Fresh thinking needed

A potent combination of demographics, healthcare inflation and the rise of new treatments mean the nation’s healthcare costs will continue to rise at rates well in excess of consumer price inflation.

In recent years, a handbrake has been applied to the rate of public spending growth in health, as the Government has sought to wring efficiencies out of the sector. Despite this ‘restraint’, health has consumed almost one dollar in every two of new Government spending in the past six budgets – with New Zealand having one of the fastest rates of increase in health spending in the OECD.

As the Treasury has repeatedly advised, the unsustainable growth in healthcare spending presents a bigger fiscal problem for the Government than the soaring cost of NZ Super. While super costs are picked to go from 5% of GDP to 8% - an increase equating to 3% of GDP – the nation’s public-funded healthcare costs are projected to jump by 4% of GDP – from 7% to 11% - over coming decades.

This is not a problem unique to New Zealand, rather it is something which all countries are facing. Some are better prepared than others. In New Zealand, we are perhaps in better shape fiscally than many other nations – but this is no cause for complacency. The 4% ‘gap’ between present funding and future funding in today’s terms amounts to $10 billion.

Saving a few million here and there through efficiencies, together with expanding Pharmac’s brief – while worthy initiatives – will hardly make a dent in the $10 billion gap.

Traditional policy options – including increased user charges, greater rationing/waiting and selected withdrawal from public provision – will all be needed to some degree in coming decades, although are only able to meet some of the $10 billion gap.

Some additional Government funding may play a limited role in targeted areas, although there is no room for significantly lifting health spending without compromising other key spending areas.

The vast bulk of the $10 billion gap will likely manifest itself in two ways: People paying a greater share of their own healthcare costs; and growing unmet need.

Another reason we cannot afford to be complacent is that the New Zealand health system is ill- prepared for the rebalancing in spending which is required. On average, OECD countries fund around 28% of their health costs privately. NZ is way below average, with just 20% of healthcare costs privately funded.

Countries like Ireland and Australia, where private funding accounts for $1 in every $3 of health spending, are undoubtedly better prepared to transition to higher healthcare costs.

Countries like New Zealand and the UK, where private funding is only $1 in every $5, will face the biggest adjustments.

New Zealand’s 20% private funding amounts to around $4 billion a year. Around $1 billion of this is healthcare treatments funded via health insurance, collectively paid for by the premiums of over 1.3 million people.

While health insurance funds around 5% of healthcare costs at present, there are good reasons why it will likely fund more in the future. Not least of these is the ability of health insurance to enable routine private funding of high cost treatments. None of the traditional grab-bag of user charge options can do this. User charges are limited by people’s ability to pay – so beyond a few dollars more for prescriptions, GP visits, lab tests or co-payments for diagnostics, there is limited ability for applying these as either cost recovery or demand management tools in a public setting.

Insurance works by aggregating premiums across a large number of people in order to fund the healthcare costs which might otherwise be unaffordable or cause financial hardship. The fact that New Zealand can achieve a billion dollars annually of healthcare funding through around 30% of the population having health insurance indicates that there is significant scope to increase the contribution to future healthcare costs by lifting coverage rates.

To come: NZIER explores scope for health insurance funding.