Publicly funded healthcare, social insurance and justice in Aotearoa New Zealand

All health systems have to ration the care they provide. Healthcare is expensive, and need will always outstrip supply. The key ethical question is how to ration fairly. Some systems ration by ability to pay. This arrangement is consistently criticised as unfair, because it disadvantages those who are worse off. Everyone needs healthcare, and it is unfair for an individual’s wealth to determine whether or not those needs are met. Other systems tax everyone to provide universal healthcare. While fairer, such systems do not avoid rationing or unmet need. In these systems, care is free but often costly in terms of long waiting times and delayed access to care.

Historically, Aotearoa New Zealand has straddled these two options with a dual system in which a private sector (financed by private health insurance and out-of-pocket payments) operates alongside the public, tax-funded sector. The intent of dual systems is to ensure everyone has access to some level of care, while allowing those with financial means to bypass the delays and constraints of the publicly funded sector. In New Zealand this system originates in a historic compromise between the government and the medical profession, forged during implementation of the Social Security Act 1938, that allowed the medical profession to engage in both public and private practice. Political support for the dual system emerged from the recognition that “every private bed was one the state did not need to provide”.¹ Coupled with a laissez faire approach to regulation² and increasing resource constraints in the public sector, the dual system has enabled the private sector to grow, becoming the default provider of non-urgent or elective services and often also urgent or time-critical care, a process the senior doctors’ union calls “creeping privatisation”.³

While some ethicists have defended dual health systems on the grounds that they promote individual liberty and do not make anyone worse off, the long-term negative impacts of this compromise are increasingly evident. Primary care remains only partially government funded, creating significant barriers to access;^4,5 medical specialists are moving away from the public sector to work in the private sector, reducing public sector capacity;⁶ and access to elective or planned care is often not equitable or timely.⁷ The costs of private health insurance are high and increasing,⁸ excluding many of those most in need of care and exacerbating existing health inequities. Increased privatisation and outsourcing of care have been shown to correspond with worse patient outcomes and diminished quality of care.⁹

The creeping privatisation enabled by the dual system raises several ethical concerns. First, it disadvantages patients without the means to fund their own care, who must wait longer for publicly funded care or simply go without. It also disadvantages patients with more complex health needs that cannot be accommodated within a profit-driven system, which favours straight-forward cases for maximum efficiency. Second, increased privatisation erodes capacity within the public sector, making those who depend on its services worse off. Competition for a limited health workforce and the time and skills of specialists intensifies this erosion, exacerbated by outsourcing of publicly funded services to private facilities, which not only drains financial and human capital out of the public sector but also creates inequities in access to care⁷ and allows private entities to profit from taxpayer funds. Third, a dual public–private system amplifies social inequality and health inequities by creating different “tiers” of healthcare for the haves and the have-nots, and undermines the social solidarity that is critical to the long-term sustainability of a universal publicly funded health system.

This paper examines ethical arguments in favour of dual health systems and shows why they are problematic. It then considers a social insurance funding model for healthcare in New Zealand, similar to that on which the Accident Compensation Corporation (ACC) runs.² Although there is variation in how this model is deployed internationally, as a financing mechanism for healthcare it is distinguished by mandatory insurance contributions that are paid into funds separate from the tax system. A recent analysis of health financing in New Zealand highlights the advantages and disadvantages of both general taxation and social or mandatory insurance as financing mechanisms for healthcare, concluding that social insurance offers few advantages in terms of access, equity and health outcomes.¹⁰ This echoes the conclusions of other analyses in New Zealand and elsewhere, suggesting that the costs of shifting to a social insurance model may outweigh any potential benefits.^2,11

However, without significant change, the future of the publicly funded healthcare sector in New Zealand is uncertain at best. A 2002 report to the Director-General of Health notes that New Zealand’s dual system is distinctive in permitting many services to be provided in both the public and private sectors at the same time, creating competition and interdependencies in which activity in one sector can impact the other.² These interdependencies have advantaged the private sector at the expense of the public. This situation is untenable and unethical. In response, some have called for “a radically different approach to health and social spending”.³ We argue that the social insurance model, arguably a radically different approach, has the potential to address the ethical concerns raised above.

