NZ Health System: The Future is Now

1. NZ Health System: The Future is Now Slides for discussion with NZIHM 12 May 2009

2. Coverage of Discussion • Treasury’s interest: • Why health matters • Long-term fiscal challenges • Recent ecc and fiscal deterioration • Addressing challenges • Not all doom and gloom • Current strategies • Design challenges • Getting enough traction? • Tentative Conclusions

3. Why health sector matters Treasury’s Interest • Health status contributes to NZ’s wellbeing • Ongoing fiscal & performance challenges • Demand side: demographics; chronic disease; rising expectations • Supply side: technology; workforce pressures; clinical sustainability; hospital productivity • Such issues confronting all OECD countries • MoF has ownership and purchase interests • Open questions about adequacy of current institutions (and realistic alternatives) • Mixed evidence on what works, why • Scope to make DHB model work better • Institutions need to endure to get benefits • But evolutionary change may not be enough

4. Slow growth relative to GDP over 1980-90s across OECD (but not NZ or Aus) NZ health spending grew more than twice GDP growth rate (1995–2005): outlier in OECD Public health expenditure projected to double by 2050 Medium term fiscal settings can’t accommodate base projections NZ long-run health spending growth is highly problematic Treasury’s Interest 1995-2005 (OECD 2007)

5. Forecast Trading Partner Growth: Now Negative Ecc & Fiscal Deterioration

6. The bottom line – lower nominal GDP Ecc & Fiscal Deterioration Change in Nominal GDP: Budget v December Downside Sce Annual Nominal GDP

7. NZ’s Operating Balance Ecc & Fiscal Deterioration OBEGAL to GDP % GDP 5% 4% 3% 2% Historical Years Forecast Years Projected Years 1% 0% -1% -2% -3% -4% -5% 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 Fiscal Year 7

8. NZ’s Projected Public Debt Ecc & Fiscal Deterioration GSID to GDP % GDP 80% Historical Years Forecast Years Projected Years 70% 60% 50% 40% 30% 20% 10% 0% 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 Fiscal Year 8

9. Overall Fiscal Strategy Ecc & Fiscal Deterioration • Future debt profile outside the range Government considers prudent • Government wants to “bend back the debt curve” while managing through tough economic times • The BPS signals the Government’s intention to: • Strengthen the economy • Limit future expenditure growth • Get better value from current spending

10. It’s not all doom and gloom… Addressing Challenges • Countries can decide level, trajectory and composition of health spending • NZ better placed to contain costs than some: • Easier to restrain spending through budget setting (tax-funded, single payer systems) • NZ has managed cost of pharmaceuticals well • DHB model enables an integrated approach to health care (some local success stories) • Platform to develop better primary health care? • But NZ exposed to global labour market pressures… • How would our current health institutions cope with serious, continuing fiscal constraint?

11. How NZ has been managing long term fiscal risk in health Addressing challenges • Building wide consensus for moderation • Fiscal risk is serious, urgent and modifiable • Funders, planners, managers and clinicians need to understand • Budget ministers manage health funding within a feasible 10-15 year fiscal path: • Clarifying minimum requirement to maintain value of today’s bundle of services (given feasible efficiency savings) • How much of Government’s allowance for new spending is available for health? • Sector work on managing fiscal sustainability: • Aligns closely with VfM agenda (next slide) • Ministry and DHB level • National, regional and local initiatives

12. How sector is addressing performance/sustainabilty Addressing challenges • Ministry activity • National targets (top 6 health priorities) • Long-term systems framework & related work • Sector Capability and Innovation Group (benchmarking) • Primary health care strategy (further development) • Service reviews (to identify best spend) • Performance information system • Collective DHB activity • Strategies to address impending workforce pressures • Productivity talks (agreed in last pay settlements) • Regional planning • Procurement strategies • Local DHB/PHO innovations

13. Questions Raised By Current Institutional Settings Design challenge • Uncertainty about end-state • Reforms could get stuck 2/3s along transition path? • Lack of effective co-ordination mechanisms • Over 100 purchasers for 4 million people • National and regional planning: emerging, mixed • Difficult to mediate differences (esp with tighter budgets) • Perverse incentives undermine full integration • Combination of co-payments and funding formula • Finding appropriate balance in DHB/PHO world: • Powers, rights and responsibilities • Ministers, central agents and arms’ length agencies • Ultimate role/shape of MoH • Rule-setter, referee, mediator, player, advisor, monitor?

