The Health Reforms (and the Blitzkreig)

Chapter 9 of The Commercialisation of New Zealand

Keywords: Health;

Undoubtedly there was at the end of the 1980s a widespread perception that there was a problem with the health system, although in retrospect this seems to have been a grumbling rather than a deep discontent. When the reforms were being put in place the public indicated they were more satisfied with the existing structures than their earlier surveys has shown. Every health system in the world appears to beset with difficulties, which ought to be a warning to reformers that there are no easy solutions.

National had campaigned in 1990 on the typical opposition policy of agreeing broadly with the existing system but promising to be more benign. Following the election the spokesperson on health, (now) deputy prime minister Don McKinnon, was appointed to the foreign affairs portfolio, and Simon Upton was unexpectedly appointed Minister of Health. Almost certainly four issues set a context for his thinking.

Upton wrote in his Mont Pelerin Society prize winning essay:
“… there are the vicissitudes of ill-health and old age which no one can hope to avoid. These should, whenever possible, be the responsibility of individuals. It may well be desirable to require some form of compulsory insurance to cope with those who would otherwise make no provision and then become a burden at a later stage … because a service is funded out of taxation, it does not mean that the government should actually provide the service itself. In many cases it will be possible to have the work put up for competitive tender by the private sector.”[1]

The second stimulus was the negative one of the Royal Commission on Social Policy. (Chapter 8) It had convincingly demonstrated that the majority of New Zealanders were not enthusiastic about the economic reforms which gathered speed after 1984. Its alternative vision was less convincingly – backward looking, riddled with nostalgia, and almost incoherent. Upton was perfectly entitled to conclude that it offered no alternative to the sort of social policies being proposed by the reformers. The conclusion was right insofar once there was the commitment to radical change. But the fundamental lesson of the Royal Commission was that the public did not want the economic reforms, and they wanted the associated social policies even less.

So thirdly, Upton turned elsewhere for his health policy thinking. Unshackling the Hospitals[2] was in two parts. The Chicago based accounting firm, Arthur Anderson, purported to find the potential for efficiency improvements of around 30 percent, but it was based as much on wishful thinking and assumption as rigorous analysis.[3] Much of its claimed potential `productivity’ amounted to cost shifting, that is switching costs from the public sector to the individual patient, family, and community. The commissioning committee, chaired by Alan Gibbs, a prominent New Right proponent, used the Arthur Anderson findings to assert that a different management regime would obtain the more efficient outcomes. Their report advocated the fashionable separation of funding and provision, with the providers (i.e. hospitals) run on business lines. The Labour government rejected the conclusions.

The fourth major factor in Upton’s health reform thinking was his proposed reforms of the public science sector, with the separation of funding and provision, contestable funding, and the public providers being run in a more business like way in Crown Research Institutes. Yet Upton was not well suited for a blitzkrieg: he is more Hayekian than the radical engineer the approach requires. The demand for the rapid radicalism probably came from the Minister of Finance, Ruth Richardson, a close colleague of Upton. As well as a radical New Right ideological commitment, no doubt fortified by her close association with Gibbs, Richardson faced a fiscal problem, like every one of her predecessors. So did her ministry, Treasury. The New Zealand government budget had gone into severe fiscal stress in the late 1970s, when the budget deficit stayed obstinately above the sustainable level where debt servicing grows no faster than the capacity to tax.

Public spending on health, at 14.0 percent of net financial expenditure in 1993/4, is a significant part of fiscal outlays. It was claimed, wrongly, that the volume of spending on public health was rising. The mistake arose in a Treasury paper which deflated the nominal spending with the wrong price index, failing to compare apples with apples, and then using a period which maximized the size of the error.[4] In 1989 the faulty Treasury figures had mislead Labour ministers to accepting cuts to public spending. Upton quoted the incorrect figures frequently, while in opposition, and in government.[5] They were used to reinforced the thesis that the health sector was inefficient, since it appeared that while resources had been poured into the sector, outcomes had not markedly improved.

