly. The aim of of the issues that have arisen during the process of devolv- the government to achieve equity of access to services for ing funds and decision-making to the DHBs are discussed all New Zealanders in all regions may be difficult where in the next section. there is such diversity amongst those organisations which are responsible for allocating the funds to providers Devolution of funds and decision-making to within their districts. district health boards Between 1993 and 1999 when the purchaser-provider While DHB establishment was itself relatively smooth, the split arrangements were in place, health services were pur- process of devolving funds and decision-making to the chased from providers largely on a cost-and-volume basis. districts has not been trouble-free. Devolution of funds A return to population-based funding at the district level involved, amongst other things, the transfer of responsi- Page 3 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 bility for numerous contracts for services from the Minis- pital because of concerns about patient safety. This is seen try of Health to the DHBs. The DHBs found that many of by some DHBs as the minister interfering with local pref- the contracts were either inaccurate or incomplete and in erences [[15], p.98]. As the DHBs become more estab- some cases there were long delays in getting copies of the lished and more experienced, the minister and the contracts [15]. The DHBs therefore did not have the infor- ministry may be more willing to allow the DHBs a greater mation that they required to monitor the services being degree of autonomy in decision-making. However, these provided under the contracts. tensions between the centre and the regions are by no means unique (or new) to New Zealand. Rather they Devolution of the funds for some services has also not reflect the hierarchical nature of a tax-funded system in occurred as soon as had originally been envisaged. By which one organisation (the central government) is early 2005, the Ministry of Health still retained responsi- responsible for financing the system while other organisa- bility for the funding of all public health services, and for tions (the DHBs) are responsible for spending the money. disability support services for people aged below 65 years. The ministry has also retained control over much discre- Developments in the primary health sector As noted above, recent developments in the primary tionary spending, so that new money transferred to DHBs is sometimes already tagged for spending on specific serv- health sector include changes both in the way that services ices. Reasons for this lack of full devolution of funds are are organised as well as in the method and level of subsidy unclear. It may be associated with a limited capacity in for these services. The restructuring involves the grouping some DHBs to manage more contracts. More fundamen- of general practitioners (GPs), primary care nurses and tally, it may reflect a perception on the part of the ministry other primary health care providers under umbrella that, notwithstanding the desire to encourage responsive- groups called Primary Health Organisations (PHOs). ness to local needs and preferences, the purchasing of These PHOs are non-profit organisations which contract some services – particularly some public health services – with DHBs to provide a comprehensive set of preventive may be better managed at the national level. and treatment services for their enrolled populations. PHOs are required to involve their communities in their Even when funds have been fully devolved to the DHBs, governing processes, and to work with their enrolees to this does not imply full autonomy by DHBs in decision- develop services that reflect their particular priorities and making. A key feature of the reforms this time around has needs. In some districts, PHOs have been established on a been the development by the Ministry of Health of two geographic basis so that membership is determined by overarching national strategies to provide strategic direc- area of residence. In other districts, people can choose tion for the health and disability sectors as a whole and to between two or more PHOs so that PHOs effectively com- ensure a degree of national consistency where decisions pete both for GPs and for individual patients. PHOs – like are decentralised [17,18]. Strategies have also been drawn DHBs – vary in size, from around 3,000 patients to over up to guide the development of services for sub-groups of 330,000 [9]. the population (such as Mäori and older people) [19,20] and for various sectors of the health system (such as pri- With respect to the funding of primary health care, a key mary health care) [5]. The 21 DHBs are required to adhere goal of the government's Primary Health Care Strategy is to the framework and priorities outlined in these national to remove the cost barrier that currently deters some peo- strategies when drawing up their annual plans and strate- ple from seeking care. Government subsidies for general gic plans, all of which must be signed off by the Minister practice services (and also for pharmaceuticals) have his- of Health. However the boundaries between the responsi- torically been paid on a fee-for-service basis in New Zea- bilities of the Ministry and of the DHBs are, as yet, by no land, with subsidies being targeted to low income and means clear. While the DHB model shifts the locus of high risk people. Because the subsidy levels have not been decision-making for the funding and provision or pur- regularly increased with inflation, and because GPs have chase of services to the district level, control over strategic retained the right to set their own levels of copayments, direction by the central government constrains local deci- this has resulted in a significant cost barrier for some peo- sion-making. Moreover local and national priorities may ple to GP services [21,22]. In a national survey undertaken sometimes be in conflict. in 2002/03, around 6% of adults reported that they had not visited a GP within the last 12 months because of cost The minister has sometimes shown some reluctance to [22]. allow DHBs to make decisions about the provision of par- ticular services in their areas, especially where this In an effort to remove or reduce this cost barrier, the move involves some disinvestment in services. For example, on to PHOs is being accompanied by three changes to the one occasion the minister reversed a DHB's decision to way that government subsidies for primary care are paid: stop providing after-hours surgical services in a rural hos- Page 4 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9  a change in the way that the general medical service sub- many technical difficulties and set up new management sidy is paid from fee-for-service payments to GPs to capi- systems during the establishment phase [25]. All of these tation funding of PHOs; pressures have created a rather unstable environment which does not align with the government's vision of a  the phased introduction of higher government subsidies primary health sector in which services are specifically tai- for general practice services and pharmaceuticals for all lored to meet the needs of a stable and identifiable popu- New Zealanders [23]; lation.  