Health Policy

Chapter 11 of The Whimpering of the State

Keywords: Health;

The chairman of the Health Funding Authority (HFA), Graham Scott, reported that the 1991 health reforms were predicated upon productivity gains in the public hospital sector, which had not occurred. As a result the Crown Health Enterprises (CHEs, now Hospital and Health Services – HHSs) are in permanent financial deficit. In Scott’s convoluted presentation ‘the current deficits in CHEs are not only about inefficiencies and variations in the quality of management but are also an outgrowth of the original efficient pricing policy [whatever that means]. In other words a share of these deficits was made in Wellington, because the policy did not work out as intended. They were inherent in the policy framework that assumed efficiency gains would be allocated to the deficit.’[1] More simply, the policy failed. Scott went on to explain that the failed theory derived from the experiences of corporatisation in other areas of government and in consultants’ reports.

Corporatisation and culture

The success of the corporatisation of State-Owned Enterprises (SOEs) was misleading for at least four reasons. First, the SOEs – in communications, energy, finance, forestry, transport – were not very different from ordinary businesses. Second, the success was measured by consultants’ reports, which usually had narrow terms of reference focusing on accounting measures.[2] Thus the study of TVNZ almost totally ignores the effect of the corporatisation on programming, despite this being the main concern of viewers.[3]

Third, the reports were often interim, and the subsequent complications were yet to become evident. Auckland has recently had three major outages, with perhaps two more to come: the national power shortage of 1992; a Auckland-wide water shortage in 1995; loss of power to Auckland’s CBD in 1998.[4] Experts say the Auckland sewerage system is close to capacity; drivers draw similar conclusions about Auckland roading. There is a pattern here. As Lady Bracknell could have said, ‘to lose one could be regarded as a tragedy, to lose two looks like carelessness.’ An easy – almost invisible way – of cutting back on investment is by squeezing safety margins, the extra capacity installed to deal with the unexpected. This seems to have happened with national electricity supply and with Auckland’s water supply and local electricity grid (and its sewerage and roads). Auckland has been the most vulnerable because it has grown fastest. Other urban centres may have serious outages in the next decade. Once engineers reigned supreme, resulting in – so it was said – the overbuilding of the infrastructure: ‘gold-plated’ works was a frequent criticism. Today it is the accountants who rule, and the infrastructure is underbuilt for emergencies: the pewter is not taking the pressure. The issue of whether the public would prefer to pay more at the beginning to give better safety margins, or suffer the deprivations when the safety margins are exceeded, was hardly discussed before the decisions to diminish the margins was made.

Fourth is the question of the institution’s culture.[5] The corporatisation typically involved sweeping changes to management, replacing specialists in the business with generic managers, and where possible outsourcing the specialists. This was often feasible because – with the economy stagnating and safety margins squeezed – the role of specialists could be downgraded. However, that is not so easy in a health system. There was no diminution of demand as a result of the economic stagnation – sickness rises with unemployment. Managers cannot stand in for medics – a notion nicely satirised in a Tom Scott cartoon in which a group of obviously demented people are being told the ‘chief accountant has just gone through the books and says you are all cured’.

The clash between the cultures of the clinicians and the generic managers came to a head at Christchurch Hospital’s Accident and Emergency Department. Some people probably died as a result. The resulting Stent Report was severely critical of the generic managers, both at the CHE and central government level.[6] The implication was that they did not understand the clinical issues involved, ignored the doctors and nurses who did, and undermined the safety margins. It would be comforting to believe the Christchurch experience was unique, but probably it was not. What distinguishes the Christchurch experience, aside from some exceptionally inept management, is that with a large workload, safety margins were exceeded often enough to rule out mere misadventure, while the size of the professional staff meant there could be the solidarity to protect the whistle-blowers.

Culture clashes appear endemic to the current system. More recently, a study into why hospitals were not adopting ‘best practice’ had the generic managers telling the investigators the main impediment to best practice was clinicians.[7] (It is not clear clinicians were even consulted.) What the generic managers were actually saying is that the clinicians were resisting the measures to cut costs and safety margins because they believed they would lead to unacceptably lower standards of health care.

If the managers were unwilling to listen to the health specialists, they seemed besotted by the consultants, the other group which Scott said let the reformers down. In a 1987 study, Chicago consultants Arthur Anderson claimed that public hospitals were inefficient and 20 plus percent productivity gains could be made. Even at the time the conclusion was known to be statistically flawed. The Gibbs taskforce, which commissioned the study, then jumped to the conclusion that a privatisation of the health system based on generic managers and market demand and supply would reap these alleged gains. Their case was entirely ideological – the consultants had not even investigated the efficiency of private hospitals.