Justice and dual healthcare systems

Krohmal and Emanuel make an ethical case for dual or “tiered” health systems, arguing that since no publicly funded health system will be able to afford all the healthcare interventions people might want, a private “tier” enables people to access care that they otherwise could not.¹² In their view, dual health systems have two advantages. First, they protect individual freedom, or “the liberty of individuals to pay for medical options that the public fails to provide”.¹² We call this the liberty argument. Second, dual systems enable Pareto improvements to welfare, where some can become better off without making anyone else worse off. We call this the welfare argument. Both of these arguments are problematic.

The liberty argument depends on the assumption that we can distinguish between the kinds of interventions that should be included in a publicly funded tier of healthcare and those that can be relegated to the private tier as “extras” for those who can afford them. Krohmal and Emanuel acknowledge that a dual health system is only sustainable and just if a core benefits package covering an adequate level of healthcare is available to all. But determining what should be included in a core package of adequate healthcare and what should be considered an “extra” is increasingly challenging. First, new health interventions appear frequently, often with high costs. Global availability raises patient expectations and increases pressure on health systems to approve and fund these interventions, potentially crowding out other important forms of healthcare. Second, as the private sector expands to cater for unmet health needs, the demand that these needs be met in the public sector is undermined. This contributes to a downward spiral in which more and more interventions are shifted from the publicly funded tier to private, user-pays tiers. Funders of public healthcare (governments and tax-payers) may even be incentivised by the existence of a private tier to reduce the provisions in the public tier in order to contain costs,¹³ contributing to erosion of the public tier and the core package of services it provides. In New Zealand’s dual system the private sector is no longer only providing “extras” for those with the liberty to purchase additional care, but necessary care that is otherwise practically inaccessible. The liberty argument, as played out in the New Zealand system, ultimately undermines the public sector.

The welfare argument claims that allowing some people to purchase private healthcare makes them better off without making anyone else worse off. The evolution of the New Zealand health system shows why this claim is ethically dubious. In primary care high co-payments create cost-related barriers to care with predictable negative impacts on health and wellbeing, particularly for those who are already among the worse off.^4,5 Health inequities for Māori, exacerbated by the growth of private healthcare, are extremely costly to individuals, to society and especially to Māori themselves.¹⁴ For those on waiting lists for elective procedures, international data show that the prevalence of private health insurance and services does not reduce, and may even increase, waiting lists or times in the public sector, particularly in dual or tiered health systems.^15,16 Contrary to political rhetoric that the private sector reduces pressure on the public sector, evidence, including an earlier New Zealand study, suggests that more private care reduces efficiency, increases costs and leads to poorer-quality care.^17,18

Dual health systems can also make people worse off by providing an option to “exit” the public system. When healthcare workers exit, “brain drain” from public to private sectors reduces the type and availability of services available to those who depend on the public system, making them worse off. When citizens exit, either by choice or need, bonds of social and relational equality are undermined.¹⁹ Universal health systems in which everyone accesses the same level and quality of care recognise and express people’s equal worth and foster solidarity. All public health systems rely to some extent on solidarity, understood as people’s “mutual recognition of each other’s equal status” and a sharing of common risks and common goods.²⁰ In many health systems an appeal to solidarity is either implicit or explicit in the justification for ongoing commitment to publicly funded, universal health systems, and empirical studies show that solidarity is critical to sustaining those systems in the long term.^21–23

Solidarity is also, importantly, tied to equity. It can be understood as a willingness to “side with” those who suffer inequity, especially in terms of being “treated as lesser” or expressing their lesser status in the health system.²⁴ When the publicly funded health sector fails to provide reasonable access to an adequate range of services or is neglected in favour of the private sector, the dual system will erode this conception of solidarity. The greater the share of healthcare performed by the private sector, the greater this erosion is likely to be. If solidarity is essential to the long-term sustainability of a publicly funded health system, and if the growth of the private sector erodes solidarity, that growth threatens the long-term sustainability of the public sector.

