The Seven Percent Solution: a Background to the Proposed Health Referendum.

Listener 31 January 1998.

Keywords Health

The health reforms debate enters a new stage in 1998 with the indicative referendum that Government should increase its spending on health services to at least 7 percent of GDP, if necessary by increasing personal income tax. Over the last six years the government has taken the initiative. The referendum presents the people seizing the initiative in 1998.

The referendum question was chosen with some care: and subtlety if I may say so, for I was one of the economists approached for advice. I can write about it because I got no fee. The Referendum Group – led by ex-auditor general Brian Tyler and backed by local authorities and voluntary health organizations (such as the National Heart Foundation and the Cancer Society) – is going to depend on voluntary effort. Contrast their resources to the millions of dollars the government poured into its abortive referendum on the privatization of superannuation.

Some of us would have liked to have had an omnibus question, which sets out principles for the public health system (like degrees of accessibility and waiting times), but that was judged too complicated. Any question has to be simple, understandable, and have significant content. The Referendum Group decided on a health spending target. But which one?

It had to be about public spending, excluding private spending, since a major concern is the cost shifting where patients, families and communities pay an increasing share of the cost of health. In order to prevent politicians manipulating the statistics, we used the official OECD definition of health spending. There is not the same information on public spending on disability, so we could not include that in the referendum question. Those voluntary groups in the disability area, whose clients and their families are also under great pressure, regretted but understood, and agreed to support the referendum. (In return let us insist the government gets a decent data base on disability.)

Having established the target variable, we had to decide on its level. One possibility was a dollar value, but that is vulnerable to inflation. We could have a target in constant prices, but there are no official price indexes for the calculation. (The government uses the Consumer Price Index, which is a nonsense, because it includes the prices of such commodities as tobacco and alcohol which hardly appear in health spending, and excludes medical salaries, and the prices of medical goods and services such as xray machines, and pharmaceuticals which do. The wrong deflator in 1989, led to the government cutting health spending, when it thought it had increased it. The error was repeated in the 1991 health reform proposals, again misleading a minister and contributing to the confusion.)

My recommendation to the Referendum Group was to target public spending as a proportion of GDP, a standard OECD measure, so we can make international comparisons. The accompanying graph shows the GDP percentage of government spending on health was falling after the 1991 reforms. But total public spending (including an allowance for spending commitments under the Coalition Agreement) since New Zealand First joined the government has increased. (Who says MMP has had no good effects?)

OECD health spending rises over time, as its populations age, people desire more health care, and new technologies become available. If the New Zealand government spending on health continued according to the projected OECD trend it would have been a fraction over 6.9 percent of GDP over the three years from 1999/2000, when the referendum proposal could be implemented. The Referendum Group asked me to look for a simple number – preferably an integer, because decimal points would complicate the question. So I rounded the target up to 7 percent. Given the spending backlog, the slightly higher target is easily justified. (The gap between the two lines amounts to around $2.3 billion in the last six years. No wonder the health system is in stress.)

I checked the 7.0 percent of GDP target two other ways. First I asked about the share of government spending in total spending. It would be about 82 percent, which puts us below Belgium, Denmark, Iceland, Luxembourg, Norway, and (even Mrs Thatcher’s) United Kingdom, and about the same as Sweden. The public to total ratio for New Zealand was 87 percent in 1981, and in the 1993 election the prime minister, Mr Bolger, promised a target of 80 percent (a promise which has not been maintained).

Could we spend effectively the proposed amount of money on health? While we have been underspending, services have been cut back, waiting lists have risen, and costs have been shifted on to the sick. New Zealanders require 35 points on a scale to be treated for a cardiac condition: the international recommendation is 25 points. Patients diagnosed with cancer having been waiting for over 14 weeks for treatment in some areas. A recent survey of families with a child with cancer found that they almost all face substantial personal costs, usually in tragic circumstances, which the public health system does not cover. Even if we get up to the 7 percent there will be a backlog of expenditure to remedy, only some of which has been covered by the sick paying for the treatment themselves, or dying early. One could go on interminably, but the point is however long the list of examples, individuals and their families are suffering unnecessarily because we are not spending enough on health care. There will always be rationing of health care, but rationing in the current system – overly dependent on rationing by ability to pay – is far too tight: unjust, inefficient, and unhealthy.
So my recommendation to the Referendum Group was a target of public health spending of 7 percent of GDP, or about $550m a year more than is currently planned under the Coalition Agreement. While the Group was happy about the proposed target level, there was an unease that it was too easy to agree with it. And then someone said the question should include that we should attain the target even if it meant higher levels of taxation. The effect on the Group was electric, for this gave real teeth to the question, and the condition was promptly added. As an economist I like the referendum proposition because it offers a demand with a price (of higher taxes).

(What about the social costs of higher taxation? The private costs of user pays for health and cost shifting have broadly the same “social cost” effect as a tax hike, so the impact of the higher taxes and lower private health care costs cancel out each other out.)

Will the public like the tradeoff? There are a history of surveys which suggest “yes”. But there is still the issue of public enthusiasm. Will there be sufficient to obtain the 10 percent of the electoral role required to initiate a referendum? Will sufficient people get out on the day to tell the politicians exactly what they think. Remember this is a voluntary group without the financial backing the government gives to its referenda (although parliament could establish a properly funded referendum commission to ensure the voters are fully informed, and encourage voting). Because there is such widespread disillusionment with the political process, there may be apathy. After all, the referendum is indicative, and the government can ignore it. But following the referendum there will be an election. A strong “yes” will greatly influence all the party’s health policies in their election manifestos.

Many people will support the referendum proposal because they are deeply distressed about the state of the health system, rather than because of the precise number. Ideally an omnibus referendum question, setting down all the woes, would have enabled voters to respond more precisely. Instead they may do is respond more in wrath.

For my part, I am confident that we are not spending enough of the health system. But other changes are also required, although they wont work if we continue to be miserly about government spending on health. Hopefully the public’s response to the health referendum will give a clear signal to the politicians that the current health system is failing the public, and something needs to be done.

91: 6.1; 6.1
92: 6.2; 6.2
93: 6.2; 6.0
94: 6.3; 5.8
95: 6.3; 5.8
96: 6.4; 5.7
97: 6.5; 5.9
98: 6.6; 6.3
99: 6.7; 6.3
00: 6.8; 6.4
01: 6.9; 6.5
02: 7.0; 6.6

The last four figures were projections at the time. The referendum was unable to get enough intitial signatures to proceed.