In 1991, when implementing the Gibbs strategy, the government hired officials and consultants who knew absolutely nothing about the health sector, while those with proven competence were ignored or sacked. Detailed questioning of the reform team indicated they had no idea how the gains would happen, other than the odd anecdote based on small unrepeatable gains already made. The advisers were so ideologically committed that expert critics were dismissed. Accountants Coopers & Lybrand even advised that, in effect, the CHEs sack any staff doubtful about the reforms.[8] Ironically, the public, who had access to both viewpoints – of the reform advisers and of the critics who were competent – were better informed than the government politicians. The difficulty with such policy implementation regimes is that not only can they lack competence, but that any attempt to draw attention to major mistakes is ignored or repressed. The consultants are hired to implement the plan, not to assess its feasibility and identify its weaknesses. Unlike the clinicians at Canterbury Health, consultants do not have an ethic which overrides their contractual obligations. Commercialism brooks no higher morality.[9]

As Scott rightly acknowledges, the result of the advice of such narrow and restricted consultants was a failure, although one may argue – as experts did at the time – that the changes to the health system were so misconceived that the reform was bound to fail. If mistakes of this magnitude involved a dam falling over, or an electricity outage, there would be a public inquiry. But the response to the health reforms disaster has been quite different. Those involved are still advising the government. Scott, who as Secretary of the Treasury ought to be accountable for the watchdog’s failure, is chairing the HFA, which makes critical decisions about the future of the health system. Coopers & Lybrand provides further reports promising vast cost savings by closing hospitals. Other advisers with equally unimpressive records continue to guide public policy. Why? The best parallel I can give involves a tenor performing for the first time at the La Scala opera house. After his aria, the audience – well known for its discernment – shouted: ‘Encore, encore!’ He sang his aria again, and again an encore was demanded. A little breathless the tenor asked how often did the audience want him to sing the aria. A voice called out: ‘Until you bloody well get it right.’

But what does ‘getting it right’ mean in this context? Why do they not do the obvious and abandon the commercialisation reforms since they have failed? It is hard to teach old advisers new tricks, while the commercialisers had substantially diminished the capacity of others to present alterative views. Many government officials are not inherently commercialisers, but they know no alternative. Moreover, the ultimate destination of privatisation has not been abandoned, even if the route is more circuitous.

Demand-side privatisation

Health system privatisation can be on the demand side or on the supply side (or both). The demand side is how health care is paid for. Traditionally, 90 percent and more of health care was paid for from the public purse. (It is not sensible to expect 100 percent to be paid by the government – people are going to purchase their own aspirins and alternative medicines.) But this proportion has been falling. Recently, less than 80 percent of total health care spending has been publicly provided, despite a 1993 election promise by the National Party that it would maintain an 80 percent ratio. There was some recovery in spending under the coalition government – but not enough to attain the 80 percent target.

Figure 11.1 [not included – see book], which compares New Zealand health spending as a proportion of GDP with the OECD trend, shows the extent of the underfunding. Even after the increases from the Coalition Agreement, the late 1990s levels will not rise to the 1991-based trend. The gap is around $2.3 billion for the last six years, almost six months of the health vote, equivalent to closing down the entire public health system one month every year. Instead, there have been financial deficits in the HHSs, explicit and implicit waiting lists of those in need of care, additional private health expenditure as a result of cost-shifting, and death and suffering that the sick and their families have experienced.

This deficit seems to be the source of the imbalanced balance sheets of the HHSs. Although the government cut back on funding, the public providers continued to provide services for patients in need, even if they were not paid adequately for them. The commercialisers who were devising the purchasing prices (Scott’s so-called ‘efficient prices’) for health services did not communicate with those who were restructuring the balance sheets, and so the purchase prices do not properly incorporate the prices set for the assets. It was a matter of the right hand not telling the left hand (or, more accurately, the very right hand) what it was doing.

According to commercial theory, the loss-making health services should have stopped producing, sold up their assets, and closed down. This applies to virtually every public hospital. Their facilities would, according to the commercialisation theory, be better converted into some other use with a higher rate of return – say hotels or brothels. This obvious nonsense, except to a commercialiser, has the consequence that selling off loss-making providers – even giving them away – would improve the government finances. Human health and welfare does not appear in the government’s balance sheet. But the commercialisers were unable to destroy the professionalism and public commitment that characterises the public health service. So the CHEs made losses by providing services for which they were not paid. Rarely a week goes by without new announcements that there is ongoing pressure on the HHSs to cut service provision.