a shift from subsidies that are targeted towards high Preliminary evaluation of the impact of the subsidy need individuals towards subsidies that are paid on a uni- increases on patient fees indicates that the fees being versal basis. charged to patients by GPs have not always fallen by as much as might have been expected, had the subsidy The bulk of government funding paid to PHOs is deter- increases been passed on in full to patients [26]. A survey mined by two alternative capitation formulas, one of of GP fees in February 2004 showed that GPs belonging to which – the 'Access' formula – provides a higher rate of PHOs funded by the Access formula were generally charg- subsidy. This formula applies only to those PHOs in ing all of their patients fees that are significantly lower which 50% or more of their enrolled population is either than other PHOs [27]. However fees in other PHOs (i.e. Mäori or Pacific, or living in a deprived area (as defined by those paid under the "Interim" formula) were generally the NZDep2001 Index which combines 8 census variables higher than in GP practices which did not belong to a that reflect aspects of social and material deprivation.) All PHO at all. This indicates that the higher subsidy paid to other PHOs are paid under the 'Interim' formula at a PHOs has not always been passed on to patients as the lower capitation rate. As the name suggests, payment to government had hoped. A later survey found that the fees providers at this lower level is intended only as an interim charged to people aged 65 and over fell by an average of measure, the intention being to gradually extend the 24% following the introduction of a patient subsidy for higher rate of subsidy to all New Zealanders over the next this group on 1 July 2004 [26]. However fees charged to few years. Higher rates of subsidy are now being paid to these patients had increased by an average of 12% in the all PHOs for children up to the age of 17 years (since months prior to the introduction of the subsidy. October 2003) and for those aged 65 years or over (since July 2004). Subsidies will be gradually increased for other As a result of the information from this evaluation, the age groups through until July 2007, at which time the government is now working more closely with PHOs and higher capitation rates will apply to the whole population District Health Boards in an effort to ensure that GP fees [23]. are set at reasonable levels. However, subsidy levels are not automatically adjusted in line with inflation. As long Payment to PHOs by the two different formulas has intro- as GPs retain the right to set their own fee levels, universal duced some inequities into the system and caused consid- low cost access to primary health care could prove difficult erable concern amongst many people working within the to achieve and to sustain in the longer term. sector. Because the capitation payment covers all enrolees in a PHO, wealthier people who belong to PHOs that are Private health insurance Unlike Australia, private health insurance in New Zealand paid under the Access formula will be paying less for GP consultations than poorer people who belong to other is unregulated and, since the abolition of the tax deducti- PHOs. bility of premiums in the late 1980s, does not receive any direct financial assistance from the government. It has The differential in the subsidy levels has also stimulated also not been a topic of any significant public debate. aggressive – and sometimes acrimonious – competition However, the issue is of interest, first, because government between providers in some districts. It has encouraged policy towards private insurance industry in New Zealand PHOs to compete to enlist general practices that have a contrasts sharply with that in Australia, and second, high proportion of deprived people on their registers. It because the industry is currently lobbying for change has also encouraged individual practices to actively enrol based upon much the same arguments as those that were particular patients as a means of obtaining eligibility for used to support the introduction of the Private Health higher subsidies through the Access formula [24]. In those Insurance Incentive Scheme in Australia. areas where there are both access and interim PHOs, patients have an incentive to shop around amongst GPs In October 2004, the insurance industry published two on the basis of price. From an administrative perspective, reports within two days, both of which lobbied for direct the move from fee-for-service reimbursements to capita- government assistance to private insurance as a means of tion payment has meant that PHOs have had to tackle enhancing efficiency, equity and choice within the health Page 5 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 sector [28,29]. The first report was commissioned by the with comprehensive cover (as opposed to cover mainly Southern Cross Medical Care Society, which provides for hospital services) has declined from 20% in 2000 to health insurance to around two thirds of the people who 14% in 2004 [28], this could equally reflect improve- have private health insurance cover in New Zealand. Writ- ments in access to publicly-funded primary health services ten in collaboration with some Australians, the report as much as a response to increases in insurance premiums. claimed that the health insurance industry in New Zea- land faces "serious decline" and that, without government It is also difficult to accept that New Zealand should fol- assistance, health insurance coverage "may halve over the low Australia in introducing a 30% tax rebate on premi- next 10 years" [[28], p.i]. The proposed solution was a ums. In Australia, the rebate was one part of a package of 30% rebate on insurance premiums akin to that in Aus- subsidies and regulations. Separating out the precise tralia. The authors argued that the Australian experience effects of the rebate from the effects of the other compo- ".....shows that a rebate on health insurance premiums nents of the package is problematic and requires the adop- has boosted coverage to a healthy level, reduced pressure tion of a number of assumptions. Even so, there appears on the public health system, improved the fairness of the to be some consensus amongst analysts that, while the health system (by the government paying some health rebate does appear to have stimulated an increase in costs of both insured and uninsured people) and gener- insurance coverage in the short term, the size of the effect ally secured the future of the health insurance industry" may have been less than the government expected, and [[28], p.i]. may not have been large enough to justify the expenditure [31,32]. Moreover, recent figures suggest that health The second report, published by the Health Funds Associ- insurance coverage in Australia is now declining [33]. ation of New Zealand (i.e. the body that represents the interests of the health insurance industry), claimed that It is even more difficult to justify a subsidy on the grounds "public health inflation is at record levels" [[29], p.1] and that it will reduce pressure on the public health system. As that such rates of increase "will quickly become unsustain- Richardson recently pointed out in this journal, in Aus- able" [[29], p.13]. Based upon an estimated public health tralia, changes in public and private bed numbers indicate inflation factor of 8% per annum over the last 3 years, the that problems of access to the public health system are report projected that public health expenditure would determined primarily by constraints on the supply side, reach 63% of GDP by 2050! The report went on to suggest rather than by an excess demand caused by an inability to that costs could be contained if contestable funding was afford private health insurance [34]. Vaithianathan, too, to be introduced into the DHB system. It proposed that has shown that the demand for public hospital beds is people earning in excess of NZ$38,000 should be unlikely to decline because an insurance subsidy is most required to purchase their own health insurance, with the likely to increase insurance coverage of people who previ- government refunding the amount of their tax that would ously paid directly for the use of private hospital beds, otherwise have been used to purchase health services. Any rather than of people who currently use public hospitals contributions made by employers should be exempt from [35]. Even if a subsidy does actually encourage a shift the fringe benefit tax. DHBs would then sell their services from the public sector to the private sector, Frech III and to those people who are privately insured at a price equal Hopkins have suggested that, from a theoretical perspec- to the true cost of the service. The report claimed that such tive, the optimal subsidy may actually be negative (i.e pri- a system would encourage both DHBs and individuals (or vate health