Populations around the world are aging. Birth rates have generally fallen, people are living longer and the baby boom generation, born in the 20 years after WW2, is now reaching old age. These three factors are combining to drive population aging from all parts of the demographic spectrum. The US Census Bureau put out a detailed report in 2016 that stated, ‘The world’s aged population continues to grow at an unprecedented rate. Today 8.5% of people worldwide (617 million) are aged 65 and over…This percentage is projected to jump to nearly 17% of the world’s population by 2050 (1.6 billion).’
That is a doubling of the number of people over 65 in 30 years time. In some countries the proportion over 65 is expected to quadruple over the period. The number of people in the world aged over 80 is expected to more than triple between now and 2050, from 126 million to 446 million.
New Zealand is experiencing these same trends. A Treasury Report in 2017 said the number of superannuitants, then 730,000, was expected to grow to 1.3million by 2039.
When people live longer they generally suffer different diseases. Young people are prone to communicable diseases, older people suffer more from chronic diseases (although Covid has shown communicable diseases can still be a threat for them). We have all but eliminated many communicable diseases in the young, such as polio, measles, and chickenpox. With less smoking we have reduced heart attacks and emphysema and we are left with ‘old people’s chronic illnesses – arthritis, rheumatism, Alzheimers, cancer, diabetes, cardiovascular diseases. Generally young people get illnesses of short duration – they either recover or die within a month. But when old people get chronic illnesses, their afflictions frequently last for years. Those chronic afflictions cost many times more to treat over the life of that illness than the shorter illnesses of younger people.
For these reasons healthcare costs rise at a proportionally greater rate than the rate of increase of aged people in a population. If you are already starting to see the financial dilemmas facing governments around the world there is one further factor to go into the mix – the advance of medicine and its rising cost.
Modern medicine now offers many more drugs and treatments than were available in the past. Take for instance arthritis. Hips, knees, shoulders, (and probably a few other joints as well) can now all be replaced. Who today does not know someone who has had two hips and a knee replaced? What did those three operations cost? In round figures the cost would have approached $100,000 for one patient. That is a sum the country wouldn’t have spent at all on that person back in 1950, before joint replacements were available.
New drugs offer major advances with cancer; and with many other significant chronic illnesses. But those new drugs come at what is sometimes a fearsome cost.
Modern medicine is continually advancing and can steadily do more (which we all want to take advantage of, if we ever need such new treatments). But those new treatments are not just coming at a price, that price is getting more expensive.
Governments attempt to ration these expensive new treatments by putting decisions on their availability into the hands of independent bodies such as Pharmac in New Zealand. But this delegation of responsibility has not been totally successful either. Drug companies are adept at advertising the benefits of their latest drug. Patients who might benefit from it are then incentivised to mount public campaigns for the drug to be made available at a free or subsidised rate. There are usually politicians to be found who will take up the populist call for Pharmac to fund the new drug. Putting a financial cap on the rising cost of medical advances is far from easy for those put in charge of public money.
The financial implications of providing healthcare to rapidly aging populations around the world are nothing short of scary, especially when it is realised we are only in the early stage of the ageing phenomenon which will not reach its peak for another 30 years. And if you are starting to feel sympathy for governments trying to keep their budgets in balance, don’t forget healthcare is not the biggest single cost in play. Superannuation is an even bigger financial burden on governments as their populations age. The looming burden is worse in New Zealand because we, the baby boomers, have failed to save over our working lives.
New Zealand’s public health budget has been getting a great deal of additional revenue from a tobacco tax that has increased to massive proportions in an attempt to stamp out smoking. (It has not worked as well as predicted, smoking rates are falling but less so among Maori and Pacific Islanders). Tobacco taxes are expected to bring in $2 billion in the 2019/20 year. At a certain point though, revenue raised from this punitive tax will surely start to decline, putting yet another health related burden on future budgets.
WHAT HEALTHCARE IS COSTING
New Zealanders pay for healthcare partly through Accident Compensation Corporation. In 2019, the net ACC levies amounted to $4.5billion. It is possible to break this annual cost down into various health costs and into earnings-related compensation which ACC also pays out. ACC has a large investment fund that earns significant income each year, further adding to the complexity of determining how much of the total ACC levies are just used for health. So take the $4.5billion figure with that significant caveat: it is the cost we pay for accident insurance but not all of it is spent strictly on health.
