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.

Conclusion

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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Endnotes

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Presentation to Information Workshop on Disease Moderating Agents, sponsored by the Multiple Sclerosis Society of New Zealand: Thursday 17 June 1999.

Keywords Health

The Public Policy Context

Public policy is about problem solving. The specific problem I shall look at today is who with multiple sclerosis should be able to obtain access to Interferon-beta therapy? But public policy answers to such questions have to take place from a wider perspective. Resolving the public spending problem on multiple sclerosis has to take place mindful of the tradeoffs with other public spending (including on other diseases) and the raising of the revenue (typically via taxation) to fund them. There has to be a consistency between the specific answers, for otherwise the various decisions – the resolutions to the problems – becomes a matter of arbitrariness, creating ongoing tensions (and further problems) because of inconsistencies.

Each democracy solves its public policy questions differently in terms of the institutions it uses, and technologies it uses for evaluation. There is however, considerable convergence between different countries’ practices. The New Zealand arrangements I am going to describe today would be recognized as similar to those in most western democracies – the US, with its emphasis on commercial principles excepted although they may be at different stages of implementing the systematic practices.

At this point, I should state that I am neither a neurologist nor a pharmacologist, so I know very little about these aspects of the treatments considered here. My contribution is to say something about the resource consequences of the use. I shall be using published papers, each typically by a team which includes a neurologist, a pharmacologist and an economist. If my task were to do an original evaluation, I would work with such a team too.

The registration of pharmaceuticals, is medical-pharmacological matter, which among other matters considers safety aspects of the drug. Once a drug is registered, it is available for a treatment. Registration provides no guarantees of universal accessibility if the drug is expensive. Those who can afford the drug may purchase it. Aspirin is available from a chemist. However many drugs – especially new drugs – may be far too expensive for the typical sufferer to afford. At which point arises the public policy problem of whether it should be funded in whole, or part, by the public purse.

The Funding of Public Health Care

A simplified version of the public policy towards the funding of health care goes like this. At the top of the system the government decides how much it is willing to spend on all its activities. That decision depends largely on the amount of taxation revenue it raises, and on a judgement of the effects of various tax rates and the willingness of the community to pay those taxes.

There is no value-free formulae which tells a government how much it should tax or spend. In a democracy that decision is made by the political judgements of the government in power. Once every three years we have the opportunity to vote for a parliament to select a government. One of the factors which influences our voting is our personal preference for more or less government spending and less or more taxation. Within the period between elections, the government is continually judging the extent to which the public in general, and its supporters and potential supporters in particular, want to spend and tax more or less.

Having decided on total spending, the government allocates it between the various general areas, including health. For instance, in last month’s budget the government announced total spending of about $36.4 billion for this fiscal year, of which $6.8 billion it allocated to health spending. Again there is no rigorous formula which says how much the government should allocate to health or any other spending. That is a matter of political judgement.

I have stressed these political judgements at upper levels, because as the money moves down through the system, technical considerations become increasingly important, and politicians become increasingly less involved. That is how it should be in a democracy. We do not want politicians making the decisions in the clinic or surgery. Even so, technical decisions almost always value judgements lurking near them.

Reflecting the changing balance of political and technical, parliament decides the amount of the health vote which goes to the Health Funding Authority which funds (in the jargon “purchases”) the various health and disability services the public health sector provides. This year the amount is about $6.2 billion. The HFA allocates about $700 million to Pharmac or the Pharmaceutical Management Agency, which is charged with administering the public subsidies on about 3000 pharmaceuticals.

Pharmac’s Problem

The policy problem which Pharmac faces is how to use its funds effectively. Some of its actions are fairly obvious. It buys drugs as cheaply as possible. It tries to make sure the drugs it pays for actually work. It tries to make sure they are not wasted. Even when such sensible things are done, the demand for medication far exceeds the funds that Pharmac has available.

