The New Zealand Health System: Insights on the Supply-Side

What is Unique About New Zealand’s Provision of Health Services?

There is nothing unusual about a public–private mix in the provision of health services around the world. Recent OECD and New Zealand Ministry of Health data (see tables appended), show that all developed nations mix private and public provision. The actual proportion of the mix is dictated largely by the values of the people. In New Zealand there has been a gradual reduction of public provision as a proportion of total health care expenditure from 85.6% in 1988 to 76.6% in 1993. It appears that the people of New Zealand do not believe the proportion of public provision should fall below 77% of total health care expenditure, however, and since 1993 there have been only small fluctuations around the 77:23 ratio (which can therefore be considered a relatively stable equilibrium over the last seven years). Intriguingly 77% was also the OECD average in 1995, with some support for an international equilibrium as well with 83% of nations that had proportions below 77% in 1990 increasing towards it by 1995. Similarly 67% of nations with proportions above the 77% mark in 1990 had also moved back toward that mark by 1995. Given the slowness with which people’s values change and the practical difficulties in changing provider-side infrastructures, the speed of change in some countries such as New Zealand has been quite rapid. Other interesting examples of quite rapid movement in proportions between public and private between 1988 and 1997 include Sweden (89.4% to 83.3%) and the USA (40.4% to 46.7%).

While the proportions of provision of New Zealand health services have changed significantly since 1988, the total real per capita expenditure has followed a very consistent and upward trend (see trend line appended). If the 77:23 public-private mix is to be maintained in the immediate future, planning for sustainable funding and expenditure increases in both sectors can be easily predicted.

Having recognised that there is nothing unusual about New Zealand’s public-private debate, let’s move on to considering what factors do make New Zealand’s health care system unique. The first is the lack of clarity about whether the private and public providers are competitive or complementary. In the past the private sector has largely mopped up the leftovers or gaps in public provision (or in improving choices of treatment provider and treatment timing). Competitive tendering for funding between public and private providers in recent years has led to some confusion at times regarding the complementary or substitutability of the two sectors. Clearly there is considerable overlap on the provider-side between the public and private markets. As the importance of the private market in providing health services has grown, it has become increasingly important for policy-makers to be concerned with global efficiency and resource allocation of both sectors. Given that supply-side resources are being shared more frequently now than ever, as well as funding and patient flows in both directions, there seems little point maintaining the policy focus on public sector efficiency alone. Since the key outcome goal is improved health status for New Zealanders, market regulators and analysts need to consider the health service market as a whole; public and private.

The second feature that makes New Zealand’s health system unique relates to our history. The public-private interface has always been most noticeable in the markets for doctors’ services. In the early days of our public hospital evolution, hospital doctors were unpaid and were expected to maintain private practices in primary care. In 1938, as a free public health service became a critical feature of the advent of New Zealand’s welfare state, public hospital doctors were paid an honorarium for the first time. To make a sustainable living however, such doctors were still expected to earn the majority of their income in the private sector. While New Zealand’s health service very much mirrored that of the British 60 years ago, it seems remarkable that the critical feature of doctors working across both public and private sectors has continued to this day. [NB: In the UK doctors working in general practice became salaried employees of the NHS, and salaried hospital doctors were employed full-time in the NHS and restricted to one-tenth private practice].

It is the unique feature of hospital doctors or specialists working across both public and private sectors (often 0.5 FTE in each), which has led to the most unusual structural interface between the two sectors in New Zealand. In most countries hospital specialists are either full-time private sector or full-time public sector (eg, in the USA most are private and in the UK most are NHS). Other countries generally do not have specialists working half-time in each, and certainly not as the norm. If the private and public hospital sectors were completely separate markets, I would foresee no real difficulties with specialists working in both simultaneously (as I do myself as an economist). It is clear in New Zealand however that there is a significant overlap in the area of non-acute or elective hospital services. The provider-side quality and quantity of services in one sector impacts on the demand for the other. In this area of service provision (eg, elective surgery), the sectors provide largely the same output. Specialists who control both patients and resource utilisation may have vested interests (ie, perverse incentives) in achieving efficiency objectives across either sector, particularly if there exist remuneration differentials between sectors.