Treasury seems to have had two major objectives. The first amounted to shifting the cost of health from the government to the individual via some sort of user-pays. Aside from any ideological merits – disguised as a claim for efficiency improvements – the effect of any cost shifting would be to reduce fiscal stress, as the government’s exposure to funding health could be reduced. Practically the mechanism involves shifting the burden onto the private household, especially the sick. The other Treasury concern was to reduce its management of resources, by privatisation. Again this was partly ideological driven, but privatization can reduce fiscal stress by shifting cost blowouts into the private sector.

Surveying the Battlefield

Consider the terrain over which a health blitzkrieg would take place. On the right front of the campaigner would be high mountains commanded by the formidable medical profession, led by the New Zealand Medical Association (NZMA), with a long history of successfully resisting encroachment on its territory.

On the left front were the vast, disorganised, population: the sick, the potentially sick, their family and friends – everyone. There were a few villages of systematic organization: public health sector workers unions; charitable organizations lobbying in the health area; the pressures groups for specific public policies. The difficulty of any reform through a left flanking of the doctors was that the terrain is swampy, and a campaign needs the cooperation of the natives to find a path and help repel attack from the medics. But like its predecessor, National was in no mood to consult with the public on matters of significance.

In the centre – rolling foothills from mountains to swamp – were the recently established Area Health Boards (AHBs), amalgamating the population based delivery component of the Department of Health, with the long founded Hospital Boards. The AHBs had had a long development history, for they were presaged in the 1974 White Paper on Health. Resistance from the medical professions had been such that it had taken a decade and a half of experiment, consultation, and development to implement them fully.

Astonishingly, for that it what a blitzkrieg is about, the government chose to drive its reforms through the centre, eliminating the AHBs. It passed legislation to abolish the (two-thirds) elected boards, an extraordinary constitutional innovation more characteristic of dictatorships, but which had the advantage of erasing (literally) overnight the one institutionalised and well funded group with official moral authority who could have resisted the reforms. The philosopher-kings showed their contempt for democracy yet again.

Yet in planning its centre strike, the government overlooked some key issues. First was the state of its own forces. How committed the cabinet was to the reforms is unclear. The may have been persuaded by Upton’s intellect, but their gut commonsense may have been less convinced. Caucus was not.

Treasury officials were battle harden, fresh from past victories, eager for more. Whether there were sufficient is more problematic: some of the successful commanders had moved onto the private sector, so there was a shortage of experienced leadership. And they had other citadels to be protected, other battles to be waged. The reforms involved the Department (later Ministry) of Health, which for almost two decades had been committed to the development of the AHBs. The Department had neither the troops available, nor the enthusiasm. A third government agency, the Department of the Prime Minister and Cabinet (DPMC), took responsibility for the reforms, while the Department of Health administered the existing system. The result was a cumbersome structure at all levels. Seven ministers were directly involved.

Previous blitzkriegs had effectively used mercenaries, consultants from typically the financial sector. Whatever their past performance, this time the consultants were inexperienced, knowing little about the health system if they were from New Zealand, little about New Zealand if they were from overseas (and even then only the ideologically acceptable were consulted). A similar problem applied to Treasury officials. It was a bit like taking a well equipped and victorious army from the deserts of commerce, and letting it loose in the health Himalayas.

Indeed, there does not seem to have been sufficient thought about the differences in the terrain for this blitzkrieg. Smashing through the AHBs might be possible in a night, but then the troops were faced with miles of rolling countryside, up and down and up again, with no obvious camping places. Corporatisation of public health provision in under two years was perhaps the most ambitious of all the blitzkriegs.

To the Green and White Paper

In its December 1990 Economic and Social Initiative the newly elected National government announced a new health policy, which proved to be very different from that in it’s election manifesto. (The statement’s title itself was an indication of a new stance. National was not going to compartmentalise the two policy areas, as Labour had tried.) Although a health services taskforce was then established, it never finally reported, being superseded by the Minister of Health’s Your Health and the Public Health. Described as a `statement of government health policy’, its nickname `Green and White Paper’ captures some of the ambiguity. Was it a green paper for discussion: was it a white paper of government policy? The balance to green on the cover belied the intent. The major decisions had been taken: matters for consultation were minor. Its summary states the government
“has made decisions about the future of the health sector. These include
– separating purchasing from providing;
– integrating funding for all types of health service;
– allowing choice among health care plans;
– separating the funding of public health care from personal health care.
The government wants there to be a wider debate on …
– the definition of core services;
– the future financing of health services.”[6]

From whence came the ambiguities and certainties? Probably the taskforce provided a background. The Minister of Health was primarily responsible for the writing the paper. Matters for decision then went to a cabinet committee chaired by the Prime Minister. The papers then went to cabinet, more often than not headed with `these papers were received after the deadline [for papers to cabinet]’. As in Roger Douglas’ day late submission meant cabinet opposition could not prepare.

