GeoJournal 59: 137–147, 2003.© 2004 Kluwer Academic Publishers. Printed in the Netherlands.

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Back to the Future? Reflections on past reforms and future prospects for healthservices in New Zealand

Ross Barnett1,∗ & Pauline Barnett21Department of Geography, University of Canterbury, Private Bag 4800, Christchurch, New Zealand; 2Departmentof Public Health and General Practice, Christchurch School of Medicine and Health Sciences, University of Otago,Christchurch, New Zealand ∗Author for correspondence (Tel: 64-3-366-7001 extn: 7915; Fax: 03 364 2907; E-mail:ross.barnett@canterbury.ac.nz)

Key words: health sector restructuring, neoliberalism, New Zealand, ‘Third Way’

Abstract

In 1991 the New Zealand health system began to experience what has been termed the ‘turbulent decade’. Without healthsector consultation or public mandate, an era of imposed market oriented reforms began. These changed the overall cultureof health care delivery and the expectations of New Zealanders regarding the role of the state in the provision of welfare.In retrospect the ideologically driven imposition of the market-oriented reforms was not an exercise of bold leadership butone of political arrogance and rejection of established community values. Within the community, the neoliberal experimentheightened income and health inequalities, created a loss of social cohesion and generally provoked feelings of powerless-ness. In the health sector, the reforms polarised clinical and commercial cultures and changed the geography of health caredelivery. This occurred not only because place was de-emphasised, but also because decentralisation of purchasing createdfour health systems with widely divergent contracting arrangements and standards of care. The lessons of the health reformshave been painful, and must not be lost. A fundamental lesson is that market approaches to the delivery of health care havemajor limitations and that the ultimate goal of a health system should be the equitable, effective and efficient provision ofcare, not the profitable sale of commodities. Since 1997 there has been a retreat from the market, although it is not clearwhether recent policy developments represent a new or distinctive ‘third way’ or a pragmatic ‘pick and mix’, combining thebest from the market and the managerialism first introduced by Labour in the 1980s. Quite clearly, the experiment with themarket was not sustainable. Whether this will also be true of the more recent and pragmatic ‘pick and mix’ approach of the‘third way’ to health care reform is uncertain.

Introduction

Thousands protest against health cuts

‘South Islanders marched against health cuts and calledfor increased health spending as part of a day of actionaround the country. More than 2000 people marched inAshburton yesterday, almost 700 on the West Coast, and180 in Motueka, while Christchurch people queued tosign a petition calling for an extra $1 billion in publicspending’ (Christchurch Press, 15 December, 1997).

This event, reported in the news in 1997, was part ofa broad reaction to the neoliberal agenda which transformedthe New Zealand health system during what has been termedthe ‘turbulent decade’ of the 1990s (Hornblow and Barnett,2000). In 1991 the Green and White Paper (Upton, 1991)heralded a major shift in both the organisation of health careand the underlying ideology which governed health policy.Without health sector consultation or public mandate, an eraof imposed market oriented reforms began. The stated goalsof the reforms could hardly be disputed. These were to im-

prove access to an effective and affordable health system,encourage efficiency and innovation, reduce waiting times,widen choice of services, enhance the work environment ofhealth professionals and increase the sensitivity of the sys-tem to changing health needs (Barnett and Barnett, 1999).Accompanying the advocacy for these laudable goals wererepeated and largely unsubstantiated accusations of grossinefficiency, poor targeting and provider capture. The moralhigh ground of universally accepted goals, combined withthe zeal of the reformers, served as the basis for refocus-ing health services from a public service to a commercialethos. However, by 1997 a changed political climate, andthe failure of many of the expected benefits to materialise,resulted in a slowdown in the pace of reform and, by 1998, amoratorium on restructuring, at least in the hospital sector. Achange of government in 1999 witnessed yet a further retreatfrom the market model and, as in Britain (Powell, 1999), thebeginnings of a ‘third way’ with respect to the involvementof the state, especially in the provision and regulation ofhealth services.

