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- Introduction
- The Development of New Zealand’s Health System
- Drivers for the Current Health System
- The Picture Today
- Structural Barriers to Integration
- The Role of the Provider
- What of the Future?
Introduction
The New Zealand health system has evolved during the past 50 years into a mixed public/private system. This paper briefly outlines the history of that health system and raises some issues about the effectiveness of the system in today’s environment. Looking forward, it promotes integration of both funding and service delivery into a framework(s) which encourages both state and private insurers to work together to promote improvements in the health status of New Zealanders, and in ways which empower consumers to be active participants in decision-making processes.
The Development of New Zealand’s Health System
Pre- and post- World War II governments created the welfare state system in the face of widespread disillusion with the free market. Depression and war reinforced the view, especially in a fledgling, low population, economically fragile nation such as New Zealand, that the State must provide for all, as opposed to a well-defined group of the needy.
The key factor in the development of New Zealand’s health system has been the determination of the medical profession to retain their independence and their rights to earn a fair fee for service over and above the stipend from the State. In the secondary care sector this meant the right to spend approximately two-tenths of their time in private practice (without which, public sector secondary care would have struggled, particularly in rural areas, to retain quality specialists). In the primary care sector this meant the right to charge over and above the statutory rate (GMS or general medical services in today’s parlance).
Various efforts to curb the independence of doctors and extend government funded and provided health care met with resistance from the profession, and ultimately from New Zealand’s consumers, as they exercised their preference for choice by supporting the country’s first dedicated medical insurance scheme set up by Southern Cross in the 1960s (initially, it must be acknowledged, a doctor-driven initiative). The idea that New Zealanders could exercise freedom of choice (about date, doctor, hospital) around a specific set of benefits (mainly elective surgery) and top-ups (primary care and then accident compensation) for a modest premium was ultimately embraced by one-half of the population. Thus, the “gap†medical insurance industry was firmly established. The key features were plan design, a co-payment and reference to a schedule of fees that represented the market in terms of what was being charged in the private sector. A high, middle and low range was presented to recognise that some practitioners did differentiate their fees from those of their colleagues. The schedule represented the benchmark against which the co-payment was calculated (typically 20% of the cost to be borne by the insured member).
Drivers for the Current Health System
This dual system, in which between 80 and 90% of the total health care spend was channeled via taxation and the balance through insurance (either self-insurance, ie, paying out of one’s own pocket, or by purchasing health insurance), worked effectively until the late 1980s, when a combination of factors contributed in tandem to a decade of turmoil and confusion, and lead to the present situation.
Briefly, what were those factors?
- Health reforms – the re-engineering of New Zealand’s economy that began in 1984 did not exclude health. The major features of the reform were a signal to New Zealanders that health care costs would rise and that cross-subsidies existed and must be recognised (introduction of user part-charges on a targeted basis). Private insurers followed suit, and community rating in its purest sense disappeared. Other major features included the purchaser/provider split, with purchasers charged with finding out what was actually occurring in the health sector in terms of quantity of output, price and cost, and, as a result, accelerating learning about how to more effectively determine health needs and priorities. This was to be achieved by introducing business principles of fiscal prudence and accountability. On the provider side, hospitals were reconstituted as companies required to make a profit. Finally the Core Services committee was asked to be explicit about what the Government’s package would not provide – in other words, the government was intent on revealing the true nature of the national health plan in insurance terms.
- Reform fatigue and resistance – a general feeling of fatigue because of too much change, mixed with ideological and sentimental attitudes towards the retention of a “special†exemption for a “special†area, ie, health is “different†and the market model will not work. All of this meant that the intent of the health reforms could only be imperfectly and incompletely introduced.
- Ageing population – this was an increasingly vocal and out-of-pocket group in terms of their own expectations of what they had paid their taxes for.
- New technology – the hospital became less relevant, but was still seen by communities as a symbol of security.
- Old technology – the hospitals aged and were not maintained.
- Better information – this highlighted inequities in funding by geography, ethnicity and service area, underpinned by belated attention to addressing the poor state of Maori health.
- Shifts in funding – the major impact of all these factors was less public money for elective surgery and more people turning to their insurance policies as a necessity and no longer an option.
- Less elective surgery and new technology in the public sector – this lead to more doctors taking advantage of a growing private sector and changing their “tenths ratio†(in many cases abandoning the public sector altogether).
- Competition in health insurance – how did one compete against Southern Cross? By removing the risk management constraints which characterised the historical Southern Cross approach, ie, remove the co-payment, remove the schedule, pay for everything. Amongst other factors, the advent of products which offered comprehensive benefits without limits, and extended maximum reimbursement levels well beyond what was necessary, exposed the health insurance industry’s inability to control costs. Many smaller players struggled to survive, and had no other tool at their disposal other than to raise prices. Passive funding was clearly a dying practice (this is not simply a dig at competitors of Southern Cross; indeed, Southern Cross fully participated in this frenzy of self-destruction).