The Green and White paper was tabled as a 1991 budget paper, the night parliament passed legislation to replace the majority elected Area Health Boards with appointed commissioners for public hospitals. The budget also introduced charges for laboratory services, and inpatient and outpatient fees.

It could be argued that the user-charge proposals were not connected with the overall health reforms, although this was a government which claimed it was integrating economic and social policy. The public thought the charges and the reforms were connected. After what can only be described as administrative fiasco and public indignation, most of the charges have been withdrawn. But the damage was done. The public had been warned that the reform proposals were radical and – in its judgement – nasty. It was as if a blitzkrieg launched under the cover of darkness had signalled its presence by shooting user charge flares into the sky.

The Ultimate Destination

The uncertainty as to the purpose of the reforms seemed to imply they were merely off in a general direction with the aim of a vaguely improving the health system. But more sinisterly they appeared to be a coherent plan to move towards the privatisation of the public health system: on the supply side via the conversion of providers (especially hospitals) into private business, and on the demand side via the conversion of public sector purchasing into private purchasing by user charges and private insurance.

There were parallels with the 1985 Cabinet paper for the corporatization of state trading activities, sufficiently ambiguous to let a determined and committed group to direct the reforms towards their ultimate destination of privatization. (Chapter 1) For fundamental to the reforms was the replacement of the AHBs by Crown Health Enterprises (CHEs), which would be run on a `business-like basis’, and which would `make adequate provision in their pricing to make a return on assets’ – phrases which could have come from the earlier corporatization program. Once this had been attained it would be simple to sell the CHEs to private buyers.

Plans to privatize the demand (or purchaser) side were less elaborate. User charges for health care had been introduced and increased. The issue of major source of funding was to be left to public discussion (with an Orwellian use of the term `social insurance’ to mean private insurance). There were to be `health care plans’ which were to allow a group to take its share of government funding and manage it separately, with the possibility of adding privately to the funds, which could ultimately lead to some sort of `social’ insurance. This may have been a compromise, in the ministerial committee, arising from a refusal to commit the government to the more radical option of private funding. Certainly it appears ill-thought through. Not surprisingly the health care plan proposals were later dropped as unworkable, although there remains a residual provision in the legislation.

Despite Upton’s earlier writings, it may have seemed paranoic to argue on such evidence that the ultimate destination was privatisation of health, but as the blitzkrieg moved forward in the light of day, more became available. The so-called `Danzon’ report, Options for Health Care in New Zealand, was not a smoking gun either. It had been commissioned by the Business Roundtable, of which Gibbs was a member. The senior author, Patricia Danzon, was an American economist specialising in private insurance with impeccable right wing credentials, including a Mont Pelerin fellowship and working at the Hoover Institute. The junior author, Susan Begg, was from C.S. First Boston, which had a record of general advocacy of privatization, had benefitted from the various corporatization and privatization of government assets in various consultant roles, but had no expertise in the health sector.

The report concludes `a private insurance option … could be viewed as a final stage towards which a mixed public/private system could evolve …’ An earlier section concluded `corporatization … would also be a sensible transition path if more far-reaching reform is contemplated.'[7] Thus it argued for reforms not dissimilar to those being introduced as a step towards the ultimate destination of privatisation. The report had been sent to the Minister of Health. It had neither been published by the Roundtable, nor seen by most members of the taskforce, which gave it an air of secrecy. The Minister could have argued that it did not influence his thinking, but then an extraordinary set of appointments were made.

