Private / Public Sector Issues in the Provision of Health Care in New Zealand

• Key Issues Faced by Providers of Public and Private Hospital Care in New Zealand
• The Future Position of Private Insurance
  • Relative Reduction in Expenditure by the Government on Vote Health, and Cost Shifting
  • Escalating Costs of Health Care Services and Technology
  • Consumer Resistance
  • Ageing Population
  • Adverse Selection and Other Issues
• The Challenge of Affordable Private Insurance Cover
• Defining the Boundary of Publicly Funded Care
• New Paradigms
• Accepting Priority Setting
• A Combination Public / Private Health Care System?
  • Advantages
  • Barriers to Progress
  • Change in Next 12 Months

Key Issues Faced by Providers of Public and Private Hospital Care in New Zealand

Greater responsibility for the financing and provision of elective surgery for non-life threatening conditions is the major challenge facing the private health sector in New Zealand. Government expenditure on health cannot keep pace with the increasing demand for health care. The drivers of demand include an ageing population, the increased availability of high-cost medical technology, increasing resistance to higher taxes to fund public sector provision, and availability of easier access to surgery for some groups.

These drivers impact significantly on the entire health sector, and thus both public and private sector providers of health care face similar key issues. In part this is because New Zealand effectively has two types of health insurer: the Government who is the public insurer, and private insurers, for example Southern Cross Healthcare and Aetna.

The Government acts as an insurer because it offers benefits in exchange for premiums which are paid as tax dollars that go into the health budget. It has been described as having the disadvantages of a "compulsory, public insurance monopoly and provision dominated by monopolistic publicly owned providers". The extent to which private expenditure could and should substitute for public expenditure on health is a core issue facing the sector, and relates to the question of the optimal role of government in this area.

A key difference between the Government’s insurance scheme and those of private insurers is that the Government does not specify exactly what benefits it offers. This means the boundary between what is publicly funded by Government and what is the domain of private insurance is unclear, in terms of who covers which benefits. Fundamentally the question is about who funds the service, because the health care itself could be carried out in either a public or private facility. The geographic location of the patient is not necessarily the determinant of who funds services for that patient, because health services are contracted by the Health Funding Authority (HFA) who may purchase them from either public or private providers. In theory, services can be contracted with any provider, public or private, but in practice this is likely to happen only in the area of elective surgery. Acute and trauma surgery has always been primarily the responsibility of the public sector. The way in which the private hospital sector has developed, and the elective nature of the work of medical specialists in their private capacity, has not supported the development of an acute capability in that sector. Economies of scale also prohibit any duplication of such high-cost care in both sectors.

The Future Position of Private Insurance

The New Zealand health insurance industry faces some real challenges in the year ahead and the way these are managed will influence the future position of insurance funded health care in New Zealand. There are also changes being made in Government policies and funding levels, the timing and extent of which are outside the control of health insurers, yet impact on and challenge them.

Five key issues the industry currently faces can be identified:

Relative Reduction in Expenditure by the Government on Vote Health, and Cost Shifting
The government’s expenditure on health has declined from 86.3% of the total amount spent on health in 1986 to 76% in 1996. In the same period, expenditure in the private health sector increased from 13.7% to 24%. Of the total spent on health (government plus private), health insurance expenditure has increased from 1.1% in 1980 to 7.7% in 1992 and then down slightly to 7.5% in 1995/6. Clearly, private health expenditure is growing faster than public expenditure, with more individuals choosing to pay extra for private health care. This illustrates the shift in costs from the public to the private sector which has been occurring in the past decade, and to the extent which this is funded through private health insurance, this must be reflected in premium increases.

This shift towards utilisation of the private sector has mainly been in the area of elective secondary care surgery (primary care has always been partly privately funded in New Zealand). This cost shift is unlikely to be reversed because the Government sees the need to fund service gaps elsewhere than surgery as a greater priority, in areas such as mental health, Maori health and children’s health.

Escalating Costs of Health Care Services and Technology
Between 1993 and 1996, the cost of general practitioner and specialist services increased more rapidly than in previous periods. Continuing advances in technology, along with the expectations of both health professionals and their patients, serve to drive costs up.

Consumer Resistance
Not surprisingly the impact of these key issues has made premiums escalate, and consequently has lead to a reduction in the health insurance coverage of the population, who have a poor perception of its value. New Zealand’s tradition of a previously comprehensive publicly funded health service has contributed to the low priority New Zealanders give to funding their own future health needs. The population’s health insurance coverage has dropped from a high of 50%, at the time the health reforms were introduced, to 38% in 1996. Socio-economic factors play their part too as do demographics (see Ageing population).

