Labour has questioned whether health is being funded adequately.
Since DHBs were abolished, health funding has been centralised. Treasury maintains that health has been receiving adequate cost-pressure funding increases.
There is no organisation in New Zealand quite like Health NZ-Te Whatu Ora.
With 82,800 full-time equivalent staff as of the most recent published financials, it employs about 1.5% of the entire population.
It has a huge share of New Zealand’s labour force – one in every 37 members ofthe labour force (the group of working-age people who have a job or are looking for one) is employed by Health NZ.
It is large by international standards. Even the United States military’s footprint is smaller as a share of the American population, although Britain’s National Health Service is still larger, employing about 2% of that country’s population.
Health NZ is also very expensive, with the total health system, including payments to ACC and Pharmac, expected to cost about $30 billion this year. The question of whether Health NZ and the wider health system is funded adequately rose to the surface this year when Health Minister Shane Reti appointed Lester Levy Commissioner of Health NZ and tasked him with closing a $1.4b deficit.
Everyone in Parliament agrees health needs more money each year to be able to provide the same degree of services. Even the fiscally conservative Act Party included cost-pressure increases to health spending in its pre-election fiscal plan. The big question is how much new funding is enough. Budget documents released by Treasury go some way to answering it.
A Treasury official explained this to the Herald. The top-down model was developed by the Ministry of Health and Treasury 2022-23 and “included assumptions around demographic change, inflation (price and wage), other health cost drivers and efficiency/productivity”.
The “bottom-up” model came from Health NZ and was “intended to be more granular to understand volume, price and other cost pressures in different parts of the health system”.
In December 2023, Treasury noted that its “top-down” forecasts showed Health NZ would require less cost-pressure funding than the “bottom-up” model, which suggested more funding would be needed.
Minister of Health Dr Shane Reti. Photo / Mark Mitchell
Treasury said Health NZ would set out a range of options for funding if the Government decided to force greater efficiencies on the organisation by not funding cost pressures at the “top-down” level. Treasury warned that Health NZ was already required to make so many efficiencies that further cutting would “require choices such as further service changes and rationing of services or increasing user-pays”.
Rationing and increasing user-pays was rejected, however, with the Government continuing to promise no cuts to frontline services – although the Opposition argues that frontline services are being affected by things such as staffing shortages.
Treasury, while supporting a funding increase for cost pressures, warned that health spending was increasing rapidly thanks to demographic pressures. It has increased by about 5.6% a year since 2009/10, a rate of increase roughly in line with the OECD average. This rate of spending increase was more than double the 2.5% average compound inflation rate during those same years. Health costs tend to increase faster than inflation because the ageing population means more people are using the health system.
Health now accounts for about 7% of GDP and that’s likely to rise to 10% by 2061, according to Treasury’s long-term model.
In the new year, the Government received further briefings from Treasury and Health NZ. The most significant arrived in March 2024. Treasury officials noted Reti signalled he wanted to fund health at a level “higher than Treasury’s scaled recommendation”.
Treasury’s recommendation was to increase health funding for cost pressures over the four-year forecast period so that by 2027/28 annual baseline spending was a cumulative $3.927b higher. Reti subsequently increased this to $4.17b – about $250 million more a year.
Treasury's recommendation for health funding levels. Table / Treasury
Reti’s chosen funding level was the same as what the former Labour Government had signalled.
Treasury noted that this level of funding was “higher than Treasury’s ... recommendation” and that it represented a significant funding increase to Health NZ given that the cost pressures were modelled at a time when inflation and wage growth were expected to stay higher for longer.
Because updated forecasts showed inflation and wage growth slowing more rapidly, the funding increases would be worth even more in real terms.
A Treasury official told the Herald the cost-pressure modelling was based on Treasury’s 2022 HYEFU (half-year economic and fiscal update) forecasts, which had inflation higher than the most recent BEFU (Budget economic and fiscal update) 2024 forecast.
The health funding option agreed by the Government. Table / Treasury
However, the funding increase was still somewhat lower than the “bottom-up” level Health NZ indicated it might need. The documents show the funding increase was 77% of the “bottom-up” level in 2024, rising to 83% by Budget 2026.
Treasury said the higher funding level would give ministers “some degree of choice between managing risk and emerging pressures or funding new manifesto [promises]”.
Papers delivered to the former Labour Government show it grappling with many of the same problems. Treasury expresses exasperation at the low productivity of the health sector which is “generally lower than that of the wider economy” both here and overseas, a factor often called “Baumol’s cost disease”.
Reti told the Herald he was “proud to announce the biggest-ever investment in New Zealand health through Budget 24″.
“The delivery of $16.68b across three Budgets is a key part of our plan to invest in frontline services like emergency departments, primary care, medicines and public health to ensure New Zealanders can get the healthcare they deserve,” he said.
Reti said he wanted the “sector to be able to plan for the future with confidence, knowing our Government will always prioritise increased investment for cost pressures, and to improve the services it delivers”.
Labour’s health spokeswoman, former Health Minister Ayesha Verrall, told the Herald that when she was minister “Te Whatu Ora did not contest the adequacy of the Treasury’s calculated cost pressure”, but this changed in 2024 under the new Government.
“Based on comments by Te Whatu Ora officials at annual review hearings in 2024, I know they did after the change of Government,” Verrall said.
She said the warnings received by the new Government “regarding the level of efficiencies required to maintain services with the modelled funding level are stronger than those I received”.
Verrall said had she been minister this year, the warnings would have led her to “interrogate the model and its assumptions further”.
She also questioned whether the efficiencies Treasury wants to see from the system were realistic.
“The advice states the model sets efficiency expectations that are higher than those usually used by Treasury and the OECD. It is unclear whether that is realistic. Accepting unrealistic expectations would result in underfunding.
“Since leaving government, I’m concerned that the methods for calculating cost pressures insufficiently reflect the effect of the ageing population and have been seeking expert opinion on this,” Verrall said.
Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.
