Health funding rollercoaster: Can we ring-fence the moolah?

Over the course of this extraordinary year in New Zealand health policy, I’ve sensed an increasing appetite to question one of the fundamental design principles of our health system – how it is funded.

The lion’s share of funding for health comes from government. Since the 1980s, this proportion has bobbled around between 78 and 83 per cent of all health spending. And around 90 per cent of government health funding comes from general taxation revenue (the rest being ACC).

Since 2000, increases in health funding have waxed and waned according to which major party is in government, and their broader policy settings around tax and government deficits. National holds the purse-strings tighter, while Labour loosens them.

Over time, this seems to be a big reason why our health system has become chronically under-funded. In the most recent time of clover, Labour’s funding boost (COVID aside) in the early 2020s was always going to be predominantly absorbed by pent-up wage and salary pressures from the 2010s, leaving little room to catch up on infrastructure, primary healthcare, workforce shortages and increasing levels of unmet need.

Many commentators have suggested that health funding should be more insulated from political cycles. But what practical alternatives exist, and what do they involve?

The first alternative is known as “hypothecated tax”. This means there would be a dedicated tax or levy for funding the health system. An example close to home is Australia’s Medicare levy in which Australian taxpayers contribute an extra 2 per cent of their income to fund health. If you are thinking this sounds like a good deal, bear in mind this covers nowhere near the full cost of publicly funded health services in Australia.

Health accounts for close to 20 per cent of total public spending in New Zealand – going forward this would require a pool of over $30 billion per year. For health funding to be fully hypothecated, nearly a fifth of all tax paid (income, GST and corporate) would need to be specifically ringfenced for health. Anything less would involve governments dipping back into general tax revenue to fund health.

Hypothecated health levies are politically attractive, as public support for dedicated health levy increases would likely be easier to achieve than for more general tax increases. This option would also be relatively simple to implement (compared to other alternatives). The biggest technical issue is how to smooth over the inevitable ups and downs in annual revenue.

The other side of the coin of insulating health funding from political cycles, would leave other, less politically popular areas of government spending even more vulnerable in budget cycles. Treasury would likely resist because it limits budget flexibility and would reduce the visibility and accountability for government expenditure on health compared to other areas.

Moving further from the status quo, some commentators, such as former Labour Government minister Steve Maharey, have been pitching for a system that takes the ACC model and extends it to all health services.

Countries such as Taiwan and South Korea have adopted versions of this model. In Aotearoa, the infrastructure already exists, so why not make use of it and, in the process, remove the arbitrary distinction between funding systems for accidents and “non-accidents”?

ACC funds services such as rehabilitation far more extensively than the rest of the health system. So, extending the ACC model to cover more, or all, health services would require significantly more funding, as well as significant increases in workforce capacity in the context of global shortages.

Who would pay? As an insurance scheme, contributions (levies) would predominantly come from citizens and employers. Employer contributions would most likely need to be somewhere between 4 and 8 per cent. Support from business groups would only be a possibility if there was a compensatory reduction in corporate tax.

Another common funding arrangement in high-income countries is to have multiple insurance funds, administered by non-government organisations. This “social insurance” approach is the main way of financing health systems in Germany, Israel, Japan, the Netherlands and France.

In such systems, the role of government is more about regulating insurers, health providers and the relationship between them.

Social insurance systems are built on “social solidarity”. Like tax-funded systems, they are based on principles of universal access to healthcare, where eligibility for services is not determined by ability to pay.

These systems are more insulated from political cycles and changes of government. However, social insurance systems are also based on citizen and employer contributions. Governments generally set these rates, so when cost pressures arise, raising contribution rates for citizens and/or employers becomes the political pressure point.

Importantly, a move to social insurance would cost considerably more to administer than a tax-based system, requiring multiple systems of revenue collection, enrolment and administration of eligibility criteria, to achieve broadly similar benefits.

Insurance-based systems – such as national health insurance and social insurance – are also more exposed to demographic changes. All high-income countries are undergoing a profound transition such that each employed person supports a much higher number of non-employed (mainly over-65s) than their parents or grandparents did. In response, governments in social insurance funded health systems are having to take increasingly direct roles in funding health.

One solution that some may favour is allowing private actors to fill the funding shortfall. Most private funding of health is from private insurance premiums or costs paid directly by patients. This is precisely the scenario that most countries, historically, have wanted to get away from, as such systems are far more inequitable, and result in worse health outcomes overall.

Tax-based systems have many advantages, including that they facilitate conversations and policies about funding according to population need. Although they are gradually evolving, all insurance-based systems generally have less capacity to recognise unmet need and respond to social changes, and inequities of access to service.

So, to paraphrase Winston Churchill, tax-based financing may well be the worst type of system for New Zealand, except for all the others.

Tim Tenbensel is professor, health systems, in the Faculty of Medical and Health Sciences at the University of Auckland