In early 1999 I completed an analysis of the hospital specialists market in New Zealand, commissioned privately by Southern Cross Healthcare (full report available from Southern Cross).

The first objective of the analysis was to establish whether there in fact existed a remuneration differential and if so what its magnitude was (I point out the commonly held view that specialists earn more in private practice than through public hospital salaries). Four methods were used to establish private sector remuneration rates, both as an hourly rate and as a FTE income level. The first method used Southern Cross’s own database of members’ claims, which allowed analysis of individual specialist’s private earnings from Southern Cross members as a basis for estimating FTE private sector annual practice incomes. Average practice costs were estimated with the assistance of a medical referee, enabling an estimate of an average private sector FTE income by specialty and location. The second method involved using Southern Cross’s private hospital database to establish the theatre contact time per treatment, with an assumption that the length of operating time reflected the full treatment package time. The Southern Cross schedule of fees was then used to estimate hourly remuneration by specialty.

The third method estimated hourly private sector remuneration rates by using Ministry of Health data on private sector expenditures on specialist services and averaging these across private sector hours worked as estimated by the New Zealand Medical Council’s workforce survey. While this is a crude method and relies on specialists’ own survey responses of actual hours worked in each sector, it is the only information available on actual FTE specialist numbers and proportion of hours worked in each sector.

The fourth method was qualitative and the simplest. It relied on several specialists simply estimating what they earned per hour in each sector. While the numbers were small and the survey unscientific, the results were similar to the earlier quantitative methods described above (NB: qualitative results were not included in the report due small number shortcomings and agreed confidentiality).

While the methods used suggested a wide range and variation of private sector time inputs and hourly and annual remuneration levels, they were consistently higher than public sector rates (as provided by public hospitals, universities and the Association of Salaried Medical Specialists). As a result I was able to compare a range of private and public sector remuneration rates as $100–$200 per hour in the private sector (net of private practice costs) to $50–$75 per hour in the public sector. Similarly FTE (40 hrs/week) public sector incomes rarely exceeded $200,000 per annum, while similarly full-time equivalent (40 hrs/week) private sector incomes were often found to be above $400,000 per annum (note that the majority of specialists do not work full-time in either sector). Once it was confirmed that there did exist evidence of a substantial gap between public and private sector remuneration, I surveyed three possible models to explain why and how such a gap could continue to exist in New Zealand’s specialist services market. A cross-subsidies model assumes that specialists accept below market remuneration rates in the public sector because they are able to supplement their earnings with above market rates in the private sector. A price discrimination model suggests that specialists are able to separate their market by ability to pay, charging higher hourly fees to high income (or insured) patients by treating them privately. A target income model suggests that specialists utilise monopoly powers across the private-public interface to achieve a predetermined target income. All three models can only exist in an anti-competitive environment, and each creates significant allocative efficiency losses as a result.

It is likely that no one model can explain fully why the specialists market has continued to display a gap in remunerations. I suspect that the truth lies in a combination of all three, although I am least convinced by the target income model. It has an inherent weakness in that it does not explain fully why specialists in areas where there is no private sector continue to work in New Zealand at public remuneration rates (eg, oncology, etc). It is also likely that one of the over-riding causes of the market failure is the lack of information and knowledge of prices and quality within the market. The market is unable to enforce the law of one price due to an information asymmetry and a lack of incentives on the demand-side. Consumers have reduced power due to third party payers (moral hazard problem) in both the public and private sectors. In the public sector the patient suffers by loss of choice of specialist and timing of treatment. In the private sector the patient rarely has an incentive to shop around since price is heavily subsidised by insurance. It is difficult to shop around on quality differences because of information shortcomings on treatment experience and result measures.