A key agent in the transition was the National Interim Provider Board (NIPB) located in the DPMC, which was to supervise the establishment of the CHEs. The chairman appointed to the board was Sir Ronald Trotter, chairman of Fletcher Challenge Ltd, which had been an active purchaser of public assets. Trotter, a well-known spokesperson for privatization, was also chairman of the Business Roundtable at the time of the Danzon report. He had no background in health administration. The NIPB’s chief economist was Geoff Schweir, an early advocate of privatization of state trading activities, with little or no experience in health economics.[8] Its primary consultants were C.S. First Boston, the sponsors of the Danzon report, again without specialist experience in the health sector. The NIPB hired overseas consultants of a privatization persuasion, including Danzon. Later it hired Peter Troughton, an ex-Roundtable member who as CEO had been involved in the privatization of Telecom, again with no background in health administration. This was generic management with a vengeance, with the managers committed to privatization.

The government never explained why it appointed so many pro-privatizers. Even were it a series of coincidences, and privatization of the public health system was not the ultimate destination of the government, the steps being taken would make the task simpler for a future government. The parallel with the corporatisation of the State Owned Trading Enterprises loomed large.


The earlier review of the terrain suggested that except for the medical profession, little effective resistance might be expected. In previous blitzkriegs there had been significant public discontent, but despite attempts to resist there had been little effective opposition. It is not at all clear how the government intended to deal with the doctors. The strategy at first seems to have been one of ignoring them. Significantly there seems to have been no deliberate attempt to divide the medical profession. The purity of the justification for the reforms – they were in the national interest; resistance was only a matter of vested interest -resulted in a naive a political strategy. Surprise and speed were to be the essence of a blitzkrieg: political acumen was not. Unsurprisingly in the light of their past record, the medical profession proved doughty foes, especially through their union, the NZMA.

There were also sporadic attempts to organize the public into mass movements, but while there was the occasional meeting, march, picket, or petition the actions were the public’s protest rather than a real threat to the government. Another centre for resistance developed, which was neither simply a vested interest nor simply a mass movement.

The Coalition for Public Health where a number of union and community organizations joined together, was a gift to the media, its spokespeople providing informed commentary on the reforms. As in previous cases, this blitzkrieg was hard for the media to present. The Coalition provided a public face, and a face which reflected the concerns of the public. It is outside the scope of this paper to detail the activities of the Coalition, but crucially it was backed by the Wellington Health Action Committee (WHAC). Some idea of the breadth of the group can be obtained from the writers in the WHAC publication The Health Reforms: A Second Opinion: retired senior administrators, economists, unionists from the health sector, medical practitioners, workers in the voluntary sector.[9] In some respects the Coalition was better served than the government by its advisers, since they had combined a wider and deeper knowledge of the health system. A number of overseas health professionals passed through adding to the depth of the understanding and critique.

Part of the aim of the blitzkrieg seems to have been to replace people well experienced in the health sector, with outside business people who were often very ignorant of the sector. But as the government turned its back on the expertise in the sector, it created a pool of resentment from the pool of the redundant and threatened redundant, willing to give energy and their expertise. Those who became redundant were not necessarily the least competent, as evidenced by many being recruited to positions in overseas health systems. Threats to employees, sometimes explicit, discouraged some protest, but no doubt encouraged underground resistance. (A consultant’s report said `don’t shelter non-committed employees.[10])

One other crucial feature was that unlike many other campaigns, the Coalition had some access to funds, initially from unions but later, as it built up credibility, from doctors with a commitment to the public health system. Not that the Coalition was well funded. In total it spent a two year period the same as the government probably spent every day on its health reforms advice.

The non-party Coalition’s initial strategy was to mute the most objectional aspects of the reforms by offering an alternative which appeared to meet the government’s stated intentions without the extreme elements (such as the profit driving of the system). The approach acknowledged the defects of the AHB based system (neutralizing the potential criticism of the Coalition was merely a front for vested interests), but argued for incremental evolution rather than radical revolution. The Minister said that there not a great gap between his proposals and the alternative strategies, but the dominance of the NIPB and Treasury with their totally different ultimate destination meant that the reforms were not to be deflected.

