NZ’s health system in crisis

As of today, New Zealand’s public health system – the biggest government agency in New Zealand’s history, which goes by the name of Health New Zealand Te Whatu Ora – is being run by just one reforming bureaucrat – Prof Lester Levy, after the Government sacked the recently installed board. This is because the hospitals around the country that employ nearly 90,000 staff and have a budget of about $28b and assets of $25b are apparently in financial crisis.

This isn’t the first crisis in the health system. As with many other aspects of New Zealand’s welfare state and infrastructure, hospitals and healthcare have been in decline for some decades now. There have been endless crises, including ongoing financial deficits amongst the now-abolished District Health Boards.

This was all supposed to be fixed by the last Labour Government, which implemented radical centralising reforms. The new Government has now declared those reforms to have been “botched”, and Health Minister Shane Reti has ordered further structural reforms to be undertaken by the newly-appointed Commissioner of Health, Lester Levy, who began in the job today. He promises to devolve power back to four regions that will operate under his control. And he is supposed to be axing “backroom bureaucrats” and reducing layers of management from 14 to 6, as he says Health New Zealand Te Whatu Ora (HNZ) has become a “bloated bureaucratic organisation”.

Financial crisis: the mysterious missing $1.4b

The most shocking part of this week’s announcement is that HNZ is losing $130m each month and is headed for a deficit of $1.4b. There’s very little clarity about this figure, with no one from the Government, HNZ, or the Ministry of Health able to explain why the system is bleeding such a large amount of money.

The communications about this figure have been particularly vague. Government ministers say it’s due to “financial mismanagement” at HNZ and the employment of too many managers. Yesterday, Prime Minister Christopher Luxon explained that “There are 2500 more managers” in HNZ than there were six years ago.

The Chief Executive of HNZ, Margie Apa, claimed yesterday that the budget blowout was mainly due to hiring more nurses and arguably too many. She said: “Over the last six months, we found ourselves actually over-correcting much quicker than what we expected... Our vacancy rates for nurses is at about 6%. When I started this role, it was about 12% to 15%.”

HNZ had inherited a severe shortage of clinical staff and, therefore, carried out a huge recruitment drive – especially for nurses. It was more successful than they expected. The thousands of new nurses working in hospitals, therefore, make up much of the $130m additional costs for HNZ.

Commenting on this today, Newsroom’s Marc Daalder suggested this was probably quite good news, and therefore the crisis was not simply due to financial mismanagement: “with a higher budget, Health NZ would be able to continue recruiting medical staff and resolving the massive workforce shortage. That would seem to be a clear-cut case of underfunding, even if a smaller portion of the ongoing deficit is still fallout from historic financial mismanagement. The exact degree to which Health NZ’s deficit is due to underfunding or poor financial management will be in the eye of the beholder. But suggestions the cause is entirely the latter are clearly not correct”.

Is Health New Zealand Te Whatu Ora underfunded?

Rather than being financially mismanaged, HNZ might be simply underfunded. Plenty of health researchers and economists argue that New Zealand hasn’t been putting enough resources into the health system in recent decades.

Christchurch surgeon Phil Bagshaw is quoted in The Post today as saying, “The health system has been seriously underfunded for decades. Anybody who thinks they can come in and make sweeping changes to the system should talk to the doctors and nurses who are working themselves to exhaustion to keep a failing system going.”

He is also backed on this by Prof Tim Tenbensel of Auckland Medical School, who was reported responding to the health changes yesterday as believing “Aotearoa is paying the price for underfunding since the 2010s and that it spends less on healthcare than countries like Australia.” He said HNZ “hasn’t had enough budget to meet the health sector crises, but does the fiscal crisis warrant this ‘breathtaking’ move?”

Interestingly, HNZ chief executive Margie Apa was asked about funding yesterday, and she couldn’t confirm that her organisation had enough funding for what they deliver.

But hasn’t the new Government injected record amounts of funding? In Finance Minister Nicola Willis’ first Budget, she allocated an additional $16.3b for the health system over the next three years. It turns out, however, that this isn’t enough, and in “real terms”, it actually constitutes a cut to the health budget.