Some of us have private health insurance. Southern Cross Healthcare, the largest insurer, received premiums totaling $1.08billion in 2019. It is said to have around 60% of the health insurance market so if we treat $1.08b as 60%, then New Zealanders paid around $1.8billion for private health insurance in 2019.
But the largest expense by far is Vote Health in the Government’s budget, $19.871 billion in 2019/20. That is about a fifth of government spending. It is being increased significantly in the 2020/21 budget.
So in total, New Zealand is currently spending a little over $25 billion per annum on health. Divide that by the population of 5 million and every man, woman and child is spending on average roughly $5000 on health each year. How does this cost compare in magnitude to other large government expenditures? The numbers are difficult to state precisely because modern budgets are a maze of detailed and somewhat conflicting figures but you can get some idea of the relative size of Health spending from the Treasury’s website, which says, ‘The three largest areas of total crown expenditure for the 2016/17 financial year were: social security and welfare $28.8 billion; health $18.3 billion; and education $14.3 billion’.
WHAT IS THIS HEALTH EXPENDITURE SPENT ON? To work this out precisely, would be a year’s work. What I can say, is that in 2018/19 the Government paid:
- $13.338 billion to district health boards,
- $262 million for primary health care,
- $985 million on pharmaceuticals, and
- $255million on medical devices.
Don’t forget these are sums paid out by the Government for health. ACC and private health expenditures need to be added on top of these figures. And note that when the DHB’s receive their $13.3 billion they do not just spend that money on running hospitals, they spend it on numerous other health services within their districts besides. The pharmaceutical allocation provides an interesting statistic. In 2019/20 there were 47.2 million prescriptions written, for 3.77million New Zealanders. That is on average more than 12 prescriptions per year for each person who had drugs prescribed for them; with a value on average for each such person of $260 in government funded drugs.
When you dig into the health figures in any more detail, you start getting a headache (and needing a prescription). There are a maze of different ‘quasi social’ expenditures that are also paid for out of the overall Health monies. Some of these include:
- Disability support
- Rest home subsidies
- Home care
- Environmental health
- Research
- Food hygiene
- Hospice
- Dental
- Mental health
- Administration.
One gets the impression there are a number of politically driven expenditures in this list and not all of the ‘quasi-health’ expenditures deliver health benefits of comparable value. A good percentage of the country’s overall health expenditure is not spent on drugs, hospitals and doctor visits. These quasi-health expenditures should be carefully reviewed and pruned. In a rapidly rising budget, we cannot afford to waste money on peripheral health projects of doubtful value.
THE INCENTIVES ARE ALL WRONG
The way our health system is set up, both providers and patients have been given no reason to minimise its costs and avoid wasting money. Let’s start with the highest-paid providers: the Specialists.
Many doctors are dedicated health professionals for whom the financial return is less important than doing the best for their patients. And plenty are not so altruistic, and are very interested in the incomes they can make. For that percentage of the medical profession particularly interested in the size of their incomes, the present New Zealand health system (modelled on the UK’s NHS), creates all the wrong incentives.
There was a time, about, 20 years ago, when waiting lists for non-urgent (‘elective’) surgery started to come down significantly and what happened? The numbers of people buying private health insurance started to drop. The relationship between the public and private health systems in New Zealand is unfortunate. The two systems do not work in tandem but in a sense in opposition to each other. The better the public system, the less people will see the need to use and pay for private health. And conversely, the worse the public system, the longer its waiting lists and waiting times, the more people will want to use private health services.
Now the key point: it is in private health services that most medical specialists make their high incomes. Medical specialists in particular, are frequently financially incentivised to keep the public health system a step or two behind the private system. Very many specialists work in both the public and the private systems (a foot in both camps). They have the opportunity to influence how the public system performs.
We have a public health system that in many cases incentivises the specialist doctors who principally run it, to make sure it never gets too good and thereby cannibalises the private healthcare system, from which they make their real money. I may be a cynic but I suspect that if some future government doubled or even trebled the amount it spent on hospitals, waiting times would not come down markedly. Doctors would somehow still keep waiting times in the public hospitals stubbornly unchanged, so their private incomes hold up.