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The aim of this paper is to assess, within broader debatesabout the changing focus of welfare in advanced capitalistcountries, the impact of health sector restructuring in NewZealand during the 1990s. This paper has three main parts.First, initial attempts to improve the performance of the NewZealand health system are outlined and the rationale for theintroduction of market led reforms in the 1990s. Next, themajor part of the paper assesses the impact of the reforms interms of the extent to which they improved efficiency, equityand effectiveness, with the main focus on equity in the fund-ing, provision and use of services. The third part traces thechanges since 1997 and assesses the extent to which theserepresent a significant retreat from the market and a new‘third way’ in attempting to achieve important health andheath system objectives. The paper concludes by indicatingthat the lessons of the 1990s neoliberal reforms have beenpainful and should not be lost. The experiment with the mar-ket was not sustainable, but whether this will also be true ofthe more recent and pragmatic ‘pick and mix’ approach ofthe ‘third way’ to health care reform is uncertain.

Public sector and health restructuring in New Zealandsince 1984

Background to reform: The New Zealand health system inthe 1980s

Nearly half a century after the momentous occasion of theestablishment of the welfare state in 1938, the 1980s sawthe beginning of two important decades of restructuring, in-cluding change in the nature of public involvement in healthservices. The beginnings of the neoliberal experiment ofeconomic and public sector reform in New Zealand began in1984, with the election of the Fourth Labour Government. Atthat time the public sector occupied a significant place in theeconomy, accounting for 37 percent of GDP, similar to thatin most OECD countries (Boston and Dalziel, 1992). NewZealand did not particularly fit any of Ware and Goodin’s(1990) three welfare state classifications (ie residualist (orneeds-based), insurance (or contributions-based) and socialcitizenship (or ‘rights-based’), and, like the UK, representeda middle way. This was true of the health system with amix of both public and private finance and services, par-ticularly in surgical services, long-term care of the elderlyand in primary care. While the state has always dominatedthe funding and provision of hospital services, private sur-gical facilities, some of which are vertically integrated withparent insurers, grew steadily in the 1960s and ‘70s. Thisgrowth was based both on the availability of governmentsubsidy and on public dissatisfaction with long waiting listsfor access to public hospital services. In the case of long termcare of the elderly, extensive government subsidies ensureda strong presence of private providers in that sector. His-torically, primary care has been largely delivered by privatepractitioners. Resisting attempts at capitation in 1938, thissector fiercely guarded its independence with general prac-titioners, alone or in partnership, continuing to practice witha fee-for-service subsidy from the state. This subsidy, over

the decades, declined as a portion of the total fee, with pa-tients contributing increasingly larger co-payments. Somefree care has been provided, however, by salaried GPs, butthis has mainly been restricted to isolated rural (SpecialMedical) areas whose population base could not normallysupport fee charging doctors (Brown and Crampton, 1997).

The New Zealand health system in the 1980s was subjectto considerable criticism. Particularly problematic was thefragmentation of services, both in terms of the spatial organ-isation and variation in size of hospital boards (Figure 1) aswell as the tripartite division of services (primary, secondaryand public health) with different funding and accountabilityarrangements with central government. Fragmentation inev-itably led to cost shifting, tension between the centre andperiphery over the control of services, lack of managementaccountability, inefficiency and an inability to control costs(Laugesen and Salmond, 1994). Levels of inefficiency werealso compounded by the presence of a supply-driven alloc-ation system which cemented regional inequalities (Barnett,1980, 1984) and it was claimed that provider and communitycapture also resulted in few incentives to enhance perform-ance or limit costs. Similar criticisms could also be made ofprimary care which was characterised by continuing inequal-ities in access (Barnett, 1993) high levels of inflation in thecosts of both pharmaceutical and patient benefits (Malcolm,1993) and a lack of accountability. In addition, since the por-tion of doctors’ fees paid by patients had grown steadily overthe years, there was increased evidence of reduced use of GPservices in relation to need and increased dissatisfaction withGP fees (Fergusson et al., 1989).