This therefore explains the mystery of the $130m monthly deficit. Although the health allocation went up by 2.9 per cent this year, inflation has been running at 3.3%, and population growth at 2.6%. On top of that, the aging population demographics adds huge additional costs that has been factored in. By one estimation, the Health Budget needed a full 8% increase in order to just deliver what was on offer last year.

The problem is that the new Government used out-of-date forecasts for the health system's needs. The increase was based on Treasury’s 2023 Prefu figures, which quickly proved to be incorrect and overly optimistic. Hence, this year, officials suggested that the Health spending had to go up much more.

BusinessDesk’s Jem Traylen explains this today, saying the problem “can be traced back to the tensions inherent in Budget 2024. Only $2.4 billion was set aside for each Budget’s operating allowance, while the Treasury estimated inflation and wage movements alone would cost $2.5b. This didn’t include “additional demand pressures on services”, such as an ageing population.  Since at least the Helen Clark Government, there has been a growing concern about how the care costs for seniors will be paid for. A 2004 Treasury study estimated that over the hundred years to 2051, their share of the health budget will rise from 29% to 63%. The Government allowed about a 5% increase in the current health budget, which barely covered inflation and population growth, let alone this ageing factor.”

Health economist Peter Huskinson has also delved into these figures recently. Writing for the New Zealand Doctor magazine a month ago, he explained: “To maintain the nation’s healthcare means keeping up with three things:  rising prices and wages, the growing population, and the higher healthcare needs that result as we get older.”

He calculated that spending on health per person has actually decreased in the latest Budget. According to his figures, which control for inflation and population, the per person spend on the Health Budget grew 4.7 per cent during the Helen Clark Government, then 1.3 per cent during the Key-English administration, and then 4.6% over the last Labour Government.

Huskinson says: “In the year to June 2024 this amounted to $4,829 per person at current prices (around $90 per week each). If we project using Stats NZ population figures and the reserve bank's May inflation forecast, the recent budget sees the amount of day to day spend per person on health next year at current prices reduce by 3% to $4,686 per person; $143 per person less in real terms.”

Therefore, the current Government’s spending on Health has declined and is actually “well below anything achieved this century in New Zealand or comparable countries.”

Is the National-led Government simply trying to blame others for the underfunding problem?

There does indeed seem to be a funding problem in New Zealand Health. But it’s possibly the opposite of what the National-led Government is suggesting. Instead of budget blowout, the missing $1.4b might be better seen as an underfunding mistake by the Government.

It looks like the Government has become aware of this and is now in the mode of damage control. However, their narrative isn’t necessarily adding up very well. Ministers mostly present the $1.4b deficit as something that has only just become apparent. Yet on Newstalk ZB yesterday, the Prime Minister made it clear that the financial losses were first indicated to them in October last year.

Shane Reti has also said contradictory things about HNZ's finances. His Cabinet paper, written a few weeks ago, on the financial deficit, said that HNZ “delivered a financial break-even result in its first year after establishment”. He’s now saying the opposite, that it was a $500m loss. Reti told Newsroom yesterday that Health NZ ran a $500 million “real” deficit for that year. It’s not clear how to account for this change.

The Health Minister also claims that the Government hasn’t been fully aware of the financial situation until now. Yesterday, he claimed that HNZ “refused to share information with the Minister, and with the Ministry of Health, and actually with Treasury.”

Opposition leader Chris Hipkins challenged this on RNZ today, saying it was “very difficult to believe” that HNZ was refusing to supply information and implausible that the Minister hadn’t acted on that earlier: “It's a Crown entity and probably the biggest Crown entity in the country. The idea that they wouldn't be providing financial information to the government monitoring agencies into their minister isn't particularly credible. If that was the case, I would be astounded that he didn't do something about it earlier.”

Therefore, it increasingly looks like the Government has realised that its own underfunding of HNZ is causing a problem, but it is seeking to create a narrative that it is due to financial mismanagement and “bureaucracy bloat.” Essentially, they are looking for someone else to point the finger at.

This doesn’t mean that Labour’s health reforms have worked well or that there isn’t room for further changes. National is probably very correct to criticise the opacity of Health NZ’s financial reporting and draw attention to the lack of targets and monitoring in the current health system.

