Productivity and long term growth

Economic Survey of New Zealand 2009: Health care reform: challenges for the next phase


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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of New Zealand published on 16 April 2009.




Control of health care costs is the most pressing fiscal challenge

As in most OECD countries, health spending has been the fastest growing component of public expenditure for several decades. This has reflected health care technology and demand pressures, the latter exacerbated by the fact that individuals do not typically pay directly for the services they receive, while suppliers have enormous influence over demand. Ongoing medical advances and rising expectations by the public of their entitlements imply that such pressures will only keep growing. In addition, demographic ageing is set to push up demand, especially for disability and long term care services. Official projections show that, even with policy reforms, by 2050 public health spending as a share of GDP could double, driving up the public debt by 80 percentage points of GDP over the 30 years to 2050. This implies the need for early policy action to contain health care cost pressures. It also underlines the urgency of averting the earlier scenario of surging gross debt over the medium term.


Projection scenarios for public health expenditure in New Zealand

Per cent of GDP

Source: OECD (2006), “Projecting OECD health and long term care expenditure: What are the main drivers?”, OECD Economics Department Working Papers, No. 477, OECD, Paris; New Zealand Treasury (2006), New Zealand’s long term fiscal position, Wellington.


Recent trends in the health care system are disquieting

New Zealand achieves relatively good health outcomes for comparatively modest health care outlays. Since around 2001, however, public health care spending has grown at more than double the pace of GDP. Health care institutions have at the same time been completely transformed: the prior market oriented reforms in the hospital sector were reversed, and a radical reform of primary care was inaugurated. Most of the increased funding went to pay for wage awards to hospital nurses and doctors and for capitation payments to primary care physicians. But there is scant evidence as yet of much higher output or quality achieved. Indeed, waiting lists and shortages have grown, and measured hospital efficiency has declined. While many of the objectives of the reforms were sound, mistakes were made in design and implementation. Few tools were provided to achieve their goals: purchasers’ autonomy was restricted, duties were not always clarified, incentives to seek efficiencies were largely lacking, and yet substantial new funding was distributed in the hope that it would all be well used. The new government’s stated commitment to address these shortcomings within the present structure is welcome.


The relationship between spending and health outcomes in OECD countries, 2003

Health adjusted life expectancy (HALE)

Source: World Health Organisation and OECD Health Data 2008.


The reorganised hospital sector faces inadequate efficiency incentives

The 2001 reform reorganised the hospital sector, then consisting of the corporatised public hospitals and an arms length national purchaser, into 21 District Health Boards (DHBs) that simultaneously own the public hospitals and purchase most health care services for their districts. The diminished emphasis on competition and profitability, together with a greater appeal to responsibility and co operation to achieve results, were popular with both the public and health professionals. Yet the new arrangements probably went too far in downplaying incentives. Some adjustment to enhance their role now appears necessary.


In particular, the amalgamation of the functions of purchase and provision of services may have distorted incentives, with DHBs tending to direct business to their own hospitals, to the detriment of private entry. This discourages potential efficiency raising competition and exacerbates supply shortages. Though top down budget controls have reduced DHB deficits, some hospitals remain in chronic deficit. Compounding these problems is a lack of autonomy by DHBs to spend budgets as they see fit. Perhaps because of weak internalised incentives in the first place, there is excessive emphasis on negotiating annual plans with the Ministry of Health and preparing detailed reports to demonstrate progress in achieving a multitude of objectives. The Ministry also allocates a high proportion of the DHB budgets centrally, overturning the principle of local accountability which is the DHBs’ very raison d’être. The DHB system is also too fragmented to make capital investment decisions, where more cross district rationalisation and specialisation may be needed to preserve clinical viability in such a small country.


