The roots of today’s public health system

July 1, 2021

Economist Brian Easton analyses the Government’s proposed health reforms, firstly from an historical perspective. In the second article in this series, in next month’s issue, he looks ahead to where the reforms might take us.

Health workers


In April, the Government announced the next health sector “redisorganisation”. To provide an account of what is happening and where we might be going, I will first look at the history of New Zealand’s public health system, and then focus on where we might be going.

Inherent tensions

I begin with an anecdote. About 30 years ago, the Government got into its head that if our hospitals were to be run like businesses, there would be a major productivity boost. They promised 20 per cent gains, although these never happened. Part of the redisorganisation – I’ll explain why I use that word shortly – was to appoint businessmen and women to run what were then called crown health enterprises (notice the weasel word “enterprise”) which evolved into what today we call district health boards.

The business-sourced chief executives knew little about health care. I was told of instances in which senior clinicians visited a CEO who showed much discomfort at their presence. One had 12 second-level managers reporting to him, only one of whom was a clinician.

Even so, chief executives sometimes had to front up to audiences of hospital clinicians. On one occasion, the CEO was saying how his task was to have everyone behind the organisation, metaphorically – perhaps actually – thumping one fist into the other hand. It was the sort of thing you might say to the staff if you were running a commercial company. Someone from the audience asked what exactly was the objective of the organisation. “It was,” he said – thumping fist in hand – “the bottom line”, but as he said it, his voice trailed off.

For even this businessman could see that the clinicians did not give a fig for the organisation’s financial position. Fortunately it did not happen, but had someone in the room had a heart attack, we would have seen what the clinicians really cared about. Their priority would have been the patient’s health and survival; bugger the bottom line, or what it cost the system. Nor would they expect to be paid for an out-of-hours emergency; their professionalism meant “just do it”.

The central tension of running a health system is clear. On the one hand there is the complex, expensive organisation represented by the chief executive; on the other there is the clinician or clinical team attending to the intimate needs of a human being.

‘There is no ultimate resolution to the tension between those running a complex, expensive organisation and the clinicians caring for human beings. With a bit of skill, one can reduce it.’

There is no ultimate resolution to this tension. With a bit of skill one can reduce it. Reconciliation of the tensions can never be perfect; there will always have to be compromises. That is why we call proposals to change the system a “redisorganisation” – the organisation structure churns in the belief that this time they will get it right and there will be improvements in health delivery without significant increases in funding. But the change managers never recognise the inherent tension; redisorganisations usually fail.

‘That is what happened, disastrously, in the early 1990s.It was a classic example of the Mencken dictum: for every complex human problem, there is a solution that is neat, plausible and wrong.’

The current redisorganisation has parallels with the 1990s redisorganisation. Fortunately, it is not being run by people as ignorant of the health system. Thirty years ago, they did not even want to learn. By coincidence, the eminent British economist Alan Maynard – who warned against the notion of redisorganisation – was visiting the country at the time, but he, and other experts who were over here, were not consulted.

I begin by reviewing the sweep of history, to give a background to the current proposals. What was happening 150 years ago may seem arcane to today’s clinicians, but we can learn a lot from the past.

The medical professions were barely scientific in the 19th century. Surgeons had operated for millennia (so had barbers), but the practice of bloodletting was only abandoned in the late 19th century. The problem of infection was first identified in the middle of the 19th century, when pain control (anaesthetics) also began to be addressed. The first miracle drug, aspirin, was introduced in 1899. X-rays were only discovered in 1895.

Nineteenth-century doctors were not useless, but the sophisticated medical professionals with a solid scientific training in the health system today are qualitatively differ from their predecessors.

Settler hospitals were established early in the settlements. They were very different establishments from today’s, as the affluent sick were treated in their homes. Hospitals were for the indigent with inadequate accommodation. A not uncommon reason for admission was mental incapacity; unsurprisingly, asylums occur significantly in the history of the hospital sector.

Nursing historian Pamela Wood reports: “…in the early years a significant proportion of cases [in hospitals] were from accidents; people with infectious diseases were not admitted and some doctors considered that the incurable, the old or the chronically ill should not be kept in hospitals… Surgical patients in particular came to be seen as representing a specific danger to others through their suppurating wounds and as sick bodies vulnerable to the dirt of the buildings surrounding them.”1

Medicine did not advance quickly in New Zealand. Joseph Lister wrote his seminal paper on antiseptic surgery in 1867. Two decades later, surgery at the Dunedin Hospital, one of the country’s most advanced, was described as being “in the transition state between the days of septic surgery and the development of antiseptic surgery”.1 Contrast how quickly today’s medics have adopted lessons from the COVID-19 pandemic.

