The Long Term Funding of New Zealand Healthcare

Transcription

1 A RESEARCH PAPER FOR THE HEALTH FUNDS ASSOCIATION OF NZ INC. The Long Term Funding of New Zealand Healthcare OCTOBER 2004 B Y K I M V O N L A N T H E N

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4 Executive Summary Public health inflation is at record levels Public health in New Zealand has been funded on the basis of demographic change and Consumer Price Index inflation. Through the 1990s significant increases in productivity and overall throughput were achieved. But these trends have stalled. Public health inflation has leapt to an estimated rate of 8 percent per annum for the past three years, greatly in excess of CPI inflation. Revision of public health projections signals the need for change Technological and demographic influences on the cost of health services are significant and make projecting public health spending into the future challenging. Projections completed by the Ministry of Health in the late 1990s on the basis of past trends suggested that public health spending into the future was sustainable. Treasury projections supported this result. Both the Ministry of Health and Treasury projected public health inflation to be inline with CPI inflation, but recent public health inflation trends are significantly different to what was assumed. By updating the projections with current public health inflation rates, health inflation surpasses technology and demographics as an influence on spending. Public health expenditure grows exponentially to over 63% of GDP by 2050, clearly an unsustainable position for taxpayers. Raising a voice for concern within DHBs Stakeholders in the new public health sector governance structures do not have a vested interest in achieving value for money. New stakeholders should be introduced that would provide a strong voice for value for money. DHBs must control their costs so that public health funding may again become sustainable. Employers paying DHBs for health services for their employees could become a strong voice for value for money. Middle and high income individuals would also be a strong influence if they had to pay for the full amount of their personal health service usage. Both employers and individuals would be relying on their insurers to cover the risk of high service use, which is difficult to predict in advance. In order to build employers and middle/high income individuals into DHBs as payers of services, a new collaboration between DHBs and health insurers would be needed. A new frontier for DHB development This paper recommends that the Government measures public health inflation so that it can start to manage it. This paper also recommends that specific steps be taken to enjoin employers, high and middle income individuals, and insurers into the public health system. There is a need for all parties to change their attitude and approach to healthcare funding.

5 Executive Summary Revising the tax regime Eliminating the unfairness in FBT tax treatments between health insurance and ACC would engage employers into the process. Some health services will be best purchased from DHBs, such as some acute services. A fairer FBT treatment of health insurance would increase policy uptake. Health insurers should give consideration to providing a fuller range of cover than they presently provide, that would better support DHBs future funding needs. At the same time it is appropriate to further encourage working age people to pay more for their healthcare needs. Government could stop collecting the proportion of tax from middle and high income earners that it spends on providing their healthcare services, and require this group to purchase health services from DHBs and private providers themselves. An appropriate reduction in taxation would enable high and middle income earners to do this. In relying on a wider range of funding sources, including employers and individuals, DHBs would get a better mix of stakeholders. They could be expected to find a balance between service development and value for money; securing their future as the mainstay of the New Zealand health sector. The Author Kim von Lanthen is married with three children. Kim has a BA Hons (Economics) studied through a Reserve Bank Scholarship. Most of his career has been with Pricewaterhouse Coopers. While his son was being treated for cancer he spent time as Chief Analyst Health at The Treasury. He now manages high risk corporate customers for a major trading bank. Kim has been on the Boards of various voluntary organisations, including health and education entities. Notice This report has been prepared for the Directors and Executive of the Health Funds Association. No responsibility will be taken by the author in respect of any other parties. Whilst it is acknowledged that the report may be circulated beyond the Directors and Executive of the Health Funds Association, the author does not assume any responsibility or liability for any losses occasioned to any party as a result of circulation, publication, reproduction or use of this report. The author reserves the right, but will be under no obligation, to review this report, and if he considers it necessary, to revise the report in light of any information existing at the date of this report which becomes known to the author after that date.

6 Contents 0. Introduction Influences on Health Expenditure An evolving science Better, more convenient treatment Induced demand Age differences Working age people and their children Trends in public funding for working age people Elderly people The ageing population A larger, older population Trying to predict the effects of technology on future health spending Trying to predict the effects of life expectancy on future health spending Risk of changes to voluntary care Past Funding Projections The drive for productivity Funding increased spending Substantial productivity improvements are possible Resulting public health funding projections Ministry of Health funding projections Treasury health funding projections Health inflation Loss of focus on value Hospital and maternity services lead in public health inflation Failure to derive value from additional health spending Health Funding Projection Revisions and their Implications Revised long term projections Past projections no longer hold Treasury projection update Improving value Limits to available tax revenue Developing a voice of concern Precedents for productive partnerships with the private sector Building partnerships with employers Building partnerships with individuals into the future Collaborating with health insurers The traditional insurance model A new model Improving health Encouraging healthy life-styles The power of financial incentives 18 Conclusion and Recommendations 19 Appendix Health Funds Association Health Sector Model 20

