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Ian Powell Address To The Anzaus Seminar

Public Sector Employment Of Urologists: Is There Any Alternative To The Traditional Salaried System?

Address To The Anzaus Seminar, Friday 22 September 2000. Copthorne Plimmer Towers. Ian Powell.

First let me express my appreciation for the invitation to address your conference on the theme of an alternative to salaried employment in the public sector. Let me also acknowledge from the outside, from a position of pride, that I am not a lawyer. My assessment of the law comes from the television programme The Practice that also enables me to keep up-to-date with current trends in American deviancy and sexual practices.

In one sense your question that forms the basis of this address is easy to answer. Of course, there is an alternative to salaried employment in the public sector. Since 1984 there has been an unfortunate terminology in public policy-making known as Tina; that is, “there is no alternative” to the course of action proposed by a particular government or organisation. This is ridiculous. There are always alternatives. The real question relates more to their robustness, suitability and applicability. My comments, however, will not necessarily be specific to urology because the arguments and discussion are not restricted to a particular specialty. This approach is open to criticism nevertheless to the extent to which urologists might consider themselves to be in a niche market compared with other specialists. International experiences are limited in assisting this discussion but there are appropriate points that can be made about Australia and Canada as comparable countries that in some circumstances use fee for service arrangements.

The substantive question I want to focus on in the New Zealand context is the two fundamental alternatives of employment for medical practitioners in the public sector – as an employee or as an independent contractor. Employee status is a contract of service with the mode of payment either waged or salaried with income tax (PAYE) deducted while the latter is a contract for service usually in the form of fee for service attracting GST. I will not deal specifically with independent contractors working together as businesses or joint ventures partly because some of the general points still apply and because it is not the direction that government policy is going.

Rather than the form of the contract the more critical issues are the extent to which different specialists work together collectively, the type of relationship between the contractual parties and the process by which the contract is achieved. One should not attach any significance to the type of contract in isolation in terms of assessing comparative advantages. As someone who had negotiated nearly 100 collective employment contracts under the Employment Contracts Act I am confident that it is the bargaining process that is more important than the form of the contract and that this is crudely based more on power, leverage and encroachment that any other factors.

In New Zealand health services are predominantly publicly funded and, at least in secondary and tertiary care, overwhelmingly publicly provided and consequently relatively integrated compared with primary care. Where health care is publicly provided employee status prevails. The standard salary arrangement comprises a scale with a variable number of steps (usually annual advancement) based on a notional 40-hour week. Part-timers are pro rata while full-timers have their average weekly hours in excess of 40 remunerated. There is also an availability allowance as a retainer for being on-call. There is a slow movement towards premium rates for hours worked when on-call.

Legal Context
Earlier I was disparaging of the legal profession, except of course for those lawyers that we engage and work alongside with. Nevertheless I accept that the law has a right to exist and that the Court of Appeal is a valuable port of call in developing an understanding of the question I have been asked to comment on.

In what I understand is the leading case in New Zealand [Cunningham v TNT Express Worldwide (NZ) Ltd, 1993], the Court reviewed several overseas decisions and developed a series of authoritative propositions for distinguishing between contracts of and for service.

These included:
1. Where the terms of the contract are largely or wholly in writing, a consideration of the contents of the written document should be read in the context of all the controlling circumstances at the time of execution.
2. The degree of control which an alleged employer exercises over the operation of a contract. However, while relevant this control test is not decisive.
3. Wording that declares the contract to be one form or another should on its own be regarded simply as a label and of little or no importance for interpretation.
4. Where in the absence of evidence other than the impression of an employee relationship, it is the onus of the employer to disprove this inference. But where the relationship is governed by a comprehensive written contract and there is common ground over the relevant primary facts there is no such onus. Instead it is the responsibility of the Court to reach an affirmative decision one way or the other.

This fourth proposition leads on to the elusive question of what is the standard test. There is no single test that conclusively proves it in all cases. Despite several subsequent changes in industrial law the best explanation appears to rest with Justice Cooke in 1969 [Market Investigations Limited v Minister of Social Security]. He stated that the fundamental test to be applied is whether the “person who has engaged himself to perform these services is performing them as a person in business on his own account?”
In simple terms if the answer to the question is “yes” then the contract is a contract for service (ie, independent contractor) but if the answer is “no” then it is a contract of service (ie, employee status).

