What does the Budget mean for the health sector in the long term?

May 25, 2022

When the finance minister says the health system is inefficient, what he means is that it is underfunded, says economist and policy analyst Brian Easton.

It was surprising that Finance Minister Grant Robertson, in a pre-Budget speech, said that he thought the current health system was “incredibly inefficient”.

Of course there are some inefficiencies in health-care delivery, just as there are in private enterprise: mistakes happen, some treatments could have been managed better with hindsight, some are unnecessary (although they are more likely to happen when the patient pays the bill). But to say that health professionals are “incredibly” inefficient is not just rhetoric but insulting to them.

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In the next sentence, the minister explains:

“Over the past two decades, [district health boards] DHBs have learned to run annual deficit after annual deficit because they know the annual Budget process allows them to do this.”

‘The health service does its best to meet the population’s health needs, but that requires it to spend more than the politicians allocate to it.’ PHOTO: ADOBE STOCK

What he is saying is that the “incredible inefficiency” is not “inefficient” at all (not in the normal meaning of the word anyway), but that the health system is underfunded. It does its best to meet the population’s health needs, but that requires it to spend more than the politicians allocate to it. So the DHBs have run deficits. Of course, the Minister of Finance cannot say that because the problem sheets home to politicians. (I know, I know — he is struggling with a myriad of financing demands but it would be better to explain the real problem, than try to shift the blame on to others.)

Uncomfortably, the analysis echoes that of of 30 years ago under the Richardson-Upton redisorganisation* of the health system. (In fairness, Grant Robertson was just 20 then, and such debates probably passed him by. Even so, it reminds us that the political system can be like the Bourbons, who forgot nothing and learned nothing.)

‘Meanwhile the professional ethics of health-care workers requires them to respond to need, despite any financial constraints.’

The 1990s upheaval was based on the premise that the public health system was highly (“incredibly”?) inefficient, which could be remedied by imposing over it a new set of managers who might know nothing about health (one confused intensive care units with post-operative care units). It was claimed that their managerial skills – in retrospect they often seemed badly lacking – would reap substantial productivity gains. The often quoted promise was an improvement of up to 25 per cent, a claim described later by the first Minister of Crown Health Enterprises as a nonsense. Even so, Ruth Richardson, the then Minister of Finance, cut health funding before the redisorganisation started. Consequently, New Zealanders died earlier than was medically necessary.

So it was with apprehension that those with memories approached the health provisions in this Budget. Apparently the Bourbons lived on and the current health system was to be redisorganised to make incredible efficiency gains (“incredible” in the sense of “not credible”).

Addressing staff shortages will take time, and patients will suffer as will the stressed staff serving them. PHOTO: ADOBE STOCK

In fact the Budget increased funding to the public health sector; but the increase is not as dramatic as the minister claimed. Excluding COVID-19 funding, the increase for next year (ending June 2023) is 9.0 per cent, a little higher than the increases of the preceding three years of 8.9 per cent, 8.2 per cent and 7.8 per cent. Part of the increases have been about increasing remuneration rates for staff, but the volume of services seems to have increased too. In contrast, under National the increases were largely just keeping up with population pressures and costs. Increases above that are to be welcomed – even 0.1 per cent is an extra $25 million a year (or, as the Government is wont to count, $100 million over four years).

Before discussing where some of this money is to be spent, we need to explore how the redisorganisation fits in, since the secondary care system is where the bulk of the money goes and where the increases are going.

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The centralisation of secondary health care (hospitals) has been a trend for the last 80 years since the first Labour government took over responsibility for it in 1938. Health New Zealand (HNZ) is the latest stage. Although we are not exactly sure what that means, it does involve a different funding regime.

In the early 1980s, central government funding of the (then) hospital boards was switched from an ad hoc system based largely on historical patterns to a “population-based” formula. Before then, the system had favoured southern New Zealand and relatively underfunded population-booming Auckland.

The latest version of the formula, which includes factors such as the age distribution and the degree of deprivation as well as population, was introduced in the early 2000s. It was better than what had gone before, but it hasn’t worked and the consequential financial discipline has steadily become more easily evaded.

‘. . . one consequence of the new system is that the details are likely to be even more opaque to the public since all the appointments to the system are to be made by the centre.’

Rather than refine the population-based formula, the task of allocating the funds is charged to HNZ who will, no doubt, use a formula but will make ad hoc adjustments for its deficiencies. We can only guess how this will be done, but one consequence of the new system is that the details are likely to be even more opaque to the public since all the appointments to the system are to be made by the centre. I shan’t be surprised if at first the smarter city and district councils, and eventually all of them, set up units to monitor whether their regions are getting a “fair” share of the funding.

I shall be astonished if, overall, Health NZ operates in surplus. A public health system functions by suppressing demand (in a private one the ability to pay does the suppression). Meanwhile the professional ethics of health-care workers requires them to respond to need, despite any financial constraints.

The Budget forecasts have the non-COVID health spend largely stagnating after next year. However there is a provision for additional new operating expenditure across the entire public service ($5 billion next year, rising thereafter); you can be sure that a goodly chunk of it will go into health spending.

The Budget-associated document, Wellbeing Budget 2022: A Secure Future, itemises about 40 new health programmes — for new treatment initiatives, new and extended services, for local developments, for ethnic needs and for administration. I focus here on the professional development one.

‘In principle, the Ministry of Business Industry and Employment has responsibility for labour-market development, but the task has been neglected.’

The late George Salmond was concerned about the development of the health labour force even before he became director general of health in the 1980s. It is a bit of a no-brainer really, given the years required to train health professionals and the extent of their migration. In principle, the Ministry of Business Industry and Employment has responsibility for labour-market development, but the task has been neglected. I suspect there is a bit of neoliberalism here – the belief that the market will fix the supply problem by itself.

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One hopes that Health NZ, the main employer of our health professionals, will set up its own health labour force unit, but that will take time. In the interim, the 2022 Budget has an initiative to provide funding for health workforce training and development. There are two components:

    •  $37 million over four years to cover about 1500 more training places for primary care work, including nursing, physiotherapy, pharmacists and optical services and 1000 places over four years for additional workforce (ie about $3900 a place a year);
    •  $39 million over four years for hauora Māori workforce development, to cover about 1000 workforce training places and 800 workforce places, targeted to increase Māori working in prioritised areas of most need (ie about $5400 a place a year).

To what extent this $76 million addresses the serious staffing shortages can be debated. Until we have workforce development assessment, we shall not know, nor will we really know much about the programmes to address them. Sadly, it is going to take time; patients are going to suffer, as will the stressed staff serving them.


* I avoid the term “reform” because it suggests things will improve. The term “redisorganisation” was proposed by the eminent health economist, Alan Maynard, after quoting Petronius Arbiter, from the novel Satyricon (about 60CE): “I was to learn later in life that we tend to meet any new situation by reorganizing, and what a wonderful method it can be for creating the illusion of progress while actually producing confusion, inefficiency, and demoralization.”

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. His most recent book is Not in Narrow Seas: The Economic History of Aotearoa New Zealand. More of his writing can be found at his website.