7 Introduction As medical science has developed so have our expectations. We want prompt access to an increasing range of medical treatments that are reliable and convenient. While individual treatment costs can reduce with medical advances, overall medical costs rise as we expect more and use more services. Working age people generally get the medical treatment they want because they pay for it themselves. There are some exceptions such as maternity and mental health care which are predominantly publicly funded. In contrast, the elderly use up to 10 times more health services than working age people. The cost can be well above their shrinking financial means and so the elderly are very much more reliant on public health services than working age people. As the population ages and there are proportionally more elderly, public health costs will rise sharply. With the instigation of District Health Boards (DHBs) funding silos have been removed. A broader approach to funding has opened opportunities for DHBs to take full advantage of developments in community services, making treatment more convenient. DHBs have not, however, been effective in controlling expenditure and improving productivity. Public health inflation is at record levels. If public health inflation continues unchecked public health expenditure will not be sustainable into the future. DHBs are not currently structured to reverse the inflation levels they have started. Their natural inclination is service design, workforce empowerment and finding new ways of meeting community needs. If they are to survive, they need to find partners that can help them develop a focus on value for money. Private providers and insurers are natural partners. Only private providers and insurers are structured to seek value for money. The essential difference is one of relationships. The relationship between DHBs and their constituents is a political one divorced from the ultimate payers for services. Private providers and insurers have a direct financial relationship with ultimate payers. Private providers and insurers are structured to account for and manage costs. Both sets of relationships and both perspectives are needed to make public health funding sustainable. Collaboration between public and private funding is the next frontier for DHBs. 01

8 1.0 Influences on Health Expenditure 1.1 An evolving science Better, more convenient treatment As health science has improved and become more capable, we have become less skeptical and more demanding of it. At the beginning of last century hospitals were not places people expected to return from. Medical conditions were not so much treated as managed. Death was a higher probability in all age groups. Today expectations have changed. Women and their new babies are not at high risk of death in childbirth. Children are not expected to die as a result of infectious disease. People expect to fully recover from most injuries. Increasingly we expect to survive cancer and cardiovascular attack. As medical science has improved, the risk of mortality has declined. Our focus has shifted to minimising temporary and lasting side effects of treatment. The focus is on maximising quality of post-treatment life. The speed at which medical science advances is increasing. Where surgery is necessary it is less invasive than in the past and recovery times are improving. Over time we have come to expect to survive medical treatment. If medical science is successful at its new frontiers, perhaps we will increasingly expect to be treated at home and in the community. We may come to expect diagnosis and treatment to be something that takes place as we continue to live our lives, in our homes and at work, rather than having to access them at a hospital or hospice Induced demand Through this process of development a fundamental shift in people s attitudes has taken place. People were reluctant to use services unless in dire need. They now have a strong desire to use medical services. Improvements in medical technology can sometimes lessen the cost of individual treatments as they become routine or administered by lower cost staff. Medical technology has reduced recovery times with a reduced need for nursing and hospital accommodation, and in some cases disability support. However, by expanding the bounds of what is achievable, medical advances increase our expectations as to what might be done for us when we are ill. Whilst the cost of individual treatments may improve, increased expectations induce new health service demand and overall system costs rise. For example, the cost of fertility treatment has stabilised around $12,000 per series. It was previously acceptable for the state to sponsor one series per couple, but now the state is expected to sponsor two series, thereby increasing overall costs. The desire to use services can go beyond what is strictly necessary for treatment or efficacious, greatly increasing costs. For instance, conditions may be diagnosed with relative certainty using routine tests. However, even greater certainty may be gained from additional diagnostic testing further increasing costs. Where patients don t have to pay all or part of the marginal cost of additional treatment, there can be a desire for more medical interventions than what might be strictly necessary. 1.2 Age differences Working age people and their children As medical technology currently stands, the types of health services required change markedly as people age. The time of greatest risk for children is birth, given the complications that can arise. As children move through adolescence the risk of injury and mental illness increases. But, given the relative size of the 02