The start of the public hospital system: New Plymouth Hospital, one of four hospitals paid for by central government under Governor George Grey in the 1840s. (Image courtesy of Puke Ariki, New Plymouth.)
The start of the public hospital system: New Plymouth Hospital, one of four hospitals paid for by central government under Governor George Grey in the 1840s. (Image courtesy of Puke Ariki, New Plymouth.)

Health care was not a national responsibility. Hospitals were local, funded from local authority rates and private donations (with doctors providing free services – subsidised from their private practices; Phil Bagshaw’s Canterbury Charity Hospital Trust is an echo of that past). However, in the 1840s Governor Grey announced that the central government would pay hospital costs for Māori and approved indigents. Four hospitals were established – in Auckland, New Plymouth, Whanganui and Wellington. The Wellington one was known as the “Native Hospital”. It did not succeed because Māori cultural practices meant a place of death was tapu. Perhaps there is a lesson here.

Inevitably, central funding led to central regulation, and in 1880 the Government appointed its first inspector of hospitals.

However, initially, the main central government concern was population-based health issues, especially water and waste-water, the control of quality of food and drugs (milk could be a carrier of typhoid fever) and dealing with infectious diseases.

It was the threat of a major outbreak of the plague coming from China via Australia which led to the passing in 1900 of the Public Health Act. A separate Department of Health was established later in 1912. In that year, central government’s annual spending on health, per person, cost around three-quarters of a labourer’s daily wage. Local body rates contributed the equivalent of two days.

Following the pandemic of November 1918, which killed more than 8550 New Zealanders – the Māori death rate was seven times the non-Māori rate, and death rates were even higher in Samoa – there was an increase in staffing and a new Public Health Act in 1920.

So governments slowly got involved in the provision of personal health care, but by no means generously. During the row over the influenza pandemic, the Minister of Health pointed out that more money was being spent on the health of animals than on that of humans.

Medicine was changing from a craft to one driven more by applied science. It did not happen overnight, and it has not stopped as new knowledge and new techniques continue to transform the health-providing professions. A more recent development has been increasing specialisation, which means that health professionals often have to work in teams.

After the Great War, hospitals became widely used by patients of all classes, as their quality and safety improved and as they provided an increasing range of effective treatments.

Personal health care became increasingly important. With a wider range of treatments, and more expensive ones, ability to pay became an issue – a trend exacerbated by the poverty of the Great Depression. By the 1930s, the pressures were for improving personal access to the health-care system. Inevitably, New Zealanders turned to their government.

Under the first Labour Government, state funding of health care was steadily introduced. Whereas the public’s central purse was spending 0.6 per cent of gross domestic product (GDP) on its health budget in 1935, by 1944 it was 2.0 per cent. Today it is about 7 per cent. (Including private spending, the total health spend is about 9 per cent of GDP.)

Perhaps the greatest failing of the Labour scheme was the assumption that the total amount of required medical care would be limited – a limit that was not great compared to the state’s capacity to pay.

But the rate of technical change was underestimated. Many innovations improve health but are extremely expensive. Add the increasing requirements of patient care and an ageing population, and the potential cost of health care becomes near unlimited – certainly well beyond the budget of the average patient or Treasury funding for all patients. The expense has been compounded by the shift from saving lives – that is, prolonging them – to improving quality of life.

This general historical overview allows us to trace the organisational structure of the health system. In the 19th century, hospitals were small, local, isolated and not very technically advanced. Medicine was primitive but not wholly ineffective. Many ordinary people today are more knowledgeable and able to apply more effective treatments than a doctor of 150 years ago.

How things have changed! Today hospitals are huge and expensive, involving technologies that no single person can master. Medicine is much the same. Typically, our hospitals are no longer isolated, and not just multi-campus, but able to connect, for patient care, with hospitals at the end of the country and, for knowledge, anywhere in the world. We have long moved away from local public and private charitable funding. The local authority rate contribution was abolished in 1952 and charitable contributions are not great; virtually all the funding of the public health system comes from central government.

However fossils from the past remain. For instance, have we the right configuration of hospitals? Do they coordinate enough? And why the localised governance structure, especially elections to the board – what are they for?

The 1990s redisorganisation by the National Government abolished local electees to the governing board by overnight legislation, ostensibly because the consumers (patients) have no role in running a business, but also because non-government appointees would have resisted the changes being imposed from the top. The Clark-Cullen Labour Government reinstated local electees to be about half the members of the governing board. The Key-English Government left them there, but now the Ardern-Robertson Government, successor to Clark-Cullen, proposes to abolish them again.

I have focused on secondary care, but we should not forget primary care, including general practice and pharmacies. Historically, this has been much more embedded in the private sector and has never really integrated with secondary care – despite efforts to do so going back for at least half a century.

Another critical dimension is population-based health services – sometimes confusingly called “public health care”. Although initially a central government responsibility, they began to be integrated into health boards about a quarter of a century ago.