Initial attempts at reform

The health sector had been under constant review since themid-1970s, with a White Paper on Health (Department ofHealth, 1974) and successive reviews of hospital funding(Advisory Committee on Hospital Board Funding, 1980),health benefits (Health Benefits Review, 1986) and hos-pital organisation (Hospital and Related Services Taskforce,1988). In the early 1980s a number of structural changesoccurred which attempted to improve the performance ofboth the hospital and primary care sectors. In hospital ser-vices, the political and economic costs of a supply-drivenallocation system encouraged two major moves to reformthe system in 1983; the introduction of population-basedfunding and the passing of the Area Health Boards (AHB)Act. Population-based funding capped expenditure and at-tempted to depoliticise an open-ended funding policy thathad changed little since 1938. The AHB legislation, fullyimplemented in 1989, not only rationalised the numbers andfunctions of local boards, by reducing their number from29 to 14 and by combining both hospital and populationhealth services (Figure 1), but also introduced new contrac-tual relationships and a business approach to management.Reflecting broader structural changes elsewhere in the publicsector, new public management approaches, including con-tracting, accountability and performance monitoring, were,via the State Sector Act (1988) and Public Finance Act(1989), extended to AHBs (Boston et al., 1996). The es-

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Figure 1. Hospital Boards, 1980 and Area Health Boards, 1989.

tablishment of health goals and targets provided a new focuson health outcomes (Beaglehole and Davis, 1992).

In primary care, however, the pace of reform was slowerand the sector remained outside any accountability structure.After an initial focus on equity issues (such as regulatingthe locational choices of international medical graduates1980-88), attention soon shifted to cost containment, withderegulatory moves involving consumerism and more opencompetition between providers with the aim of restraininggrowth in primary care expenditure (Barnett and Kearns,1996). These were followed by government attempts to ne-gotiate formal contracts with GPs, with those undertakingto limit fees to be eligible for higher state subsidies. How-ever, as in the past, GPs used their political power to resistsuch overtures and expectations of lower fees were not real-ised. The Government also supported alternative efforts tolimit costs and improve access to care through state andtrade union health centres funded by capitation rather thanfee-for-service, but overall the effect of these was minor.

These developments led Martin (1991) to concludethat ‘in all likelihood the period of major organisationalchange. . . in the public health service is probably over’. Inview of this comment, it can be questioned whether furtherchange was justified in the light of the gains made during the1980s. The formation of AHBs had prompted service ration-alisation by centralising the fragmented system of hospitalboards and by integrating public hospital and public healthservices. Population-based funding, despite debates over thestructure of the formula (such as the negative weightingfor private sector care), nevertheless had begun to redressthe geographical inequities of the old incremental hospitalboard allocation system. Furthermore, one effect of the StateSector Act was increased productivity, evident in decliningaverage lengths of stay and increases in hospital through-put, all in the context of health spending which showedlittle growth during the 1980s, remaining 7.2–7.3% of GDP(1980–90) (Laugesen and Salmond, 1994). Managers them-selves reported trends towards greater efficiency, improved

decision-making and increased accountability by doctors(Malcolm and Barnett, 1995). Finally, the system was ac-quiring a strategic orientation, with the introduction of a‘Health Charter’ in 1988, and its associated health goals andtargets (Minister of Health, 1989). For AHB managers thisessentially meant a shift in focus from inputs to outputs, withperformance contracts increasingly involving service targetsor improved health outcomes.

Enter the market: Neoliberal reforms 1991–97

Despite positive gains and improved system performanceduring the 1980s, the predominantly managerialist approachpursued by Labour within the health and wider public sectorwas not followed by the newly elected National Governmentin 1990. Instead, the Government chose to pursue a strongneo-liberal agenda in health, as it did across the full range ofsocial services (Bolger et al., 1990). In health care, imme-diate measures provided for increased targeting of primaryhealth care benefits and a comprehensive review of the sec-tor. Despite the gains of the 1980s, long waiting lists (whichgrew by 61% between 1981 and 1991), aspirations to greaterefficiency and the continuing growth of social expendit-ure (from 52.8 to 68.8% of state spending 1984–89) underLabour (LeHeron and Pawson, 1996) made further reformimperative. In primary care, limited accountability of GPsand uncapped primary care expenditure meant that serviceintegration was still imperfect, with government having noway of controlling costs. In the hospital sector, too, des-pite the introduction of population-based funding, the AreaHealth Boards Act 1983 had not adequately resolved theproblem of financial accountability. Frequent overspendingon the part of area health boards, and their dual accountabil-ity to government and local communities suggested that theinstitutional structure of the health system allowed boards tobe ‘captured’ by a combination of community and providerinterests. The result, in the Government’s view, was that thesector was incapable of its own reform (Fougere, 2001).