I am now going to try to explain the policy framework which Pharmac is increasingly using to decide which drugs to fund, given the budget constraint it faces. The underlying theory is complex, although I have done my best to keep the exposition as simple as I dare. Some readers may find it convenient to jump three pages, accepting that there is a criteria, and the ratio of the Net Cost to Quality Adjusted Life Year (or QALY) is a rational way of making the decision whether to fund a drug or not. However others will value the opportunity to obtain some idea as to the underlying analysis behind the theory.

The (over) simple example is set out in the Table 1. It assumes there are just 10 drugs (Column 1) to be funded, which in total cost $55m (Column 2). But suppose there is only a total of $20m available for funding. How is the $20m to be spent given that the demand for funds far exceeds those funds available?

There are many possible rules, some of which have developed in an ad hoc way over the years. For instance, the “grandfather rule” is that if the treatment had applied in the past it should continue into the future. Whatever its merits – much of today’s treatments are grandfathered rather than using any systematic approach – the rule does not tell us how to decide between new therapies.

Another approach might be called the “shout principle”: those who make the most noise get the treatment. There are a number of dangers: given all the shouting, no-one may be heard, however justified their need; it is an encouragement for political interference in technical decisions; and it can be very wasteful of resources.

To illustrate, suppose that therapies are chosen in order to have the maximum number of people treated – since loudness is in numbers. That is equivalent to allocating the funds by cost per patient (or shout). Column 3 shows the cost per patient for each therapy. Table 2 ranks the drugs by cost per patient. Drug A costs $10 a patient, cheaper than any other, so the rule would fund the 1,000,000. Drugs E and G are the next to lowest in cost per patient terms, so they are funded. The three cost $20m, and exhaust all the available funds. On the shout criteria, the drugs A, E, and G would be funded.

There is absolutely no allowance in this assessment for the benefits of the treatment. For instance, drug A may be something like an aspirin, which is of small benefit to a lot of people. In contrast drug H might be a matter of life and death – if the patient does not get it the patient dies. Intuitively one feels that drug H should be given more significance than drug A, but the cost per patient criteria does not take that into consideration.

QALYS and Decision Making

In order to get around the problem of treatments having different benefits, economists have evolved the QALY, or “quality adjusted life year”. QALYs work like this. A person living a normal life, in normal health, has a QALY of 1. A person who is dead has a QALY of zero. People whose health is between have a QALY level between 1 and 0. If a person’s health changes, then the QALY level also changes. For instance a person who is saved from certain death has a QALY level of 1 rather than 0, and a treatment that saves is treated as adding one QALY a year to the person’s life. Calculating QALYs is complicated and riddled with problems. Let us take it here that they are a reasonable way of resolving the impossible problem of comparing everybody’s health. We know no better one.(1)

Historically, a common means of measuring the effects of Multiple Sclerosis has been by the Kurtzke expanded disability status scale (EDSS) of neurological impairment on a 0 (normal) to 10 (dead) scale, based on responses to 20 questions. The EDSS scale can be mapped onto a QALY one, which applies to all health statuses.(2)

Column 4 of Table 1 shows the QALY gained from the treatment for each patient. The aspirin of drug A gives only a small gain of .0001 QALY per patient, but the life saving drug H treatment gives a gain of 1 QALY. The gains for the other drugs are in the range from .1 to .4 QALYs. Column 5 gives the total QALYs gained from each treatment, and Column 6 gives the cost of each QALY gained. They range from $6000 for drug H to $500,000 for Drug I. If we want to maximize the QALYs to be gained from treatment, we will choose those which are cheapest in terms of the cost per QALY. This is summarised in Table 3, where you see that drugs D,E,G and H are the cheapest and there total cost is $20m. So if we choose our therapies by the criteria of QALY gained, we replace the low return drug A (the aspirin) with drugs D and life saving H which seems to be a more sensible outcome.

There is one further major modification to the Pharmac evaluation method. Some therapies save resources elsewhere in the health system. For instance, a course of Interferon-β may mean fewer relapses, and less use of medical and hospital resources. Column 8 of Table 1 lists the cost savings to the health system for the various therapies, Column 9 shows the net total cost to the health system when the savings per patient are deducted. It makes sense to include these cost savings in the calculations. For instance, without them the method could rule out a better and cheaper drug therapy for a particular condition, because it would ignore the savings from abandoning the old therapy. So instead of using gross cost per QALY, we would use net cost per QALY, which is shown in Column 10.