This typically results in cost shifting on to the private sector – on to patients – thus incrementally privatising the demand side. The shift may occur indirectly, as when an early discharge adds to the costs of the family, friends, and neighbours in looking after the patient, or when the patient finds her- or himself unable to be treated and so carries an economic burden from the sickness. It becomes direct when the sick abandon the public sector and purchase private care. By screwing down public spending, the government forces what is, in effect, privatisation on the demand side.

The commercialisers aim to force the population to purchase private medical insurance as their funder. They have not been successful. Indeed the proportion of the population with private health insurance has fallen.[10] The existing private medical insurance system had developed as a supplement to the state, topping up a well-established public system (so that the insured could jump public waiting lists). They were unable to adapt to the new system, especially as their charges were being dramatically raised as they were required to cover more and more deficits in the public health system. Moreover, because of the purity of the reforms, explicit and implicit subsidies were withdrawn (as when private hospitals depended upon facilities from public hospitals without charge), further raising private costs to the public. Ironically, a system of private medical insurance needs some government interventions and support – as Act advocates. But encouraging private medical insurance is a signal to the public that privatisation is the ultimate destination on the demand side. Once private medical insurance begins functioning properly, the government would increasingly restrict access to the public system, driving people to make use of private insurance. (A similar strategy applies in the tertiary education sector. By cutting back government funding to the teaching institutions, the institutions are forced to raise their fees to students.)

As long as the government insists on cutting back on public health sector funding, the threat of demand-side privatisation remains. Post-MMP, there were two initiatives to address the undermining of the public sector. First, as a result of the Coalition Agreement, public funding was increased. And second, there was an attempt to have a citizens-initiated referendum, to further raise the level of public health funding.

The health spending referendum

In the course of the planning of this health-spending referendum I was asked to advise on a suitable target for public health spending. 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, an official definition of health spending like that used by the OECD was necessary.[11]

One possible target variable was a dollar value, but that is vulnerable to inflation. A constant price total could be targeted, but there are no official price indexes for the calculation.[12] In the end the Referendum Group chose to target public spending as a proportion of GDP, a standard OECD measure, so international comparisons are possible. As Figure 11.1 shows, the GDP percentage of government spending on health fell after the 1991 reforms. But total public spending after NZF joined the government increased (demonstrating, incidentally, that MMP has had an effect). 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. The Referendum Group wanted a simple number – preferably an integer. So the target was rounded to 7 percent. Given the spending backlog, the slightly higher target is easily justified.

I checked the 7 percent of GDP target in two other ways. First, government spending as a percentage of total health spending would be about 82 percent, which would put New Zealand 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 National promised a target of 80 percent. Second, could the proposed amount of money on health be spent effectively? I looked for evidence of real health needs being unmet: New Zealanders require 35 points on a scale to be treated for a cardiac condition, although the international recommendation is 25 points; some patients diagnosed with cancer had been waiting for over 14 weeks for treatment in some locations; 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. The list of examples could go on interminably, but in summary individuals and their families are suffering unnecessarily because there has not been enough spending on health care. There will always be rationing of health care, but current rationing – overly dependent on rationing by ability to pay – appeared 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 was currently planned. 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 the condition 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. This economist liked the referendum proposition because it offered a demand with a price (of higher taxes). Thus the group chose as its proposal for an 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.

Would the public like the trade-off? There is a history of surveys which suggest ‘yes’. But there is still the issue of public enthusiasm. Would there be sufficient to obtain the 10 percent of the electoral roll required to initiate a referendum? In the end the task proved too onerous. The various voluntary organisations exhausted by day-to-day matters were unable to find the energy to pursue long-term ones. And so despite a lot of public support the sponsoring organisations decided not to go ahead. A citizens-initiated referendum requires a petition signed by 10 percent of the voting population – a high hurdle – which indicates why such referenda have so rarely occurred.

Supply-side privatisation

Supply-side privatisation refers to use of private sector providers. Until the 1996 election this goal was pursued by contracting to private hospitals and other providers, so an increasing proportion of the public funding has been going to private suppliers. Should a medical service be provided by a public or private supplier? The crucial element is whether the private sector can provide the high professional and public spirited standards that are expected of the public health service. Without going into detail, we may ask whether a private hospital would provide treatment for a patient in need for which it has not been paid, as do public hospitals. The other worry is the fragmentation of the entire health system. A private provider can choose to offer services which are profitable, leaving the public provider those which are unprofitable, but may be socially valuable but badly priced. This can result in the abandoning of the so-called unprofitable services. Given interdependencies between various services, that could collapse local provision, especially in rural areas. (Recall Scott acknowledging that the government had made mistakes in its health pricing policies. Obviously it can do better, but it will make mistakes which leave the private sector with the opportunity to cherry-pick.)