- Adverse selection – as elective surgery shifted into the private sector, utilisation put further pressure on insurance premiums, which rose and rose, and the young and healthy lost touch with the value proposition (what value is there in retaining insurance if it is not being used and premiums keep going up?). Health-insured numbers plummeted. The less healthy, older members remained. Now just one third of New Zealanders perceive they need, or can afford, health insurance.
- Ageing population – this was an increasingly vocal and out-of-pocket group in terms of their own expectations of what they had paid their taxes for.
The Picture Today
So, what do we see today?
Today the system, as a direct consequence of the turmoil of the past 10 years, is fortunately more transparent. But with that transparency comes a clearer view of its faults, its weaknesses and its dishonesty (from a consumer point of view).
The dual (or two-tiered) system still sees the government playing the major role in funding and provision (77% of funding, 43% of provision) and indemnity insurers struggling to fill an increasingly complex gap. The definition of a core of Government funded services has failed to emerge. Thus, an opportunity to educate and empower New Zealanders to understand the role of insurance in managing health risk (ie, the public system is an insurance plan) and to value their own health risk has been missed.
Essentially the government acts as New Zealand’s Health Maintenance Organisation, in which all New Zealanders are compulsorily enrolled by virtue of a premium extracted in relatively arbitrary fashion (how much can we afford?) from the general taxation pool. Risk is managed in this environment at a very high level – the main tool at the government’s disposal being lack of specificity about entitlements (if you don’t know what the service is supposed to provide you don’t know what to expect or whether or not to be satisfied). Although this is a touch cynical, and unfairly dismissive of government’s recent efforts to be more explicit (ring fencing, service coverage document, booking system, publication of contract details, etc) it is still the case from a consumer perspective.
Divorced from a clear understanding of the premiums, divorced from the obligation/opportunity to contract, divorced from a clear understanding of what constitutes quality, New Zealand consumers of health care cannot develop anywhere near the level of discriminatory capability which is evident, for example, in the purchase of groceries, or the purchase of a car. Conversely, the decision-makers who administer the premiums, purchase the care, set the priorities and manage the resulting transactions, do not deal directly with the consumer.
These may be traditional arguments, and there is a traditional response about the “difference†in health, eg, the inappropriateness of market economics, the need for cross subsidy and, hence, the advantage of transacting transfer payment activities remote from the market. But if one accepts merit in both arguments (the art of compromise, or, more positively, synthesis) then how does one improve the system?
Before answering that, let us go back to the two tiers. If one accepts that the government is the HMO, and risk management is more of an implicit political process than an explicit effort to improve health status based on a defined set of benefits or entitlements, how do private insurers cope? With difficulty. The market in which private insurers operate is extremely volatile in that the “gap†is both amorphous and constantly changing. As a result, health insurance policies have become more explicit, but also more complex, focussing more on what is not in the gap that what is (increasingly, difficult to understand and therefore purchase).
Extend the picture to include the Accident Rehabilitation and Compensation Insurance Corporation (ACC), which is about to be further fragmented, and contemplate that every New Zealander has three or four insurers looking after their health risk (Government, ACC, private medical insurers, and themselves through self- funded care). “Who is responsible for what part of my body and when?†is the plea from the disempowered consumer. Other questions might be “what do I get for my taxes?†and/or “who coordinates this system and can help me navigate through it?â€.
And what of the gap? No one really knows what is in the gap in New Zealand. It is not as easy to measure as it is in the US, where approximately 15% of the population is without insurance at any one time. Nor is the gap as simple to describe as it is in the US, in terms of whether cover exists or not. The “gap†is a combination of insufficient service, insufficient money, inefficient delivery and variations by geography, ethnicity and service. But, more importantly, the gap reflects culture, expectations and uncertainty as to whether access (or “coverâ€, in insurance terms) exists when it is needed.
Dealing with culture and expectations may only be a generational issue, as New Zealanders come to realise that they can’t have lower taxes and, at the same time, a heavily funded public sector engaged in insuring, purchasing and provision of health care. Even if that is disputable (the contra-argument being that people are prepared to pay more tax for health), history has shown that, no matter what the taxation levels, demand in a service where consumers are divorced from the consequences of their consumption will always outstrip resources. That logic notwithstanding, a large proportion of our population still believes that, in return for paying its taxes, the Government should, and should be able to, provide for its citizens a fully comprehensive service despite the fact that both of the major political parties acknowledge that rationing in today’s world is inevitable.
