Big changes are on the way in how healthcare is funded as costs rise

Healthcare is typically the largest area of government spending, and our ageing population means that public health budgets will be placed under significant pressure for the next two decades, just when the country must be frugal to balance its books.

Greater rationing in the public health sector seems inevitable. It already occurs routinely throughout health systems. People are going to have to pay a greater share of their health costs in the future - either out of pocket or by way of health insurance to cover significant expenditures such as surgical treatments.

Many countries have actively supported a healthy level of private provision by encouraging health insurance through specific incentives and subsidies. Such a package of incentivising could see around 50 per cent of a population covered by health insurance, as in Australia. New Zealand, with no specific incentives or assistance, is far behind on 31 per cent coverage.


In Australia private spending accounts for 32 per cent of total health expenditures, above the OECD average of around 28 per cent. New Zealand lags behind by a considerable margin, with private spending accounting for just 19.5 per cent of total health expenditure.

For New Zealand to move to the OECD average would require an increase in the level of private contribution of 44 per cent. This would see New Zealanders paying another $2 billion per annum privately towards healthcare costs, either via health insurance or out of pocket. As difficult as this sounds, the OECD average may rise as high as 35 per cent over the next decade, placing us further behind.

This is where New Zealand will need to move because the Government has no money. Not this year, nor next - nor any time soon.

The Government's Budget Policy Statement released last week contained only modest increases in government spending for the coming four years, averaging just $1 billion per year - around 1.4 per cent of operating spending - aiming to get back into surplus by 2014/15.

Health inflation and demographic changes are widely predicted to add at least 4 per cent annually to the public health budget. Treasury's 2009 long-term fiscal model forecasted that health costs would increase from 7 per cent to 11 per cent by 2050. Last year's Budget increased health spending by 3 per cent - similar to the previous year's increase - and coming years are likely to see even smaller increases.

The need to provide for future health costs is likely to outstrip general inflation. Growing accessibility of surgery, together with the introduction of new procedures and previously unavailable treatments, mean the demand growth in the health sector is only limited by our ability to pay - either individually or collectively.

Greater private contribution to overall healthcare costs can occur in several ways, either through government withdrawal from some services, greater co-payments and user charges, or a healthy private health insurance sector with higher levels of coverage.

Policies which ration or limit access to healthcare are widely unpopular, as seen here in the early 1990s. Treasury has suggested a policy debate as soon as possible to gauge public opinion on the options. I suspect most of us would favour paying a little more ourselves where possible and affordable, rather than increasingly being disqualified from treatment because of stricter rationing.


Expecting people to pay top-ups or higher co-payments for doctor's visits, specialist tests, x-rays and prescriptions may work well for small amounts, but when it comes to the larger amounts involved in elective surgery, it does not appear reasonable or equitable to require people to pay for these out of pocket. Such a system would see those without insurance cover have to dip into their retirement savings - in some cases using it all up.

We need to find ways of privately funding big-ticket surgeries routinely and for the majority, and the only way this can be achieved is to lift the levels of health insurance cover far above 50 per cent of the population. This will require some element of compulsion for those who can afford it, together with assistance for those who cannot, similar to the Australian model.

The New Zealand industry has promoted two low-cost targeted interventions which would go some way to encouraging higher coverage. Removal of fringe benefit tax on employer contributions to workplace-based health insurance plans would lift the level of participation in these schemes. At the same time, a rebate on premium contributions for the over-65s would help a greater number of people retain health cover in retirement.

However, even implementation of both of these measures would probably only help to lift coverage from 31 per cent of the population to around 40 per cent in the medium term.

The scale of the rebalancing required will demand the use of all options - higher user charges and co-payments, together with increased rationing of public health budgets, plus a healthy private insurance sector with most people covered.

Those currently of working age need to prepare themselves for paying more for their healthcare in the future.

Having health insurance will play an important part in keeping those costs manageable and spreading risk.

Roger Styles is chief executive of the Health Funds Association of New Zealand.The need to provide for future health costs is likely to outstrip general inflation.