Some spontaneous steps in this direction have been taken: for example, DHBs are co ordinating their hospital planning and managements regionally. The existing momentum towards greater DHB collaboration may lead to some mergers and increased specialisation, which should, in principle, be accompanied by greater internal contestability among hospitals. If this fails to secure improved purchasing and service delivery, then a next step would be to instil stronger incentives for efficiency through a formal separation of hospitals from DHB funders. It would be important to build public understanding and support for such an institutional change. DHB flexibility and accountability need to be strengthened. This goal would usefully be served by allowing each DHB to negotiate its own hospital wages, rather than through multi employer agreements. There would also be benefits from paying hospitals on the basis of prospective costs and volumes within a budget-holding approach. The Ministry needs to more actively monitor performance while devolving its purchase function to the DHBs. Bureaucratic reporting burdens should be radically cut. The Ministry can also help by developing user friendly databases of best practices, performance benchmarks, public health programmes of national scope and strategic planning.

Primary care reform ambitions have not yet been achieved

The 2001 Primary Health Care Strategy envisaged a primary care system that would: i) close existing social gaps in health outcomes by improved access to care, particularly among the substantial Maori and Pacific Islander minorities; ii) engage in more preventive care to maintain population health proactively; and iii) develop integrated, community based models of care able to better meet minority and immigrant needs and more efficiently manage the increasing burden of chronic care. Two instruments were created: Primary Health Organisations (PHOs); and a switch in method of paying GPs from fee for service to capitation payments based on patient lists. Practices were to sign up with a PHO in order to obtain capitation payments. Once substantial co payments fell across the board, though by less than doctors’ capitation payments grew, and consultations increased, although apparently less so for the targeted groups. Primary care physicians’ incomes also trended up, and the subsequent closing of many PHO patient lists may suggest the existence of cherry picking to discourage sicker patients and prevent new practices from entering. The PHOs’ effectiveness as agents of change was highly variable, while the new models of care generally failed to take hold. To achieve the laudable objectives of the strategy, further changes will be required. Practices should have access to capitation payments directly from the DHBs to avoid restrictions to competition by PHO “club membership” obligations. The PHOs should be either eliminated as an unnecessary new bureaucratic layer or else their role and obligations must be more clearly defined, particularly as regards to facilitating the development of the new clinical models, with the DHBs using part of their funding to the PHOs as a lever. Fees should be better regulated by the DHBs but balanced sufficiently with capitation payments in order to maintain doctors’ intrinsic motivation to exert effort. The appropriate balance may need to be tailored to the needs of particular groups.

Private funding and provision are underutilised

Though the proportion of the population holding supplementary private insurance is relatively high, it is typically used to circumvent elective surgery waiting lists, to pay for services not covered by public insurance or to reimburse primary care co payments. As the latter have now been sharply reduced, the contribution of private funding to health care costs has dwindled for rich and poor alike. This in turn has increased demand for heavily subsidised primary care, perhaps particularly by the “worried well”, harming equity and boding poorly for the ability of the system to contain taxpayer costs in the future. The emergence of large, non transparent deficits in the Accident Compensation Corporation (ACC) suggests a weakening of cost control in recent years under public monopoly insurance. In the interests of both fiscal sustainability and health care market competition, the authorities should consider a greater, well-regulated role for private insurance. To improve burden sharing, the recent move to extend eligibility for lower co payments to wealthier people could be rolled back. The contestable parts of ACC should once again be exposed to competition from private insurers for accident insurance contracts. Private hospitals and auxiliary service provision should be encouraged in parallel with the above DHB reforms.

Severe health workforce shortages are looming

New Zealand is quite constrained in how much it can control medical professionals’ wage costs because of its open market for their skills. A high proportion of locally trained doctors and nurses emigrate, while around half of all practicing doctors and nurses in New Zealand are foreign trained immigrants. Heavy turnover of immigrant professionals implies large recruitment and training costs, however, along with greater risks of shortages. Imminent ageing of the doctor and nurse populations implies a scarcity of future capacity, against which sharply rising demands on the system would greatly increase cost inflation. The number of slots for medical studies should be increased, and more foreign students should be accepted in the hope that many will stay on after graduation. To the extent that New Zealand cannot offer international level specialist wages, it should work harder to create a satisfying and innovative clinical environment, giving doctors a high degree of autonomy and interaction with other professionals in the new collaborative care settings.


How to obtain this publication


The complete edition of the Economic survey of New Zealand is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.


Additional information

For further information please contact the New Zealand Desk at the OECD Economics Department at

The OECD Secretariat's report was prepared by Alexandra Bibbee and Yvan Guillemette under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.




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