9 1.0 Influences on Health Expenditure child population, child health is a low cost component of the health sector. Early adulthood is the point of highest risk for mental illness. In later adulthood, injury recovery services along with maternity services are important. The working age segment of the population is a more significant expenditure band. Having to wait for treatment or receiving low levels of treatment can cause incapacity, distress and pain. For people in the workforce or those who care for children or elderly parents, waiting for treatment also has a high opportunity cost. It is the cost of lost income, or the additional cost of having to pay for the time of others to assist with care responsibilities. Because of this, working age people are more inclined to pay for their own health services. In paying themselves they are better able to require services to be delivered on their terms. They are in a position to control the timing, method and level of treatment. Working age people predominantly pay for their own general practitioner services, and a substantial proportion of their own pharmaceutical expenses. In respect of hospital care they are more likely than not to pay for elective surgery performed. Payments are made both out of cash and through their ACC and private health insurance policies. Figure 1 Average per person spend by service type for working age people and their children 0 15 years of age years of age years of age public private Source: Health Funds Association Health Sector Model public private public private Maternity GP & Labs Pharmaceuticals Hospital Mental Disability Aged care Total $ 1,181 $460 $ 810 $ 434 $ 781 $ 1,033 Notes: Average spend per annum Trends in public funding for working age people Working age people use public maternity and mental health services. But, these are historical funding anomalies that probably won t continue into the future. Working age people are also more likely to rely on publicly provided disability services. This is a style of support that does not meet their aspirations and will likely change. Public funding of maternity services is a remnant from the times when maternity/postnatal care outcomes and costs were unpredictable. This is no longer the case. Further, family sizes are smaller and parents more demanding about the type of support they require. There are pockets of private service development, opening the opportunity for parents to pay for their own services to get the level and style of service they require. Mental health has also historically been predominantly funded by government. Mental health conditions were once untreatable and patients were institutionalised. Recent technological developments have meant that psychiatric conditions can be treated like any other illness, with drug and medical protocols. There is increased understanding of mental illness as a disease, and mental health costs are becoming more predictable. Costs are increasingly within the affordability of working age people. What is more, with earlier intervention, sufferers are likely to remain participating in the workforce, and in a position to pay for the treatment style that best suits their needs. Attitudes to non-injury disability are changing. The disabled are increasingly seeing themselves as no more than challenged. They resent the stigma they perceive to be associated with health 03

10 1.0 Influences on Health Expenditure services, when they do not believe they have a health problem. The disabled are increasingly integrated in the community. It is expected that over time assistance in meeting their challenges will be by way of income support rather than the provision of health services Elderly people The types of health services used by the elderly are very different. In older age groups there is increased prevalence of chronic disease and frailty. The higher prevalence causes more widespread and intensive service usage. Expected costs in old age are on average up to 10 times higher than they are in mid-life. In old age, the ability to earn an income is limited and equity is often locked into the house lived in. Yet, expected health service requirements and associated costs peak at this time. The cost of care is beyond the reach of most. For the elderly, payment for health services is predominantly through taxpayer funded provision of services. Figure 2 Average per person spend by service type for elderly people Maternity GP & Labs Pharmaceuticals Hospital Mental Disability Aged care Total public Source: Health Funds Association Health Sector Model 665 1,100 4, ,332 $ 8, years of age private Notes: Average spend per annum It is a testament to the compassion of working age people, and their willingness to care for the older members of the community, that they fund public health service provision to such a high service level. Whilst the public provision of services may not give the elderly complete control over the timing and level of service they receive, the opportunity 1, $ 2,309 cost of their time differs from that of the working age population. 1.3 The ageing population A larger, older population The population mix is changing so that a greater proportion of the population will be in older age groups, where average annual health service costs are much higher. From a historical perspective family sizes through the Depression and then World War II were relatively small. Family sizes immediately after World War II were considerably larger and haven t been as high since. The bulge in population that resulted is known as the baby boom generation. As the baby boom generation ages so too does the overall population mix. Over the long term the older segment of the population is expected to increase both as a result of the ageing of the baby boom generation and as a result of increased life expectancy. In 1971, 8.5 percent of the population was over 65. It is now 12 percent and is forecast to be 25 percent in Figure 3 Total number of people 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Source: Statistics New Zealand Population projections assuming medium fertility and mortality, long-term annual net migration of 5,000 people 0 15 years of age years of age years of age 66+ years of age Immigration may do little to change these projections, as the immigration age profile has historically been similar to the age profile of the pre-existing population. For immigration to have a counter-balancing effect 04