We should also not forget care of the elderly, in rest homes or supported by outpatient services. There is a disability sector as well, not to mention the voluntary sector, which is both a service provider and advocate. Add in PHARMAC and a few others and you can understand why the system is a disorganisation.

Lessons from Canterbury fracas

All this reminds us that the health sector is inevitably disorganised. The kerfuffle which recently occurred at the Canterbury DHB illustrates some of the difficulties.

The essence of the problem was a conflict over funding – and over control. It resulted in the destruction of the DHB’s widely admired senior leadership team which had been a champion of its region’s communities and clinicians.

There is a problem over any account because the centre’s case – the perspective of the government with its centralised state health agencies in Wellington – is hardly available and we have to rely on those who are critical of the centre. I mention this not only because scholarship requires drawing attention to imbalanced sources, but because if the proposed changes weaken local involvement, we would have an even less informed idea of what was happening during a future occasion.

As far as can be judged, the dispute – an example of that tension between the centre and the clinical I began with – arose from the Canterbury DHB overspending relative to its revenue. This is a regular feature of the DHBs, and their predecessor crown health enterprises, and evidence that the system of financial controls is not working properly. It arises because the clinical imperatives of treating patients in need override the financial imperatives of staying within budget.

The Canterbury DHB deficit, however, was unusually large. It arises, so the locals tells us, because of inadequacies in the DHB funding formulae. (I expect the new structure will enable a revision of the current population-based formula.)

However it appears the Canterbury DHB suffered badly because of the Canterbury earthquakes of a decade ago, which destroyed a lot of its capital works. The population-based funding formula assumes that all DHBs’ capital structures are equally well off – or badly off. Clearly, in the case of the earthquake-shattered Canterbury DHB, that has not been correct.

It is also argued that the mosque massacres imposed heavily on the DHB. I’ve not seen precise numbers and there was some sharing with other DHBs. Even so, it raises the issue of whether the population-based funding formulae should have included a reserve for exceptional circumstances, in addition to the earlier point that it needs to make greater allowance for differences in capital structures.

The complexity of the situation is well illustrated by the Canterbury DHB’s new acute services block, which opened two years late and over budget. Apparently the Wellington centre is responsible for the building phase and therefore – in principle – for the substantial additional costs (which include the overruns, capital charges and depreciation). However, the additional costs are not charged to the centre but to the Canterbury DHB, which has already been paying for more costly service provision when the building was not commissioned. That, anyway, is the local critics’ assessment; I have seen no alternative account from Wellington.

The Canterbury DHB senior leadership team said they had a plan to pull back the deficit. However, central government appointed powerful advocates above them to implement the Wellington agenda, overriding the the previous board and its executive team. Whether this was justified or not depends on your perspective, but it reminds us of the power of the centre to control constructive developments in localities.

Benefits of local autonomy

At a more general level, local autonomy allows for innovation and experiment, which has improved some of the disjunctions in the health system. You may be disappointed that there is still not enough integration between primary and secondary care, but there has been a lot of progress over the last few decades. We may ask, however, to what extent the innovative successes of one locality have been quickly transmitted elsewhere. In treatment practices, the answer may generally be “yes”, but one is less sure in organisational practices.

Main points

  • First, there is an inherent tension between the centre which funds health care – together with the complex organisations it leads to implement its plans – and what goes on at the clinical and local level of professionals dealing with patients. The tension is unavoidable.
  • Second, the complexity of the sprawling health system is substantial. Plans to redisorganise it need to be humble and aim for incremental improvements, rather than being ambitiously neat, plausible and wrong.
  • Third, one of the sources of the sprawl in the health system arises from its historical development from a 19th century system in which hospitals were small, local, isolated, and not very technically advanced, in which primary care developed separately from secondary care, and in which medicine was primitive but not wholly ineffective. Despite the spectacular changes in the following 150 years, there are still fossilised remnants of the old ways.
  • Fourth, the centre has made errors, but generally does not acknowledge them. It is easy to blame the districts for everything. Ignoring this will inevitably result in failures in a redisorganisation.

We should not be surprised there are pressures to centralise the system further, even at the cost of the loss of local, and even clinical, autonomy and less innovation. That is what I will discuss in my next article.

Brian Easton
Brian Easton

Brian Easton, BSc(Hons), BA, FRSS, CStat, DSc, is an economist, social statistician, policy analyst and historian. He has held a variety of university teaching posts, and is a commentator and well-published author. He was formerly the director of the New Zealand Institute of Economic Research, and was economics columnist at the The Listener for 37 years. He has just published Not in Narrow Seas: The Economic History of Aotearoa New Zealand where some of the material in this article comes from.


  1. Wood, P. (2005). Dirt: Filth and Decay in a New World Arcadia. Auckland University Press.

This article – the first in a series of two – is an edited version of a speech given by the author at the conference of theatre managers and educators in Dunedin in May. It is used with permission.

The second article entitled “Over-centralising the health system will not help” is also available on this website.