HEALTH CAREANALYSIS VOL.I: 57-62 (1993)

From Evolution to Revolution: Restructuring the New Zealand Health System Toni Ashton Department of Community Health, School of Medicine, University of Auckland, New Zealand Abstract

After a number of years of evolutionary changes to the New Zealand health system, the government announced a radical restructuring of all publicly funded health services in July 1991, to be implemented on 1 July 1993. The primary features of these changes are a splitting of the purchaser and provider roles, and a restructuring of health services along more business-like lines. The proposals have been highly contentious and have attracted little support from within the health sector. This paper outlines the reasons for and nature of the reforms and explores some of the issues behind the changes. These include problems of pricing services for purchasing purposes, the potential conflict between financial and social objectives, and questions of accountability of purchasers and providers. Considerable uncertainty surrounding these and other issues means that any potential efficiencygains cannot be guaranteed. The costs of the reform process have, however, already been high, both in financial terms and in terms of their impact on the morale of health workers.

Introduction In July 1991, the New Zealand government announced a radical restructuring of all publicly funded health services. 1 Very broadly, the proposals fall into the category of what has commonly become known as 'managed competition'. The announcement has been followed by months of concentrated activity to meet the deadline for implementation on 1 July 1993. The proposals and reform process have been highly contentious. Supporters consider that the changes will make services more transparent, improve efficiency, reduce waiting lists and increase consumer choice) Opponents argue that the system will be costly, as well as uncertain and unproven. 2 Their preference is for cooperation rather than competition, and for evolutionary Toni Ashton, Department of CommunityHealth, School of Medicine, Universityof Auckland, Private Bag 92019, New Zealand. 1065-3058/93/010057-06508.00 9 1993 by John Wiley & Sons, Ltd.

change rather than revolution. While business people are generally in favour of the changes many health professionals are strongly opposed to them. A survey of nurses, for example, reported that 82% of respondents were generally opposed to the reforms. 3 This paper discusses some implications of the New Zealand reforms from an economic perspective, beginning with a review of the background to and reasons for the changes. The main features of the proposals are then described, followed by discussion of the underlying theoretical and ideological issues.

The Reasons for Change Government funding accounts for just over 80% of health expenditure in New Zealand. 4 The government also provides most hospital services although the majority of primary health services are privately owned.

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In the years prior to the announcement of the proposed reforms, the N e w Zealand health system had already undergone a period of considerable change. Between 1983 and 1989, 14 area health boards were established, the role of these boards being to provide hospital services, public health services, and some community services for the people of their region from a populationbased global budget. In 1988, a rather cumbersome triumvirate system of hospital management by doctor, nurse and administrator was replaced by general management. In 1989, a set of national health goals and targets was developed to establish spending priorities and the boards were required to draw up strategic and business plans for all of their services. 5 Accountability of the boards was established through a contract with the Minister of Health based on these plans. As a result of these and other changes, the area health boards began to operate in a more business-like fashion and by the end of the 1980s there was some evidence of productivity improvements. For example, between 1987 and 1990, throughput of hospital patients increased by 10% while spending remained fairly constant. 6 But in spite of increased throughput, waiting lists and waiting times remained unacceptably long3 Budget constraints were often evident in the continued presence of ageing equipment and poor maintenance. Moreover, productivity gains were not universal and some area health boards were getting into debt. It was also argued that, because area health boards owned their own facilities, there was no incentive for them to contract with more cost-effective providers. 1 Another problem arose from the fact that most primary care has traditionally been funded separately by the central government on a fee-forservice basis. This has meant that, unlike area health board budgets, public funding for primary care has been open-ended. Patient user charges already apply to general practice services and pharmaceuticals. Nevertheless, there was concern that primary care expenditure was increasing steadily and could not be controlled directly. 1 The separate funding for primary and secondary care also meant that patient care was poorly integrated and some cost-shifting occurred. In 1986, the funding of primary care services was reviewed and recommendations made. 7 However, no action was taken. Then in 1988, a

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task force reported on hospital and related services but again no changes were made. s Finally, in February 1991 soon after a change of government, a third task force was appointed to review the whole spectrum of publicly funded health services. The recommendations of this group were not published separately but instead were used as the basis for that part of the government's annual budget of 31 July 1991 which became known as 'The Green and White Paper'. ~ The two colours of the cover indicated a desire for the document to be regarded in part as a discussion (green) paper but in part as a policy (white) paper. In fact, it very soon became apparent that the paper was more white than green, there being little or no room for any discussion or submissions from interested parties prior to the introduction of legislation to implement the reforms in August 1992. 9