National’s “turnaround plan” for Health NZ

Reti says the Government wants to see the agency develop a “turnaround plan”—just as Chris Bishop has imposed on Kainga Ora. This plan will involve a “hard reset” of the finances.

The new Commissioner, Lester Levy, will direct all of this. So, what will this look like, and what can Levy be expected to deliver?

Levy already has a track record of being put into DHBs to reduce financial deficits. But his record isn’t necessarily very positive. He chaired the three Auckland DHBs, creating temporary surpluses in their books before they immediately returned to deficits after he left.

He was also appointed as the Crown Monitor of the Canterbury DHB, but their deficit actually worsened under his watch. He wasn’t popular with the board, most of which resigned in protest, including the CEO.

Some commentators are, therefore, fearful of what Levy will now do at the national level. So far, Levy has suggested that he will be benign and that cuts to services and clinical staffing won’t occur. And this is how he’s painted his approach: “Get the waiting times down, be more productive, give more services into the hands of patients, their families, and communities and make everything we do infused with a milk of human kindness, compassion, consideration, and empathy and never forget that we are dealing with people when they vulnerable.”

Canterbury’s Phil Bagshaw responded today, saying that Levy’s promises are a “neo-liberal fantasy”. Likewise, University of Canterbury health researcher Michael Gousmett is quoted in The Post today saying: “The simple answer is underfunding. Lester Levy can say there is more money going in now than ever before but the trouble is they are still not putting enough in… I don’t see how it’s going to work”.

The Association of Salaried Medical Specialists are also very sceptical. Executive Director Sarah Dalton said today: “Our members, senior doctors and dentists, are working under significant staffing shortages... If he can turn it around on the same budget that’s great but New Zealand’s health care spend doesn’t stack up compared to other developed countries”.

Certainly, Levy has given no indication of where he is going to make cuts to save money. But given what was disclosed about the cause of the budget blowout being nurse recruitment, it seems likely that this will now be reined in. And yet Reti said yesterday that there were still some serious nurse shortages in mental health and maternity wards.

There will be much more debate to come. Finding $130m a month in savings is going to create some significant problems and unhappiness in the sector. The crisis is, therefore, far from over.

It’s also worth remembering that the sector has plenty of other problems. What is currently being discussed is “operational spending” (or opex). But there’s also something of a crisis in terms of “capital spending” on hospital buildings and infrastructure (or “capex”).

Jonathan Milne of Newsroom has also pointed to that today as being the next crisis that needs to be dealt with in health: “We haven't even touched yet on the costs coming down the pipeline in GP services, and aged care, and the vast infrastructure deficit that must eventually be funded out of capex. This year, work has almost stalled on projects to replace the aged and sometimes unsafe Tauranga, Palmerston North and Hawke’s Bay hospital, two of which are deemed earthquake-prone. Even the Nelson Hospital Redevelopment, which received $73m for design and enabling works last year, is now being slowed down with ‘a new, staged approach’.”

There will likely be plenty more debate about how to run health services in the country. Lester Levy himself is signalling some significant changes. He says that health services need a “different paradigm, a different approach” and has been reported as promising to bring about a philosophical change to health in New Zealand. Health is, therefore, going to be a big political issue in 2024 and beyond.

Dr Bryce Edwards

Political Analyst in Residence, Director of the Democracy Project, School of Government, Victoria University of Wellington

Key Sources

Nicole Bremner (1News): Health NZ 'bloated' and in need of reset, new commissioner says

Marc Daalder (Newsroom): Unexpected success hiring nurses drove Health NZ deficit (paywalled)

Richard Harman: Luxon gets caught out (paywalled)

Peter Huskinson (New Zealand Doctor): Follow the money to see what Budget 2024 spends on health (paywalled)

Jonathan Milne (Newsroom): New Health NZ commissioner hesitates to express confidence in CEO (paywalled)

Joanne Naish (The Post): Who is Lester Levy, the man replacing Health NZ board? (paywalled)

RNZ: 'Totally bloated': New Health NZ Te Whatu Ora boss Lester Levy lays into bureaucracy

RNZ: Chris Hipkins says Shane Reti should have acted earlier if 'farcical' Health NZ claims were true

Jem Traylen (BusinessDesk): Business of Government: health's 'hard reset', help wanted busting red-tape, and more... (paywalled)