Ageing Population
Health expenditure by age group increases dramatically at the age of 65 years, and continues to increase exponentially to age 85+ years. Up to age 65 years, expenditure for each age band of 5 years is relatively similar. This increase in utilisation by those over 65 years occurs in both the public and private sectors, but it leads to consumer resistance against increased premiums from those who are privately insured. Resistance is becoming particularly noticeable in the older age groups as insurers move away from cross-subsidies between age groups when setting premiums. In other words, premiums for a particular age cohort today tend to be set to fund the actual utilisation of health services which that group enjoys, rather than funding the costs of utilisation of one age group from premiums charged to some other age group. The move away from this form of cross-subsidy between different groups has resulted from competition between insurers and their products and the need to keep all premiums as low as possible.

Adverse Selection and Other Issues
The very nature of health insurance and the model of fee-for-service health care raises issues which need active management. These include differential fees and over-servicing by health professionals and the corresponding over-utilisation by patients, and cost-shifting from public to private health providers. Exposing individuals to some of the costs of health care has the advantage of encouraging them to consider the trade-off between taking personal responsibility for their health and increased premiums.

Adverse selection is the propensity for those who need health insurance to stay insured while those who do not opt out, and the consequent increase in the pooled risk and cost of claims, which in turn forces premiums up.

The Challenge of Affordable Private Insurance Cover

The challenge faced by insurers in light of these key issues, and the continuing increase in the volume of insurance claims, is to keep annual premium costs as low as possible. The political context of the health sector is also very influential, and volatile. Yet the expectations of the population in terms of its demand for service is greater than that which the government and private insurers together can afford to offer. This raises an awareness issue and the need for public acceptance of some form of rationing or prioritisation.

A further issue is that of the definition of exactly what services the government will fund. At present, the boundary between public and private sector provision is a moving target, and costs are being shifted into the private sector to be funded by insurers or directly by patients themselves. Increasingly elective surgery is being funded in the private sector with acute and medical care being retained by the public sector. The expectation of having surgery for most conditions in a public hospital, within a reasonable waiting period, is now unrealistic.

Defining the Boundary of Publicly Funded Care

The new public hospital booking system is to be introduced by July 1998 and will be used by the Health Funding Authority and professionals to assess levels of need. Designed to provide a clinically based measurement system to be used by both funder and providers to allocate resources, it will also assist in defining in an explicit way the boundary between what will and will not be provided by the public sector. This will assist patients to make informed decisions about their options.

The booking system is based on assessment criteria which will be used to do three things. First, assess patients’ relative priority for surgery; second, ensure consistency and transparency in the provision of health services across New Zealand; and third, provide a basis for describing the kinds of patients who will or will not receive surgery under various possible levels of funding. Patients who are assessed under this system will receive a points score, which will be used to prioritise patients in need of health care, and will also determine whether or not the patient will be treated in the public sector at all. There may well be a gap between the levels of treatment that are clinically desirable and levels that are financially sustainable in terms of funding.

If a patient does not meet the points threshold to receive treatment in the public sector for their particular condition, they can chose to wait until their condition deteriorates and their (higher) score may then qualify them for publicly funded care. Alternatively, they may opt to go private and have surgery without delay, in the sure knowledge that they would not be treated in the public system with their level of points. This system will improve equity of health care across New Zealand by ensuring that treatment is provided where there are similar levels of clinical need.

However, there is a downside to this new information about the likelihood of whether (and if so, when) a patient might receive treatment in the public sector for their condition: for many patients it will come too late. By the time a patient has been diagnosed and needs treatment, unless they are already covered by insurance, their condition will be "pre-existing" and disqualify them from claiming for a period of time. In other words, by the time a patient who does not qualify for publicly funded care finds out they are sick, they will have a stand down period for that condition if they then take out a health insurance policy to cover their condition.

How effective the booking system will be in enabling more of the general public to anticipate the need for some additional insurance coverage is not clear, but it is a step in the right direction. Within the medical profession, there is much discussion on the gaps between the clinical threshold for particular conditions and the financial threshold to which treatment will be funded. While individuals will not know their points score until after they have been accepted or rejected by public providers, over time, a greater understanding should develop about the levels of clinical need which will be funded. This should enable more informed decision making about the need for individuals to purchase health insurance.