11 1.0 Influences on Health Expenditure we would need to restrict immigrants to younger age groups. Such restrictions can be difficult given that it is not unreasonable for immigrants to want their parents and older family members to immigrate with them Trying to predict the effects of technology on future health spending At the current time, the focus of investment in medical science is on curing chronic disease and management of disability associated with frailty. Both areas of development are likely to significantly impact on costs for older age groups. The exact nature of any future changes is difficult to predict. New technologies may allow increased preventative care, displacing the need for some curative treatments. New technologies may increase intervention in order that the risk of disability is reduced, displacing the need for some disability support services. Discoveries in these areas will potentially improve the cost of individual treatment and support. However, it is also probable that expectations will increase and we will come to treat previously untreatable conditions, so that total costs will rise. Uncertainty as to the effects of technological change on the costs of care in old age makes it difficult for working age people to know how much to save for future healthcare needs. The wide variance in possible outcomes makes it difficult for actuaries to devise suitable pre-funding insurance policies. The difficulties working age individuals and insurers face can be complicated by health inflation. As discussed later, health inflation is currently greater than general inflation. In such circumstances it is difficult to find a rate of return on invested funds high enough to hold the purchasing value of money put aside for future health needs. The value of savings for health services can be quickly eroded. It is likely therefore that the elderly will continue to be dependant on public funding Trying to predict the effects of life expectancy on future health spending A proportionally greater number of elderly as a result of the ageing of the baby boom generation will increase overall health system costs. This is unavoidable given the high average annual cost differential between working age and elderly age groups. At the same time the elderly will live longer. There is great debate as to what increased life expectancy means for health costs. Some say that health service use will continue to be the highest in the final years of life. It is conceivable that the elderly population may live for longer periods in good health through better diet and exercise, and not necessarily require health services. If this is to be the case, the age at which people become more expensive users of health services is simply delayed. Another point of view is that increased life expectancy will be because of increased use of health services throughout old age. If this is the case system costs will be higher. But it may also be conceivable that people will work to a later age than they currently do. Higher incomes in older age may mean that, as with the current working age groups, the young elderly will be better placed to pay for their own services Risk of changes to voluntary care A significant risk that could add to the technological and demographic pressures on the cost to taxpayers of supporting the elderly, is a reduction in the availability of voluntary nursing. Voluntary nursing by family and friends for all age groups (valued at an average nursing wage) is in the region of $9 billion. If through changing marital and family patterns there was an increased tendency for the elderly to live alone away from or estranged from their children, voluntary care may be less likely. Small reductions in voluntary care needing to be replaced with paid care, would have significant health expenditure implications. 05

12 2.0 Past Funding Projections 2.1 The drive for productivity Funding increased spending Anticipating and preparing for technological change is difficult given the wide range of possible directions and outcomes. Likely trends are more effective medical treatment and increasing emphasis on convenience. While individual treatments may become more economic, induced demand will increase overall system costs. Preparing for demographic change is somewhat more straightforward. With reasonably stable birth and death rates and trends in immigration, the future population can be predicted with reasonable certainty. There will be relatively more people in older, higher cost age brackets where there is greater reliance on public health funding. As the population ages over time, some areas of government expenditure, such as early childhood and compulsory education, might be expected to decrease. However, forecast reductions in education expenditure are reasonably minor against likely increases in health expenditure and superannuation, driven by population ageing. Productivity improvement is one of the most appealing means of funding increased public service requirements. By this means, increased demand is met by improved efficiency obviating the need for additional funding through reductions in other government programmes or increased taxes. During the 1990s there was considerable emphasis on productivity improvement as a means of holding the sustainability of public health care into the future. The three most notable elements of this programme were centralised pharmaceutical purchasing, increased hospital efficiency, and a move to ageing in place for the elderly. Pharmaceuticals, hospitals and aged care are all key services for the elderly. With increased productivity in these areas, increased demand is more affordable within existing funding Substantial productivity improvements are possible Pharmaceutical purchasing: Pharmac was formed as a centralised bargaining agent for public pharmaceutical purchasing. Competitive purchasing tenders, at a time when a number of key pharmaceuticals were coming off patent, has enabled Pharmac to bring unit costs down over time. Public pharmaceutical funding is estimated to be around half of what it would have been for the same items as a result of Pharmac s actions. While a much narrower range of drugs is now available, each taxpayer dollar spent on pharmaceuticals buys more. New, more effective pharmaceutical technologies, on patent, are more expensive. Inevitably, pressure will mount for them to be included on the Pharmac schedule. But, over time, they will also go off patent and become subject to competition from other manufacturers. Again, Pharmac can make use of this competition to keep costs down. Figure 4 Actual and estimated Pharmac expenditure $ million Source: Ministry of Health Actual expenditure with Pharmac intervention Estimated expenditure without Pharmac intervention Hospital medical and surgical discharges: In the 1990s there was emphasis on the full documentation of hospital procedures using case weights, where all possible procedures were rated according to their relative complexity. Hospital policy focused on increasing case-weighted throughput at the same time as setting strict requirements for the elimination