14. 2009 OECD Challenge: DHB/PHO model optimal? Design Challenge • MoH: • Devolve purchase role (circa $2.5b services) • Focus on monitoring, info, strategic advice • DHBs: • More mergers, with hospital contestability • Formally separate purchase from provision • Negotiate at enterprise level, not MECAs • Primary health care: • Better define PHO role or eliminate them • Give DHBs more flexibility to contract/fund

15. Meeting service needs within affordable budgets will require transformational change Tentative conclusions • NZ relatively well-placed internationally to manage long-term fiscal challenges • Scope for improving VfM within current DHB regime… • MoH and DHBs are identifying key challenges • Mobilise clinical sustainability concerns • Variation in hospital performance = room to improve • …implies huge change management challenge • Likely limits to consensus solutions (speed & scope) • Probable need to revisit institutional settings over time • Does sector have enough sense of urgency • Big question: sufficient pace and scale of change?

16. Annexes: more detail • Economic and fiscal deterioration • Health spending context • Institutional design challenge • Overview of health sector performance

17. Large fiscal stimulus in the economy Ecc & Fiscal Deterioration OECD Estimates of Fiscal Stimulus (2007-2010) Contractionary Expansionary

18. Weaker real growth Ecc & Fiscal Deterioration

19. Rising forecast unemployment Ecc & Fiscal Deterioration Unemployment rate

20. Muted forecast price pressures Ecc & Fiscal Deterioration Consumer price inflation

21. What has changed Ecc & Fiscal Deterioration Tax revenue Benefits Finance costs Total Changes by 30 June 2012 since Budget 08 $5.5 billion $1.2 billion $1.2 billion $7.9 billion

22. Ecc & Fiscal Deterioration Fiscal toolkit

23. NZ’s Mounting Demographic Pressures Ecc & Fiscal Context Ratio of those aged 65+ to 15-64 0.6 2009 0.5 0.4 Ratio to population aged 15-64 0.3 0.2 0.1 Older (65+) Projection 0.0 1880 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 Source: Statistics New Zealand 23

24. 8% growth path 6.3% growth 16 14 5.8% growth 12 10 5.1% growth % of GDP 8 6 4 2 0 2000 2010 2020 2030 2040 2050 Fraction of GDP spent on public health services expected to double by 2050… Spending Context • NZ will need to use every $ even more well to deliver required quality and quantity of health services

25. 12 11 10 Nominal Health expenditure growth (%) 9 8 7 %Growth 6 5 4 NominalGDPexpendituregrowth(%) 3 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $5+ billion increase in health expenditure since 1998, but health costs rising too Spending Context

26. New Zealand’s health spending similar to other OECD countries Spending Context • But watch this space… • NZ’s share of GDP spent on health has just risen above OECD average. 10th highest in OECD in 2006 data

27. NZ managing pharmaceutical spending well • Growing second slowest in OECD (above only Japan) • Declining proportion of health spending (opposite to OECD trend) • Implies high growth in other areas of health spending • Looks excessive and unsustainable cf OECD – what is the driver in NZ? • Few countries had faster spending growth than NZ (10th overall) • There are clear choices: countries travel at different speeds, different mix

28. Complexity of health processes Design Challenge • Inherent characteristics of health • Multiple, competing objectives • Joint production process • Probabilistic nature of outcomes/interventions • Demand heavily mediated by clinicians • Asset specificity • Particular NZ features • Dispersed population • Thin supply side (esp for hospital services) • Enduring public preferences (eg 80% public funding; NZ’s particular mix of public and private providers; equity matters) • Public funding directed at providers

29. Why it’s hard to design health sector institutions Design Challenge • Limits to conventional mechanisms for driving performance: • Central dictates: bind clinician-patient interactions? • Accountability: providers not fully responsible • Performance measurement: multidimensional • Incentives: can undermine intrinsic motivators • Supply-side competition: limited applicability • Patient choice: limited impact on behaviour • Design challenge: creating an environment that reinforces underlying motivators

30. Performance: Outcomes NZ health outcomes are very mixed picture… • Health status improving, But not as fast as other countries… • NZ’s overall ranking declining • Females compare least favourably • Serious health inequalities • Obesity high and rising • Chronic disease rising Source: OECD Health at a Glance, 2007