The final, and perhaps most insidious, feature of the gap is the lack of certainty which characterises New Zealanders’ view of their health system – rather ironic, when the same health system generally serves them well in an emergency or acute situation. Most New Zealanders do not know whether they are covered or not until access is required, granted or denied. Consequently, they do not know enough about their own risk to determine rationally whether they need indemnity cover (when all the anecdotal evidence would indicate that they do).
The picture which emerges is one of a health system which disempowers consumers, in an overall climate of uncertainty exacerbated by generational change, and a fragmented, multiple insurance (funding) environment where lack of specificity about each insurer’s responsibilities creates a risk avoidance mentality as opposed to one of risk management. Managing health risk has thus become a matter of struggling to avoid risk being shifted from one pool to another.
Is that all? No, not yet. We need to look also at providers, and structural barriers to integration.
Structural Barriers to Integration
Before considering structural barriers to integration, one must expand the case for integration, again taking the consumer’s perspective. In other sectors, commercial enterprises compete to make it easier for consumers to make choices and to make decisions about their consumption of goods and services. One way to attract consumers is to bundle services into simple products which conceal the complexity of activities and processes making up the service. Other consumers prefer to pick and choose from unbundled componentry. Whatever the preference, providers of goods and services must know (or know about) everything which goes into the process of producing the good or service, or, in modern terms, understand the value chain.
Health care, by comparison, is still a cottage industry with providers operating largely in isolation of each other, even though a patient may access multiple providers in the journey along the value chain. In this environment it is hard for consumers to get a sense of how well their health system is performing. Integration of care is much talked about, and a lot is being done, but unfortunately in a rather piecemeal and fragmented way. What makes sense in every other sector of commercial activity doesn’t seem obvious to the players in health care.
Why is this?
One major barrier to integration has been touched upon – fragmented funding streams pursuing a fragmented view of the health risk of an individual or population. The second major barrier arises out of the way the dual system has developed, with cross subsidies or distortions blurring a true view of pricing, cost and efficiency.
The two major distortions are, first, the fact that private sector secondary care has not developed the capacity or infrastructure capabilities of the public sector with respect to acute and tertiary care. Arguably the private sector has cherry-picked elective surgery from the public sector (although it is not as simple as that). Secondly, and conversely, the private sector has subsidised the public sector in terms of specialist remuneration. Both these distortions arise out the historical context referred to earlier. Both are being addressed in incremental fashion as private capital flows into the health sector and the private sector tackles acute or semi-acute cases. Equally, remuneration levels in the public sector have grown significantly over recent years (looking at total remuneration), whilst specialist fees for service in private have been static, if not declining, in real terms. Nevertheless, New Zealand is far from having a uniform view of the health system from which a more transparent view of cost and price could emerge.
The third major barrier to integration is lack of information – a uniform set of data from which the needs of the population can be derived, the “risk†of health status priced and improvements and declines in status clearly measured. It is impossible to measure and price risk in this environment as each insurer and provider jealously guards their own data, which of course reflects their particular view of the system. It is not simply a matter of finding a way to aggregate what each one has in their own database. The reason for this is because no one has a reason or right to view the total health status of the population. Therefore, no one is collecting even the components of the data necessary to aggregate to the whole, although some Independent Practitioners Associations (IPAs) have been getting quite close.
The final barrier is culture. Health professionals are, by and large, averse to change, and who would blame them after the relatively brutal way the reforms were implemented in the early to mid nineties. Cultural change in an organisation is the most difficult area to address in any transformation or re-engineering. The health sector has not succeeded in engaging people in the need for change (although the past three years have seen quantum leaps forward, particularly in rural areas and with both urban and iwi Maori).
The Role of the Provider
The final part of this historical and current analysis turns to the health professionals and doctors, who, in spite of the cottage-industry nature of the health sector, despite the barriers to change and integration, despite all the media horror stories, still provide outcomes which are very good by international standards, particularly for a relatively poor country that spends a low percentage of its GDP on health. And it must be remembered that doctors have traditionally been the best (albeit, at times, the only) advocates for consumers, especially the sick ones. Quality in the New Zealand system is perceived by most observers and participants to be above average, and arguably excellent; but is it really measured? And surely it could always be improved? The single most important way to make it better is to encourage reduction in the variation in medical practice. Dr. David Lawrence, the CEO of Kaiser Foundation Health Plans, reckons that for every dollar that can be saved from re-engineering non-clinical processes in their system, $3 can be saved by reducing unnecessary variations in practice.
What of the Future?
Before turning to the future, let me assure the reader that the above observations are neither portents of a pessimistic view nor the protestations of a struggling indemnity insurer crying foul at everyone else. On the contrary, this is a very upbeat and optimistic writer, keen to work with the entire health sector to make the health care system better for providers and consumers alike. However, the issues must be understood and interpreted before the future can drive the present.