It is unclear whether the commercialisers running the health system deliberately drove the hospital system into debt to facilitate its privatisation: incompetence is probably a better explanation. But even if that was not their explicit intention, it is the long-run effect of their policies. The HHSs have had strong financial signals to let the private sector win contracts, and sell off the buildings, lands, and other services – a privatisation by attrition. It is not as efficient as straight privatisation, but that has been proscribed by the public. In principle, the shift of public funding to private provision was prohibited by the Coalition Agreement, except in special circumstances. Practice has been more complicated. While it is too soon to tell about the successes and failures of the practices, the policy makers have continued to seek ways of reducing the government’s involvement in the supply of health care.

Privatisation could be pursued by turning primary carers into fund-holders. It is not clear how advanced is this strategy, and there have been some recent setbacks. Here is an extreme scenario, where the funds that would normally be spent on secondary care for a particular population are given to their general practitioners, who purchase the secondary care on their patients’ behalf. Thus groups of general practitioners replace the HFA as the regional purchaser of all local secondary services. There is a case for some fund-holding by GPs for those services whose use they control: pharmaceuticals, laboratory services, possibly first referral to specialists. It rests on GPs taking responsibility for the resource consequences of their treatments. However, it is difficult to organise equitably the funding (to decide how much funding for each patient),[13] while in Britain there are stories of GPs making poor-quality decisions – treating patients in their clinic instead of referring them to a competent specialist. But once the patient is outside their control, the case for GPs managing funding is considerably weaker. At best it would be a privatising of the HFA, with inefficient agencies managing the funds on behalf of the GP group, a private decentralisation reminiscent of the ‘Health Care Plans’ proposed in the original reforms, but rejected as impractical and socially undesirable. GP fund holding can be used to privatise demand. GPs already charge their patients. Faced with squeezed public funding, they would have to charge their patients more. At first these would be supplementary payments, but after a while the organisation managing the funding on the GPs’ behalf would start offering what amounts to a medical insurance scheme. GPs would insist that all their patients join it, and after a while there would be, virtually, a nationwide compulsory private medical insurance scheme, which would allow the further squeezing of public funding. This scenario is speculative. But it illustrates how privatisation can remain on the policy agenda, whatever the public wants and whatever the politicians may protest – as indeed they protested innocence about their intentions in the 1991 reforms.

An alternative approach

Can the disintegration of the public health system of the 1990s be stopped? The policy needs to be based on neither extreme privatisation nor extreme anti-privatisation. Because there needs to be public confidence that any advice is pragmatic and not ideologically committed to privatisation, the most important single change would be to staff the government advice and provision agencies with people who are committed to a public health system, and who want to implement one pragmatically.

The second major change is that there needs to be a recognition that there is no substitute for more public spending on health. Promises of efficiency gains to substitute for funds are worthless. As explained above there is a strong case for public funding to be increased to at least 7 percent of GDP, and thereafter in line with the OECD trend.

The third major change is that the primary purpose of the system must be the provision of health care, and a secondary objective is to do so within the constraints of the available funding. This would be a return to the pre-1991 culture.

Is there a role then for private provision? In some respects the crucial distinction is not between public and private provision, but between not-for-profit and for-profit provision (for many private sector providers such as voluntary agencies are not-for-profit). Recall Allen Schick’s equation of public sector managerialism to ‘responsibility’, which he defines as ‘a personal ethic, a commitment to do one’s best, a sense of public service’ (Chapter 7). Schick is of the opinion that the contractualism which has driven the public and health sector reforms can undermine public managerialism for it may diminish public-regarding values and behaviour in government. While it is not an exact equation, a not-for-profit organisation is generally driven by personal responsibility, whereas accountability is much stronger in a for-profit organisation. This is not to argue that responsibility cannot occur within a for-profit organisation. What Schick was saying is that it is harder to nurture responsibility in a system which is driven by accountability.

Today, senior doctors’ employment contracts often include a clause which states that all parties (including the HHS itself) recognise the primacy of the personal responsibility of the clinicians to their patients. As the Medical Council said, ‘doctors should be aware when taking up employment that they have a personal responsibility to their patients which should take precedence over accountability to their employer . . . It is important to ensure that management policies reflect ethical medical advice.’ The clause is a whistle-blower’s charter. Suppose a medical professional is aware of some circumstance which is contributing to the financial viability of the employing institution, but a risk to patients – say compromising the safety margins. Suppose all internal channels of redress have been exhausted. Then the professional is obliged by their personal ethic to go public. Their employment contract means to do so is not a disciplinary offence. This approach is very different from that taken by a newly appointed CHE chief executive, a generic manager from outside the medical system, who announced that his object was to get his staff to ‘own the problem’. When asked what the problem was he admitted the problem was CHE profitability, and even his voice trailed off when he realised the absurdity of the notion.