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Encouraged by Treasury advice and the public choicerhetoric of the New Right, National’s health reforms (Up-ton, 1991) now embraced the internal market and elementsof corporatisation as the solution to health care problems.These strategies, initially recommended by the Hospitaland Related Services Taskforce (1988) but rejected by theLabour Government, now became central to National’s neo-liberal agenda for health (Kelsey, 1997). The new govern-ment relied heavily on Treasury advice, which itself wasstrongly influenced by American ideas on the role of com-petition in health care. Three reports influenced Treasurythinking: Alain Enthoven’s work on the internal market,adopted in Britain as the basis for National Health Service(NHS) trusts (Enthoven, 1985); a report from the CS FirstBoston Company commissioned by the New Zealand Busi-ness Roundtable (Danzon and Begg, 1991); and the earlier(Gibbs) Report of the Task Force on Hospitals and RelatedServices (Hospitals and Related Services Taskforce, 1988).The Gibbs Report itself had been strongly influenced by areport it had commissioned from the U.S. consulting firm ofArthur Andersen which had claimed that a 32% reductionin hospital costs could be achieved without loss of out-puts. These policy documents underlay the production of the‘Green and White Paper’ in 1991 (Barnett and Jacobs, 2000)and the work of its implementation authority, the NationalInterim Provider Board (NIPB). In 1992 and consistent withthe ideological perspective of the earlier reports, the Boardboldly concluded that ‘Competition is the only way of en-suring on a continuing basis, constant innovation and bestvalue at optimum quality for every health dollar’ (NIPB,1992). Such ideas reflected similar ideological claims else-where that; ‘competition makes for better health care. It’sjust that simple’ (Brown, 1981).

As a result of such influences, reform proposals wereimplemented between 1991 and 1993 and set up a managedmarket for health services. This market created a separationof purchasers from providers through the establishment offour regional health authorities (RHAs) to act as purchasersof all health and disability services for their populations(Figure 2). They were to purchase in a competitive marketthat would include public, private and voluntary providers.The 14 area health boards were abolished and reconstitutedas 23 Crown Health Enterprises (CHEs), corporatised pro-vider units with appointed boards of directors. No specificproposals were made regarding the organisation of gen-eral practice or the wider primary health care sector, otherthan that they would be funded through RHAs under in-terim arrangements with an expectation that there would bean eventual move to contractual arrangements and the cap-ping of hitherto open-ended expenditure. Nevertheless thereforms exposed traditional providers to competitive pres-sures because new types of providers were now able tonegotiate contracts for publicly funded services. Moreover,the threat of contracting and loss of autonomy promptedresistance in the form of the development of GP collect-ives known as Independent Practitioner Associations (IPAs)(Barnett et al., 1998). The introduction of budget holding(where IPAs are responsible for funding the laboratory and

pharmaceutical services used by their patients) neverthelessincreased the significance of cost issues in group decision-making and resulted in a certain loss of individual autonomy.Finally, an increased targeting of patient benefits occurred,based on an income tested Community Services Card (CSC),and also included new (short-lived) part-charges for hos-pital services and some increased charges for primary careconsultations and pharmaceuticals. These were widely per-ceived as reflecting the Government’s position that marketsmust be promoted not only to maximise economic efficiencybut also to provide the economic and political freedom forindividuals to pursue their own goals.

The goals of the 1993 reforms were to introduce morecompetitive processes into the hospital system, to fosterfurther service integration (primary care was now includedunder the purchasing orbit of the RHAs), and to encour-age greater accountability by devolving ‘control’ from thecentre to the regions. In reality, however, elements of cent-ral control remained, reflecting the anti-democratic and theauthoritarian nature of reform elsewhere in the public sec-tor (Murphy and Kearns, 1994; Kelsey, 1997; Lewis andMoran, 1998). Many of the non-elected, government appoin-ted RHA and CHE directors came from the private sector,reflecting government’s priorities regarding productivity andefficiency over social responsibility and sensitivity to localrequirements. This was perceived as a way of reducingboth provider and consumer interests in formal contract-ing arrangements, with the lack of any formal territorialattachment and local public input into CHE governance,accentuating this trend.

Impact of the 1993 health reforms

This section assesses the effects of the reforms across threeperformance areas; health spending and efficiency, equityof access and use of services, and effectiveness especiallyin terms of improvements in system integration and healthoutcomes.