The Main Features of the Proposal The central feature of the proposals is a splitting of the purchaser and provider roles previously carried out by the area health boards. The 14 boards have been replaced by four Regional Health Authorities (RHAs) whose role is to assess the health service requirements of their populations and to purchase services as necessary from the most cost-effective providers. The RHAs will be responsible for purchasing primary health care (which was previously centrally funded) as well as secondary services. A committee, known as the National Advisory Committee on Core Health and Disability Support Services (NACCHDS), has been established whose task it is to define explicitly those services that RHAs are obliged to offer to the people of their regions. A separate national authority, the Public Health Commission, will be responsible for the planning and purchasing of public health services. Most of the hospital and community services previously owned by the 14 area health boards have been reorganised into 23 Crown Health Enterprises (CHEs). The CHEs will compete with private and voluntary providers to sell their services to the RHAs. They will act as independent businesses with appointed boards of directors, and will be required to pay both dividends and taxes to the government.

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Links between the RHA and competing providers will be established through negotiated contracts which will be supported by the legal system. The basic premise is that, by simulating some of the features of a competitive market, both purchasers and providers will face incentives which encourage greater efficiency in service provision. In the original proposals it was intended that, once RHAs were fully established, people would be given the opportunity to take their share of government funding to an alternative purchaser (a health care plan), the amount of their entitlement reflecting their level of risk. Thus the intention was to introduce competition not only amongst providers but also amongst alternative purchasers. However, this proposal has since been shelved, apparently indefinitely.

Theoretical and Ideological Underpinnings During the second half of the 1980s, the dominant school of economic thought in New Zealand, as elsewhere, fell into the general category of monetarism. Interestingly, unlike most other countries, in New Zealand these policies of macroeconomic restraint and microeconomic restructuring were first introduced by a Labour Government although the National (Conservative) Government elected in 1991 has continued in much the same vein. Policies have included balanced government budgets, a stripping back and restructuring of the welfare state (including increased user charges for education and health), and the corporatisation and privatisation of many government enterprises. The ideology underpinning these policies includes a general belief in the superiority of markets over governments, of competition over cooperation, and of self-reliance over community responsibility. The abandonment of any commitment to an egalitarian society by the New Zealand government has been discussed by Boston and DalzieP ~ who note that: '... important values such as human dignity, distributive justice, and social cohesion, have been given second place to the pursuit of efficiency, self-reliance, a fiscal balance, and a more limited state'.

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The introduction of more business-like arrangements and greater competition into the health services is in accord with these economic and social trends. The relevance of the competitive market model to health services has been the subject of a longstanding debate amongst economists. Proponents of the market view hold that health services are no different from other services in terms of the expected responses to market mechanisms. 11 Therefore, strengthening market mechanisms should improve the efficiency of health services and so achieve greater value for money. Those of the opposing view, recently articulated in the New Zealand context by the Wellington Health Action Committee, 2 consider that market theory has limited application to health services; problems of asymmetry of information between patients and health professionals, and hence the need for health professionals to make decisions on behalf of patients; and the judgement that everyone should have access to health services regardless of their ability to pay. As well as the prevailing market liberal school of economic thought, the health reforms reflect a number of more specific influences. The splitting of purchaser and provider follows the broad recommendations made in the 1988 Task Force on Hospitals and Related Servicess which had been chaired by Alan Gibbs, a businessman who was a close friend of the Minister of Finance. The reforms also follow the general direction of the recent restructuring of the National Health Service in the UK. But the New Zealand reforms are far more radical in a number of ways, especially with regard to the autonomy of all hospitals, the integration of funding for primary and secondary services, and the original proposal to introduce competing purchasers. The New Zealand reforms also differ from those in the UK in terms of depth and speed of change. With the exception of the shelving of the proposal for competing purchasers, there has been little indication of any desire for a 'smooth take-off', or for anything beyond a minimum of government intervention in the supervision or management of the emerging provider market. The reforms have been implemented in haste, with the speed of change accelerating as 1 July 1993 approaches.