Further elaborating Justice Cooke noted that while there were no strict rules and that control was important but not solely determinant, there were several factors that helped shape the interpretation such as whether the person performing the services:
 provides their own equipment
 hires their own helpers
 assumes a degree of financial risk
 assumes responsibility for investment and management
 has the opportunity to profit from sound management in the performance of the task

Again none of these is defining and are often of extent and degree. To a very large extent it boils down to what the relationship looks and feels like. But there is no doubt that the usual method of part-time or full-time employment of specialists in public hospitals fall into the contract of service or employee category based on these factors.

In a case the Association is currently involved in it largely boils down to the question of what is more important – the nature of the work relationship or the mode of payment. In this particular instance using all these factors above the individual is an employee. But he was also paid a fee for service that attracted GST rather than a salary attracting income tax.

Employment Relations Act
The new Employment Relations Act, effective from 2 October 2000, is consistent with this understanding. S.6 states that an employee “means any person of any age employed by an employer to do any work for hire or reward under a contract of service…”. If required to resolve whether it is a contract of service the Employment Court, or Employment Relations Authority, must “determine the real nature of the relationship” between the parties. In this determination they:

(a) must consider all relevant matters, including any matters that indicate the intention of the parties, and
(b) are not to treat as a determining matter any statement by the parties that describes the nature of their relationship.
Taking its cue from the new legislation the Department of Labour has produced explanatory guidelines that place the emphasis on the “real nature of the relationship”. It outlines the following indicators that, if all or most are present, are likely to make it an employee relationship:

 there is an agreed intention to form an employer-employee relationship that is verifiable either in writing and/or by behaviour;
 the employer or their agent controls the hours worked;
 the employer or their agent has the right to hire and fire;
 the employer makes the profit or loss from the enterprise;
 the employer deducts ACC premiums and PAYE tax on behalf of the employee;
 the employer supplies materials for the work;
 the employer owns or leases the equipment needed; and
 the employee is bound to one employer at a time and expected not to compete or offer their skills to competitors of the employer.
On the other hand, the following indicators can determine whether someone is an independent contractor:
 there is an agreed intention not to form an employer-employee relationship that is verifiable either in writing and/or by behaviour;
 the contractor controls how and when the job is done;
 payment is made in a lump sum at the end of a job or in instalments as progress is made on the job;
 the contractor can choose who does the job and can hire other people without approval from the other party;
 the contractor pays any tax, ACC and insurance directly;
 the contractor can make a profit or suffer a loss directly;
 the contractor supplies equipment and materials; and
 the contractor is free to accept similar work from a number of sources at the same time.

The Most Favourable Political Environment for Fee for Service Arrangements
It is worth considering the assessment of fee for service at a time when ‘free market’ ideology was at its highest public policy peak in relation to publicly provided health services. The key document was the 1991 ‘Green and White Paper’ that formed part of the Budget of that year in the name of then Health Minister Simon Upton. One might have expected that if any policy proposal would promote independent contractor status, this one would as it staunchly advocated commercial competition as the most effective way of providing health services. But instead this core ideological document could not, in fact, make up its mind stating that there was no right way to pay doctors. Perhaps appropriately at this time Mr Upton briefly acquired the nickname Simon Option!
In reference to fee for service (p.49) it alleged:

“…fee-for-service payment of doctors makes it difficult to control the overall costs of doctors’ services, but encourages doctors to see and treat more people. Hence fee-for-service payment tends to be accompanied by measures to help control costs and to discourage provision of unnecessary services….Fee-for-service payment lends itself to procedure-based medical care, and to services where patients can be expected to judge whether the service offered is really needed and to pick up a reasonable share of the costs.”

Two methods were promoted as measures of controlling fee for service costs. The first was user charges that were introduced in 1993 but eventually discontinued for a variety of reasons including public opposition and high transaction costs. The second was the American managed care technique known as utilisation review, particularly for high cost procedures. This never took off to any significant extent despite a managerial desire in some crown health enterprises to promote independent contractor status. For some the objective was to shift cost and risk from themselves to other players
But the formal term 'independent contractor' does not by itself, despite the implication, mean contractual or operational independence. It can be used to disguise a real position of dependent contractor. More important is the comparative economic and bargaining strength of the respective parties.