Health spending and efficiency

An important motive for the health reforms was to achievegreater efficiencies, particularly in public hospitals. Healthspending and efficiency by CHEs was monitored by theGovernment using a standard set of 23 indicators (later re-duced to 18), introduced in 1993 (CCMAU, 1993). Reportson service performance indicators (CCMAU, 1996, 1997)and other research (Devlin and O’Dea, 1998) confirm thatkey output indicators such as hospital discharge, bed occu-pancy and day surgery rates and average length of stay allimproved over this period. Performance was less satisfact-ory on total (inflation adjusted) operating costs which, whilerelatively stable up to 1993, increased dramatically afterthat at a rate exceeding improvements in service perform-ance. Despite improvements (1993/4–1998/9) on three ofthe five designated financial performance measures (Barnettet al., 2001), an early briefing to the incoming government

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Figure 2. Regional Health Authorities, 1993 and District Health Boards, 2001.

pointed out (CCMAU, 1996) that the ‘pace of perform-ance improvements seems, if anything, to have weakenedsince the reforms.’ A later review reported a gradual im-provement on return on assets, but well below commercialexpectations ‘reflecting both price and efficiency issues’(CCMAU, 1997). Indeed, instead of the substantial savingsanticipated from the introduction of competitive and com-mercial incentives, overall public expenditure on hospitalservices increased rather than declined and the efficiencygains were less than expected. These trends reflect not onlythe prior years of underinvestment in public hospitals butalso the substantial transaction costs of contracting in theinternal market. But there were other barriers to achiev-ing cost reductions. Many of the new CHE managers werefrom outside the health sector, finding it difficult to work inan environment where, at least initially, information aboutcosts was limited, and where the incentives to reduce costswere lessened by the unwillingness of central governmentto provide deficit financing (Ashton, 1999). This situation,graphically described by one observer as being ‘on a hidingto nothing’ (Barnett et al., 2001), was exacerbated by cent-ral government pressure on RHAs to limit spending, withresulting cost shifting to CHEs (Barnett, 1999). This tookthe form of contracts not adequately taking into accountincreases in inflation or patient volumes, inevitably result-ing in increased financial deficits and pressures for servicerationalisation (Barnett, 2000).

Within the primary care sector, assessing performance isdifficult since few reliable cost or output measures are avail-able, and there have been few studies of attempts by IPAsto limit inappropriate variation in primary care expenditure.Issues of cost escalation have been of less concern amongcapitated providers in ‘third sector’ organisations (Cramp-ton et al., 2000). Despite the emergence of IPA protocols,expenditure is still high. Initially IPAs adopting budget hold-ing made savings in the order of 8–23% for laboratory andpharmaceutical expenditure (Malcolm et al., 1999), ratesconsistent with those reported for fundholders in Britain

(Harris and Scrivener, 1996). However, such reductions areunlikely to be sustained as most of the drop in pharma-ceutical expenditure, the biggest source of costs, occurredamong IPA doctors who were already low spenders (Mal-colm, 1997; Malcolm et al., 1999). Such trends could alsohave reflected the lack of strong incentives in the absenceof risk-sharing in most IPAs and the fact that any savingshad to be shared with regional purchasers and less fiscallyresponsible colleagues. It is also likely that costs remain highbecause IPA contracts did not markedly affect the historical‘maldistribution’ of GPs (Malcolm, 2000). Despite the in-troduction of targeted means-tested benefits and attempts torestrict the ability of new GPs to claim benefits for patientsin overprovided areas, the ability to reduce costs is prob-ably limited due to the continued presence of supply-induceddemand (Barnett, 1993).

Resource allocation and equity issues

The above evidence suggests that the health reforms hadlimited impact on overall spending and efficiency. Of equalinterest, however, is their impact on the distribution ofresources and equity of access to care.