13 2.0 Past Funding Projections of deficits. Some of the practical responses to these policies that drove productivity increase, were a reduction in average length of hospital stay, increased use of day surgery, and giving specialists the opportunity to meet wage aspirations through parttime private consultancy. Hospital productivity in the period from 1993 to 1998 grew at the rate of 2.5 to 3.0 percent per annum, at a time when productivity in other segments of the economy was growing at a rate of only 1.0 to 1.5 percent. As a result each additional taxpayer dollar spent in hospitals bought more surgical operations and medical procedures. Figure 5 Medical/Surgical discharges Total discharges in 000 s Source: Ministry of Health Raw medical discharges Case weight adjusted medical discharges Raw surgical discharges Case weight adjusted surgical discharges Aged care: An area expected to grow most rapidly with an ageing population was aged care in rest homes and hospitals. Subsidy costs are high given intensive nursing support over sustained periods of time. More emphasis was placed on home based support for the elderly, encouraging existing voluntary care, and avoiding capital costs. Subsidy levels for rest home and hospital care were held down. Priority was given to only severe cases of disability. The end result has been less rest home subsidy payments and more high need hospital beds, with increasing availability of home support services. The change in cost structure has enabled more elderly to be supported from available funds Figure 6 Aged care funding $ million Source: Ministry of Health Rest home beds Hospital beds Other aged care services Resulting public health funding projections Ministry of Health funding projections These efficiency improvements and controls were the background to expenditure projections sponsored by the Ministry of Health in the late 1990s. The projections considered prospects for public health spending as a proportion of GDP to Adjustments to public health spending due to demographic change had been in the vicinity of 0.4% at the time. Projections of this adjustment, given Statistics NZ population projections, and per capita public health costs for different age bands, suggested that the rate of ageing adjustments would climb to 1.2% in 2026 with the ageing of the baby boomers; then fall back to 0.4% as the baby boomers died. It was estimated that over the 20 year period from 1978 to 1998, real per capita health spending had grown by an average of 1.0% excluding ageing adjustments. This estimation includes a number of factors that contribute to increases in health spending, including technological developments. Finally, annual inflation was assumed to be 1.5%. The result was an average growth in health spending of 3.6% over the period to

14 2.0 Past Funding Projections Real GDP was considered to be the product of the size of the labour force and labour force productivity. Population change effects the size of the labour force and hence the size of GDP. Productivity was assumed to grow at a constant rate of 1.5% throughout the period. Real GDP was then adjusted by the assumed rate of inflation of 1.5% to give nominal GDP. With the ageing of the population the growth in GDP slowed to 2026 and then began to rise again. The result was average growth in GDP of 3.1% over the period to Given the differential between average public health and average GDP growth rates in each year, public health expenditure was projected to grow as a proportion of GDP over the period. Growth was most marked around 2026 when individual year public health growth rates were high and individual year GDP growth rates were low. Varying the real per capita health spending growth factor, excluding ageing adjustments, gave different possible outcomes for public health spending as a percentage of GDP. At the upper bound of sensitivity testing for this factor, it was expected that public health spending might grow from 6.5 per cent of GDP to 10.6 per cent of GDP in Figure 7 Percent of GDP 12 % 10 % 8 % Ministry of Health forecast of public health spending as a percentage of GDP Treasury health funding projections Concurrent with the Ministry of Health s calculations Treasury completed its own projections. They used a slightly different formulation which acted as a useful cross-check to the Ministry of Health s calculations. Health expenses were calculated separately for primary, secondary and disability care on a per person basis for different age categories. These per capita cost factors were then multiplied by Statistics NZ population projections to 2051 to give expected health spending in each year purely as a result of demographic change. The percentage increase in the annual totals gave the rates of change in public health expenditure as a result of demographic transition. The rate of demographic change was then further adjusted by expected inflation at a rate of 1.5% and a health spending growth factor. The health spending growth factor comprised labour productivity of 1.5% on the assumption that productivity would be passed back in full as wage increases and a health income elasticity of 1.0%. The productivity assumption sought to cover technological change. The income elasticity assumption sought to cover propensity to use services. When the productivity and income elasticity were multiplied together they gave a total health spending growth factor of 1.5%. Figure 8 Percent of GDP 12 % Comparison of base case Treasury projections with Ministry of Health upper bound projections of public health spending as a percentage of GDP 6 % 10 % 4 % 8 % 2 % 0.5 % real growth per annum 1.0 % real growth per annum (base case) 1.5 % real growth per annum 6 % 0 % % Source: Ministry of Health 2 % 0 % 2000 Treasury 1.5 % growth per annum multiple Ministry 1.5 % real growth per annum Source: The Treasury and Ministry of Health 08