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Some Implications of the reforms The one point upon which there appears to be general agreement is that the new system will cost a lot more to administer. N e w layers of bureaucracy are being put into place to cope with the extra work involved with the design, negotiation, monitoring and enforcement of contracts. Each of the RHAs and CHEs have boards of directors whose fees alone amount to more than NZ$1 million* per annum. The implementation process has also proved costly, the latest estimates for the cost of the agencies implementing the reforms being in the order of almost NZ$100m over 1991/2 and 1992/3. Provision has been made for a further NZ$250m in the following 2 years to cover 'a number of fiscal risks associated with the wind up of existing institutions and the establishment of CHEs'. 12 The big question now is whether the potential efficiency gains will outweigh these additional costs. At the heart of this question lies the contracting process. In theory, competitive bidding for contracts should ensure that RHAs purchase services from the most cost-effective providers, while providers have an incentive to produce at least cost so as to secure contracts and maximise their financial returns. But there are a number of reasons why, in practice, the process may produce less efficient outcomes than the theory predicts. In purchasing services, the central problem that RHAs face is that they have less information than providers about the services. In particular, they have less information about the production process and cost structures. This problem is in part offset by the fact that an RHA, being the dominant purchaser in a region, will enjoy considerable bargaining power. Nevertheless, RHAs may find it difficult to evaluate prices, especially where there are few providers and no obvious pricing yardsticks. Even where there are many providers, costs vary significantly due to factors such as (dis)economies of scale, costs of provision in urban and rural areas, availability of voluntary labour for some private providers, and so on. In this environment, RHAs are likely to find it difficult to determine whether price differences are due to internal efficiencies, or real differences in

* NZ$1.00 = 35p Sterling, or US$0.52 (as at February 1993).

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cost structures. Already information about production processes such as mix of the workforce and technological inputs are being zealously guarded by providers on the grounds of commercial sensitivity. An associated problem is the difficulty of measuring quality of service, especially in terms of the impact of a service on health status. The specification of indicators of quality that are both meaningful and measurable has provided elusive for many services. Because of the imbalance of information between RHAs and providers about production processes, RHAs may be tempted to define quality requirements--to the extent that they can be specified--according to existing production methods. But this discourages innovation and may constrain potential efficiency gains. A study in the USA found that, contrary to expectations, competitive bidding for services led to a lack of innovation because contracts were won by those providers who could meet certain quality standards set by the purchaser. 13 A feature of the new system that appears to be inconsistent with the market liberal view is the central prescription of a set of core health services which must be offered at low cost or free of charge by the RHAs. The justification given for this explicit definition of central services is 'to protect the level of health services and hold RHAs ... accountable', and to 'get better value for scarce resources and seek to limit the growth of medical expenditure'. However, the central prescription of core services limits the ability of RHAs to adjust their purchasing patterns in response to consumer needs. This suggests that, contrary to the rhetoric used to support the reforms, an efficient allocation of resources is not expected to be achieved automatically through the strengthening of market forces. The attempt to define core health services raises a host of other economic, ethical and political questions which are outside the scope o f this paper. At a more practical level, the endeavour is meeting some major technical barriers, not the least of which is the dearth of information about the quantity, quality, use and cost of existing services. To date, NACCHDS (the 'core-services committee') has concentrated on doing a stock take of existing services and is attempting to estimate the cost of these. 14 In the first year, RHAs have been given a directive simply to rollover

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existing services and to try to smooth out differences in access to these services as indicated by national utilisation rates.iS Unfortunately the use of regional comparisons to establish some sort of ideal utilisation rate only tells us what is: it says nothing about what ought to be, either'in terms of economic efficiency or social preferences. While the approach to be taken by the core committee in the future has not, as yet at least, been stated explicitly as it has in the Netherlands and Oregon, the committee was appointed 'to represent the views of the community to the Government'. This seems to imply that some kind of community perspective is intended, as it was (in different forms) in the above two projects. To encourage cost-minimisation and to secure a return on public assets, the original draft legislation required CHEs to be 'as profitable and efficient as comparable businesses that are not owned by the Crown' .9 The wording of this clause was subsequently changed following widespread objections in public submissions on the legislation. CHEs are now required to provide services 'while operating as a successful and efficient business'J 6 However, while the letter of the law has been altered, the spirit remains much the same. The requirement for CHEs to be successful financially raises important questions about the underlying ethics of health service providers and about the compatibility of combining financial targets with social objectives. As well as the requirement to be successful and efficient, the draft legislation also requires each CHE to 'exhibit a sense of social responsibility by having regard to the interests of the community in which it operates'. 16There are many instances where these two objectives could conflict. CHEs could, for example, increase their surpluses by selecting those patients who are likely to cost least. The inevitable result of this would be that access to services is restricted for those in greatest need. Another difficulty arises because many private provider organisations which will be competing with CHEs are non-profit organisations which pay neither dividends nor taxes. This puts CHEs at a competitive disadvantage with privately owned organisations. Public hospitals are further disadvantaged by the fact that their patients have, to date at least, generally been sicker and poorer (and hence more costly) than those of private hospitals. Furthermore, in order to ensure the