Table 4 shows the rankings. Now drug J is the cheapest, and that with drugs H, D, G, and F would be the recommended ones. However, while their gross cost is $20m, their net cost (after we have deducted the savings to the health sector) comes to only $12.2m. We can now also afford drug E, and still have a bit over for some spending on drug C.(3)

Table 5 summarises the outcomes of different choice of drugs within the budget constraint. By changing the selection criteria we change the set of drugs which the agency would provide free. As the criteria moves from gross medical cost per patient to cost per QALY, drug A gets dropped in favour of D and H. Shifting to net medical cost enables drugs F, G, and part C to be added.

What is unavoidable however, is that given the budget constraint a selection has to be made, and that some selections are better than others.

Some Problems with the Method

I have simplified the method for expository purposes. However there are some issues which are still being debated and need to be briefly mentioned:

– Should other net gains to government revenue (such as savings in social security benefits and additional tax payments from working) be included? But we need to be careful about the implications. For instance, incorporating the gains from employment could mean that the potentially employed were given preference to the unemployable.

– Should non-government gains (such as the extra earnings of a well person) be include? We have to be careful here not to double count, since the quality of life includes the consumption which goes with it. Moreover, too wide an approach can lead to ethical issues: if some illnesses cause marital breakups, which treatment prevents, does that mean the treatment should preferentially be given to the married?

– Are all QALYs are the same? Some surveys suggest that people think some lives have characteristics (such as age) which are more worthy.

– How are the effects of the treatment on the quality of life of others to be included? For instance there is a case for a higher QALY score of parents with young children, because it improves the young’s quality of life too (or adding in a QALY for the better life of a child without a sick parent).

– Should low probability health events (such as MS) be treated differently from high probability ones (headaches)? Part of the issue here is what costs can be reasonably attributed to the person. We dont give higher social security benefits to people who need to more to eat.

– What about moral hazard, the technical term for situations which affect one’s health or entitlement to treatment? Most people would be more reluctant to provide aspirins for a headache precipitated by a hangover, which the patient’s drinking brought it on.

– How events that take place over time to be treated?. The technical notion is “discounting”: there is some dispute over what is the correct discount factor. Different ones may affect the relative ranking of wasting diseases such as multiple sclerosis compared to one-off gains from surgery.

These are proper matters for debate. Very often they will reduce the cost per treatment but not change the rankings. Whatever the outcome of these debates, I doubt they will have much influence of the question of the funding of Interferon-β therapy. And they certainly do not invalidate the need for an approach which involves a systematic decision rule.

In Defence of Pharmac

After presentations such as this, economists are often accused of being calculating and hard hearted. Calculating we are, just like engineers who design bridges you can trust. In the economists’ jargon the calculations are to get “as big a bang for the buck as possible.” Without them there will be a waste of resources, and less people would be effectively treated.

But economists are not necessarily hard-hearted. What we are aware is that where there is a budget constraint, being warm hearted to one means being cold hearted to others. It is a sad truism that people allege cold heartedness when they are turned down, but dont mention a warm heart if they are given a “yes”. Economists dont push into health policy because they are intelligent, beautiful, witty, wise, or power hungry. They may (or may not) be some (or all) of these. The reason economists get involved because of the funding constraint. Were there no economists, the government’s health agencies would still face the problem of what to do with limited funds. Eventually someone would recommend a prioritisation not unlike that which economists recommend.

My impression of the economists and others who work for Pharmac is that they would love to be able to say “yes” to everyone. They, too, have friends and family who suffer illness but are unable to get the maximum treatment for conditions they suffer, because of the budget constraint. Of course they are tough. They have to be, when they say “no” to one treatment because the funds could be better spent on another. And they have to be tough when the front up to a pharmaceutical company to get the best possible price, knowing the money saved can be spent on other drugs.