Hospital services and waiting listsIn the hospital sector assessment of the impact on equity re-lies on the effects of the internal market upon the distributionof available funding and provision of services. This includesconsideration of levels of privatisation of services and theproblems of access and waiting lists. Prior to the health re-forms, progress towards regional equity had been slow, withthe Central and Southern RHAs being ‘overfunded’ relat-ive to their northern counterparts. AHBs had contested thelegitimacy of the population-based funding formula and con-tinued to lobby for extra funds. They remained ‘captured’by provider and community interests, and central govern-ment lacked influence over local decision making (Barnett,2000). The abolition of AHBs, the imposition of greater

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regulatory control over the funding of RHAs and a newfunding formula saw a broad reorientation of funding to-wards northern areas of higher population growth, althoughat the sub-regional scale such trends are much less evident(Sutton and Crampton, 1997). Despite this more equitableformula and increases in real funding for RHAs after 1993,most CHEs (20/23 in 1997) nevertheless experienced sub-stantial fiscal deficits in the years following the introductionof the internal market. The reasons for these trends havebeen discussed elsewhere (Barnett, 1999), suffice to say thatCHE deficits prompted strategies to secure alternative fund-ing (Kearns and Barnett, 1999, 2000) as well as pressuresto rationalise the delivery of services. Rationalisation pres-sures were greatest in the two southern regions where CHEs’accumulated deficits grew the most and it was here that theloss of public hospital services was greatest. However, thesewere not new trends for an even higher rate of rationalisa-tion was characteristic of the previous AHB regime. Whatwas new was the increased regional differentiation in theloss of public beds, reflecting the introduction of the newpopulation funding formula and greater regulatory controlover unnecessary spending. Not surprisingly, patterns of re-gional purchasing and rationalisation by providers have ledto changes in service access, with surgical waiting lists andrural health services being particular examples.

Waiting lists had been a longstanding issue, with the situ-ation worsening through the 1980s (Hospital and RelatedServices Taskforce, 1988). The numbers of people waitingfor increasing periods of time had risen 25% during thisperiod. Waiting lists reportedly varied by region and oper-ation. Regionalisation of purchasing within a competitivemarket was seen as a helpful strategy and the expectationwas that the health reforms would lead to increased privat-isation of surgical services and increased levels of efficiencyin the public sector. The pressure on public surgical wait-ing lists, however, continued throughout the 1990s withboth numbers waiting and waiting times increasing stead-ily after 1993, reaching almost 100,000 by 1996 (Ashton,1999). This reflected not only the increased cost of alternat-ive private insurance (the proportion of the population withprivate health insurance declining from 51% population in1990 to just 38% in 1998 (Davies, 1999), but also changesin the patterns of community need. Increased poverty andproblems of access to primary care appears to have resul-ted in increased social polarisation of admissions, with veryhigh rates being typical of more deprived communities in thelater, compared with the earlier, 1990s (Barnett and Lauer,2003).

The introduction of the market did not help surgical wait-ing lists. While the level of privatisation of surgical servicesincreased following the health reforms, growth was slow,with overall government expenditure on the purchasing ofprivate surgical services only 23.5% of all surgical costs(Ministry of Health, 1999). Private surgical providers wererelatively reticent in bidding for public contracts because ofthe RHAs’ low prices, an issue also of contention for publicproviders, and the relatively small volumes involved. Never-theless, some new investor-owned providers have entered the

scene and obtained public surgical contracts, but for the mostpart their success has depended on developing private nichemarkets for their services rather than relying on income frompublic contracts (Kearns and Barnett, 2002).

Alternative regulatory strategies were also developed, pi-oneered in the early 1990s by the Core Services Committee,to improve both equity and access by managing the de-mand for rather than the supply of surgical services. Thisapproach was pursued throughout the 1990s, and involvedthe establishment of nationally agreed assessment criteria forparticular procedures and need-based scores which woulddetermine priority access for surgery. These initiatives cul-minated in the adoption of a national strategy (Ministry ofHealth, 2000d), confirming that the market had failed tomanage waiting lists, and that a more regulatory approachwas now preferred.

Developments in primary careFor primary care we focus on three indicators: changes inthe distribution and funding of providers; levels of utilisationin relation to need for care; and the effects of an increasedflexibility of service provision.