Now look at the incentives faced by patients. When patients go private they take away from the public health system the need to provide the procedure or service they pay for through private insurance, or out of their own pockets. That is a considerable saving to the public system, so what does the government do? It charges them GST on the private medical costs they pay – a financial disincentive to patients who save the Government money.
But if patients go into the public health system they are not charged at all. They have no idea of the cost of the treatments they are being provided with. I always remember one of the first lectures in Economics: consumers push the consumption of a free good to the point where it is wasted. So you should always charge people for a good or service to ensure it is used wisely.
This principle also applies to pharmaceuticals. The standard patient part charge is around $5 per prescription. In other words, peanuts, compared to the cost of the drugs which may be being prescribed. There is no financial disincentive on either doctors or patients to minimise their use of drugs. Plenty of people have hundreds or even thousands of dollars worth of unused medicines in their cupboard at home. The principle applies also to diagnostic tests and x-rays. Patients have no idea how much they cost. Ideally they should know.
Accident compensation pays the full medical costs of treatment and yet accident clinics levy a part charge of $25-$50 per patient, figuring they can add that to what ACC pays them because patients expect to pay something and will wear a small part charge. When most people go to a GP, they pay them roughly $50 for a visit. Doctors can add on a part charge, because their patients have no idea what the Government is also paying towards the cost of that visit. Nowhere in the primary health sector are there any obvious incentives to keep costs down, indeed full information on costs is almost totally absent from the primary system.
Private hospitals, too, face little pressure to minimise costs. I recently had a hernia operation in a private hospital. I paid for my treatment (plus GST) out of my own pocket. I looked at the account from the hospital. It was a good example of adding everything into the bill at maximum cost. The skin marker pen charged at $6.98. Waterproof dressings at $5.72 each. Then a sundry charge of $66.50 on top. There was no evidence in the bill of competitive pressures restricting health care costs.
DISAPPOINTING REVIEW
The public health and education sectors have been singled out by the Productivity Commission as areas of the economy where productivity is hard to measure but appears to be falling. During the Covid lockdown some less than impressive decision making among health officials showed why that might be occurring: poor handling of Covid cases by Waitakere Hospital, faulty decisions on requests for compassionate visits, insufficient supplies of personal protective equipment. Then the ultimate poor performance – a mishandling of our borders, such that the task had to be taken out of Health Ministry’s hands and the Defence Force brought in. +
If health officials don’t perform well in responding to Covid, it is difficult to see them being able to do a great job in running and managing our hospitals.
But just as the weaknesses of these officials were being exposed in relation to Covid, the Government released the findings of a review of the public health service conducted by a committee chaired by a former chief of staff to Labour Prime Minister Helen Clark. Prepared at a cost of $9.5million (how many elective surgeries would that have paid for?) it called for fewer DHB’s, no more elections of board members and predictably, more centralised control of the country’s health system by a new body to be called Health NZ. Its representation would be 50% Maori, 50% Crown. It would draw up a NZ Health Plan.
The report contained almost no financial facts or analysis and no discussion at all on how to integrate private and public health systems for the best overall health outcomes for the country. On the very day the inadequacy of officials running the Health Ministry was being exposed by Covid, and the Minister of Health was under attack for it, this report called for health officials to be given a much greater role in running the sector. A more stark contradiction would be difficult to imagine. Let us hope the report’s recommendations are not taken up and decision makers start looking elsewhere for creative ways to improve the public health service.
SOME ISSUES TO BE CONSIDERED IN ANY REFORMS
Politicians have meddled in the health system for years. Their meddling has almost certainly generated complexity and caused more problems than it has solved. Minimising political involvement for the future would surely be advantageous. Major restructuring should be avoided if possible. Better to tweak what is there and focus on areas of weakness rather than re-invent the wheel at a cost of major disruption, redundancies and years required for the new order to get up and running properly. First step: bring in plenty of accountants, so that costs can be analysed at every step of the system. Effective reform will never be possible, if there is not detailed financial information available in respect of all parts of the public health system; and in respect of all aspects of our public hospitals.