insurance should be taxed) [32]. their employers) to focus on value for money, thereby providing the necessary incentives to keep health inflation In the second report [29], while the main justification for down. a greater role for private health insurance was escalating costs in the public sector, the meaning of the term "public Interpretation of the data which form the basis for the health inflation" was unclear. In some instances [e.g. [29], claims made in each of these reports is highly questiona- p.12], the term seems to apply to changes in public health ble. This comment applies both to the evidence presented expenditure, while in other cases it apparently refers to to illustrate that there is a problem with current financing increases in public hospital costs adjusted for hospital arrangements in New Zealand, as well as to the impact of throughput [[29], p.9]. Neither of these are good indica- the proposed solutions. Even the basic premise that pri- tors of cost increases across all of the services that are pub- vate health insurance is in serious decline is not well sup- licly funded, but either way, the estimated figure appears ported. While the proportion of the population covered to have been simply extrapolated to the year 2050, thus by private insurance has indeed declined from a peak of producing an estimate of public health expenditure that is around 45% in the late 1980s [30] it has remained fairly both excessive and, more importantly, newsworthy. Even stable at around one third of the population over the past if such a figure could be substantiated, there is little evi- five years [28]. And although the proportion of insured dence from the international literature in support of the Page 6 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 claim that contestable insurance funding is likely to assist Conclusion in controlling costs. If anything, total health expenditure This paper has described and discussed just some of the tends to be higher in insurance-funded systems than in issues that currently face the New Zealand health system. systems that are predominantly funded by general taxa- Many of these issues are not new but rather are renewed tion [36,37]. Reasons for this higher expenditure include manifestations of debates which have been recurrent fea- the difficulty of containing costs in a system where there tures in various waves of health sector reform. In particu- are multiple purchasers, and where reimbursements are lar, the division of responsibilities between the centre and usually on a fee-for-service basis. the regions, uncontrolled copayments for GP consulta- tions, and the tax treatment of private health insurance are While the government did not respond publicly to the all issues which have repeatedly challenged decision-mak- claims and proposals made by the health insurance indus- ers. try in these two reports, it did take two decisive actions. First, it requested briefings from the Treasury on both of During any period of change, there are inevitably con- the reports immediately prior to their public release flicts, tensions and disagreements as new boundaries are [38,39]. Second, on the same day that the second report drawn and the various players jostle for position. This cer- was published the Ministry of Health released its own tainly has been, and continues to be, the case in this latest report on the future funding of health services in New Zea- round of reforms in New Zealand, most particularly in the land [40]. One of the conclusions from this report – primary health care sector. As the system matures, the which had in fact been written for the Ministry two years boundaries of responsibility across the sector should earlier but which had not been released – was that "there become clearer. If the vision of a community-oriented sys- should be no public subsidies of private health insurance tem is to become a reality, full devolution of responsibil- in New Zealand" [[40], p.xiv]. The main reasons behind ities from the centre to the districts will be essential as the this conclusion were (a) inequalities are likely to be exac- DHBs continue to build their capacity, capability and erbated, because expenditure on private insurance experience. The Ministry of Health can then focus on pro- increases with income; (b) control over health expendi- viding strategic direction to the sector and on monitoring ture is more difficult under private insurance than under performance through appropriate accountability mecha- direct public funding; (c) greater value is likely to be nisms. achieved by increasing expenditure in the public sector because service provision tends to be more expensive and In spite of the tensions and difficulties associated with administration costs tend to be higher in the private sec- implementation of the new structure, the sector already tor; and (d) because demand for private insurance is rela- appears to be developing a much stronger sense of direc- tively insensitive to price changes, the cost of a health tion and purpose. This is in sharp contrast to the 1990s insurance subsidy will be greater than the value of any when the change towards a more market-oriented system health services that are stimulated by that subsidy. resulted in a high degree of uncertainty for, and alienation of, many service providers [41]. Another difference is that In summary, while a rebate on private insurance may well the government has invested in a number of evaluation improve the health of the private insurance industry, there projects by health service researchers this time around. appears to be little evidence that it would make any useful These evaluations should highlight the main strengths contribution towards improving the health of New Zea- and weaknesses of the new institutional arrangements, landers. More fundamentally, the current government and, where necessary, indicate areas where further adjust- would require any changes to financing arrangements to ments are required. align with the principles which underpin the New Zea- land Health Strategy. One of these principles is: "timely Competing interests and equitable access for all New Zealanders to a compre- The author(s) declare that they have no competing inter- hensive range of health and disability services, regardless ests. of ability to pay" [[17], p.vi]. As Richardson has noted, the egalitarian desire of equalising access to health care Acknowledgements The useful comments of two referees on an earlier draft are acknowledged regardless of ability to pay, and reducing inequalities in with appreciation. health are "more easily achieved through a compulsory public health system" [[34], p.5]. In contrast, contestable References funding and subsidisation of private insurance are more 1. 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OECD: OECD Health Data 2000: A Comparative Analysis of [http://www.moh.govt.nz/moh.nsf/wpg_index/-Pri 29 Countries. Paris, Organisation for Economic Cooperation and mary+Health+Care+Established+PHOs+by+DHB]. Development; 2000. 10. Gauld R: Revolving Doors: New Zealand's Health Reforms. 37. Mossialos E, Dixon A: Funding health care in Europe: weighing Wellington, Institute of Policy Studies; 2001:254. up the options. In Funding Health Care: Options for Europe Edited by: 11. Smith PA: The Private Prescription, the Story of Southern Mossialos E, Dixon A, Figueras A and Kutzin J. Buckingham, Open Cross Health Care. 1st edition. Auckland, Southern Cross; University Press; 2002. 1994:251. 38. New Zealand Treasury: Ministerial Briefing - Choice and 12. McGuigan T: A Health Service for New Zealand. Wellington, Affordability: a Proposed Rebate for Health Insurance Government Printer; 1975. (Southern Cross). Wellington, New Zealand Treasury; 2004. 13. Ashton T, Mays N, Devlin N: Continuity through change; the 39. New Zealand Treasury: Treasury Report on Proposals for rhetoric and reality of health reform in New Zealand. Social Funding of NZ Health Care. Wellington, New Zealand Treasury; Science and Medicine in press. 2004. 