Although the evidence is fragmentary, geographic dif-ferences in the availability of general practitioner servicesappear to have intensified during the 1990s. Factors contrib-uting to this include: a reduced output of medical graduatesand high rates of outmigration; the withdrawal of regulatorymechanisms (eg over the locations of international medicalgraduates) in 1990; and changes in the provision of hospitalservices which have increased the workloads of local GPproviders. This last particularly affects rural areas with acuteshortages and a high turnover of GPs in certain locationsand where added responsibilities are thought to have beena factor in the increased ‘burnout’ of rural doctors (Jenkins,1998). The implementation of the internal market had littleinfluence upon the pattern of primary care. Although IPAsnegotiated contracts with RHAs, initially the latter made noattempt to restrict the autonomy of GPs in terms of wherethey could practice, although new initiatives did start toemerge after the election of the National-New Zealand FirstCoalition Government in 1996.

With respect to the utilisation of services a variety ofevidence suggests that the promise of the means tested tar-geted regime of the CSC has fallen below expectations. Theintroduction of the CSC in 1992 had the potential to increaseaccess for the poor and the so-called ‘marginal poor’ giventhe increased level of subsidies available. However, a num-ber of studies have found that, despite the introduction ofthe CSC, many low income patients, either because theyare unaware of their entitlements or because of the stigmaattached to the card (Crampton and Gibson, 1998), do nottake advantage of its benefits. Even the 75% eligible popu-lation who do take up the card (Crampton et al., 2000) willstill experience difficulties in accessing care and have ratesof utilisation much lower than expected given their levelof need (Barnett and Kearns, 1996; Barnett et al., 2000).In addition to lower levels of GP use, common responsesto problems of affordability included delays in obtaining

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medication, seeking financial help from GPs and switchingproviders (Barnett, 2001). Indeed in a five country compar-ison, only the USA is perceived to have worse access toprimary medical care than New Zealand (Donelan et al.,1999), a sad judgement on the health reforms’ ability todeliver affordable and accessible care.

Finally, one positive aspect of the 1993 reforms was theencouragement of greater flexibility (Barnett and Barnett,1999). With respect to ‘service products’, reform has en-couraged the development of a wider range of primary careservices designed to meet specific needs. These includeemergency clinics (Kearns and Barnett, 1996), marae-basedservices for Maori (Durie, 1996) and some integrated careprojects that provide co-ordinated approaches to particularhealth problems for the first time. As there had been similarattempts before the reforms, including the introduction ofincreased price competition (Kearns and Barnett, 1992) andthe evolution of ‘third sector’ non-profit providers (Cramp-ton et al., 2000), it would be too simplistic to attributemotivation for such initiatives to the internal market. How-ever, greater success in the implementation of innovation canprobably be attributed to the recent more flexible structures.Particularly noteworthy here have been the large number ofnew Maori health care services that have been establishedboth in primary and secondary care. These trends are sig-nificant given the traditional low rates of GP utilisation,even of sympathetic ‘third sector’ providers, by Maori pa-tients (Malcolm, 1996). Flexibility is also evident in someof the alternative arrangements in rural communities. Forinstance, CHE exits from hospital services did not alwaysresult in hospital closure, with rural hospitals frequentlytransferred into either private or community ownership, de-pending on the regional context. For example, in Midland,the most entrepreneurial RHA, CHE exits resulted in in-creased privatisation, mainly in the form of profit-providers,long the dominant form of hospital ownership in the geriat-ric sector (Barnett and Barnett, 1989). In other regions, butparticularly in the Southern RHA, not-for-profit communitytrusts have emerged as an important new organisational form(Coster, 1999; Barnett and Barnett, 2001, 2003). Thesetrends largely reflect a process of ‘hollowing out’ or costshifting whereby responsibilities for the funding and pro-vision of care were increasingly transferred from RHAs toCHEs and then to local communities themselves (Kearns,1998).

Effectiveness of service deliveryThe impact of the market model also needs to be consideredin terms of its effectiveness in resolving problems of sys-tem fragmentation and addressing health outcomes. Withrespect to the former, the health reformers’ expectations thatthe structural changes introduced in 1991 would enhancethe effectiveness of the system have only been partly real-ised. The introduction of a commercial ethos into RHAsand CHEs, while improving the accountability of providersto purchasers (Ashton, 1999), nevertheless led to an essen-tially adversarial contract environment, engendering highlevels of mistrust between purchasers and providers (New-

berry and Barnett, 2001). The commercial ethos also led tomistrust between managers and professionals (Barnett et al.,2000) and system breakdowns, most notably in Christchurchwhere patient deaths were blamed on system changes andinadequacies (Health and Disability Commissioner, 1998).Nevertheless the exclusion of community interests resultedin a loss of democratic accountability. Government appoin-ted boards of both RHAs and CHEs, for example, althoughrequired by the Health and Disabilities Services Act to ‘con-sult’ communities about their purchasing and rationalisationplans, did not always do so (Barnett, 1999).