Public hospital systems combine elective surgery with normal operations, which means if there is a major accident or some other event disrupting hospital routine, elective surgery has to be rescheduled, which is inefficient. I once spoke to someone who had elective surgery in a large US hospital. They described four ‘starting gates’ where patients arrived at carefully scheduled times, leading through pre-op to theatre. The ‘four ‘production lines’ were continuous through the day with no time wasted, and making maximum efficient use of the theatres and hospital facilities every day. Australia combines public and private hospitals much better than New Zealand to produce more efficient outcomes from both. Singapore has a significant business carrying out elective surgery for people from outside the country who fly in for the procedure. Can you imagine New Zealand hospitals being efficient enough to ‘export’ some of our health services?
It would be interesting to see how efficiently DHB’s perform elective surgery, compared to overseas elective surgery hospitals. One suspects New Zealand’s public hospitals are generally far behind, which is tragic when you think of sick patients waiting months or years to get surgery which efficient public hospitals could have been provided much more promptly.
Undoubtedly there are rigidities, inertias, vested interests, pay scales and structures in the public health sector in need of reform. These involve all service providers, including specialists, GP’s, and nurses. Their professional bodies are strong and often resistant to change. Good ideas to improve the system can all too frequently fail not because they are good ideas but because they are not supported by the people at the coalface. Buy-in from key areas of the system is difficult to achieve but critical for successful reforms.
In summary, we have a health system, which is already costing us $5000 per head per year, with plenty of impediments in the way of substantial improvement. The costs are going to rise steeply over the next 30 years, to the point where they will seriously threaten the ability of the Government to fund them. We need some fundamentally new thinking to examine our system and improve it, so that all parts of the system are incentivised to be as efficient and cost effective as possible. We do not have the incentives working in the right direction at the moment. That is a major problem.
Perverse incentives are not peculiar to the New Zealand health system. In a 2018 article, the Australian Productivity Commission described similar issues in Australian health:
‘Key decision-makers (in the Australian public health system) have no direct financial incentive to be efficient in their use of other parts of the system … clinicians do not face strong financial incentives to avoid high-cost activities (such as tests, referrals to specialists and hospital admissions), use lower-cost delivery methods (such as employing nurse practitioners or phone-based consultations) or encourage co-ordinated care of patients.. The system is medically rather than patient centred, with the patient often an inconvenient guest within the system. Payment and funding system reforms are required to support these changes.
Medical interventions funded by taxpayers are undertaken despite little evidence that the intervention is beneficial…There are striking inexplicable variations in clinicians’ use of medical procedures across different health districts- hardly science at work’.
SOME POSSIBLE REFORMS
First, a reminder: no matter how the public health system is financed, one thing is inevitable – it is the populace who pay the bill, either through taxes or through part charges. People will say: the Government should pay more and the patients should pay less. That is a complete misconception. Nothing can change the fact that the people have to pay for everything. So surely it is in the interest of the populace to structure the health system so the incentives within the system work in favour of keeping the costs of the entire system as low as possible.
PART CHARGES
When I go to my dentist I get a bill before I leave and pay 100% of the charge. Is it less important to go to a dentist than a doctor? I doubt it. Does a lesser percentage of the population visit their dentists rather than their doctors, because the government does not subsidise dentists? That would be a very interesting statistic to see. What we can say is that most people probably need to visit their doctor more frequently than their dentist and when they do visit their dentist, the cost of the dental visit will on average be higher than when they visit their GP.
When I go to my GP, I pay roughly $50 for the visit; which goes straight to the doctor. I have no idea how much the Government is subsidising my visit on top of my part charge. All I know is that the Government spends around $260 million per annum on primary health care. My doctor is financially incentivised to lift my part charge as high as possible, because the government subsidies don’t decrease if I pay a larger fee for my visit. If my doctor orders blood tests, x-rays and the like, I pay nothing towards them. If pharmaceuticals are prescribed, I pay a fee per prescription which on average probably recoups less than 20% of the country’s pharmaceutical bill. What we have at the moment, is a hotchpot of a system.
In principle it seems fair enough that patients pay a reasonable percentage of the costs of their primary health care. I would estimate the percentage of the total cost currently paid by patients, then make that a fixed percentage across all primary healthcare services. The GP would give you a bill for the full cost of the consultation when you leave and you would then pay that required percentage of it from your own pocket.
My suggestion: start by requiring, say, 20% of all primary health care costs, including pharmaceuticals prescribed at the primary healthcare level, to be paid by patients. Require providers to give a bill to patients when they complete their service (just like my dentist does now) and the patient then pays their required 20% of that bill. Once the provider has received that part payment, then they can ask the Government to pay the remaining 80% (you can’t allow providers to waive the patient part because then they could write a large bill and claim 80% of that large bill from the government – i.e., circumvent the part charge regime).
