Opinion: Healthcare productivity has become an economic illness

This op-ed, written by Taxpayers' Union Economist Joe Ascroft, was originally published on Health Central.

By 2060, Treasury’s Long Term Fiscal Model forecasts that government debt will reach 205.8 percent of GDP – approximately ten times our current debt burden as a proportion of the economy. Just financing that debt will cost 11 percent of GDP – one in every nine dollars in the economy will be used to just meet the interest cost of government debt.

Clearly that is an unsustainable future. When debt gets that high simply meeting the cost of basic public services like education, law and order, transport, and defence becomes extremely difficult – let alone welfare payments and superannuation.

So what’s driving our future of debt?

The two most important factors are superannuation and healthcare spending. While superannuation (expected to increase from 4.8 to 7.9 percent of GDP) routinely receives coverage in the media, healthcare (expected to jump more aggressively from 6.2 to 9.7 percent of GDP) is actually expected to be more of a burden on taxpayers.

Our aging population is one explanation for both factors. As the population distribution skews older, it’s natural that a greater share of resources will be used to fund superannuation and healthcare.

But population aging is not the only factor driving the accelerating cost of healthcare. When the Office of the Auditor General examined Treasury’s Long Term Fiscal Statement they noted that “non-demographic factors raise healthcare costs 35% faster than normal real output growth and 25% faster than normal consumer price growth. These two factors are behind most of the increase in healthcare costs during the 40-year projection period.”

In short, the OAG claims that a majority of the expected increase healthcare costs is attributable to healthcare cost pressures and higher demand for healthcare coverage associated with income growth, rather than an aging population.

So how can we mitigate those cost pressures if they are not related to demography?

Improving healthcare productivity would be a good start.

Productivity is a measure of how much output we get for the inputs we invest. Typically, we expect productivity to grow in response to new technology and capital investment. Productivity growth is the driving factor behind wage growth and prosperity.

Unfortunately, productivity growth in the health sector has been woeful for the last ten to fifteen years. In the period 2004 to 2015, cumulative health productivity growth was close to zero. In the period 1996 to 2017, labour productivity growth in the healthcare sector was half of the rest of the economy.

Put simply, any increase in output in the healthcare sector in the last two decades is largely attributable to more inputs, rather than any improvement in efficiency. It is wholly unsurprising that Treasury expects debt to climb to impoverishing levels, if one of the largest areas of public expenditure is failing to become more efficient in line with the rest of the economy.

Beating the debt apocalypse by taking on healthcare productivity is possible but might require the Government and DHBs to make difficult choices. Abandoning our public-focused healthcare model in favour of American privatisation would be a big mistake – instead we should focus on implementing a series of small reforms to cut costs while improving output.

The Taxpayers’ Union proposes some of these reforms in a series of papers released in the coming weeks: attempting to limit hospitalisations associated with adverse drug reactions (i.e. becoming ill because you have incorrectly taken prescription medicines), cutting down on missed specialist appointments, and minimising large redundancy payments.

DHBs might also want to consider tying remuneration of board members and executives to the financial health of the organisation, in light of the Government having to call in commissioners to Southern and Waikato DHBs. The Government could also consider increasing the proportion of each board appointed by the Minister, rather than elected by the public in notoriously misunderstood, low-turnout elections. Finally, amalgamating some DHBs might help to cut down on administration costs.

Each of these policies will need to be considered on their merits and none of them are a silver bullet, but if the Government implements no reform, taxpayers will be on the line for eye-watering levels of debt. 

The report can be found by linking directly to the PDF here.