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Health Budget on track for a $100m shortfall

15 May 2013

Health Budget on track for a $100m shortfall

A pre-Budget analysis of government health expenditure prepared by the New Zealand Council of Trade Unions and released today, estimates that if last year’s increase in Vote Health was repeated this year, there will be an almost $100 million shortfall in health funding that must be met by cuts in services, increased user charges or efficiency or productivity increases.

“Last year Health received approximately $350 million in new money,” says Bill Rosenberg, CTU Economist. “If the increase in the Budget tomorrow is only $250 million, the shortfall will be almost $200 million.”

Bill Rosenberg said “we estimate that to avoid cuts in services or increased user charges, the Health Vote would need to increase by at least $445 million just to keep pace with population growth, ageing, and increases in costs. To allow a reasonable amount for new treatments and services, a further $70 million would be needed, so the total required would be $514 million. A $350 million increase in the Health Vote would leave New Zealanders around $150 million short of what is needed to maintain and make modest improvements to health services.”

“Out of the increase, District Health Boards (DHBs) need $351 million just to cover costs, ageing and population pressures, or over $406 million if we wish to provide for new treatments and services.”

“Given that there has been a substantial shortfall over the last three years we have been tracking the Health Vote, significant productivity improvements will be hard to find,” says Bill Rosenberg. “That suggests we will see more deterioration in services or increased user charges.”

The Ministry of Health estimated that there was a $376 million shortfall in last year’s Budget which had to be met by cuts and efficiencies. “Our estimates in previous years have been very similar to the Ministry’s, totalling $220 million in shortfall in the two years to June 2012 – but their estimate of the shortfall last year is considerably higher than ours,” Rosenberg said. The Ministry’s estimate was revealed in Budget documents released after last year’s Budget. “Our estimates tend to underestimate the needs of Vote Health compared to the Ministry.”

“The CTU and its affiliated health sector unions have made this estimate so that we and the public can judge whether the Health vote announced in the Budget on 16 May provides for improved health services, or is really a cut in those services, or a standstill,” said Rosenberg.

In the last three years, the CTU carried out a similar analysis prior to Budgets. “Our estimate of the increase needed simply to keep up with costs and population increase was within 1 percent of that provided by the Ministry of Health in 2010 and 2 percent in 2011. In 2011 we estimated that $564 million was required, compared with the Ministry’s estimate of $576 million. In addition we allowed for new treatments and an increase in productivity, both which the Ministry did not allow for.”

The CTU website has aworking paper and spreadsheet providing details of the analysis.

Health Budget on track for a $100m shortfall: Q & A

How much was allocated to Health last year and how much will be needed to maintain the current level of funding?
In the 2012 Health vote, $13,836 million was allocated for operational expenses, plus $289 million for capital expenditure, a total of $14,125 million. Operational expenses will need to rise by 3.2 percent or $445 million (from $13,836 million to $14,281 million) to maintain the current levels of services. It would need a further $69 million to make reasonable provision for new treatments and services without cuts elsewhere, bringing the total to $514 million.

Estimating capital needs is more difficult as the drivers for it are less direct. Capital goods prices are rising only slowly so cost pressures alone would require the $289 million capital funded in the 2012 Budget to rise to $291 million. With that, the total Health vote would rise from $14,125 million in 2012/13 to $14,573 million in 2013/14 without any new Health spending.

How much of the Health vote goes to district health boards and how much goes to other services?
The biggest portion of the Health vote is to fund District Health Boards (DHBs). In the 2012 Budget, $10,819 million went to DHBs and $2,799 million to fund other health programmes such as provision of clinical training, infection control and immunisation programmes, public health and other national health services. It is estimated that DHB funding will need to rise by 3.2 percent, or $351 million, and funding for the other health programmes by 3.2 percent, or $90 million, to maintain service levels.

What about administration costs and any other spending?
The operation of the Ministry of Health, and “other” expenses such as New Zealand’s membership of the World Health Organisation and legal expenses require an estimated further $4 million, taking them to $223 million.

What were the NZCTU’s estimates based on?
The estimates are based on a population increase, including an allowance for the ageing population, of 1.42 percent, wage and salary increases (mainly based on most recent settlements) of between 1.3 percent and 2.1 percent, and other cost increases at a forecast level of inflation of 1.8 percent. The working paper shows how the estimates would change with a variation in any of these values.

Has allowance been made for productivity improvements?
If we use the assumed productivity increase in Treasury’s long-term projections of 0.3 percent, it saves $43 million. However productivity is notoriously difficult to measure in the health sector. There is evidence of increasing productivity but we also need to be careful to distinguish real productivity and efficiency gains from the spin often put on cuts in services.

The CTU health sector unions have made substantial commitments to improving services in the health sector. They are involved in a number of projects under the auspices of the Health Sector Relationship Agreement (between unions, DHBs and government) which tap into the expertise and experience of the unions’ health care members in order to improve the delivery and quality of health care. Their expectation is that productivity will improve, although its results may often be measured in better patient health outcomes rather than immediate cost savings. However better patient health outcomes do result in future cost savings by reducing demand which is in fact the only way to keep costs down in the long run.

What about savings in Health such as through Health Benefits Ltd?
We take account of savings for which there is reasonable certainty and publicly available, reliable information. There have been announcements of savings in previous financial years that do not affect the calculation of the increased expenditure needed this year. There are projections of further savings for the current financial year but we have not incorporated those because we consider that would be optimistic given that projects to make those savings are still in development and are likely to have significant offsetting costs even if they get underway on schedule.


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