Population-based funding and primary health care in New Zealand: What changes can we expect?

• Abstract
• Introduction
• The Changing Primary Care Environment
• Primary Health Organisations
• Some General Issues Relating to PHOs
• Economic Issues Relating to PHOs
  • Changes from a Service User Perspective
  • The Effects of Capitation for PHOs
  • Managing PHOs and the Implications for Size of PHOs
• Conclusions
• References

Abstract

The New Zealand Government is implementing a Primary Health Care Strategy (hereafter, the Strategy), which will see the establishment of Primary Health Organisations (PHOs) as key agencies involved in organising primary health care in New Zealand. PHOs will be not-for-profit organisations, which will organise and/or deliver primary health care services to a defined population. PHOs will be paid on a capitation basis, and there will be community participation in PHO governing processes. This paper looks at some of the issues surrounding the implementation of PHOs and the changes that New Zealand might expect from their establishment. The paper particularly emphasises the consequences that might arise from the changing economic incentives that the Strategy envisages for primary health care providers.

Introduction

Primary health care involves generalist, comprehensive, continuing care that is accessible as the point of first contact and, hence, provides a key means of entry into the wider health system ^{[ 1 ]}. The organisation of primary care service delivery in New Zealand has undergone significant change over the past 15 years. General practitioners (GPs) have increasingly joined together in formal networks of various types ^{[ 2 ]} and a wider range of professionals is now engaged in the delivery of care. The Primary Health Care Strategy (hereafter, the Strategy), released by the Labour-Alliance government in February 2001, is a further step on a road towards significant reorganisation of primary care in New Zealand. The Strategy envisages a strong primary health care system aimed at improving health and reducing inequalities, by reducing barriers to care and improving access to primary care, supporting the development of Primary Health Organisations (PHOs) as local structures which serve the needs of a defined group of people, encouraging multi-disciplinary approaches and decision-making, supporting the development of services by Maori and Pacific providers, and facilitating transition to widespread enrolment through a public information and education campaign ^{[ 3 ]}.

In this paper, I look at the development of PHOs as a means of implementing the Primary Health Care Strategy. I look at a number of general issues relating to the implications of the Strategy in New Zealand, and the paper focuses in particular on the likely changes that may arise from changing economic incentives associated with the Strategy.

The Changing Primary Care Environment
Primary health care in New Zealand has traditionally been organised around general practice services that provide first contact care, from which people are then referred into the separately funded and organised wider system of care (covering laboratory and pharmaceutical services, community-based services for mental health and disability, and secondary and tertiary care provided by hospitals). General practice services have largely been based on a single or small group practice model. They are funded through government part-subsidies paid to GPs on a fee-for-service basis, and service users also pay fee-for-service charges ^{[ a ]}. Practice nurse subsidies are paid for some nursing support.

This approach has been the subject of criticism for many years, raising concerns over:

• fragmentation of services between general practice and other primary care services and between general practice and secondary care
• financial incentives from the fee-for-service system which encourages visits to GPs, as opposed to other providers
• the separation of services and budgets for referred services (eg, laboratory tests, pharmaceuticals, as well as secondary care), combined with fixed part-subsidies for care provided in general practice, provides some incentives for patients to be referred on into other parts of the health care system, potentially inappropriately
• poor access to care for some groups in the population, arising from financial, cultural and other barriers to care ^{[ 1 ]}, ^{[ 4 - 8 ]}].

Primary health care service delivery in New Zealand underwent significant change during the 1990s. As a result of a formal purchaser-provider separation in the health care sector ^{[ 9, 10 ]}, GPs increasingly joined independent practitioner associations (IPAs) or other loose networks ^{[ 11 ]}. The 1990s also saw the further development of "third-sector", community-governed, not-for-profit provider groups where GPs work alongside a range of health professionals to deliver care (eg, community health, and union- and iwi-based organisations networked with Health Care Aotearoa) ^{[ 5 ]}. Since 1990, independent midwives have been able to claim the same levels of subsidies for care as specialist GPs for maternity care and midwives now appear to dominate primary maternity care delivery. There has also been a rapid increase in the number of by-Maori^{[ b ]}, for-Maori providers, and increased interest in developing Pacific providers ^{[ 6 - 8 ]} The overall result is a more diverse set of arrangements in primary care than New Zealand has ever had before.