In summary, the Coalition for Public Health had status from the organizations which supported it, it had expertise from highly competent volunteers, and it had some resources to lobby and debate publicly. That gave it credibility, in public, to the media, and grudgingly from politicians. The government may have quickly broken through the AHB line, but it unexpectedly met a second one linking the medical heights with the public plains.

The Government Response

It is not this chapter’s purpose to detail the campaign, nor highlight individual skirmishes, except insofar as they illustrate more general points. Central to understanding the campaign seems to be poor tactics and irresolution by the government.

Tactically it seemed brilliant to promise an `integration’ of primary and secondary health care, especially as it can mean all things to all people. For many general practitioners it means the anathema of being put, directly or indirectly, onto an employment relationship similar to a salaried hospital doctor. The government was under the impression that there was widespread medical support for the change, an illusion perhaps partly fostered by one of the strongest medical advocates of the reforms being Tom Marshall, deputy chairman of the NZMA, and chairman of the General Practitioners’ Association (GPA). A rebellion within the ranks had Marshall’s team toppled from the GPA and Marshall from the NZMA.

The government seemed to be beset with irresolution. The Prime Minister recognized the need for an advertising campaign to get the public onside during the February 1992 Tamaki by-election. National MPs, returning in January 1993 from their Christmas vacation – a traditional period for getting a feel of the public’s concerns – demanded a campaign. But nothing was done until May 1993, a couple of months before the new system was to be introduced. By then it was too late. And it was neutered.

Previous blitzkrieg advertising campaigns had been extremely emotional. In response to public protest to what was seen a political advertising, the Auditor-General had rules limiting government paid ones to informational content only. Even then aspects of the campaign were criticised by the Advertising Standards Board. The outcome of the $2.5 million campaign was considered, even by an Associate-Minister of Health, to be of little value. Despite the NIPB and officials beavering away, there was surprisingly little leadership. It was almost as if the generals thought a blitzkrieg involved them pointing the troops in the right direction, waving them goodbye, and returning to base.

The Blitzkrieg Failure

Any campaign whose instigator is replaced must be judged a failure. In March 1993 the Prime Minister transferred the Health Portfolio from Upton to Bill Birch, the toughest administrator in the cabinet. Birch drove the reforms through to the establishment of the CHEs (and the funders, the Regional Health Authorities (RHAs)) on time in July 1993.

In terms of its own goals, even at their most ambiguous, the government had
– abandoned health care plans (the public state firmly it wanted no change in public funding);
– abandoned the public health commission;
– abandoned the core health services definition program;
– withdrawn the hospital overnight charges and withdrawn or reduced some other user charges;
– failed to gain significant productivity gains;
– substantially increased public funding (rather than hold it, as hoped), yet various indicators (such as waiting list lengths) have not improved or had deteriorated;
– increased the exposure of ministers to minor failures in the system (because previously the elected Boards had taken responsibility), while
– despite their business goals the CHEs continued to make losses.

The lack of gains is nicely illustrated by the 1996 OECD report on the New Zealand economy. As the CHE chief executives found, funders control providers, and the OECD is funded by the New Zealand and other Treasuries. Even so the OECD commentary struggles to be positive.
“… even though the system is in its third year of operation, it is not yet clear how the reforms will ultimately affect health care in New Zealand.It is too early to observe their effects on health outcomes and to discern what impact they will ultimately have on output of the health sector as well as the organization of output provision”[11]

Despite claims before the reforms of substantial and rapid improvements, justifying the costs of the upheaval, improvements were not discernable. Claims that significant benefits were delayed but would appear in time became a monotonous litany for all the reforms. When the OECD report tried to make an evaluation it said `assessment must rely largely on a priori considerations’, that is the theory on which the reforms was based was going to be used to evaluate the outcomes. The tight prior remained the bench mark, rather than evaluated.

Inevitably over a five year period there has been some positive improvements (which could have occurred anyway, if policy development had been more incrementalist):
– there has been some separation of purchasing from provision;
– a simple form of budget holding (which can lead to improvements in management of resources) has been introduced in primary care, although there is likely to be resistance to further changes;
– there has been substantial improvements in the balance sheets and accounting systems of the public providers.