The key benefits of this regime would be that first, patients know the actual total cost of the primary healthcare they are receiving. You can’t properly value something if you don’t know how much it costs. Secondly, patients would be paying a reasonably significant percentage of that cost which means they have a financial incentive to see that cost does not rise too quickly. If you are paying 20% of the cost of an X-ray which costs $300, maybe you say to your GP, ‘Are you really sure that X-Ray is needed?’ Thirdly, the patient percentage could be increased gradually over the years (say 1% increase per annum over 13 years, from 20% to 33%), to help offset the rising cost of health to the Government. Because the patient is always paying a percentage, you avoid the situation where the medical service provider imposes as large a patient part charge as possible and still claims the maximum amount in state provided payments on top. Medical Specialist visits could come under the same patient percentage part-payment regime as GP’s.
Would this mean a lot of paperwork behind the scenes? Hopefully not. Each primary health provider would make a return each week of all the consultations that had been part paid and bill the Ministry of Health for the remaining 80% of that weekly total.
And yes, you would need some scheme to allow babies, the very elderly, beneficiaries and other heavy users, to pay a reduced percentage of the cost. But make everyone pay some percentage. Offering anyone totally free healthcare is a mistake.
Finally, a word on minorities: Pacific Islanders and Maori tend not to take advantage of free vaccinations for their children, don’t visit their GP as often as they should, and so on. Put a part charge on services and this will deter them, you may think. Well, in the last 20 years we have increased the price of cigarettes dramatically, in an effort to deter smoking. A packet now costs around $40. As a result, smoking has fallen from 18% to around 13% of the overall population but the drop among Maori and Pacific Islanders (the very people who have on average lower incomes, poorer health, and who can least afford on both counts to continue smoking) has been much less. Around 35% of these minorities still smoke.
Financial deterrence has not discouraged smoking enough among minorities. Part charges similarly will probably have a limited impact in deterring them from going to the doctor. The reasons such people do not make wise choices in life and with their healthcare are far wider than financial. And put a part charge on visits to Hospital Emergency Department visits, so if people avoid visiting their GP and then end up in Hospitals, or try to go to hospitals to avoid the GP part charge, they still end up paying. So, yes, make everyone subject to part charges and allow some reductions for people with proven need.
HOSPITAL PART CHARGES
Hospitals are the really challenging and super expensive cost. The present system seems to proceed on the basis that if you are unlucky enough to end up in hospital, then you should not have to pay at all (even if in reality you pay 100%, but solely through your taxes). The drawback of providing ‘free’ hospital care is that people turn up at Emergency Departments to minimise the cost, even although in some cases they should have gone to a GP; and in the case of surgery, there is no limit to the ‘free’ elective surgery people want. Public hospitals carry out 200,000 elective surgical operations every year.
Here are a couple of suggestions. First, have a system of patient part-payments for visits to the Emergency Departments and also at least for elective surgery. Set the percentage at say the percentage people pay for healthcare in the primary sector, for visits to Emergency Departments; and at say half this percentage for elective surgery (so start at say $2000, or 10% of the cost of your elective surgery whichever is the greater in each case, increasing over time). Perhaps put a ceiling on the amount a person need pay in a year – $10,000, or whatever figure is acceptable. Impoverished people would pay just a part of this ceiling. Create a scheme with banks that lets people get an increase on their mortgage to raise this money if needed. An average part payment of $2,500 per surgery would bring in $500m per year.
Tell people if they pay treble (or some similar percentage) the standard part-charge for their type of operation up front, they automatically go to the top of the waiting lists.
Remember these charges would be for non-urgent surgery. People who have a debilitating illness (cancer for example) need surgery that is not elective and probably should not bear a charge – even though such illnesses can sometimes be caused by lifestyle factors which the patient should have addressed and avoided.