New payment arrangements were also introduced during the 1990s. There was an increase in the use of weighted capitation formulae for some GPs; along with the development of some general practice budget-holding for pharmaceuticals and laboratories; some service-specific funding to develop new services for a range of new providers; and the development of a case payment approach for maternity care.

The changing primary care environment has set the scene for the further development of primary care in New Zealand. The Strategy proposes new organisational forms - PHOs - as a key part of the future for primary health care there. It is unlikely that New Zealand policy makers could have promoted the development of such organisations earlier, because the development of networks of primary care providers during the 1990s provided a basis for future change ^{[ 12 ]}.

Primary Health Organisations
An essential aspect of the Strategy is the development of PHOs. PHOs:

• are to work to improve and maintain health
• are to work with groups in their populations that have poor health or who are missing out on services to address their needs
• will be funded by district health boards (DHBs)^{[ c ]} for the provision of essential primary care services to an enrolled population
• will develop services that will be directed towards improving and maintaining the health of the population as well as providing first-line services to those who are unwell
• will involve their communities in their governing processes and be responsive to community needs
• will involve all providers and practitioners in influencing decision-making
• will be not-for-profit
• will be funded on a capitation basis ^{[ 3 ]}

The rules and requirements for PHOs - to provide guidance to DHBs and organisations interested in becoming PHOs - form the basis of a regulatory structure for PHOs. These cover institutional features, enrolment and information management requirements ^{[ 3, 13 - 15 ]}. Minimum service specifications are still being developed. PHOs will be funded using a national formula, also still under development at the time of writing, but on which some information is available ^{[ 16 ]} The formula will provide per capita funding for each person enrolled with the PHO, adjusted or weighted for higher levels of need using proxy variables such as age, gender, ethnicity and socio-economic status ^{[ 15 ]}.

The development of PHOs has been linked to increases in the funding for primary health care in New Zealand. Over an eight-to-ten year period, the government contribution to primary health care will rise so as to enable most New Zealanders almost free access to primary care. New primary health funding is in the first instance being directed towards PHOs "serving low-income, high-health needs New Zealanders"^{[ 17 ]}. Funding will be provided to approved DHBs using the new national formula, with new primary care funding targeted towards PHOs with high concentrations of people in deprivation quintile 5 (the highest quintile of deprivation) and/or Maori and/or Pacific people ^{[ 17 ]}

Some General Issues Relating to PHOs
It is hoped that the changes envisaged would improve access to services that can help to prevent ill-health and treat illness early, and enable the development of services that more appropriately meet the needs of people not well served by traditional models of care. The development of PHOs would also encourage practitioners to work together across traditional disciplinary boundaries and to develop strategies across providers to improve quality of care. Finally, the changes might also allow local populations to have more input into health care service delivery, creating a more responsive set of services.

There has been a number of New Zealand initiatives in primary care over the past 15 years and, although formal evaluation of initiatives is rare, the new approaches to primary care are positively viewed and may lead to improved health in the longer term because of a combination of factors including more appropriate services for specific cultural and community needs, lower co-payments and changed financial incentives (see, eg, material in Crampton 1999; Crengle 1999; Malcolm, Wright and Barnett 1999; Tukiotonga 1999) ^{[ 5,6,8,11 ]}. International evidence about the development of population-based approaches to health care shows that changes such as those envisaged for New Zealand can work to improve access to services and reduce institutional and inpatient care (see the references in Crampton 1999 ^{[ 5 ]}). Yet there can be barriers to success. In the UK, for example, barriers include a lack of strategic development of population-based approaches and the lack of a strong organisational support for these approaches, lack of organisational capability, and inadequate assessment of needs. In the US, barriers have arisen because of difficulties in teams working together, lack of knowledge and skills, and lack of financial reimbursement for health promotion. In Australia, it has become apparent there is a need for specific training in population-based approaches (see the references in National Advisory Committee on Health and Disability 2000 ^{[ 18 ]}. More recent research from the UK, where Primary Care Groups and Trusts (PCG and PCTs^{[ d ]}) are being established to manage the health of populations, suggests that PCGs/PCTs are making good progress in developing as organisations that can focus on improving population health status^{[ 19 ]}. However, there is a clear need for a degree of stability in the policy context, for leadership and for adequate time and resourcing to support such organisations^{[ 20 ]}. Researchers and commentators have particularly identified lack of management resources as, at times, a major impediment to progress^{[ 21 ]}. (For more on this point, see below.)