How might we address these problems? Considerations for a social insurance model

The argument so far raises four concerns about the justice of dual health systems. First, dual systems incentivise erosion of the public sector as more and more services are shifted to the private sector. This erosion is accelerated as interventions become more costly to the public system or as public funds are funnelled to private providers instead of being reinvested in the public sector. Second, dual health systems make some better off and some worse off; they are therefore not a benign welfare improvement. Third, dual health systems express inequality and injustice by failing to treat people as equals. In an important sense, users of different healthcare “tiers” are not “in the same boat”.²⁵ Finally, the expression of inequality in our healthcare institutions undermines social solidarity, both in terms of our willingness to act collectively to support the public system and our willingness to side with the worse off or those who suffer the inequities imposed by the system. The erosion of solidarity threatens the long-term sustainability of a publicly funded universal health system. In New Zealand, as in other health systems globally experiencing similar cost and workforce pressures, the breadth and depth of the gap between private and public healthcare, and the growth of the private sector relative to the public sector, signal serious and long-term problems for universal healthcare.

One option to address these problems is to change the funding arrangements for our healthcare system. This change acknowledges two vulnerabilities of tax-funded systems: first, they are vulnerable to budget cuts and shifting political priorities and preferences; second, since tax revenues are often considered “insufficient to finance enough health care at a quality level that meets the expectations of the population”,²⁶ the private sector exploits gaps between what the government is willing to fund from tax revenue and the care taxpayers want or feel entitled to receive.

These vulnerabilities are amplified as people spend more of their income on private healthcare or insurance. If some can “exit” the public sector through these means their social and political support for it will wane over time, as many might reason “Why pay taxes for coverage they don’t use?”.²⁷ Moreover, as the capacity of the publicly funded system to meet health needs decreases, those in the middle of the income distribution may increasingly see their interests as more aligned with those at the top than with those at the bottom, further increasing support for private payment and provision.²⁸

Recent analyses suggest the number of people paying for private health insurance in New Zealand is growing, signalling a growing willingness, or need, to “exit” the public system in order to access care.³ In order to prevent this shift towards private insurance from further driving inequity and undermining solidarity in the health system overall, there is an ethical case for considering a system of universal social insurance, in which working individuals pay a proportion of their income as a health insurance premium or levy, much as they currently do for ACC coverage in New Zealand. The premium is then paid to a health insurance fund that provides access to a specified package of health services (which can be legislated by the government in order to ensure universal coverage and access). There are several examples of this funding arrangement internationally.¹⁰

Justice and equity gains under a social insurance model

Although evidence is mixed in terms of the advantages of social insurance models over tax-funded models,^2,10 we suggest that social insurance offers potential advantages specifically in terms of justice and equity over the current tax-funded model in New Zealand.

1.     Closing the gap

Economists acknowledge that because tax-funded systems redistribute significant amounts of money, the tension between the economic interests of the healthy and wealthy and the unhealthy and unwealthy in those systems is especially prominent. This means that pressure for more private funding is a permanent feature of such systems. This pressure can increase if many in the population consider that care in the publicly funded system to be “inadequate or inaccessible and that their health is being put at risk”.²⁸

In social insurance models this push-pull tension between decreasing public share and increasing private share is less prominent because in practice there is little, if any, distinction between public and private services. The universality of these systems “packs” together the wealthy and less wealthy (and healthy and less healthy), promoting equity along several dimensions, including access to services, opportunity for health, and patient status. Some commentators note that social insurance systems “may make every patient a private patient”,²⁹ a status that is associated with high levels of satisfaction with such systems, but which also expresses the equality of patients.

Similarly, under a social insurance model the location in which care is provided, or the person providing it, does not depend on willingness or ability to pay. This reduces the gap between private and public healthcare that is created by separate tiers in the dual model. This is both a physical gap (services are provided in the same location) and a “status” or “value” gap. A social insurance model reduces the perception that private care has higher status or value and that the patients receiving it therefore have a higher status. In Germany, for example, sickness funds and private health insurers use the same providers, with many hospitals and doctors treating patients regardless of the source of their insurance. This arrangement reduces (though does not eliminate) the gap between public and private healthcare that is created by separate tiers. A social insurance system can achieve more equitable access to care since it is “agnostic about who provides care and simply funds patients based on need”.³⁰

2.    Access not determined by ability to pay

Because insurance is mandatory in a social insurance model and paid for as a proportion of income (as well as subsidised for the unemployed or those on lower incomes), access to timely, adequate healthcare is not determined by ability to pay (though patient co-payments can pose barriers when these are in place³¹). This is an advantage over a dual tax-funded system, such as New Zealand’s, in which patients needing non-acute care are increasingly unable to access it except through the private, self-funded sector,³ and high costs and capacity pressures are also creating access issues in the private sector.⁸