Remuneration might be through fee for service or a fixed amount. It would be naïve to conclude that either would of itself generate more remuneration and guarantee greater autonomy and control for clinicians. An independent contractual arrangement is a mechanism and a means to an end rather than end in its own right.

In a situation of monopoly funder(s) an independent contractual arrangement can increase the vulnerability of the provider (recipient) because of dependency. It is not like normal private practice where the demand comes from numerous and various patients able to take advantage of this facility rather than monopolies.

Canadian Experiences
In Canada 91% of hospitals and 99% of doctors’ services are almost exclusively funded by the public sector. It is a publicly funded single payer system in which specialists are predominantly paid on a fee for service arrangement. Unlike New Zealand and many Australian states, fee increases are negotiated between the medical profession and provincial governments. Each medical association then allocates the increase across the fee schedule although the government has a rarely used veto power.

But fee for service income is not as demand driven as one might think. There is an ability to cap income at the source of payment by capping thresholds and proportionately reducing income above the threshold, usually at the end of the year. From 1991 to 1997, adjusting for inflation, public funding for the whole Canadian health system fell by 7.1% while for specialists it decreased by 8.1%. This was part of a wider cost-cutting strategy in which, over a two-year period from 1996 the federal government slashed its funding to provincial governments by one-third from $18.5 billion to $12.5 billion.

According to a Canadian Medical Association study there are also other pressures on fee for service specialists that suggest they are subject to similar pressures to those that face salaried specialists. For example:
 Based on price adjusted fee-for-service earnings, specialists were working more intensively in 1995-96 than they did in 1985-86. Further, they are currently working an average of 56 hours per week (excluding on-call), an increase of 14.5% from 48.9 hours in 1990.
 Whereas there is currently one specialist for every 1130 people, by 2011 it is estimated that this will increase to 1:1229 and by 2021 to 1:1346. While the actual number of specialists is expected to increase it will not keep pace with either an increasing population or an aging population’s increasing needs.

It is interesting that there is a slow movement towards salaried employment away from the prevalent fee for service arrangement that is based on time and intensity. New models of employment are being implemented and receiving positive feedback contrasting with the continuing pressures to squeeze fee for service provisions.

There are about 27,500 specialists in Canada. About 62% of specialists receive at least 90% of their remuneration through fee for service. This includes about 80% of surgeons compared with 54% of medical specialists and 63% of males compared with 57% of females. For about 9% of specialists, salary comprises at least 90% of remuneration. Another 2-3% of the medical profession is capitated. The remainder is largely self-employed with “blended” arrangements of fee for service and salary, for example, 80% and 20% either way.

Also of interest is a newly negotiated remuneration system in the province of Ontario called the alternative payment programme, also known as alternative funding arrangement. It is a capitated alternative to fee for service although it is still within a self-employed or independent contractor rather than employee status because it is illegal in Ontario for doctors to unionise as employees. The two main locations where the new system is being used are the Toronto Hospital for Sick Children and Queen’s University (Kingston).

The details are unclear but the principle is that the government pays a lump sum to a collectivity of doctors who then divide it up among themselves through an internal governance system. The provincial government is happy with the new system although it is unclear of the actual outcomes. Nevertheless the Ontario Medical Association does receive some membership complaints over the application of internal governance.

The advantages of this system, compared with fee for service, as seen by the Ontario Medical Association, include:
 Getting off the fee for service treadmill of income linked to throughput.
 More time for professional development.
 Greater utilisation of other staff such as enhancing the work of nurses.
 Improved health services for patients due to the above and related organisational changes.

Independent contractor status is an important part of the Australian health landscape through the visiting medical officer (VMO) system. VMOs are part-timers engaged as independent contractors in public hospitals compared with salaried full-time, and some part-time, specialists. Their prevalence reflects the greater absolute and relative significance of the Australian private sector compared with New Zealand. New South Wales is unique in that VMOs are covered by industrial legislation despite being independent contractors.
My understanding is that in Australia the most significant disadvantage of being an independent contractor contracted to a public hospital is the inability to negotiate collectively on issues related to the price of providing services. This is due to the strong provisions of the Trade Practices Act that condemns anti-competitive behaviour. For example, in Victoria an official of the Australian Medical Association could be fined up to $(A)500,000 for getting a group of specialists together just to discuss contract negotiations with a hospital. Although the AMA provides assistance to its members individually this is very resource intensive. It also means that the outcomes are variable and inferior relative to collective negotiations.
Independent contractor status is directly affected by Australia’s National Competition Policy that governs, through the Trade Practices Act, all aspects of life including the health system. Important areas of exemption include employees and public funded and owned hospitals. For other exemptions the critical yardstick is "public benefit". The statutory vehicle for enforcement and compliance is the Australian Competition and Consumers Commission (ACCC).