Economic Issues Relating to PHOs
Economic theory suggests a number of changes may result from changing the economic incentives associated with the development of PHOs ^{[ 7, 23 ]}. However, there is very little research to support existing theory, and the extent to which we can predict what might happen in New Zealand is complicated by the different policy, organisational and service delivery contexts that exist here. New Zealand’s arrangements are somewhat unique in that capitation at PHO level is often being combined with continued fee-for-service arrangements for those actually delivering the service. There are primary care user charges paid by patients in New Zealand that may continue to distort the choices of both providers and patients. The breadth of coverage of capitation will make a difference to behaviour, and the actual level and mix of funding can also influence outcomes. This makes it difficult to predict likely outcomes in New Zealand; and, given that there are likely to be increases in funding for some providers and reduced user charges, the outcomes are even more difficult to identify clearly. This next section focuses on the key economic changes that may come about arising from the development of PHOs.

Changes from a Service User Perspective

A key change that service users might see relates to enrolment. Formal enrolment with a single health care provider has not been a key feature of the New Zealand primary care landscape to date. This appears set to change: as a result of the Strategy, people will be encouraged to formally enrol with a provider and hence a PHO. Enrolment is designed to encourage a population approach to delivering health care. But New Zealanders who have always had a choice of GP, and the ability to use a variety of primary health care providers if they so choose, may find it a challenge to respond to a formal enrolment system. They may also find that enrolment reduces opportunities to use a range of primary care providers. For the present, enrolment is voluntary but the importance of choice and competition for responsiveness and satisfaction with services is an important component of our primary care services. Concerns have been expressed about the impact on choice that these reforms might have ^{[ 24 ]}, and any evaluations of the Strategy should collect data on the effects the policy has had on choice. Interesting dynamics arise when people using services dislike the policies of the PHO but like their provider or vice versa, particularly since providers can only belong to one PHO ^{[ 25 ]}. On a related issue, it is also not yet clear what information will be provided to people to help them decide between competing PHOs. Such information needs to be credible, perhaps being organised by an independent agency, or at least subject to rigorous external audit if produced by the PHOs themselves ^{[ 26 ]}.

Traditionally New Zealanders have obtained their primary care from sole or small group practices, separate from other primary care services, such as pharmacies and laboratories. This is slowly changing and the move to PHOs may further encourage this change, if PHOs engaging in more health promotion and disease prevention activities and working with a wider range of providers begin to locate services together. Little has been made of this point in New Zealand discussions to date. Such a change might improve the position of primary health care as a visible feature of the New Zealand health care environment, perhaps one day replacing the attention paid to local hospitals as a focal point of health services delivery.

The Effects of Capitation for PHOs

In New Zealand, it is possible that capitated funding for PHOs will be combined with on-going use of fee-for-service arrangements for service providers. The move to capitation, therefore, might partly be about enabling a redistribution of resources, over time, away from organisations with patients who use a lot of care to organisations with patients with higher needs, proxied by age, gender, ethnicity and socio-economic factors. This could lead to improved levels of provision for particular groups in our society, provided that the additional weighting given to proxy measures of need adequately funds these higher needs. Otherwise, capitation payments to PHOs allow increased flexibility in how primary care payments can be used, and at the PHO level may allow pooling of resources across providers in order to promote a more proactive and less restrictive approach to meeting population health needs. For example, the approach might enable better co-ordination across providers and allow education and support services to develop for particular conditions (such as immunisation registers and proactive systems to promote immunisation, or improved disease management for diabetes or asthma), where a single practitioner may not be able to provide such services. The move away from fee-for-service payments tied to GP care also enables more flexible service delivery, with a range of providers able to deliver care, at least at the PHO level. However, at the level of the individual provider, with no change in financial incentives to deliver care differently, we might see a continuation of current patterns of care, with financial incentives at provider level that continue to encourage GP care, and a higher number of shorter visits than would occur under capitation.