15 2.0 Past Funding Projections Public health spending was projected using the demographic change, inflation and spending growth factors. These figures were then divided by Treasury s GDP projections. The resulting projection of public health spending as a percentage of GDP was very similar to the upper bound of the Ministry of Health s projections. 2.3 Health inflation Loss of focus on value The introduction of new DHB governance structures has coincided with a period of significant health inflation. Current levels of public health inflation are well in excess of private health inflation. Private health inflation is immediately observable as private health services are priced and form part of the Consumers Price Index measured by Statistics NZ. Public health inflation is not immediately observable because individual services are not priced. However, public health inflation can be estimated by comparing overall funding growth, excluding funding for demographic change and new initiatives, with throughput trends. It would appear that public health inflation has been running at an average rate of 8 percent over the past three years. Over the same period private health inflation has been running at an average rate of only 4 percent. Reducing these two rates by the general cost of living or Consumers Price Index rate of 2 percent, gives 6 percent for the public sector and 2 percent for the private sector. Public health inflation above the cost of living adjustment has therefore been some three times higher than private health inflation above the cost of living adjustment. DHB governance should take a balanced approach to requiring service development at the same time as achieving value for money. Increased funding through appropriation and increased deficits has meant that value for money issues, which invariably lead to prioritisation and controls, have not been faced. Figure 9 Percentage change 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % General, private health and estimated public health inflation General CPI inflation Private health CPI inflation Estimated public health inflation Source: Statistics New Zealand and Health Funds Association Health Sector Model Increased funding and deficits have been made possible through reductions in other government programmes such as defence, and increased taxation through higher marginal tax rates. Because public health inflation is running at such high levels these sacrifices are not purchasing the levels of health service that they might have. Patients are receiving less service than they might have. For the private sector high public health inflation means that in order to continue to attract resources they must follow suit. As the private sector puts up their charges to fund increased resource costs, private sector usage is at risk of reducing. Reduced private sector usage will put additional strain on public sector resources Hospital and maternity services lead in public health inflation Most of the estimated public health inflation is in relation to hospital and maternity services. Hospital funding increased from $4 billion to $4.3 billion in An increase of 7.5%. Hospital throughput in total overnight and day patient 09

16 2.0 Past Funding Projections discharges fell from 816,622 in 2002 to 809,547 in A decline of 1 per cent. Of most concern was an increase over the same period in the number of people waiting. The number of people waiting over six months for elective surgery, or on active review, increased by 11,365. An increase of 56 percent. The preliminary results for 2004 suggest further decline in hospital throughput, and further increases in people waiting for treatment, despite large increases in funding. Between 2000 and 2003 hospital employee costs increased 25%. Full gross wage information for specialists and nurses is difficult to obtain, but what information is available suggests a combination of wage growth and growth in the numbers of specialists and nurses employed. From available information it would appear that specialist base salaries have grown at modest levels. However, allowances and other salary add-ons have increased significantly making overall salary growth substantial. Some people have suggested that specialist wage growth has been necessary to keep specialists in New Zealand, but this proposition is unsupported by specialist numbers. Over the past eight years specialist numbers have grown every year, and most rapidly over the time when hospital employee expense growth was at its lowest. Again, from available information, it would appear that nursing levels relative to DHB hospital throughput are increasing. While total overnight and day patient discharges fell from 816,622 in 2002 to 809,547 in 2003, the ratio of nursing staff to throughput increased by 4 percent. In addition to having more nurses to throughput, nurse wage demands have become significant. On top of recent wage increases and overtime provisions, DHBs are offering nurses a 32 percent wage rise over the next three years. Given that hospital nurses make up a large proportion of total hospital, and indeed total public health expenditure, if this wage offer is honored, public health inflation is likely to rise to even higher levels. In addition to wage and employment growth, the other significant increase in hospital expenditure has been in capital expenditure over and above depreciation funding. The effect is that the government is now funding capital expenditure twice; once through funding of depreciation and again through specific capital project funding. A question that should be asked is why hospitals aren t providing for and spending from provisions for depreciation more wisely. A more fundamental question is why the Government would wish to put so much emphasis on building and maintaining hospitals when technological change is shifting the balance of services out of hospitals into the community. Figure 10 Public hospital expenditure Total revenue 2,900 3,004 3,355 3,538 3,744 3,797 4,126 Increase 4 % 12 % 5 % 6 % 1 % 9 % Employee costs 1,970 1,990 2,022 2,101 2,269 2,471 2,633 Increase 1 % 2 % 4 % 8 % 9 % 7 % Medical expenses ,033 1,111 1,191 1,220 1,320 Increase 5 % 8 % 8 % 7 % 2 % 8 % Depreciation Increase 1 % 8 % 2 % 2 % (3) % 8% Other expenses Surplus/(Deficit) (223) (196) (56) (13) (61) (287) (169) Source: Statistics New Zealand Notes: $ million and percentage change It has not just been public hospital inflation that has increased out of all proportion with private health and general inflation; maternity inflation has also been of concern. Funding per live birth has increased from $7,435 in 2001 to $9,953 in This dramatic increase of 34 percent in three years has been at a time when service delivery methods have been substantially unchanged. 10