Valuable though each is, they hardly justify the turmoil the reforms have caused, not their expense: estimates range between 2 and 10 percent of a year’s Health vote. Yet the fiscal costs have probably not been as great as the political costs. Jim Bolger specifically mentioned the government’s health policies as a major reason for the substantial loss (a quarter) of National voters in 1993.

The Campsite in the mid-1990s

By 1996 it was not the tactics of blitzkrieg so much as trench warfare, where the government relied on its weight and momentum to force the reforms through, coopting people as they went. But while the health professionals left continued to service their patients, few committed themselves to the reform. At one stage the tactic of the `sap’ appeared to be evolving, undermining the public health system by increased funding of the private system. This continues, but that has not proved to be as effective as it might have seemed, probably because of the dominance of the public sector in the system, and the commitment of the public to a public system.

If by the 1993 election the health reforms were temporarily camped uneasily on a hillside, under fire from the public, by the 1996 election it was difficult not to discern preparations for a strategic retreat, even if these were overlooked by the OECD report. Bill English, the new National Minister of Crown Health Enterprises, foreshadowed (if his government were returned)
– the reduction of the four RHAs to one;
– the reduction of the number of CHEs to about half (the reforms had split 14 AHBs into 23 CHEs);
– the combining of the portfolios of the Minister of Health and Ministers of CHEs.

The other party manifestos had promised no less drastic reversals. Meanwhile CHE boards were replacing the rapidly leaving chief executives (over half went within three years) by new ones with clinical experiences.

What went wrong? From one perspective, the model was wrong. The reforms were based on the assumption that health was a generic product (Chapter 2), which could be administered by generic managers. Even the CHE boards, packed with businessmen (and the occasional woman) who have little experience of the medical industry, quickly recognized the first point. Less than six months after the appointment of the boards, the Chairman of the Crown Health Enterprise Chair’s Consultative Committee wrote `[t]he CHE group are of the view that the business of providing is not a genuine commercial mode.'[12] This culture clash is not only a recipe for worker demoralisation, poor productivity, and industrial disputes. It overflows into public perception. It was reported that `Capital Coast Health is short of blood because donors believe their blood will be sold.[13]

And yet there was a more fundamental problem. It was not just that the account of how the health system worked was irretrievably flawed. For a blitzkrieg to work, the map of the territory must also be accurate. In Roger Douglas’s words `uncertainty, not speed endangers the success’, and `dont stop until you have completed it’. But what if the plan is wrong?

It is especially ironic, that Upton, who so respected Fredrich von Hayek, advocate of organic growth of institutions, commenced down such a radical and disruptive path. If only he had recalled the sentence of Hayek, with which he concluded his prize winning essay.
Least of all shall we preserve democracy or foster its growth if all the power and most of the important decisions rest with an organization far too big for the common man to survey or comprehend.[14]

Not surprisingly the reforms generated, what was described by Alan Maynard, an eminent British health economist who was not consulted despite regularly visiting here, as `re-disorganization’.

Effective health reform probably requires an incrementalist approach, involving consultation with the public and the bloody-minded vested interests. Mrs Thatcher tried on a couple of occasions to carry out a major restructuring, and each time backed down in favour of incrementalism: the re-disorganization task was too large, and the public health system too important to the public to allow an all out assault to succeed. Health is the part of the welfare state which most touches everyone, including the articulate middle class and the swinging voter. The political power of the medical professions arise not only from their power over life and death, but also because they are close to the heart of community and individual aspirations – closer apparently than the politicians of the 1980s and 1990s.

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[1] Upton, (1987:24, 26).
[2] Hospital and Related Services Taskforce (1988).
[3] Arthur Anderson (1987).
[4] Easton, `Faulty Figures’ (1987), Scott (1990), Bowie (1992), Easton & Bowie (1992).
[5] Upton (1990, 1991:8)
[6] Upton (1991:132).
[7] Danzon & Begg, (1991:85, 57).
[8] Oliver (1989:19).
[9] WHAC (1993).
[10] Coopers & Lybrand (1993).
[11] OECD (1996:117).
[12] P.D. Wilson, letter to the Ministers of Health, Crown Health Enterprises, and Finance, 17 December 1993, para 6.9.
[13] Evening Post, (October 1993:3).
[14] Upton (1987:38).

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