14. New Zealand Labour Party: Focus on Patients: Labour on 40. Ministry of Health: Future Funding of Health and Disability Health. Wellington, New Zealand Labour Party; 1999. Services in New Zealand: Report to the Director General of 15. Health Reforms Research Team: Interim Report on Health Health, April 2002. Wellington, Ministry of Health; 2002. Reforms 2001 Research Project. [http://www.vuw.ac.nz/hsrc/ 41. Ashton T: The rocky road to health reform: some lessons reports/new-reports.aspx]. from New Zealand. Australian Health Review 2001, 24:151-156. 16. Ministry of Health: Frequently Asked Questions About District Health Boards. [http://www.moh.govt.nz/moh.nsf/wpg_index/ About-DHBs]. 17. King A: The New Zealand National Health Strategy. Welling- ton, Ministry of Health; 2000. 18. Ministry of Health: The New Zealand Disability Strategy: Mak- ing a World of Difference: Whakanui Oranga. Wellington, Min- istry of Health; 2001. 19. King A, Turia T: He Korowai Oranga: Maori Health Strategy. Wellington, Ministry of Health; 2002. 20. King A: Health of Older People Strategy: Health Sector Action to 2001 to Support Positive Ageing. Wellington, Minis- try of Health; 2002. 21. Schoen C, Osborn R, Trang Huynh P, Doty M, Davis K, Zapert K, Peugh J: Primary Care and Health System Performance: Adults' Experiences in Five Countries. Health Affairs Web Exclu- sive [http://www.cmwf.org/publications/ publications_show.htm?doc_id=245178]. 22. Ministry of Health: A Portrait of Health. Wellington, Ministry of Health; 2004. 23. King A: Cabinet Paper: Primary Health Care Strategy - Achieving Low Cost Access. [http://www.moh.govt.nz/moh.ns0/ EC272299ECCBF6E1CC256C4F00028D15/$File/CabinetPaper Low- CostAccess.pdf]. 24. CBG Health Research Ltd.: Reducing Inequalities Contingency Funded Projects. Wellington, Ministry of Health; 2003. 25. Perera R, MacDonald J, Cumming J, Goodhead A: Primary Health Organisations: The First Year (June 2002 - June 2003) from the PHO Perspective. Wellington, Health Services Research Cen- tre, Victoria University; 2003. Publish with Bio Med Central and every 26. Ministry of Health: General Practitioner Fees Information: A scientist can read your work free of charge Summary of Key Findings from Five Reports. [http:// www.moh.govt.nz/moh.nsf/238fd5fb4fd051844c256669006aed57/ "BioMed Central will be the most significant development for 1bf9a9b04aa23b8acc256ef4000d3a8a?OpenDocument#reports]. disseminating the results of biomedical researc h in our lifetime." 27. CBG Health Research Ltd.: National GP Fee Survey: A report Sir Paul Nurse, Cancer Research UK prepared for the Ministry of Health. Wellington, Ministry of Health; 2004. Your research papers will be: 28. Econtech Pty Ltd in association with Harper Associates: Choice and available free of charge to the entire biomedical community Affordability - for Healthcare in New Zealand. A report pre- pared for Southern Cross Medical Care Society. [http:// peer reviewed and published immediately upon acceptance www.southerncross.co.nz/sx_internet/library/t28892_3.pdf]. cited in PubMed and archived on PubMed Central 29. von Lanthen K: The Long Term Funding of New Zealand Healthcare. Wellington, Health Funds Association of New Zealand; yours — you keep the copyright BioMedcentral Submit your manuscript here: http://www.biomedcentral.com/info/publishing_adv.asp Page 8 of 8 (page number not for citation purposes) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Australia and New Zealand Health Policy Springer Journals

Recent developments in the funding and organisation of the New Zealand health system

Australia and New Zealand Health Policy , Volume 2 (1) – May 7, 2005

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Medicine & Public Health; Public Health; Social Policy
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Abstract

During the 1990s, the New Zealand health sector went through a decade of turbulence with a series of major structural changes being introduced in a relatively short period of time. The new millennium brought further change, with the establishment of 21 district health boards and the restoration of a less commercially-oriented system. The sector now appears to be more stable. However many incremental changes are in train and there has been considerable turbulence below the surface as key players jostle for position. This paper reports on some of the recent changes that have occurred in the restructuring of the New Zealand health system. Three issues are discussed: the devolution of funds and decision-making to district health boards, developments in primary health care, and the position of the private health insurance industry. Introduction tion government. The general direction of change this The New Zealand health system has gone through a series time around was towards a more planned and commu- of fairly radical structural changes over the past decade or nity-oriented system, with 21 district health boards so. Most notable – and most radical – were the 1993 so- (DHBs) being responsible for meeting the health and dis- called "health reforms" in which an attempt was made to ability service needs of the people living within their dis- introduce market-like incentives into the system by trict. The aims of the restructuring into DHBs are set out requiring public and private providers to compete for in the New Zealand Public Health and Disability Act service contracts from public purchasers. Although it was 2000. In addition to providing appropriate health and probably too early to expect any major improvements in disability services for all New Zealanders, the objectives health sector performance, the general consensus that are to reduce health disparities (especially by improving emerged from policy analysts was that the new system was the health outcomes of Mäori); to foster community par- unlikely to achieve any significant efficiency gains [1-3]. ticipation (via elected representatives, openness of deci- The competitive arrangements were also rather alien to sion-making and community consultation on strategic many of those working within the health system who planning); and to facilitate access to and dissemination of were more accustomed to a public sector style of philoso- information pertaining to service delivery. phy [4]. A strong primary care system is seen as central to improv- The new millennium brought yet another round of ing the health status of the population generally and, restructuring following the election of a Labour-led coali- more particularly, to reducing health inequalities. The Page 1 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 government has therefore given priority to implementing above any subsidy for general practice consultations. A the Primary Health Care Strategy [5]. The strategy is com- dual system of provision also emerged, with most primary plex and multi-pronged, and includes changes to both the services being provided in the private sector but most sec- organisation of primary health services and to the level ondary and tertiary services being provided by public hos- and method of subsidising these services. pitals. As public provision of hospital services expanded, the number of private hospital beds initially declined. As in 1993, the fundamental method of financing health However, the introduction of private medical insurance in care through general taxation has remained unchanged the early 1960s, together with subsidies for the mainte- during this latest round of reform. While the share of pub- nance of private hospitals, eventually reversed this trend. lic spending in total health expenditure declined from a [10,11]. high of 88.1% in 1981/82 to 76.6% in 1992/93, it has since remained fairly stable at around 77% of total health By the 1970s, concern was growing that "the fragmented expenditure [6,7]. However, after increasing steadily from pattern of health care delivery means that New Zealand 2.8% of total health expenditure in 1989/90 to 6.8% in lacks a national health service" [12]. After a series of 1996/97, the share of private health insurance in total reviews and proposals, 30 local hospital boards were funding subsequently declined to 5.7% in 2001/02 fol- eventually gradually