An early experience of the ACCC involved the Australian Society of Anaethetists who sought authorisation to enter into negotiations, contracts, arrangements and understandings with private health funds. This was in relation to remuneration and conditions for providing anaesthesia services to privately insured patients throughout Australia. In July 1999 the ACCC issued a draft determination rejecting the application on the basis that the proposed conduct would "result or be likely to result in a lessening of competition" that would not be outweighed by any public benefits that might arise.

More serious was an ACCC decision affecting the Western Australian AMA branch. The AMA had reached a fee for service agreement involving visiting medical officers with a public hospital that had come under private management. The hospital was to revert to public ownership after about 20 years. There was nothing unusual about the agreement itself; these agreements are common in all states. However, the changed status of the hospital made the difference with the ACCC determining that as a result it now had jurisdiction.

After lengthy argument and debate the ACCC determined that the agreement was in breach of the Trade Practices Act and as a result the AMA and its affected members liable. The ACCC adopted a ‘take-it-or-leave-it’ position. If the AMA paid a fine of around $(A)250,000 it would not proceed further. However, if the AMA declined this offer it would be taken to court with the prospect of a fine in the millions rather than thousands and with all affected AMA members named will be personally liable for separate fines. Faced with this intensity of threat and an acknowledgement that there was a technical breach of the Act, the AMA was forced to settle along these lines.

Some of the key points of this legislative competition environment are:
 The penalties for breach of the Act are major. In the case of companies it is up to $10million while for individuals it is up to $500,000 (the latter cannot be protected by personal indemnity). The definition of company is sufficiently broad to encompass incorporated societies.
 The thrust of the Act is arrangements or undertakings that have an anti-competitive purpose or effect. But it is not necessary to show an effect on competition. In what might be a cute urological inference the "mere arousal of expectation" or the suggestion of a "nod or wink" triggers it. An example is where separate GP practices in rural communities share after-hours rosters.
 The ACCC is specifically targeting the medical profession, particularly those in private practice, convinced that price fixing is occurring and must be stopped.
 Those in situations where there is potential competition are not permitted to even share or discuss information such as fee levels. This does not preclude "market intelligence" such as printed Medicare schedules but the line is blurred.

The Negotiating Process
The type of contract can’t be considered in separation from the negotiating process that leads to its construction. With the exception of the nine years under the Employment Contracts Act, for over a century there has been a positive right to collective bargaining. The Labour-Alliance government’s new Employment Relations Act continues this principle but with a strengthened underpinning by the North American concept of “good faith”. Even the more individualistic regime of the Employment Contracts Act tolerated collective bargaining. Provided that a particular group of employees had sufficient leverage collective bargaining is achievable and permissible. This was the case with senior medical staff employed by crown health enterprises and subsequently hospital and health services.

In contrast, independent contractors, outside the Act, have no equivalent legislative right, unlike their colleagues in New South Wales and Canada. They also have to consider the restrictions of the Commerce Act from which employees are fortunately exempt. Acting under its jurisdiction the Commerce Commission has to consider not only whether a particular action is anti-competitive but also has the potential to be anti-competitive.

If I might digress a little, the case currently before the Courts involving eye surgeons and the waiting list initiative for additional cataract operations in Southland provides an interesting comparative discussion point. Had Southern Health used its normal locum arrangement with Canterbury Health and used the latter’s surgeons as employees there would have been no controversy. However, because of reasons best known to itself, Southern Health opted to use independent contractors, principally an Australian surgeon on an itinerant basis. But the oversight requirement of the Medical Practitioners Act meant that this could not be provided and the rest as they say is history.

What is pertinent for this discussion, however, was the approach of the Commerce Commission. Its statement of claim to the High Court provided no evidence of collusion, price fixing or any other conscious anti-competitive behaviour. Rather it said that the actions of those concerned about the oversight question, even if motivated by patient safety, had the potential to be anti-competitive.

