New Zealand’s addiction to healthcare

Media Release

New Zealand’s addiction to healthcare: A diagnostic, trends and initiatives to arrest growth

Prepared by Temple: Capital Investment Specialists

May 2009

24 August 2009

Investment consultancy presents a diagnostic of the health sector
Temple: Capital Investment Specialists have today released new research into the multi-billion dollar healthcare sector in New Zealand in their report.

New Zealand’s addiction to healthcare: A diagnostic, trends and initiatives to arrest growth

Temple’s Dr. Paul Winton explains the underlying problem,

“For decades health has been growing faster than the economy however we’re now reaching a point where the nation will need to make significant tradeoffs. Our analysis suggests that recent government initiatives only deliver about 20-25% of the savings need to make healthcare in New Zealand sustainable.”

Temple’s research shows the cost of health is taking over. Health spend is approximately 20% percent of government spend and has been growing at just under 6% CAGR, twice the Gross Domestic Product (GDP), for a decade. At this rate in 2026, spend will be $30Bn higher in real terms and account for ~40% of government core spend, twice the current load of healthcare on the tax system. New Zealand is addicted to healthcare.

To better understand the causes and possible actions that the public and private sector could take the study has examined five drivers that impact the amount of healthcare service and five drivers that impact the price per unit of healthcare.

“We wanted to undertake a robust analysis that swept away all the noise and rhetoric and gave us some insight into what has really been causing this cost growth over the past decades” explains Dr. Winton.

This research shows cost rises are split evenly between volume and price. The volume of care we are providing has grown by 3% compounding per year, while price growth has contributed a further 2.8% CAGR to total costs.

The largest three contributors to cost growth are increases in treatment availability, population growth and increases in the cost of labour. Surprisingly the aging population accounts for less than one tenth of the cost growth. Dr. Winton outlines a common misconception,

“People always talk about the aging population being the issue. While that contributes to the story it really only accounts directly for 10% of the growth”

Cost rises are split 50:50 between volume and price. The volume of care we are providing has grown by 3% CAGR per year, of which only one sixth is attributable to the aging population and almost half is caused by increases in the availability of new treatments. Price growth has contributed a further 2.8% CAGR to total costs. Medical goods account for a third of price growth and may be attributed to either price or increasing diffusion of Medical Goods

A credible scenario where cost growth continues at 6% CAGR or more should be considered. Our scenario sees structural volume drivers likely to increase from 3% CAGR to 3.3% CAGR over the next two decades. Price growth may rise from 2.8% to 3.5% CAGR and will be dominated by labour price rises and the emergence of new Medical Goods.

“Looking forward twenty years is hard at the best of times but we think a scenario that sees even greater growth demand is sufficiently credible that we really need to be having a national discussion”, explains Dr. Winton

To sustain this growth New Zealand must borrow, increase GDP, decrease non-health spend or increase tax take. All of these options are unpalatable or difficult and hence we must consider the current cost trajectory to be unsustainable.

“There really isn’t a get-out-of-jail-free card here. The country needs to make some difficult decisions and at the moment we’re not well prepared to understand or make those decisions”, explains Dr. Winton

The recent example of Herceptin cost curtailment by Pharmac shows that there is a risk that those with the loudest voice or best PR firm will win the war for funds, leaving many New Zealanders marginalised. Finally, on this path New Zealand falls into a vicious cycle led by low staff morale that will ultimately increase labour costs and potentially lower quality of care.

Examinations by Treasury and the Ministry of Health have underestimated the problem. Specifically the current cost of health has exceeded even their worst case scenarios by almost fifty percent. Furthermore there is little evidence of a true shift in approach by The Ministry of Health. Current language is focused on issues caused by inflation and the economic crisis (2008-2009) rather than underlying structural issues. Lastly none of the leaders are well positioned to elevate the discussion to a national level to slow down the current cost trajectory. Material changes to health have been described by some commentators as ‘political suicide’.

“We really don’t expect to see much more leadership coming from the core. Fundamentally this is less about the right answer than the right communications approach and the Minister really is in a difficult position. Climate change searches on the web increase over 150% after the Stern Report and Al Gore’s Inconvenient truth. Maybe we need a similar story for health”, explains Dr. Winton

Four initiatives that could arrest and reduce the projected growth rate scenario have been identified. These four initiatives have the potential to reduce healthcare growth from ~6.8% to ~5.5% CAGR.
• Understanding and managing supply induced demands for healthcare services will support cost containment
• Review underlying ACC cost drivers focusing on price management in the short term to reduce growth by 0.6 percentage points
• A national procurement strategy for Medical Goods should be implemented and run in a manner similar to Pharmac to reduce growth by 0.4-0.5 percentage points
• Technology driven labour productivity must be pursued as a matter of urgency to reduce growth by 0.2-0.4 percentage points

Some of these initiatives are outlined in the recent Ministerial Review Group report. However even with these initiatives a large gap remains between health and forecast GDP growth.

“Even if we pull the lever really hard on these ideas we will only close the gap to sustainability by about a third. The remainder, two thirds, will need to come from somewhere else and that means starting to talk now about what health care services we deliver and how we deliver them. One thing is clear. To be sustainable healthcare in 2025 will look very different to what it looks like today”, explains Dr. Winton

To bring healthcare cost growth in line with forecast GDP growth over a 20 year period would require year-on-year productivity improvements of 3% driven by new innovative healthcare models. To achieve this we recommend the Crown consider a 1-2%, $150-300m, fund focused on health innovation and matched by the private sector to fund, develop, trial and roll out new healthcare models.

Only innovation, potentially the largest driver of all, has the potential to truly close the gap between health costs growth and GDP and in doing so move to curing New Zealand of its addiction to healthcare services.

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