replaced by 14 area health boards lowing a series of rises in premiums [6,8]. The lack of between 1983 and 1989. The funding and provision of growth in membership of private health insurance, public health services and public hospital services were together with the subsidisation of private insurance in amalgamated under area health boards. However, pri- Australia, has encouraged the health insurance industry to mary medical services remained separately funded and lobby the government for a greater role for private insur- provided. Thus the vision of a "national health service" ance in financing the health system. remained illusive. We are now three years into the new structure. The DHBs Area health boards had a number of features that were are well-established, with the second round of elections subsequently reintroduced in 2001 as part of the district for board membership having taken place in October health board structure. These features include: 2004. DHBs have been active in working with primary health care providers to establish networks of providers  governance by a locally-based and (mostly) locally- called Primary Health Organisations (PHOs) and by April elected board; 2005, 77 PHOs had been established covering more than 90% of the population [9]. While significant progress has  funding by means of a population-based formula; been made away from the commercially-oriented envi- ronment that prevailed during the 1990s towards a more  a reorientation away from curative services towards pre- community-focussed health system, the path has not vention; always been smooth. This paper describes and discusses three particular issues: the process of devolving funds and  planning of services in consultation with key stakehold- decision-making to the DHBs, developments in the pri- ers; mary health sector, and the private health insurance lobby. To place the issues into a historical and political  a more strategic approach to health service delivery, context, the paper begins with a brief overview of the New including the use of national goals and targets. Zealand health system and its development. Each of the three issues is then described and discussed in more Establishment of the 14 area health boards had not long detail. been completed before they were abolished in 1991 and the so-called 'purchaser-provider split' was introduced in 1993 following two-years of preparation. In reality the Overview of the New Zealand health system The roots of the New Zealand health system as it is today split only applied to those services that had previously were first formed through the Social Security Act 1938 been provided by the area health boards: that is, public when the (Labour) government of the day outlined its hospital services, public health services, and a limited vision of free health services for all New Zealanders, range of community-based services. The roles had always regardless of ability to pay. However widespread opposi- been separated for most primary health services and no tion from the medical profession meant that the Act was attempt was made to apply the principle to privately- never implemented in full [2,10]. Instead, a dual system funded hospital services. The main objective of separating of funding emerged in which mental health, maternity, the roles of purchaser and provider was to secure effi- and hospital services were fully funded by the govern- ciency gains by introducing market-like incentives into ment, while GPs retained the right to charge a fee over and the health system and requiring a more commercial Page 2 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 approach to health service delivery. The separation also therefore requires some redistribution of funds across the effectively allowed, for the first time, funding for all per- 21 districts. The formula that is now being used for deter- sonal health services (i.e. including primary health serv- mining a district's share of public funding takes into ices) to be amalgamated into a single funding stream. account the demographic make-up of each district, plus Funding for public health services was initially "unbun- additional adjustments for unmet need, overseas visitors dled" and given to a separate purchasing agent so as to and the degree of rurality. Perceived problems with the ensure that these funds could not be spent instead on population-based funding formula mean that many treatment services. However, these arrangements were DHBs remain unhappy with their resultant quotas. These short-lived and from 1996 the same purchasing authori- perceived problems include: systematically inaccurate ties became responsible for both personal and public population forecasts (primarily as a result of rapid inter- health services (although funding for public health serv- nal migration); inadequate adjustment for people who ices remained ear-marked specifically for this purpose). have a high need for services but who historically may Between 1991 and 1997, the formal locus of responsibil- have under-utilised these services; no adjustment for new ity for purchasing health services shifted from local pur- immigrants who often have special health service needs; chasing (under 14 area health boards), to regional and the possibility of 'medical migration' of people with purchasing (under 4 regional health authorities) to cen- on-going special service needs to the larger boards which tral purchasing (under a single health funding authority) are able to provide a more comprehensive service. There [13]. has also been much debate over the speed with which funds should be reallocated away from those boards The nature and impact of these changes have been dis- which are over-funded to those that are under-funded. cussed in detail elsewhere [1,3,10,13]. Of relevance for These issues have created some tensions amongst the this paper is the fact that, while funding for primary DHBs. In the longer term, the aim of achieving equitable health care had effectively been merged with the funding access to services for all New Zealanders may continue to of other services, New Zealand still lacked a coordinated be compromised if there are inherent inequities within national health system. The system was unplanned and the funding formula. often uncoordinated, service delivery was still fragmented, and problems of access to primary medical care due to The initial establishment of the 21 DHBs reportedly went high patient copayments remained. In addition, the relatively smoothly [15]. In part, this was because, in an Labour party, which won the right to lead a coalition gov- effort to minimise disruption, the number and size of the ernment following the 1999 election, was ideologically DHBs were configured to match the services and implicit opposed to "a model which promotes competitive tender- boundaries of the publicly-owned organisations (previ- ing for contracts" [[14], p4]. ously called Hospital and Health Services). This pragmatic approach facilitated implementation of the new model Restructuring commenced once again early in 2000, the and kept the associated costs down. However it also cre- key aim being "the restoration of a non commercial sys- ated a rather large number of boards for a population of tem, with the focus on the provision of quality services" only four million. A large number of DHBs increases [[14], p.4]. Responsibility for purchasing services was transaction costs (for example, of the associated bureauc- transferred from the central purchasing agent (the Health racy and of tracking the flows of patients across district Funding Authority) to the Ministry of Health as a tempo- boundaries) and may result in losses of potential econo- rary measure until the 21 DHBs could be established. As mies of scale. It has also meant that scarce expertise is noted above, DHBs have a number of parallels with area spread very thinly, especially in areas such as Mäori health health boards. However the range of services covered by and public health [[15], p.100]. The size of the 21 DHBs DHBs is wider than those covered by area health boards. varies between about 33,000 and over 430,000 