There is very limited research evidence that tells us how service delivery is actually affected by changes in economic incentives. A recent review concluded that there is evidence to suggest that the way in which primary care physicians are paid does affect behaviour, and that those paid a fee for service do provide a higher quantity of primary care services compared with those paid by capitation (and salary payments)^{[ 23 ]}. Evidence on clinical outcomes and patient health status does not exist, and there also does not appear to be robust evidence on the extent to which a move from fee-for-service towards capitation would result in a move towards a more population health based focus or preventative approach. One New Zealand study in the early 1980s did not find that there had been more preventive care as a result of such a shift, putting this down to a conservative style of primary care and expectations relating to patients’ and providers’ desires for curative care ^{[ 27 ]}. This suggests that the desired changes, in practice, will need to come from the development of new philosophies, rather than relying on changes in incentives per se.

Both the UK and New Zealand have had experience of changing economic incentives associated with budget-holding, which would be relevant if the capitation approach were to include laboratories and pharmaceuticals for example. UK evidence is equivocal as to whether there has been significant change in utilisation and health outcomes as a result of changing incentives, and the evidence is difficult to interpret ^{[ 28 ]}. In New Zealand, often a move from fee-for-service payments towards capitation was accompanied by increased management of services at an organisational level, for example with changes in claim forms or the provision of feedback to practitioners on service delivery rates. Research evidence of the effects of such changes is scarce, but does suggest that there have been changes in resource use in some cases ^{[ 11 ]}.

A key issue is the degree to which PHOs will be expected to manage within their budgets, and how much flexibility there will be for PHOs in terms of financial performance. For example, would PHOs be able to offset deficits over a multi-year period or will they be expected to remain within budget each and every year? The latter approach might be particularly problematic for smaller PHOs. There might need to be some form of risk sharing between DHBs and PHOs^{[ 29 ]} to ensure PHOs do not take on an unreasonable share of financial risk. The performance management system chosen to accompany the introduction of PHOs will, therefore, have implications for provider and PHO behaviour.

The use of capitation for PHOs would provide financial incentives for them to engage in "cream skimming". Cream skimming occurs when health care organisations actively recruit healthier patients and actively seek to discourage enrolment of those more likely to require care. It is a particular problem in a competitive environment. Anecdotal evidence suggests it occurs frequently in the US, but there is little evidence of it in the UK, and a number of reasons have been posited for this ^{[ 7, 30-32 ]}. In New Zealand, it seems that there will be more than one PHO in some areas, but the degree to which they will compete for patients is unclear as yet. The more competition occurs, the more there is a need for strong enforcement of the regulations relating to enrolment ^{[ 14 ]}, in order to reduce the potential for cream-skimming. An increase in competition might also require refinements to be made to the weighted capitation formulae. In New Zealand, this incentive would operate at the PHO level and on-going monitoring of enrolments and disenrolments will be required to identify such behaviour. Weighted capitation formulae might have to become more sophisticated to reduce incentives for such behaviour, requiring specific consideration of individual health status ^{[ 33 ]}. The performance management system must be able to impose penalties where such behaviour is detected.

Managing PHOs and the Implications for Size of PHOs

The Strategy clearly views PHOs as a particular form of health sector organisation: with community governance, involvement of wide range of providers in decision-making, and a not-for-profit focus. However, the fact that the development of some PHOs has been driven by smaller communities and providers means that some small groups of providers may develop as PHOs. Such a move could provide the community, public service focus envisaged by the Strategy. However, there are also features of the Strategy that suggest that larger PHOs would have some advantages over smaller PHOs. This is because PHOs also must be able to:

• support primary care services through activities such as quality assurance, training programmes, support enrolment processes, administer payments, provide information technology advice, work with DHBs, facilitate service development and manage reporting requirements to DHBs and the Ministry of Health ^{[ 34 ]}
• directly manage some services, especially where a minimum scale is required for a service to be effective (eg, specialist community nurses, immunisation co-ordination, mental health workers, social workers, health educators)^{[ 34 ]}
• manage provider and community relationships, including provider and community input into planning
• manage financial risk.