The Threshold

In practice, Pharmac does not do the elaborate exercise I have just described, for that would mean evaluating every drug therapy every time a new drug appears. Rather they calculate the net cost to QALY ratio of each new drug, and compare the ratio with that for other drugs. This is equivalent to a “threshold” approach where if the cost per QALY of a new drug is below the base threshold it is subsidised. Usually there is a grey area, where drugs with ratios above the base threshold up to a second higher threshold, where other factors not included in the Cost per QALY consideration are taken into account.

Looking at Table 4, the lower threshold might be $10,000. If the ratio comes below that, and Pharmac has the money, they are likely to recommend to the provision of the drug without charge to the patient. In the grey area, say up to $20,000, they are likely to say no, unless there are some other relevant considerations.

Pharmac has not said what its thresholds are. Essentially they are the consequence of the amount that parliament provides for health care. The more money voted, the higher the thresholds, and the more drugs and other treatments that can be funded by the public. However, we can guess the Pharmac thresholds must be near $20,000 a QALY. That is about the average (public and private) consumption per New Zealander. If, for instance, the threshold was $200,000 a year, then ten people in the community would have to give up all their consumption in order to gain one QALY. It seems unlikely that New Zealanders would be willing to accept the taxation consequences (and their personal consumption loss) of such a high threshold. Thus the technical threshold for evaluating the drug ratio reflects a political judgement at a higher level.

(Even so, I am of the view that there is a case for spending about an extra $500m a year on the health sector, in terms of what New Zealanders are willing to sacrifice, and the substantial health improvements which would arise as a result.)

The Net Cost to QALY Ratio for Interferon-β

Although there has been no New Zealand specific evaluation of the costs per QALY for Interferon-β treatment for multiple sclerosis, there are four foreign reports in the public domain, which give us a strong indication of what a New Zealand analysis would look like. They identify two key benefits from the treatment, where it is applicable (noting that there is no evidence those with primary MS benefit from the drug). Among those with its relapse-remission from it appears that as a result of using Interferon-β:
– there are (perhaps a third) fewer relapses, which saves medical costs and gives a better quality of life;
– the progression of the disease is retarded. However, not a lot is know about the long run retardation, mainly because the systematic evaluation of the treatment is recent, so there has not been enough time to observe its effects in the long run. Trials have been at most three years, and there may never be long term trials because of the ethical issues involved.

Here is a brief summary of each, focusing on the key efficiency finding:

A Therapeutic and Economic Assessment of Betaseron@ in Multiple Sclerosis. (Dalhousie MS Research Unit, Halifax, Nova Scotia, Canada: July 1996)
The net cost/QALY of the Betaseron® therapy amounts to around $CAN160,000 (say $NZ200,000) for women and $CAN136,000 ($NZ170,000) for men.

Interferon Beta-1a in Relapsing-Remitting Multiple Sclerosis. (The Wessex Institute for Health Research and Development: December 1997)
The net cost/QALY of the Interferon Beta-1a therapy amounts to between £740,000 and £5.5m ($NZ2.1m and $NZ16.5m). The report concludes “not proven”, the lowest level of its five recommendations.

Comparison of Drug Treatment for Multiple Sclerosis. (Canadian Coordinating Office for Health Technology Assessment: November 1998)
The net cost/QALY of the Rebfin® therapy amounts to at least $CAN406,400 ($NZ.500,000).

A Cost-Utility Analysis of Interferon Beta for Multiple Sclerosis. (University of Newcastle: December 1997)
The net cost/QALY of the Interferon Beta therapy amounts to between £228,300 and £809.900 ($NZ680,000 to $NZ2.4m). This study, the most comprehensive, looks at various retardation rates and reports “[t]he most optimistic estimate from the ten year model, incorporating some extreme assumptions about natural history and the impact of therapy was £74.500 [$NZ220,000] per QALY gained.”

These are all very high figures – the lowest is around $200,000 per QALY, well beyond any likely threshold that Pharmac (that means “us”) can afford. I was asked to look at doing a New Zealand study, which would have applied New Zealand parameters to these studies. My advice to the MS Society was that they would be wasting their money, because whatever changes were made, the ratio would remain well out of line with any Pharmac threshold.