people Most significantly, their responsibilities include primary [16]. The dynamics, management and issues facing these health services as well as secondary and tertiary care. Some 21 organisations therefore vary significantly. The aim of of the issues that have arisen during the process of devolv- the government to achieve equity of access to services for ing funds and decision-making to the DHBs are discussed all New Zealanders in all regions may be difficult where in the next section. there is such diversity amongst those organisations which are responsible for allocating the funds to providers Devolution of funds and decision-making to within their districts. district health boards Between 1993 and 1999 when the purchaser-provider While DHB establishment was itself relatively smooth, the split arrangements were in place, health services were pur- process of devolving funds and decision-making to the chased from providers largely on a cost-and-volume basis. districts has not been trouble-free. Devolution of funds A return to population-based funding at the district level involved, amongst other things, the transfer of responsi- Page 3 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 bility for numerous contracts for services from the Minis- pital because of concerns about patient safety. This is seen try of Health to the DHBs. The DHBs found that many of by some DHBs as the minister interfering with local pref- the contracts were either inaccurate or incomplete and in erences [[15], p.98]. As the DHBs become more estab- some cases there were long delays in getting copies of the lished and more experienced, the minister and the contracts [15]. The DHBs therefore did not have the infor- ministry may be more willing to allow the DHBs a greater mation that they required to monitor the services being degree of autonomy in decision-making. However, these provided under the contracts. tensions between the centre and the regions are by no means unique (or new) to New Zealand. Rather they Devolution of the funds for some services has also not reflect the hierarchical nature of a tax-funded system in occurred as soon as had originally been envisaged. By which one organisation (the central government) is early 2005, the Ministry of Health still retained responsi- responsible for financing the system while other organisa- bility for the funding of all public health services, and for tions (the DHBs) are responsible for spending the money. disability support services for people aged below 65 years. The ministry has also retained control over much discre- Developments in the primary health sector As noted above, recent developments in the primary tionary spending, so that new money transferred to DHBs is sometimes already tagged for spending on specific serv- health sector include changes both in the way that services ices. Reasons for this lack of full devolution of funds are are organised as well as in the method and level of subsidy unclear. It may be associated with a limited capacity in for these services. The restructuring involves the grouping some DHBs to manage more contracts. More fundamen- of general practitioners (GPs), primary care nurses and tally, it may reflect a perception on the part of the ministry other primary health care providers under umbrella that, notwithstanding the desire to encourage responsive- groups called Primary Health Organisations (PHOs). ness to local needs and preferences, the purchasing of These PHOs are non-profit organisations which contract some services – particularly some public health services – with DHBs to provide a comprehensive set of preventive may be better managed at the national level. and treatment services for their enrolled populations. PHOs are required to involve their communities in their Even when funds have been fully devolved to the DHBs, governing processes, and to work with their enrolees to this does not imply full autonomy by DHBs in decision- develop services that reflect their particular priorities and making. A key feature of the reforms this time around has needs. In some districts, PHOs have been established on a been the development by the Ministry of Health of two geographic basis so that membership is determined by overarching national strategies to provide strategic direc- area of residence. In other districts, people can choose tion for the health and disability sectors as a whole and to between two or more PHOs so that PHOs effectively com- ensure a degree of national consistency where decisions pete both for GPs and for individual patients. PHOs – like are decentralised [17,18]. Strategies have also been drawn DHBs – vary in size, from around 3,000 patients to over up to guide the development of services for sub-groups of 330,000 [9]. the population (such as Mäori and older people) [19,20] and for various sectors of the health system (such as pri- With respect to the funding of primary health care, a key mary health care) [5]. The 21 DHBs are required to adhere goal of the government's Primary Health Care Strategy is to the framework and priorities outlined in these national to remove the cost barrier that currently deters some peo- strategies when drawing up their annual plans and strate- ple from seeking care. Government subsidies for general gic plans, all of which must be signed off by the Minister practice services (and also for pharmaceuticals) have his- of Health. However the boundaries between the responsi- torically been paid on a fee-for-service basis in New Zea- bilities of the Ministry and of the DHBs are, as yet, by no land, with subsidies being targeted to low income and means clear. While the DHB model shifts the locus of high risk people. Because the subsidy levels have not been decision-making for the funding and provision or pur- regularly increased with inflation, and because GPs have chase of services to the district level, control over strategic retained the right to set their own levels of copayments, direction by the central government constrains local deci- this has resulted in a significant cost barrier for some peo- sion-making. Moreover local and national priorities may ple to GP services [21,22]. In a national survey undertaken sometimes be in conflict. in 2002/03, around 6% of adults reported that they had not visited a GP within the last 12 months because of cost The minister has sometimes shown some reluctance to [22]. allow DHBs to make decisions about the provision of par- ticular services in their areas, especially where this In an effort to remove or reduce this cost barrier, the move involves some disinvestment in services. For example, on to PHOs is being accompanied by three changes to the one occasion the minister reversed a DHB's decision to way that government subsidies for primary care are paid: stop providing after-hours surgical services in a rural hos- Page 4 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9  a change in the way that the general medical service sub- many technical difficulties and set up new management sidy is paid from fee-for-service payments to GPs to capi- systems during the establishment phase [25]. All of these tation funding of PHOs; pressures have created a rather unstable environment which does not align with the government's vision of a  the phased introduction of higher government subsidies primary health sector in which services are specifically tai- for general practice services and pharmaceuticals for all lored to meet the needs of a stable and identifiable popu- New Zealanders [23]; lation.  