INCENTIVISING PUBLIC HOSPITALS
To create some incentives to improve productivity in public hospitals, could we fund hospitals per procedure, not on a per capita basis? Based on the population in its catchment, a DHB could be financed for the expected number of each procedure that population could be expected to need each year. The Government could budget to pay the DHB for that many operations but pay only for procedures actually performed. That would incentivise the DHB to have as many procedures carried out by its doctors and staff as its district needs. It would even allow the DHB to contract the private sector to carry out the operations if the cost of doing them internally was higher than the sum per operation the Government was offering. Spread this system across the entire budgets of the DHBs throughout the country to try and incentivise DHBs to drive outputs and efficiency.
For reasons discussed above, I suspect public hospitals are less efficient in carrying out elective surgery than private hospitals could push through. DHBs already contract out a reasonable amount of elective surgery to private providers. Why not contract out the lot from one or two public hospitals as a trial? There is a new elective surgery building at North Shore Hospital. Call for quotes from overseas as well as local private hospital operators (we need some new competition so don’t confine the choices to New Zealand’s existing private hospital operators) to run that whole elective surgery programme for the DHB.
IMPROVING INCENTIVES FOR SPECIALISTS
Specialists make more money operating in the private system than in the public system. This creates a problem only because many surgeons work partly in public and partly in private. Surgeons wholly in one system or the other are not conflicted. Perhaps say to surgeons who wish to work in both, that they must agree as a condition of working in the public system, to receive the same fee per procedure in both systems. It appears a few DHB’s have already adopted this system. One can imagine there may be opposition from surgeons to such a proposal but unless and until the financial incentive on surgeons to operate privately is removed, it is difficult to see how there can be progress with public hospitals. Surgeons could go 100% private, and then set their own fees. But if they want to work in both systems – and there are said to be professional satisfactions in doing so – then they should agree to waive their financial incentive to work in the private sector.
Southern Cross has set prices it pays surgeons for procedures in its private hospitals, perhaps these could be adopted by the public sector. Initially this might cost DHBs more; but if this changed the perverse financial incentives applying to surgeons at present, and made them indifferent financially whether they carried out a procedure in the public or private system, that may be a price worth paying.
We also need some incentives for efficiency placed on clinicians and other hospital staff to keep health costs down. The best I can suggest: set budgets for each hospital department. These budgets will obviously vary between departments depending in part on how many patients each usually treats in any quarter. If the department’s expenses come in for that quarter under the budget then a percentage of the savings could be paid out to its staff as a bonus.
And we need to improve DHB management. Public hospital systems seem poorly run. Patient waiting times in so many hospital districts are really disappointing. Should senior management be incentivised to try and lift performance over a defined range of key performance indicators? And appoint (rather than elect) the complete boards independently of political influence so the best possible skills are available to run their exceedingly expensive operations.
PHARMACEUTICALS
Allow parallel importing of over the counter and pharmacy-only drugs from certain approved countries overseas. This is prohibited at the moment, because it makes it very difficult to have a medicine recall. In fact, preventing parallel importing helps keep the local cost of over the counter drugs high.
PRIVATE HEALTH AND GST.
The population appears to spend around $1.8 billion on private health insurance each year. There will also be some patients who pay their own private hospital charges without insurance. If the population spends $2.5billion on private health each year the GST on that figure would amount to $375million. If you also exempt private school fees from GST (which would be consistent) the Government would be looking at a likely revenue loss in the vicinity of $500million per annum. Few governments would be keen to forego such a sizeable amount of revenue however logical it is not to tax activities that save the State from paying for and providing those activities itself. One hopes, if there was a full review of the tax system, that GST on private school fees and on private hospital charges (along with tax on the earnings of superannuation funds) could all be dropped.
IN SUMMARY
New Zealand’s population is rapidly aging. That is already putting pressure on pensions and on healthcare costs. Those cost pressures are going to continue to intensify. The health system is complicated and contains perverse incentives. With the increasing pressures coming onto health expenditures, it is important that as far as possible all incentives are aligned toward the State keeping health expenditures within bounds. To help do this, patients need to know the costs being incurred in their treatment; and to pay a percentage of these costs. A part-charge should also be introduced for elective surgery in the public system. Surgeons who operate in both systems, should be paid the same in both the public and private sectors. The financial structures of DHB operations and funding need to be changed so that in the future public hospitals are financially incentivised to drive efficiency.
And GST on private healthcare and private school fees is perverse. Where citizens spend their own money to acquire a service which the State would otherwise have to pay for and provide, it does not seem reasonable to tax those private costs.
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Covid – Catalyst for Change 