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Many factors go into outsourcing (Image: Tina Tiller)

SocietyNovember 22, 2022

The rising costs of outsourced healthcare

medicine, heart reate, crutches, ambulance, injection, and dollar signs on red background
Many factors go into outsourcing (Image: Tina Tiller)

The cost to the public of sending non-emergency surgeries to the private system has nearly doubled over the past five years. Data journalist Emma Vitz and reporter Shanti Mathias look into why. 

The lines on the road at night are blurry while you drive, the headlights of other cars too bright. You go to your GP and are diagnosed with cataracts, a condition that can be treated with a straightforward surgery by a trained specialist. You go through various referrals and assessments as the public health system determines how much the cataracts are affecting your life, deciding how much of a priority your treatment is. You’re put on a waiting list but your procedure can’t be done in New Zealand’s public health system, not in the time they set themselves to do it; maybe there are staff shortages, or all the theatres are at capacity with other procedures, or there’s no specialist in your area.

But your vision is still blurry, and it’s getting worse. So the public system sends you to the private system; you’re given a date and a time, show up at a clinic, have the clouded lens in your eye replaced by a crystal clear artificial one and go home. The private clinic sends an invoice to the public hospital that referred you, taking into account the costs of its staff, facilities and administration. If everything has gone well, you get better – and because the procedure was funded by the public, you never see the bill. 

Outsourced procedures aren’t a one-off; thousands of surgeries funded by the public system are outsourced each year, under a variety of arrangements. Generally, outsourcing means that the public health system pays a private hospital to carry out a procedure. Outplacement, where private hospital facilities are used but not staff, are another option when the public system has the staff available to carry out a procedure but not the space. 

While outsourcing has been part of the public health system for decades, the cost to the public is going up. Data provided to The Spinoff from each DHB prior to the formation of Te Whatu Ora on July 1, 2022 shows that spending on outsourcing has risen from $63.4m in the 2017-18 financial year to $115.3m in the 2021-22 financial year. (These figures do not include imaging, scopes or other non-surgical procedures, which can also be outsourced.) Notably, the increase in outsourcing costs is greater than the increase in procedures that have been performed. Why is this happening? And who does it impact?

Painting a picture of planned procedures in Aotearoa 

The data released to The Spinoff, which covers the five years to the amalgamation of DHBs on June 30, 2022, show the scale of outsourcing and its increasing cost to the health sector. In the year to June 30 2022, 17,600 surgeries were outsourced, a similar number to the year before, but at a greater cost. 

There can be significant differences in which procedures are outsourced in different places. Private healthcare in New Zealand mainly performs orthopaedics, general, ear nose throat (ENT) and ophthalmology surgery. Accordingly, procedures in these categories are frequently outsourced by the public system; in the year ending June 30, 2021, for example, Counties Manukau outsourced 2,314 surgeries, primarily in these specialties. This cost $11.6m and was likely made up mostly of cataract surgery, knee and hip replacements, and removing tonsils and gallbladders.

Whether a surgery is outsourced (or outplaced) at all depends largely on the staff availability in the area. In the Canterbury DHB, for instance, workforce availability – for medical, nursing, allied health, administration, and scientific and technical – was a key determiner when deciding to outsource. The DHB is now part of the Southern health area after the formation of Te Whatu Ora. “Work occurring nationally and in Canterbury to attract qualified people to our workforce is key to ensuring that there is the capacity to provide the amount of surgery that we’d like to deliver,” said Dr Rob Ojala, acting interim district director of Te Whatu Ora Canterbury.

Demand is a factor, too. Thanks to Covid measures put in place throughout 2020 and 2021, as well as the burden of high case numbers in hospitals during 2022, elective surgeries were delayed across the country, creating a backlog. While the data provided to The Spinoff doesn’t demonstrate a clear link between lockdowns and increasing outsourcing, the impact of these delays may become evident over time. 

Outsourcing takes place in the context of a health system in the midst of both crisis and reform. Long waiting lists for planned procedures have been affecting people for many years, and outsourcing is only able to help those who have jumped the hurdles to qualify for surgery in the first place. The pressure of the pandemic and staff shortages have only made it harder for people to get care, meaning that even more New Zealanders live with the pain and frustration of health conditions which could be treated. 

Access to treatment is not, and never has been, equitable; Māori, Pasifika and those living in low-income areas like South Auckland find it harder to get on waiting lists, and may spend longer waiting before receiving treatment. As the government announced some of the details of new national health agencies Te Whatu Ora and Te Aka Whai Ora in May, there was a signal that the inequality of planned care would be a key area of  reform. Health minister Andrew Little announced the creation of a taskforce to address some of the inequities in planned care.