a shift from subsidies that are targeted towards high Preliminary evaluation of the impact of the subsidy need individuals towards subsidies that are paid on a uni- increases on patient fees indicates that the fees being versal basis. charged to patients by GPs have not always fallen by as much as might have been expected, had the subsidy The bulk of government funding paid to PHOs is deter- increases been passed on in full to patients [26]. A survey mined by two alternative capitation formulas, one of of GP fees in February 2004 showed that GPs belonging to which – the 'Access' formula – provides a higher rate of PHOs funded by the Access formula were generally charg- subsidy. This formula applies only to those PHOs in ing all of their patients fees that are significantly lower which 50% or more of their enrolled population is either than other PHOs [27]. However fees in other PHOs (i.e. Mäori or Pacific, or living in a deprived area (as defined by those paid under the "Interim" formula) were generally the NZDep2001 Index which combines 8 census variables higher than in GP practices which did not belong to a that reflect aspects of social and material deprivation.) All PHO at all. This indicates that the higher subsidy paid to other PHOs are paid under the 'Interim' formula at a PHOs has not always been passed on to patients as the lower capitation rate. As the name suggests, payment to government had hoped. A later survey found that the fees providers at this lower level is intended only as an interim charged to people aged 65 and over fell by an average of measure, the intention being to gradually extend the 24% following the introduction of a patient subsidy for higher rate of subsidy to all New Zealanders over the next this group on 1 July 2004 [26]. However fees charged to few years. Higher rates of subsidy are now being paid to these patients had increased by an average of 12% in the all PHOs for children up to the age of 17 years (since months prior to the introduction of the subsidy. October 2003) and for those aged 65 years or over (since July 2004). Subsidies will be gradually increased for other As a result of the information from this evaluation, the age groups through until July 2007, at which time the government is now working more closely with PHOs and higher capitation rates will apply to the whole population District Health Boards in an effort to ensure that GP fees [23]. are set at reasonable levels. However, subsidy levels are not automatically adjusted in line with inflation. As long Payment to PHOs by the two different formulas has intro- as GPs retain the right to set their own fee levels, universal duced some inequities into the system and caused consid- low cost access to primary health care could prove difficult erable concern amongst many people working within the to achieve and to sustain in the longer term. sector. Because the capitation payment covers all enrolees in a PHO, wealthier people who belong to PHOs that are Private health insurance Unlike Australia, private health insurance in New Zealand paid under the Access formula will be paying less for GP consultations than poorer people who belong to other is unregulated and, since the abolition of the tax deducti- PHOs. bility of premiums in the late 1980s, does not receive any direct financial assistance from the government. It has The differential in the subsidy levels has also stimulated also not been a topic of any significant public debate. aggressive – and sometimes acrimonious – competition However, the issue is of interest, first, because government between providers in some districts. It has encouraged policy towards private insurance industry in New Zealand PHOs to compete to enlist general practices that have a contrasts sharply with that in Australia, and second, high proportion of deprived people on their registers. It because the industry is currently lobbying for change has also encouraged individual practices to actively enrol based upon much the same arguments as those that were particular patients as a means of obtaining eligibility for used to support the introduction of the Private Health higher subsidies through the Access formula [24]. In those Insurance Incentive Scheme in Australia. areas where there are both access and interim PHOs, patients have an incentive to shop around amongst GPs In October 2004, the insurance industry published two on the basis of price. From an administrative perspective, reports within two days, both of which lobbied for direct the move from fee-for-service reimbursements to capita- government assistance to private insurance as a means of tion payment has meant that PHOs have had to tackle enhancing efficiency, equity and choice within the health Page 5 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 sector [28,29]. The first report was commissioned by the with comprehensive cover (as opposed to cover mainly Southern Cross Medical Care Society, which provides for hospital services) has declined from 20% in 2000 to health insurance to around two thirds of the people who 14% in 2004 [28], this could equally reflect improve- have private health insurance cover in New Zealand. Writ- ments in access to publicly-funded primary health services ten in collaboration with some Australians, the report as much as a response to increases in insurance premiums. claimed that the health insurance industry in New Zea- land faces "serious decline" and that, without government It is also difficult to accept that New Zealand should fol- assistance, health insurance coverage "may halve over the low Australia in introducing a 30% tax rebate on premi- next 10 years" [[28], p.i]. The proposed solution was a ums. In Australia, the rebate was one part of a package of 30% rebate on insurance premiums akin to that in Aus- subsidies and regulations. Separating out the precise tralia. The authors argued that the Australian experience effects of the rebate from the effects of the other compo- ".....shows that a rebate on health insurance premiums nents of the package is problematic and requires the adop- has boosted coverage to a healthy level, reduced pressure tion of a number of assumptions. Even so, there appears on the public health system, improved the fairness of the to be some consensus amongst analysts that, while the health system (by the government paying some health rebate does appear to have stimulated an increase in costs of both insured and uninsured people) and gener- insurance coverage in the short term, the size of the effect ally secured the future of the health insurance industry" may have been less than the government expected, and [[28], p.i]. may not have been large enough to justify the expenditure [31,32]. Moreover, recent figures suggest that health The second report, published by the Health Funds Associ- insurance coverage in Australia is now declining [33]. ation of New Zealand (i.e. the body that represents the interests of the health insurance industry), claimed that It is even more difficult to justify a subsidy on the grounds "public health inflation is at record levels" [[29], p.1] and that it will reduce pressure on the public health system. As that such rates of increase "will quickly become unsustain- Richardson recently pointed out in this journal, in Aus- able" [[29], p.13]. Based upon an estimated public health tralia, changes in public and private bed numbers indicate inflation factor of 8% per annum over the last 3 years, the that problems of access to the public health system are report projected that public health expenditure would determined primarily by constraints on the supply side, reach 63% of GDP by 2050! The report went on to suggest rather than by an excess demand caused by an inability to that costs could be contained if contestable funding was afford private health insurance [34]. Vaithianathan, too, to be introduced into the DHB system. It proposed that has shown that the demand for public hospital beds is people earning in excess of NZ$38,000 should be unlikely to decline because an insurance subsidy is most required to purchase their own health insurance, with the likely to increase insurance coverage of people who previ- government refunding the amount of their tax that would ously paid directly for the use of private hospital beds, otherwise have been used to purchase health services. Any rather than of people who currently use public hospitals contributions made by employers should be exempt from [35]. Even if a subsidy does actually encourage a shift the fringe benefit tax. DHBs would then sell their services from the public sector to the private sector, Frech III and to those people who are privately insured at a price equal Hopkins have suggested