3.    Health spending not a political football

Social insurance models have other advantages that might indirectly lead to more equitable provision of healthcare than dual and tax-funded models. First, insurance levies are paid to funds that are independent of the government treasury, so that health funding is not competing against other spending priorities for a share of the tax revenue. Commentators have noted that social health insurance is therefore likely to be less politicised than tax-financing, making it less vulnerable to shifting political preferences.^29,10 Second, since under a social insurance system people are paying more directly for healthcare through insurance premiums or levies (as opposed to general tax revenues), they might perceive a stronger link between the premiums and health benefits than between taxation and health benefits. This may increase solidaristic support for the system.

Limitations

No health system is perfect, and social insurance models also have disadvantages. These include: i) Accountability. Since those who make decisions on how tax revenue is spent are held accountable by regular elections, tax-funded systems may provide more accountability, or at least “a more open debate about public spending tradeoffs between health and other sectors”.²⁶ ii) Revenue. Social insurance systems still require tax revenue to supplement coverage for low-income groups, the unemployed and the costs of an aging population.¹⁰ Since individuals are paying both insurance levies and taxes, the system may cost them more, or be perceived as costing more. Insurance contributions may increase more significantly over time than taxes, although the benefits of risk-pooling and universal coverage may mean these increases are far less than in private insurance markets. iii) Administrative costs. Collection costs may apply for insurance contributions that do not apply for taxes, which are being collected anyway. This may lead to higher administrative costs for a social insurance model, especially if there are multiple insurers. iv) Regressive financing. Whereas taxation is proportional or progressive, social insurance contributions can be regressive, if capped at a certain level of contribution. However, as in Germany, contributions can be proportional to income, making the system more progressive. v) Fee schedules. An additional complexity for all social insurance systems is the fee schedule for providers that requires administration and negotiation. Payments from the schedule are for services provided by either the public or private sector. Where social insurance exists incentives may emerge for providers to treat only better off patients and to over-provide services in order to generate more income. Methods exist to counter these behaviours, however, and of course different negative behaviours are associated with tax-funded systems, including a lack of consumer focus and issues of quality and efficiency.

These disadvantages must be weighed against the potential for a social insurance model to reduce the growing inequities in access to healthcare created by New Zealand’s dual system and the costs associated with increased and unregulated privatisation, including the direct costs of increasing insurance premiums and the indirect costs of lower quality of care, worse patient outcomes and fractured social solidarity. In his proposal to expand ACC to fund the health system on a social insurance model, Maharey notes that such a system redesign also offers scope for innovation to address long-standing issues in the New Zealand health system.³² For example, a social insurance model could improve access to primary care by significantly reducing co-payments and better co-ordinate and integrate primary and secondary care. In a recent visit to New Zealand, physician and ethicist Ezekiel Emanuel, cited above as a defender of the ethics of dual health systems, echoed these benefits, advocating mandatory social insurance alongside other reforms, such as 100 percent funding for primary care, infrastructure investment and an increase in health spending as a share of gross domestic product.³³ Such reforms increase the likelihood of achieving universal healthcare coverage and access.

Conclusion

New Zealand’s dual healthcare system, in which growth of the private sector erodes provision of adequate levels of healthcare in the public sector, is untenable and unethical. Dual health systems are not more just, either in terms of individual liberty or efficiency gains, in allowing some to become better off. Rather, dual health systems make the most in need worse off, promote social inequality and undermine solidarity.

In addressing the ethical issues facing the New Zealand health system, the social insurance model offers several advantages over the current dual, tax-funded model. One key advantage is that by closing the gap between public and private health services, social insurance models do not treat people differently based on their ability to pay and so reduce inequities in access created by tiered systems. Despite the origins of New Zealand’s health system in legislation designed to provide a robust social safety net, ability to pay is now a determinant of access to healthcare in this system. Long-term outsourcing contracts, defended as a mechanism to address unmet health needs, divert taxpayer funds and human capital away from public services and into private profits, further eroding the capacity of the public sector to provide care. These facts should be challenged at all levels of public and political debate and the full range of alternative models considered.