The true cost of outsourcing

The cost of outsourcing procedures in Aotearoa is only a tiny portion of the billions of dollars spent on public healthcare, and about 10% of surgical discharges in the private system, according to data from the New Zealand Private Surgical Hospitals Association. Still, the cost of outsourcing has increased as a proportion of the health budget far more rapidly than the number of procedures performed – a product largely of health inflation caused by rising wages. But understanding the cost, and the benefit, of giving people care for health conditions goes beyond this. 

“Inflation is measured by the Consumer Price Index (CPI), based on a standard basket of goods you’d get at the shops,” says Jackie Cumming, a health economist and former director of the Health Services Research Centre at Te Herenga Waka. “But health inflation is higher, because most costs associated with healthcare are people – labour costs.” According to insurance provider Nido, medical inflation is currently around 9-11% per year, higher than New Zealand’s annual inflation (measured by CPI) which was 7.2% in October. New technology also contributes to healthcare inflation – if new treatments or procedures or machines are developed, they are usually more expensive than old ones.

Cumming says that healthcare is a particularly internationalised market: human bodies are the same everywhere, but wages vary wildly around the globe. “This means that wages go up faster than the goods and services measured in the CPI”. Recent strike and pay negotiations in Aotearoa’s health sector for nurses and other health workers will likely contribute to rising costs, as will chronic staff shortages – and these wage increases in the public sector may affect the private sector too. 

Additionally, specialists who perform surgical procedures in the private system are usually paid more than they would be to perform the same work in the public system. “Procedures like cataracts, general surgery, and anaesthetics [which are commonly outsourced] are very lucrative,” says Robin Gauld, a professor at the University of Otago who specialises in health systems.  

Richard Whitney, CEO of private Mercy Hospitals in Dunedin and president of the New Zealand Private Surgical Hospital Association (NZPSHA), emphasises that while the cost of privately outsourcing procedures looks high, an invoice takes into account a range cost-driven factors that DHBs, which receive bulk funding from the government, do not. When invoicing the public system for a procedure, a private hospital counts the cost of cleaning and administration, building facilities and buying equipment, as well as costs individual to the patient, like medication provided and the time of the healthcare workers who did their surgery. “In many cases, the private system can do [the procedure] for the same or less,” he says. Private procedures aren’t necessarily more expensive, just “more transparent”. 

But outsourcing operates in more complex ways, too. A quirk of the New Zealand health system means that outsourcing patients to the private system may be directly reducing capacity in the public system. Many specialists work in both the public and private health systems, meaning more private procedures can affect public capacity. “The more procedures you send to the private sector, the more [specialist] time you take out of the public sector,” says Cumming. 

But there are many benefits to providing planned healthcare, regardless of the cost. “There’s a strong economic argument to get people treatment in a timely manner,” says Gauld. Healthcare is deeply personal, intertwined with every aspect of someone’s life. While waiting for a hip replacement, for instance, your mobility is affected, which may impact your ability to work and to get out and see family, or may mean that you have to be on a benefit. The period of waiting for a procedure, Gauld says, is also a time where a health condition can get worse, more complex and expensive to treat, and lead to other complications, including mental illness. While it’s more difficult to measure the many ways that delayed treatment can have financial, emotional, and social costs, Gauld says it’s clear that “unhealthy populations are less economically buoyant”.

Limited money, unlimited demand

Demand for procedures in the public system is high, especially if you take into account the many people who would like to be on wait lists or to be seen by specialists but haven’t been able to. Since 2018, specialists within the public healthcare system have seen approximately 85% of the volume of patients that are accepted for referral.

Outsourcing is one way to meet this demand when staff and healthcare facilities in the publicly funded system aren’t able to perform planned procedures. But why doesn’t the public healthcare system have capacity for all planned surgeries in the first place? 

One reason is differing funding patterns in the private system. “We couldn’t run a [private] hospital on a 12-month window of what funding we will get; we plan and project three to five years into the future. The public system doesn’t enjoy that because they receive annual budgets from the government,” says Whitney. While the policy advice that is considered for determining budgets takes into account long term demographic trends like population growth and ageing, a change in government or a new policy may divert funds that could be used to increase public system capacity.

When the public system can’t meet demands, “contracting out is a way to play catch-up,” Gauld says. “Ideally we would be investing in building the public healthcare system up, where there is a focus on equity and accessibility.” He thinks that under New Zealand’s current funding models, outsourcing is the operating theatre at the bottom of the cliff, not a coherent way to address consistent gaps in capacity which take time and capital to resolve. 