17 2.0 Past Funding Projections Failure to derive value from additional health spending It is concerning that at a time of record public health inflation the Government has also significantly increased funding in areas that are not expected to produce population health gain. The above public health inflation estimates do not include the increased subsidies for general practitioner visits or increased mental health funding. DHBs are intending to spend an extra $418m on general practitioner services over the next three years and an extra $250m on mental health services over the next four years. General practitioner subsidies are being increased even though the price elasticity of general practitioner visits, or the degree to which people use more of them in response to lower prices, is low. Increased amounts are being spent on subsidies with no likely increase in usage of services and therefore no likely health gain. The funds spent on across the board increases in subsidies could have instead been used to fund retention of general practitioners in rural areas, or lower cost services for community cardholders. In doing so unmet need would have been more directly met and additional health gain could have been expected. Furthermore, it is tragic that over the period in which mental health spending has doubled, suicide rates have remained substantially unchanged. World Health Organisation and National Health Service best practice in mental health service delivery is drug and cognitive based therapy in the community with earliest possible intervention. Additional funding could have been used to reengineer to this style of service delivery and improve suicide rates. Instead most of it has been spent on expanding traditional hospital based approaches. Consequently, New Zealand s suicide rates are likely to remain some of the highest in the world. 11

18 3.0 Health Funding Projection Revisions and their Implications 3.1 Revised long term projections Past projections no longer hold Public health inflation is growing so fast that total appropriated public health spending is expected to be 7.1 percent of GDP in This is a level of expenditure that the Ministry of Health had not anticipated New Zealand would reach until It is a level of expenditure Treasury did not expect New Zealand to reach until What is particularly concerning is that the dramatic rise in health expenditure as a percentage of GDP has occurred at a time of high economic growth. Public health spending is appropriated three years in advance and is therefore difficult to quickly reduce in line with reduced economic conditions. If GDP had been growing at historical levels, health expenditure as a percentage of GDP would have been even higher. Current levels of public health inflation are well in excess of what was anticipated by either the Ministry of Health or Treasury when they completed their projections. At that time public health inflation was being funded at the rate of Consumers Price Index inflation and productivity gains were considerable Treasury projection update Assumptions in the Treasury approach to projection are a little more explicit than in the Ministry of Health approach. Their approach is therefore easier to update given the substantial change in health inflation. As set out earlier, the projections used average per capita costs for different age groups prevailing at the time, and assumed that health inflation would be the same as general inflation at 1.5%. The resulting projection was a rise in public health spending as a proportion of GDP to 10.8% in the year The Treasury projections can be updated for changes in the per capita cost factors for each age group, higher public health inflation, and the latest Treasury GDP forecasts. Updating the Treasury assumptions (I) Public Health Inflation: rates are estimated using the Health Funds Association Health Sector Model. Given that public output is not priced, estimates rely on funding/volume comparisons for each service type. Private health inflation rates are as published by Statistics New Zealand as part of their Consumers Price Index. (II) Per Capita Cost Factors: new initiative spending and service development since the original Ministry of Health and Treasury projections, have altered the age distribution of public funding. Notable influences include increased mental health funding which affects younger age groups and reallocation of aged care funding which affects older age groups. New cost weights are estimated in the Health Funds Association Health Sector Model based on Ministry of Health funding analysis by service type for the 2002 financial year. (III) Treasury Long Run GDP Forecasts: have been significantly revised from the time of the original Treasury health projections to take into account recent GDP growth. The most recent GDP forecasts are used in the Health Funds Association Health Sector Model. The original Treasury health projections and Health Funds Association Health Sector Model projection comparison is therefore influenced by both revised health spending and GDP projections. Updating the projections to include revised per capita cost factors for those existing as at 2002, revised GDP forecasts, and most particulary increasing the health inflation rate from 1.5 percent to the rate of 8 percent experienced over the past three years, results in public health spending climbing to a level that well and truly exceeds what is feasible. The 1) Total appropriated public health spending for 2004 is estimated to be $9.429 billion which includes operating costs of $8.474 billion and capital costs of $0.955 billion. The Health Funds Association Health Sector Model calculations that follow amortise capital appropriation. 12