Why is Interferon-β so cost ineffective? An examination of the studies suggests that:
1. Interferon is expensive – treatment costs about $20,000 a year;
2. It is ongoing treatment (rather that a one-off therapy – like surgery);
3. The average reductions in other medical costs are relatively small. For instance, while there are medical savings from fewer relapses, one study estimated that the saving was only 31 percent of the cost of the drug.
4. The therapy is ineffective for many people, and it does not eliminate all relapses. The studies assume that it is not possible to discriminate between those who will benefit and those who wont, and so – as it were – much of the expensive shot is wasted.
5. The health (quality of life) gains are on average relatively small per dollar spent.

It appears that in our current state of knowledge, the gains from reducing relapses are insufficient to justify Pharmac subsidizing the medication. Ultimately the justification is likely to be from better targeting on those with a high relapse rate (because that may reduce high hospitalisation and other medical costs), but the big gains arise if the progressivity is greatly retarded, especially with better targeting. Only further trials will tell if we have been too pessimistic.

In the longer run, we can expect neurologists and pharmacologists to refine their administration of the therapy to get improved patient benefits, while the drugs themselves will improve, and their costs reduce. The net cost to QALY ratio is likely to lower steadily overtime. Unless someone finds an better drug, Interferon-β may eventually be made widely available without charge by Pharmac or its successor. But that date is some time away.

A Strategy for Accessing Interferon-β for Multiple Sclerosis

What is clear is that Pharmac is not going to be funding the drug to all potential beneficiaries (no matter how small the benefit) in the near future. What is to be done in the interim? I am assuming that the MS Society will not want to do nothing, nor would it waste it time by trying to bust the policy framework.

It appears that in most countries where there is MS, make Interferon-β available for some patients without charge. But given the greatly varying utilisation rates, they must have quite different rules about its use. This suggests that New Zealand will also settle on a selective rather than universal entitlement.

The criteria for selection needs to be designed primarily by neurological and pharmacological specialists, but with a clear view of the implications of the policy framework analysis which I have outlined above. Pharmac will be most responsive to a criteria which targets those:
– who are most likely to respond to the treatment; and
– who have highest relapse rates or otherwise incur relatively high health sector expenditure; and
– who are likely to experience high retardation of the progressive deterioration; and
– where there are rigorous and effective criteria for identify those who are not responding to treatment, and should have the treatment withdrawn. (Alternatively a trial followed by selection as to those who are successful may be an option.)
Basically we should be searching for practices which cut therapeutic costs (of both the drug and of other therapies), and/or which increase the efficacy of the therapy in terms of some concept as the EDSS or QALYs.

There may also be personal factors which may affect eligibility for treatment (as occurs for the surgical waiting lists). One which may be especially relevant to a MS, with its high initial incidence among young women, is that parenthood should be taken into account, since success will also benefit the quality of life of young children.

Ultimately the criteria could even end up with a points system, like in surgery eligibility.

However, I would not wish to raise the expectations of the MS Society and its members that there will be a lot of people eligible under this criteria. Because funds are so scarce, Pharmac is more likely to look favourably on a proposition involving 25 people than 450.

If I may end on a personal note. I usually enjoy my consultancy work. This case is an exception. It gives me no pleasure to have to be so pessimistic about the short term opportunities for moderating the condition of people suffering a debilitating disease like multiple sclerosis. But that is how the material available to me appears. I would have even less enjoyment if I had used my expertise to tell the sufferers an untruth.

Endnotes
1. There are alternative proposals, such as Disability Adjusted Life Years (or DALYs), but they are not as nearly convincing as QALYs. They would not change the story greatly. Pharmac, rightly in my opinion, uses QALYs.
2. One contribution at the seminar argued that QALYs are not yet well defined for neurological problems.
3. I am not sure whether the HFA directly gives over to Pharmac the savings to the rest of the health sector from the use of pharmaceuticals. However, what we can be sure is that insofar as Pharmac increases its contribution to the rest of the health sectors savings, the HFA will increase Pharmac’s budget in due course.