that, from a theoretical perspec- to the true cost of the service. The report claimed that such tive, the optimal subsidy may actually be negative (i.e pri- a system would encourage both DHBs and individuals (or vate health insurance should be taxed) [32]. their employers) to focus on value for money, thereby providing the necessary incentives to keep health inflation In the second report [29], while the main justification for down. a greater role for private health insurance was escalating costs in the public sector, the meaning of the term "public Interpretation of the data which form the basis for the health inflation" was unclear. In some instances [e.g. [29], claims made in each of these reports is highly questiona- p.12], the term seems to apply to changes in public health ble. This comment applies both to the evidence presented expenditure, while in other cases it apparently refers to to illustrate that there is a problem with current financing increases in public hospital costs adjusted for hospital arrangements in New Zealand, as well as to the impact of throughput [[29], p.9]. Neither of these are good indica- the proposed solutions. Even the basic premise that pri- tors of cost increases across all of the services that are pub- vate health insurance is in serious decline is not well sup- licly funded, but either way, the estimated figure appears ported. While the proportion of the population covered to have been simply extrapolated to the year 2050, thus by private insurance has indeed declined from a peak of producing an estimate of public health expenditure that is around 45% in the late 1980s [30] it has remained fairly both excessive and, more importantly, newsworthy. Even stable at around one third of the population over the past if such a figure could be substantiated, there is little evi- five years [28]. And although the proportion of insured dence from the international literature in support of the Page 6 of 8 (page number not for citation purposes) Australia and New Zealand Health Policy 2005, 2:9 http://www.anzhealthpolicy.com/content/2/1/9 claim that contestable insurance funding is likely to assist Conclusion in controlling costs. If anything, total health expenditure This paper has described and discussed just some of the tends to be higher in insurance-funded systems than in issues that currently face the New Zealand health system. systems that are predominantly funded by general taxa- Many of these issues are not new but rather are renewed tion [36,37]. Reasons for this higher expenditure include manifestations of debates which have been recurrent fea- the difficulty of containing costs in a system where there tures in various waves of health sector reform. In particu- are multiple purchasers, and where reimbursements are lar, the division of responsibilities between the centre and usually on a fee-for-service basis. the regions, uncontrolled copayments for GP consulta- tions, and the tax treatment of private health insurance are While the government did not respond publicly to the all issues which have repeatedly challenged decision-mak- claims and proposals made by the health insurance indus- ers. try in these two reports, it did take two decisive actions. First, it requested briefings from the Treasury on both of During any period of change, there are inevitably con- the reports immediately prior to their public release flicts, tensions and disagreements as new boundaries are [38,39]. Second, on the same day that the second report drawn and the various players jostle for position. This cer- was published the Ministry of Health released its own tainly has been, and continues to be, the case in this latest report on the future funding of health services in New Zea- round of reforms in New Zealand, most particularly in the land [40]. One of the conclusions from this report – primary health care sector. As the system matures, the which had in fact been written for the Ministry two years boundaries of responsibility across the sector should earlier but which had not been released – was that "there become clearer. If the vision of a community-oriented sys- should be no public subsidies of private health insurance tem is to become a reality, full devolution of responsibil- in New Zealand" [[40], p.xiv]. The main reasons behind ities from the centre to the districts will be essential as the this conclusion were (a) inequalities are likely to be exac- DHBs continue to build their capacity, capability and erbated, because expenditure on private insurance experience. The Ministry of Health can then focus on pro- increases with income; (b) control over health expendi- viding strategic direction to the sector and on monitoring ture is more difficult under private insurance than under performance through appropriate accountability mecha- direct public funding; (c) greater value is likely to be nisms. achieved by increasing expenditure in the public sector because service provision tends to be more expensive and In spite of the tensions and difficulties associated with administration costs tend to be higher in the private sec- implementation of the new structure, the sector already tor; and (d) because demand for private insurance is rela- appears to be developing a much stronger sense of direc- tively insensitive to price changes, the cost of a health tion and purpose. This is in sharp contrast to the 1990s insurance subsidy will be greater than the value of any when the change towards a more market-oriented system health services that are stimulated by that subsidy. resulted in a high degree of uncertainty for, and alienation of, many service providers [41]. Another difference is that In summary, while a rebate on private insurance may well the government has invested in a number of evaluation improve the health of the private insurance industry, there projects by health service researchers this time around. appears to be little evidence that it would make any useful These evaluations should highlight the main strengths contribution towards improving the health of New Zea- and weaknesses of the new institutional arrangements, landers. More fundamentally, the current government and, where necessary, indicate areas where further adjust- would require any changes to financing arrangements to ments are required. align with the principles which underpin the New Zea- land Health Strategy. One of these principles is: "timely Competing interests and equitable access for all New Zealanders to a compre- The author(s) declare that they have no competing inter- hensive range of health and disability services, regardless ests. of ability to pay" [[17], p.vi]. As Richardson has noted, the egalitarian desire of equalising access to health care Acknowledgements The useful comments of two referees on an earlier draft are acknowledged regardless of ability to pay, and reducing inequalities in with appreciation. health are "more easily achieved through a compulsory public health system" [[34], p.5]. In contrast, contestable References funding and subsidisation of private insurance are more 1. 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CBG Health Research Ltd.: National GP Fee Survey: A report Sir Paul Nurse, Cancer Research UK prepared for the Ministry of Health. Wellington, Ministry of Health; 2004. Your research papers will be: 28. Econtech Pty Ltd in association with Harper Associates: Choice and available free of charge to the entire biomedical community Affordability - for Healthcare in New Zealand. A report pre- pared for Southern Cross Medical Care Society. [http:// peer reviewed and published immediately upon acceptance www.southerncross.co.nz/sx_internet/library/t28892_3.pdf]. cited in PubMed and archived on PubMed Central 29. von Lanthen K: The Long Term Funding of New Zealand Healthcare. Wellington, Health Funds Association of New Zealand; yours — you keep the copyright BioMedcentral Submit your manuscript here: http://www.biomedcentral.com/info/publishing_adv.asp Page 8 of 8 (page number not for citation purposes)

Journal

Australia and New Zealand Health PolicySpringer Journals

Published: May 7, 2005

References