Restraining Health Costs

By Jim McVeagh 05/11/2009

Brian Fallow provides an excellent look at the urgent need for cost containment in health and the problems this involves. He points out that rising health costs is a far bigger potential problem than superannuation. It is also far more difficult to solve as a simple shift in age eligibility would sort out most superannuation problems. Fallow points out a number of problems that make solving the problem of health costs particularly troublesome.

Since 1950 health spending has grown more than three times faster than per capita GDP and the gap between the two tracks has widened markedly since the mid-1990s.

It illustrates one of the factors which makes constraining health care costs a particularly intractable problem.

Demand for health services grows at least as fast as incomes. It resembles in that way a luxury good.

It has been well established that increasing a country’s wealth will proportionally increase the demand for medical services. This is over and above the increase caused by inflation and by population growth. This means that New Zealand cannot increase the relative amount of money available for health by increasing the nation’s wealth, as people will simply access a larger quantity, absorbing the increase.

Another problem is our reliance on foreign professionals:

Indeed one of the issues the ministerial health review cites is that “our health workforce has a high dependence on overseas born and trained staff in a world of growing health workforce shortages and with our ability to pay internationally competitive salaries falling behind faster-growing economies”.

The upshot of this is that we tend to attract doctors from poorer countries than ourselves, often meaning that we need to make considerable investments in integrating these professionals into our health system. There is also a serious tendency for our New Zealand graduates to gravitate to countries with better pay scales, meaning that we attract staff with higher training needs but still have to pay higher salaries to them, least we loose our home-grown staff.

One of the ironies of the medical world is how third world countries lose doctors to richer countries, who, in turn lose doctors to countries that are richer still until, eventually, the richest countries send doctors back to the third world countries as volunteers.

Fallow then moves on to the problem of age-driven demand.

Then there is the demographic problem. Average lifespans have increased but remain finite and we tend to cost the health system most in our final year.

Fallow is not quite correct here. The problem is not so much that we are getting older, but that the expensive “last year of life” is getting later and later. The cost of managing someone aged 85, on average, in their last year of life, is exponentially more expensive than managing someone at age 75 years. This is because the extra decade adds multiple medical problems to the management. And they are now all problems that we can manage, and so we do.

The current thrust of the National health board will provide some cost savings by co-ordinating purchases and support services. Unfortunately, as Fallow points out, these savings are likely to be once-off only and will make little inroad on the overall cost of healthcare.

There is a fundamental economic problem with health care which makes cost reduction extremely difficult.  It is the clash of moral hazard and access to health care. Moral hazard is a term used by health insurers (amongst others) to describe the behaviour of people to the cost of health care. Essentially, people access more healthcare the lower the perceived cost. Healthcare use is maximal when it is free. This is why insurance companies use co-payments and deductibles to discourage maximal use of health care.

The difficulty with co-payments and the like, is that they discourage access of essential medical services as well as trivial access. This effect is multiplied amongst low wage earners and increases with increasing co-payments. Thus one of few proven methods for controlling health care costs runs the risk of denying health care to low income groups. Of course, low wage earners find health care more difficult to access no matter what system is in place. As Fallow points out at the end of his article:

The clear implication is an expectation that people will have to fund more of their own health care.

Doesn’t that mean rationing access to health care by income?

“Well,” says de Raad, “at the moment we ration by waiting lists.”



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