It may well be that the objectives of for-profit institutions are more destructive to the culture of personal responsibility, because they are more concerned with accountability. Thus the crucial questions in the public or private provision debate may be: does the agency expect that the first loyalty of the professionals will be to their patients or to their employer’s profits? Is it organised on responsibility or accountability lines? No doubt every health organisation, if pressed, will say that of course their highest priority is to their patients, although for-profit ones may be a bit more reluctant to incorporate that notion into their employment contracts, because of its potential to compromise the bottom line. That cultivation of responsibility needs to be a part of the design of a health delivery system. It should be mandatory on publicly owned providers. Most not-for-profit organisations in the private sector may well follow voluntarily. A condition of public funding of the private sector – for-profit or not-for-profit – should be a professional responsibility clause in all the relevant employment contracts.

In the longer run, the best way to implement this change of orientation and recommitment to the traditional health service culture may be to make each HHS responsible for a particular region, and give it responsibility for the provision of public health in its region. But they should be required to utilise private agencies which provide comparable quality at lower cost.


Despite the 1996 Coalition Agreement, and despite a public demand for a reversal of the policy direction of the 1990s, a surreptitious privatisation of the public health system appeared to remain part of government policy. The government has been trapped into the strategy by three major factors. First, it was reluctant to provide adequate funding. Second, it has continued to rely on a paradigm – and those who promoted it – which emphasised the running down of the public provision, while continuing to ignore those who advised that the reforms were not going to work. And third, the government has not been able to apologise.

It is worth exploring the political implications of the third factor. Australian Graham Richardson, an ex-Labor senator and insightful political analyst, argues that when building a house the first thing to build is the backdoor – the exit if something goes wrong. The same almost applies for policy. What is a politician to do, if the promised outcome proves elusive, or even is worse than the situation it was alleged to remedy? How is a politician to say, ‘sorry, let’s reverse the policy and start over again’? The conviction politics of the commercialisers implementing a blitzkrieg make this virtually impossible. Apologising and retreating are not in politicians’ vocabulary, eventually to their cost. When Geoffrey Palmer became prime minister, the government undertook a major secret review of its economic policy, and concluded it could not be changed. The inevitable outcome was that the Fourth Labour Government was destroyed in the 1990 election.

For that is one of the strengths of democracy. Failed policies can be changed by changing the politicians. Any smart politician must conclude that there has to be a better way. Given parliamentary outcomes are going to be more responsive to public judgements and sensitive to policy failure under MMP-elected parliaments than under FR ones, and given it is inevitable some new policies are going to fail, successful politicians are going to have to find ways of apologising and retreating. Not overcommitting oneself to a fallible policy development would be the first step.

Even so, Bill English, the Minister of Health from 1996 to 1998, was promoted to Minister of Finance in early 1999 with much comment that he had taken ‘health off the front pages’. In part that was because his cabinet colleagues had other political disasters which were crowding health stories out. But also, the additional funding as a result of the Coalition Agreement enabled the government to attend to some of the worst problems. There are two interpretations to this success. The first is the Treasury nightmare: a politician can buy popularity by spending more generously. It is instructive that as a new finance minister English commented: ‘The view that you can just shrink expenditure if you have an ideological commitment to it, I don’t think is practical in New Zealand.’[14] The second is also in English’s statement. The public desires more public health, and although seeking productivity improvements is continually necessary, ultimately and more importantly ongoing increases in public expenditure are more significant in meeting the public’s aspirations. It will be interesting to see whether the public is willing to trade-off additional spending for no apology, or whether the simmering anger will burst out again and be offset by another round of additional spending. But without that apology – the admission that the health reforms were deeply flawed – it is difficult to see how National can provide a sensible account of its new policies.

There is one further lesson from the failed health reforms. Despite their incompetence, the health system struggles along reasonably successfully. True, there are near-bankrupt financial statements, run-down buildings, inadequate equipment, limited access to resources, management that does not understand health care, waiting lists, inappropriate discharges, cost-shifting, and a host of other items which leads New Zealanders to despair. Yet they regularly report how well they are treated once they are admitted to hospital. The paradox is explained by the quality of the doctors, nurses, and technicians, with their culture of public service. Ironically reforms, which were contemptuous of their culture and tried to undermine it, have had the fig leaf of success preserved by the dedication of the medical professionals to high standards of health care, and their disregard for the commercial principles which override personal responsibility by financial accountability.

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