What could the future look like? A few basic principles must be established first of all:
- Risk should be assessed for the total population using common data aggregated from all providers and all insurers. This risk model, one for all New Zealand, should be based on what is wrong with people as opposed to what was done to them (ie, based on epidemiology rather than on historical interventions). The Health Funding Authority has begun to move in this direction.
- Risk selection should be discarded by insurers as a means of managing risk. Managing the risk by coordinating and integrating health care (anything but the “manage†word again!) is a much more noble task. For this to happen the pricing must be robust, ie based on the new approach outlined above and risk adjusted where appropriate (it does not apply to today’s indemnity environment where the ability to price for risk in an unfettered way is essential to the survival of the industry).
NB: These two principles are fundamental to New Zealanders accepting the best of what the US health system has to offer by eliminating the worst – huge, costly information systems infrastructures built around the competitive nature of information and the use of those systems to cream-skim.
- New Zealanders must have freedom of choice and access to alternative systems of health care (this implies layers of choice above a standardised minimum as well as satisfying competition laws). A balanced (knowledge-based) three-way dynamic between funder (insurer), provider and consumer.
- Integration between public and private sectors is encouraged (better market data about pricing and costing).
- Integration between providers is underpinned by a clear set of rules and principles related to data and data aggregation (the privacy thing).
- Regulation must emerge to combat public fears about risk selection and exclusion. Regulation dealing with risk adjustment, information, contract, consultation and corporate structure/governance will be necessary but only in a total risk management or budget-holding environment (one must not attempt to resolve these issues by regulating the private or indemnity sector only; consider the difficult situation this has created in Australia).
Secondly, a few pragmatic observations (remember the synthesis argument made way, way back?):
- Government should retain the role of major funder of health care and continue to be involved in certain provision (limited to secondary/tertiary/quaternary with variations in terms of the extent of ownership of provision and the extent of risk management and/or delegation). This deals with the cross-subsidy issue, at least in the short term (because the taxation system is a cross-subsidising system, one step removed from consumer outrage) and allows for a minimum of regulation (as opposed to the type of environment which would be required if the government were to completely withdraw from everything but funding, which is a possibility but not in the medium term).
- Government should retain its managed care role.
- “Core†services definition will emerge over time (regardless of whether the political will exists to make the announcement).
- Delegation of risk (budget-holding) to emerging integrated care organisations (ICOs), for want of a better term, will proceed slowly.
- Information gathering takes time, which is why the government remains the best total risk holder in the short-to-medium term.
- Public acceptance of a more explicit insurance model with the involvement of private players, will take time.
- Delegation to communities will be a practical first step in terms of bringing decision-making closer to those affected by those decisions and gaining experience in working in integrated systems.
The future, therefore, will see continuous improvement in both the public insurer’s ability to measure and manage risk, and the private insurer’s ability to understand and fill (finance) the gap. Communities will be one of the catalysts for change, as local people increasingly take charge of their own health.
The government will remain the predominant funder/provider of a loosely (but gradually more explicit) defined package of services. Government-provided services will erode over time as a function of fiscal pressure and increasing delegation of management (sometimes with risk) to increasingly capable ICOs. ICOs will largely be community and/or iwi based in the short term, but national ICOs will also emerge over time. The definition (or explanation) of what the tax-funded health plan provides will become clearer as government (through its agencies) becomes more courageous about saying what will not be provided and as ICOs, by working with government agencies, educate themselves and their communities/customers as to what constitutes the core package. Layering value-added features and services to the government plan will also assist the definition/explanation process.
Private indemnity insurers will also get better at designing products and services that will delve deeper into what was once considered publicly funded territory (the private sector providers will increasingly take on acute work). The two tiers may become three as the gap loses some of its amorphous nature. There will still be squabbles at the boundaries, but these will be handled by the industry with consumers not being denied access because of a dispute over who should be the lead insurer.
An additional dynamic will be added by corporate New Zealand better understanding the value of good health and risk management; firstly, through being in greater control of accident risk and, secondly, by bundling medical and accident risk in new and innovative ways.
Consumers will become far more aware through community and corporate advocacy groups, which will force insurers in turn to be more open and user friendly.
Insurers in this environment will take on a number of roles:
- traditional indemnity “gap†cover
- bundled indemnity and other cover (eg, catastrophic cover)
- administrative services for ICOs
- risk management and risk-holding for ICOs
- transformation into ICOs, both local and national
- consumer advocates.
The questions of how long this will take, how many ICOs New Zealand needs (more than one, please) or can support (probably 15 to 20), the future role of the public sector, the capacity of health professionals and consumers alike to drive, accept and/or manage change are questions which Southern Cross Healthcare is eager to pursue answers to . . .
Welcome to the future.