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provision of less profitable services, the Minister may require a CHE to provide a service for 'a reasonable price ... but any dispute as to such a price shall not entitle the enterprise to withhold those services'. 16 This not only disadvantages CHEs but also compromises their profitability. One argument that has been advanced in favour of the purchaser/provider split is that the contracting process should improve the accountability of providers making explicit the quantity and quality of services supplied. Interestingly, under the current system accountability is stronger amongst area health boards which are both purchasers and providers (but which have contracts with the Minister of Health) than it is amongst primary health care providers where the purchasing and providing roles are split. In fact, somewhat contradictorily, the lack of accountability of primary care providers has itself been advanced as one of the major reasons for reform! Clearly it is not the split itself which secures accountability but the nature of the contracts. In particular, the degree of accountability will depend upon whether the contracts can be satisfactorily monitored and enforced at reasonable cost. Questions are also being raised about the accountability of the RHAs to taxpayers. Each RHA will be required '... on a regular basis (to) consult in regard to its intentions relating to the purchase of services'. 16 However, the nature of the consultation process has not been specified. Moreover, the Minister has indicated that neither RHA board meetings nor contracts between RHAs and providers will be open for public scrutiny (although these decisions could be reversed before July 1993). Thus it is not clear as yet just how accountability will be achieved. In spite of the rapid progress that has been made towards implementation, there are many other issues which have yet to be resolved. These include some questions of major importance such as payment systems for general practitioners and other primary care providers, and payment to CHEs for teaching and research activities.

Conclusion

The health reforms being introduced into New Zealand represent a departure from the

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egalitarian philosophy that has traditionally underpinned health service provision in this country. The reforms are based upon an ideological commitment to competitive markets rather upon any clear empirical evidence that the changes will achieve greater value for money, thereby improving the health status of N e w Zealanders. The process of translating the theory into practice has proved costly, difficult and controversial and many details have yet to be decided. The morale of many in the health sector has been undermined by the uncertainty created by the changes. Moreover, the public health service in N e w Zealand was once based upon a wide measure of cooperation and many are now critical of its replacement by competition. If nothing else, the reforms have generated widespread debate and raise important questions about priorities in health services. They have also encouraged providers to examine their methods of provision, to consider how and where efficiencies might be achieved, and to set up appropriate information systems. Whether any efficiency gains will be sufficient to outweigh the additional costs of the new system remains to be seen.

References I. Upton, S. (1992). Your Health and the Public Health A Statement of Government Health Policy by the Hon Simon Upton, Minister of Health, Wellington. 2. Wellington Health Action Committee (1992). Health Reforms: A Second Opinion: A Comprehensive

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Critique by Leading Health Commentators, Wellington. 3. Wills, D. J. (1991). A survey of nurses' views on the latest health services 'reforms'. New Zealand Nursing Forum 19 (4); 6--7. 4. Muthumala, D. and McKendry, C. (1991). Health Expenditure Trends in New Zealand 1980-1991 Department of Health, Wellington. 5. Labour Minister of Health (1989). A New Relationship: Introducing the New Interface Between the Government and the Public Health Sector, Report by the Hon Helen Clark, Labour Minister of Health. 6. The Teasury (1990). Performanceof the Health System, unpublished internal report, Wellington. 7. Report of the Health Benefits Review (1986). Choices for Health Care, Wellington. 8. Report of the Hospital and Related Services Taskforce (1988). Unshackling the Hospitals, Wellington. 9. Health and Disabilities Services Bill, Draft legislation, 1992. 10. Boston, J. and Dalziel, P. (1992). The Decent Society? Oxford University Press, Oxford. 11. Logan, J., Green, D. G. and Woodfield, A. (1989). Healthy Competition, Centre for Independent Studies Policy Monograph 14, Australia. 12. The Treasury (1992). December Economic and Fiscal Update, Government Printer, Wellington. 13. Schlesinger, M., Dorwart, R. and Pulice, R. (1986). Competitive bidding and states' purchase of services. Journal of Policy Analysis and Management 5 (20); 245-263. 14. First Report of the National Advisory Committee on Core Health and Disability Support Services to the Minister of Health, the Honourable Simon Upton (1992). CoreHealth and Disability Support Services for I993/94, Wellington, New Zealand. 15. Statement by the Minister of Health (1992). Policy Guidelines to Regional Health Authorities. 16. Health and Disability Services Bill (as reported by the Social Services Committee), Revised legislation, 1992.