Gauld notes that the public sector subsidises and supports the private sector in other ways. Medical specialists trained in New Zealand have had much of their education subsidised by the public purse, and usually gain skills and experience working in the public system (although the private system supports training, particularly of nurses, too). And if patient funded procedures go wrong in the private sector, it’s the public sector, with ICUs and emergency departments, that delivers care. “The relationship between the public and private sector is an uneasy compromise,” Gauld says. 

While some of these big-picture issues play a role in outsourcing, it’s also a local, operations question. Recruiting one new ophthalmologist into the hospital in one area could mean that more procedures can be provided by the public system; having one hospital building decommissioned due to earthquake risk could lead to hundreds of patients’ procedures needing to be outsourced or outplaced.

Dan Pallister-Coward, chief operations officer of hospital and specialist services at Te Whatu Ora, said that the organisation intends to work more with private providers to provide orthopaedic surgeries like knee and hip replacements, in particular, which have the longest waiting lists. “Working as one health system allows national consistency to be established around the cost of outsourced surgeries,” he said via written statement.

While outsourcing can alleviate some demand, providing publicly-funded healthcare is an expensive proposition, whether care is public or private. “It’s an area of never-ending demand,” says Gauld. “You have to decide how you allocate [limited] resources.”

“No country could afford an uncapped approach to healthcare,” Whitney agrees. “Any publicly funded health system has to have rationing applied.”

Planning for the future

New Zealand’s population is ageing, and this will impact the cost of outsourcing too. Data from the Counties Manukau DHB, which provided a detailed breakdown of costs, show that ophthalmology and orthopaedics are a large portion of outsourced procedures. Furthermore, orthopaedic procedures like hip and knee replacements are particularly expensive, taking up much of the cost of outsourcing. 

Cataract surgery and joint replacements are healthcare procedures largely for the elderly. If Te Whatu Ora intends to continue paying the bills for these procedures, and the public system continues to have some capacity limits as well as the burden of health inflation, then the cost of outsourcing procedures will surely continue to increase. 

Given the many financial and operational limitations in the public health system, those who work in the sector think that outsourcing is more of a solution than a problem, at least in the short term. Pallister-Coward says that Te Whatu Ora is currently trying to implement a range of measures to help patients receive procedures sooner. Among this is making contracts with private providers longer, which could make outsourcing planned procedures more financially sustainable.

Increasing contract lengths so patients and hospitals have more certainty is a good option for reducing outsourcing costs and improving the consistency of care, Whitney agrees. “Making a difference requires consistency in planning, relationships, and contractual arrangements,” he says. “If [public hospitals] were to plan and provide for greater longevity in use of the private sector then we could build that capacity – at no capital cost to the public system.”

Hospitals also say that longer-term outsourcing commitments help plan patient care and reduce some of the burdens of high demand. Data from MidCentral DHB, centred in Palmerston North, show that spend on outsourcing has increased over the past five years. But this means better outcomes for patients and staff, says Lyn Horgan, the DHB’s CEO. Palmerston North-based health services have just signed a long term contract with private Crest Hospital to use one of its operating theatres. “By having access to an extra theatre, we can book additional surgeries with members of our team working in the offsite theatre while our onsite theatres are in use. For patients, this means we can help more of them to get the operations they need in a given day.” 

The establishment of Te Whatu Ora as a nationwide health provider is also an opportunity for price negotiations across Aotearoa to be consistent when outsourcing, says Cumming. “The advantage of a streamlined national organisation with the same thresholds [for planned care] is that they will have more bargaining power dealing with the private sector than an individual DHB,” she says. Te Whatu Ora’s Pallister-Coward says that while the organisation is using existing DHB contracts for now, national contracts with private providers will be implemented in the future. 

The current system of outsourcing works within a health sector under pressure. Private hospitals get a reliable source of income and the opportunity to use their expensive facilities and staff as much as possible. Patients, at least those who qualify for treatment, ideally receive care quicker than they would within the limited resources of the public system. Specialists get to work in the public and private system. None of the individuals operating in this system necessarily need to think about the challenges of long-term capacity planning in the public and private sector for the challenges of health inflation and an ageing population. 

But Te Whatu Ora does – because taxpayers, young and old, pay for outsourcing, as well as the billions of dollars spent in the rest of the health sector bearing the load of many individual and structural crises. The Planned Care Taskforce, announced by Andrew Little in May, released its first report in September, examining a range of issues which create long wait times for planned surgery. One of its recommendations was for the public health system to increase its use of the private sector. 

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