19 3.0 Health Funding Projection Revisions and their Implications compounding effect of high public health inflation becomes such a significant impact on health expenditure that it overtakes technological and demographic change as influences on expenditure. Because GDP is inflating at a much lower level the ratio of public health spending to GDP begins to grow exponentially to an amount in excess of 63% of GDP in the year This is of course inaffordable. Updating the per capita cost factors for those existing as at 2002, revising the GDP forecasts, and increasing the health inflation rate from 1.5 percent to the rate of only 4 percent experienced in the private health sector over the past three years, keeps the projections at levels more closely aligned to those previously anticipated by The Ministry of Health and Treasury. Up-dated forecast of public health spending Figure 11 as a percentage of GDP Percent of GDP 70 % 60 % 50 % 40 % 30 % 20 % 10 % 0 % Previous Treasury projection Adjusted for GDP, cost factors, and current public health inflation average Adjusted for GDP, cost factors, and current private health inflation average 2010 Source: Health Funds Association Health Sector Model Like any projections these updates contain a margin of error and give an indication of the possible growth path, not a definitive prediction of what the actual path will be. What is clear from the projections however, is that public health inflation cannot continue to grow at levels greatly exceeding general price inflation across the rest of the economy. If public health inflation continues to grow at rates well in excess of general inflation, public health spending will quickly become unsustainable given the available tax base. The differences in projections from using public and private health inflation rates, suggest that the public sector can learn from the private sector in controlling inflation in order to maintain sustainability. There is likely to be benefit in collaboration across the sectors. 3.2 Improving value Limits to available tax revenue The tax base is a fragile thing and there is only so much burden it can stand. Of the $20 billion currently collected in personal income tax $8 billion or 42 percent is used to pay for health services. Most of this burden is carried by a small number of higher income earners. Higher income earners on a per person basis pay considerably more for health than they could ever be expected to use themselves. Because health spending is such a significant portion of the overall government budget, rapid growth in health spending has a significant impact on tax rates. As an illustration, suppose health funding increased 25 percent by increasing the top marginal personal income tax rate. The additional funding requirement would increase the top marginal rate from 39 cents per dollar earned to a rate in the region of 57 cents per dollar earned. The exact increase is difficult to predict because there is a point at which increased tax becomes a disincentive to engage in the taxable activity, and increased tax rates potentially produce less revenue. An increase to 57 cents would put tax rates for our top 308,000 income earners out of line with what they would face if working in Australia. These people are generally the most highly skilled and mobile element of the New Zealand work force. A significant migration to Australia and other more tax competitive countries that are still reasonably close to home could be expected. 13

20 3.0 Health Funding Projection Revisions and their Implications Figure 12 Personal income tax collection by total income bracket Individual Number of people Percentage of Tax paid Percentage of taxable income work force ($ million) tax paid Implied average per person tax contribution to health funding ($) 0 176,000 6 % 0 0 % 1 9, , % % ,000 19, , % 2, % 2,454 20,000 29, , % 1,610 8 % 4,613 30,000 39, , % 2, % 6,840 40,000 49, ,000 8 % 2, % 9,627 50,000 59, ,000 5 % 1,770 9 % 12,920 60,000 69, ,000 3 % 1,710 8 % 16,602 70,000 99, ,000 4 % 2, % 22, , ,000 3 % 4, % 62,179 Source: The Treasury The same kind of simple analysis could be made in relation to other taxes. For instance, suppose a 25 percent increase in health spending was instead funded through the GST system. The additional funding requirement would increase the GST rate from 12.5 percent to something in the region of 17 percent. Unlike personal income tax, GST is a regressive tax and the people most affected by an increase in GST rates are low income earners. Low income earners spend a greater proportion of their income on consumption items, and therefore end up proportionally worse off as a result of the GST increase than high income earners Developing a voice of concern When new funding for hospitals simply goes on increased wages and new buildings, not additional medical and surgical procedures, with waiting lists only increasing; there needs to be a voice of concern for value for money. When DHBs intend spending large additional sums on general practitioner services and mental health services without expecting to show resulting health gain; there needs to be a voice of concern for value for money. DHBs cannot be expected to develop a voice of concern on their own. DHB politicians won t win votes for suggesting moderation. Most DHB users are elderly, they pay less in tax than the services they use, therefore moderation is unlikely to improve their overall status. Appointed technical directors on DHB boards have only minority representation so are not well placed to do much more than speak to their area of expertise. Funding managers are more likely to have an easier time of fulfilling their roles when the funding pool is increasing rather than decreasing. Doctors and nurses may be seen to have a conflict of interest between any public preference for value and any private interest in income growth. Whereas the DHBs natural inclination is to concern themselves with service design, shaping the workforce, and looking at better ways of meeting their communities needs; private providers and health insurer s natural inclination is to seek value for money. This difference is borne from relationships between DHBs and constituents being a political one, whereas the relationship between private providers and insurers and ultimate payers is a contractual and financial one. The two sectors need not be mutually exclusive but could instead work together to ensure that as services develop to better meet the circumstances of patients, they also develop in a way to achieve better value for money for payers. 14