For example, in relation to managing enrolment processes, health care providers would need to: inform patients and potential patients of the implications and benefits of enrolment; establish an enrolment system, at a provider level, that is kept up to date with accurate information about enrolees that is fed through to the PHO; collect ethnicity data; and keep auditable records in relation to enrolment and termination of enrolment. PHOs would need to: collate and check the data for duplication; ensure National Health Index information is accurate; resolve disputes; assist patients to find providers if they become dis-enrolled or are unable to be enrolled; and assist those patients whose providers have left the PHO to find a new provider ^{[ 14 ]}.

With regards to financial management, the move to capitation for PHOs away from fee-for-service provides PHOs with financial incentives to manage resources at the same time as placing them under more financial risk than if fee-for-service continued, although the actual level of capitation fee compared with fee-for-service payments would affect overall incentives and level of risk initially. An interesting feature of the New Zealand developments has been the capitation of organisations that then continue to pay their providers on a fee-for-service basis. This would seem to require good information systems to be in place to ensure the organisation remains within budget. PHOs face an additional problem - the capping of user fees - which does not occur at present and which would increase the need for good financial management. Expanding capitation to include pharmaceutical and laboratory budgets increases the financial incentives to carefully consider referrals but also requires good information systems and financial management.

These management responsibilities are likely to impose a significant burden on smaller PHOs. The recent UK experience with PCTs shows there is a tendency for management functions to be merged, in order to share expenditure, pushing the average population per trust to 193,000^{[ 21 ]}. This is larger than a number of New Zealand DHBs. The UK experience suggests that similar pressure would arise in New Zealand, even though there is no evidence that larger PHOs would necessarily be better performers than smaller PHOs ^{[ 35 ]}. It will be imperative in New Zealand to undertake research to identify the relative advantages and disadvantages of having smaller and larger PHOs, in light of the goals PHOs are expected to achieve.

Conclusions
The development of a Strategy for primary health care in New Zealand is to be welcomed, as is the promise of additional resources for primary care. It is hoped that these changes will improve access to services that can help to prevent ill-health and treat illness early, and will enable the development of services that more appropriately meet the needs of people not well served by traditional models of care. The development of PHOs also encourages practitioners to work together across traditional disciplinary boundaries and to develop strategies across providers to improve quality of care. Finally, the changes may also allow local populations to have more input into health care service delivery, creating a more responsive set of services.

This focus on primary health care follows an international interest in the role improved primary care might play in improving health and reducing inequalities, and some research that suggests that strong primary health care is associated with improved health care, lower overall costs and reduced inequalities ^{[ 36-38 ]}. The development of PHOs in New Zealand also follows growing interest in population-based approaches to health care, ie, "organised responses to promote and protect the health of identified groups. . .".^{[ 18 ]}.

The Strategy certainly is a bold attempt at reform, one that will require on-going commitment and leadership if it is to be implemented well in New Zealand. The level of resources available to PHOs will be a crucial factor in how successfully they are able to perform. A number of issues, however, remain unresolved:

• minimum service specifications have still to be finalised; these will in part determine the breadth of services to be provided, which has implications for the size of PHOs
• the length of time it might take to implement the Strategy and to fund it adequately
• the degree of competition that will develop and the choices people will have with respect to PHO selection
• the information to be provided to service users choosing between PHOs
• the appropriate size for PHOs
• the performance management framework for PHOs.

The evidence to support the expectations of the Strategy is somewhat weak, particularly from an economic perspective, and, as a result, evaluation of the model will be essential to improving its performance over time.

Acknowledgements:
Jackie Cumming gratefully acknowledges the Health Research Council of New Zealand for the funding of this research.

References

Footnotes