Returning to the theme of the type of negotiation, unless an individual has a particular economic leverage and is in the dominant bargaining position, greater strength invariably arises from collective bargaining. The achievements the ASMS has made over the past few years, particularly since 1993, are directly attributable to collective leverage. These include:
1. The average full-time (40-hour) specialist salary increased by over $26,000 (30%) from $85,658 on 1 July 1993 to $111,724 on 1 July 1999
2. The average first specialist step is now $97,390, an increase of over $26,000 (37%), compared with $71,126 in 1993 while the average top step has moved from $109,582 to $139,454, an increase of nearly $30,000 (27%).
3. The merit roadblock to salary scale advancement has now been removed with advancement generally regular and annual.
4. Annual leave has increased from four to between 5-6 weeks.
5. Continuing medical education expenses have moved from being either around $2,500-$3,000 or at managerial discretion to around $5,500-$7,000 per annum. In addition secondment and sabbatical provisions have been negotiated in many collective contracts.
6. After a slow start there has been a significant advance in the implementation of subsidised superannuation for those ineligible for the former government schemes.
7. Recognition of non-clinical/non-patient contact hours in the calculation of remuneration. The Association is currently further promoting this through an approach we call the 70-30% split.

In addition we have negotiated many professional-type provisions in our collective contracts. One that immediately comes to mind is the explicit recognition by management of the primacy of responsibility of senior medical staff to their patients particularly where there might be a conflict with responsibility to one’s employer. For example, our Waitemata Health collective contract states:

The parties recognise:
(a) the primacy of the personal responsibility of employees to their patients;
(b) that employees are responsible and accountable to the statutory authorities such as the Medical and Dental Councils, established under the Medical Practitioners Act 1995 and Dental Act 1988, as applicable, including their relevant policy statements and guidelines; and
(c) that employees are responsible and accountable to the ethical codes and standards of relevant colleges and professional associations.

Non-Salary Benefits for Employees
It is wrong to compare fee-for-service income with straight salary. Any comparison on this basis badly misses the boat. Other elements normally associated with salaried employment rather than independent contractor status also come into the calculation of comparative benefits. These include:
1. Annual leave now ranging between five-six weeks nationally. Representing around 10-12%.
2. Continuing education leave is normally two weeks per annum. This equates to another 4%.
3. Reimbursement of CME expenses, although difficult to be specific, 5% is a reasonable ballpark figure for these.
4. Our objective of 6% for subsidised superannuation.
5. Employee status also attracts an entitlement to paid sick leave. Under open-ended systems that the ASMS has negotiated these are normally for at least six months for each illness or accident. Independent contractor status simply cannot match this. In addition if one was to annualise it perhaps 2% (one week) might be a reasonable ballpark figure.
6. Various work-related expenses are reimbursed and we have gradually extended them over the years. These include medical indemnity, transport, annual practising certificate, disciplinary levy, colleges, professional associations and radiation licenses. Adding them up is difficult but around 3% feels crudely right.
When one adds all these up it suggests that in addition to straight salary another 30% loading should be taken into account.
Also important in comparisons is security of employment. When employing salaried employees, apart from locums and fixed term arrangements, management is required to demonstrate good cause for terminating employment. It cannot terminate employment after a specified period of time simply because it wishes to. But for independent contractors no such good cause is required. Shifting from employee to independent contractor status to be reasonable must involve a transparent ‘trade-off” between much greater remuneration for reduced security of employment.

In conclusion there are four key factors you need to mull over in a consideration of the question. These are:
1. What is the economic leverage one might have available to achieve a satisfactory outcome? In terms of supply, demand and public policy direction, is it significantly more than what is available under employee based collective bargaining?
2. Are the actual and potential risks associated with independent contractor status, particularly associated with the powers available under the Commerce Act and the mindset of the Commerce Commission, too great or sufficiently minor to ignore?
3. Is “independence” a correct word to describe independent contractor status or is there a significant degree of dependency?
4. Do urologists consider themselves an integral part of the senior medical workforce in public hospitals or do they see themselves as more external to it in a unique niche market?

I appreciate the invitation to speak to you today and hope that I have provided at least some clarity if not a substantive answer to the question.
Ian Powell

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