By Eric Crampton 30/05/2017

So Labour and National are scrapping over whether National’s increased or decreased the health budget.

There’s no question that health budgets are well up since National took office, whether in per capita terms, real terms, nominal terms, or real per capita terms. Population’s up about 10% since 2008; health budgets in CPI-adjusted terms are up about 29% since 2008. So real per capital spending has to be up.

But the more interesting question’s on how to adjust health costs for CPI.

StatsNZ has a sub-index on health costs. And that’s shown substantial cost inflation – well above CPI in some categories. But should health spending be adjusted for that sub-index? Let’s look at what’s in it.

Position in the CPI structure

The health group of the New Zealand Household Expenditure Classification represented 5.09 percent of the CPI at the June 2008 quarter.
Table 1
Expenditure weight for healthJune 2008 quarter
Group, subgroup, or class Level Weight (percent) Examples of items within class
Health Group 5.09
Medical products, appliances, and equipment Subgroup 0.98
Pharmaceutical products Class 0.61 Prescription medicines, oral contraceptives, and over-the-counter products such as painkillers, cough and cold preparations, sunscreen, and vitamins
Other medical products Class 0.03 Bandages and contraceptive supplies (other than oral contraceptives)
Therapeutic appliances and equipment Class 0.34 Corrective glasses and contact lenses
Out-patient services Subgroup 3.32
Medical services Class 1.97 General practitioner, specialist, and optometrist consultation services
Dental services Class 0.94 Dental examination, filling, and denture services
Paramedical services Class 0.41 Medical laboratory (eg scanning) services
Hospital services Subgroup 0.78
Hospital services Class 0.78 Private hospital services

Let’s assume that this is all still the same in terms of weightings and definitions as it was in 2008.

If you flip over to the figures, Infoshare has 2006Q2 as base set at 1000 for the level 2 subgroups. Medical products, appliances and equipment had dropped to 890 by 2008Q3 (National comes in) and is now at 1030. Basically, no inflation there. This group covers pharmaceuticals, medical products, supplies and equipment.

Out-patient services were at 1035 in 2008 and are now 1356. This covers things like GP fees, specialist fees, optometrist fees, dentist fees, and medical lab fees. It’s mostly GP, specialist and optometrist fees. Suppose that the government wanted to concentrate health spending on lower income cohorts and so reduced the capitation fee paid to GPs while increasing the range and subsidy on the Community Services Card – with the whole thing being revenue neutral if clinics upped the GP consultation fee. That would increase measured out-patient service cost inflation but it would be silly to increase health budgets on the back of that inflation.

Similarly, if specialists decided to charge private clients more, that affects measured inflation but only affects government health provision costs if they also change how they bill DHBs.

Hospital services rose to 1187 by 2008 and to 1527 by 2017. This reflects costs at private hospitals. If richer people demanded nicer services at private hospitals that would show up as cost inflation but wouldn’t affect costs at public hospitals – but could reflect that public hospitals are declining in quality of amenities relative to private ones.

Bottom line: the health component of the CPI has increased far more quickly than other parts of the CPI, driven by increases in private hospital costs and out-patient services. It’s very likely that the cost of providing health services in the public system has outpaced CPI inflation, but I’d be reluctant to just use the health services subcomponent of CPI for a weighting there.

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