The mind set in New Zealand with regard to accepting personal responsibility for providing for one’s own health care needs may be slowly changing. However there will be many who slip between the old and the new paradigms. The old paradigm, where the public sector ultimately provided for all surgical and medical needs, remains part of the rhetoric of some political parties, but is no longer reality. There is a widening gap between our total health care requirements and the level of public spending on health. How will the gap be bridged?

New Paradigms

One new paradigm is that individuals will fund their own treatment, by either self-insuring or through insurance schemes. However, people will have difficulty accepting this because that would involve denying the rhetoric and acknowledging the reality that no government is likely to fund health care to the level of services of the past.

An alternative paradigm for the future is a health system which integrates both public and private funding into one stream, and bridges the "gap" between legitimate need and the total funds available to meet that need by managing priorities for patient care, and seeking new ways to fund this from sources other than taxation. By integrating care so that care coordination is improved and both public and private sector performance is enhanced, cost shifting between sectors would no longer be such an issue, and efficiencies would be gained to make the health dollar go further.

Accepting Priority Setting

The future shape and success of our health system will be determined by the willingness of politicians to discuss the difficulties of priority setting and to face up to its consequences. Some form of limitation of health services is inevitable, given budget limitations. Chris Ham, Director of the Health Services Management Centre, University of Birmingham, supports the need for politicians to think "about the role of private funding in support of public funding, given the difficulties of increasing public resources for health care in a climate of constraints on public spending and resistance to increased taxes."

A Combination Public / Private Health Care System?

The alternative paradigm referred to in New Paradigms above involves a combination of the funding and provision of health care across both public and private sectors. This would require the role of government to be more clearly defined, together with the extent to which private expenditure substitutes for public expenditure on health. However, there would be barriers to progress as well as advantages to such a combination, along with questions as to the optimal institutional design which would achieve its objectives.

Advantages

• A clearer definition of "who funds what" would create more opportunities for alliances between the sectors.
• A reduction in cost shifting between sectors would result.
• The improved interface between primary, secondary and tertiary care would lead to coordinated, seamless integration of care, intersectoral collaboration and efficiency gains.
• Private and public sector engagement would engender a degree of competition, incentives, innovation and information sharing.
• Achieving health gain in the population served would result, as health gain is a necessary criterion before such new initiatives will be supported by the HFA.
• Dismantling of the current publicly owned health infrastructure could begin.

Barriers to Progress

• The politically sensitive nature of health care means that some political accord about the health system would be required, to give stability, and a more open understanding about the need for priority setting. Some level of "depoliticisation" of health is a prerequisite before progress can be made towards a more integrated public/private health system.
• New Zealand is made up of many communities, and their expectations would need to be managed successfully if new project initiatives were to be successfully implemented. The public’s view of the role of the public and private providers (and funders) is not well understood.
• The HFA might act as a monopolistic public insurer, and the Crown Health Enterprises as monopoly providers, which would make it difficult for private players to enter the market in any significant way and create new alliances and ventures. On the other hand it is the private providers who may have greater freedom to create innovative relationships, but they may not be significant or strong enough players, in contrast to their public sector counterparts, to be influential and to drive progress.

Change in Next 12 Months
The following are some predictions of the direction which the health sector and its players might take over the next twelve months, given consideration of the drivers and core problems facing the industry.

• An opportunity exists which could be used to create change because New Zealand is around the middle of an election cycle. Because health is a very sensitive area, when an election is imminent, the wishes of local communities and the pace of change are given greater consideration. Indications are that, politically, a straighter and firmer course might be set on progressing public/private alliances than has been seen in the recent past.
• The HFA is more ready for change than the previous Regional Health Authorities were, and is more able to assess risks and hand over control to new alliances. The centralised function of the HFA may better manage the move to a new culture of collaboration, replacing the competitive culture which characterised the early years of the health reforms in New Zealand.
• Efficiency gains in the public sector are likely to continue to be pursued by the HFA despite the lack of market forces in the health sector, where a market has not been allowed to develop. The new population-based funding formula designed to create greater equity across New Zealand will continue to impact on remote and underpopulated areas, and put pressure on the configuration of their health services. Reconfiguration of health services in such rural areas experiencing declining population growth is likely to continue.
• Progress will be made towards integration of both public and private funding streams by way of local initiatives, but supported by government through the leadership of the HFA.
• Crown Health Enterprises will continue actively to seek to treat private patients, with a view to enhancing their revenue streams and to compete with the private sector.
• Introduction of the booking system will occur in the public sector but may be limited to a small range of procedures in the first instance.
• Integrated care initiatives such as contracting with primary care providers towards co-ordinated care provision will continue to progress.