However, it was among IPAs that issues of fragmentationof services were addressed most effectively. Despite beingformed in a climate of mistrust over potential control by thestate, IPAs, rather than reflecting the ethos of the ‘market’,soon developed into co-operative organisations. GP mem-bers, who had traditionally worked in isolation, have cometogether to improve the efficiency and quality of the services,as well as improve the status of general practice (Barnettet al., 1998). As well as extending their roles in traditionalprimary care areas such as sexual health and immunisa-tion, IPAs have become increasingly involved in areas, suchas rehabilitation of the elderly, previously considered theprovince of specialist or secondary care.

While economic imperatives dominated the introductionof the 1993 health reforms, the question remains regardingtheir effects upon the health of the population. In this respectthe evidence is not clear, as there have mainly been cross-sectional rather than longitudinal studies in health (Ministryof Health, 2000a). Nevertheless the little evidence that ex-ists suggests that inequalities both in health (Brown andSalmond, 1997), and trends in the use of services (Barnettand Lauer, 2003) widened during the 1990s. These trendscome as no surprise given that income inequality experi-enced in New Zealand since the 1980s has increased at agreater rate than in most other developed countries (Min-istry of Health, 2000a). Although targeting health benefitshelped dampen such inequalities, it is clear that such redis-tributive policies were overwhelmed by other, more regress-ive, changes elsewhere in the economy and welfare state.Not surprisingly, many of the health targets (eg reductionin smoking levels) set in 1994 by the former Public HealthCommission (which was abolished by Central Governmentin 1995 to placate both commercial and established gov-ernment interests (Barnett and Malcolm, 1998)), aimed atnarrowing ethnic and socio-economic differences in health,were not able to be met.

Retreat from the market

By 1996 public concern over the performance of the healthsector contributed to the election of a Coalition governmentand the beginnings of significant retreat from market ideo-logy. There was widespread public dissatisfaction with theprocess and outcomes of reform, including the failure todeal with increased waiting lists, disenchantment amongthe elderly over the punitive asset testing regime, and out-rage over the introduction, albeit short-lived, of general

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public hospital user charges. In addition, community res-istance had hardened with respect to further closure of localservices and public disenchantment increased with well pub-licised events such as the high turnover of senior managersand continuing problems of the deinstitutionalisation of thementally ill (Joseph and Kearns, 1996; Brunton, 2000). Inresponse to these developments, the new Coalition Govern-ment (1997–99) took the position that ‘principles of publicservice replace commercial profit objectives for all’ (Co-alition Agreement, 1996), and introduced policies whichrepresented the beginnings of a shift away from the mar-ket model. These included changes in the discourse and theabandonment of the language of the market, with CHEs re-named Hospital and Health Services (HHSs) and consumersbecoming ‘patients’ once more. Central control and regu-lation, while never completely absent, was intensified withthe abolition of decentralised purchasing arrangements andthe replacement of RHAs by one central funder, the HealthFunding Authority (HFA) and, for example, the develop-ment of national policy on waiting lists. Income testingtargeting was modified with the introduction of free univer-sal care for children under 6 years of age and a lessening ofthe burden of asset testing for the elderly, resulting in greaterpublic subsidies for those persons forced to enter long-term care. There were restraints on the further privatisationof services, as evident in the Government’s scuttling of aCHE/private sector joint venture to provide cardiothoracicsurgery in Christchurch.

These policy changes represented a significant philo-sophical U-turn over the market-led approach that had dom-inated health policy since 1993. This redirection of policyhas continued, although the collapse of the Coalition agree-ment in 1998 resulted in a brief new attempt by the rulingNational Party to re-introduce competition when the Acci-dent Compensation Corporation (ACC) lost its monopolyon the insurance of work-related injuries in 1999. Sincethen the election of a new Labour-led Coalition Govern-ment (1999) has resulted in a further withdrawal from themarket. However, the question remains over the extent towhich the post-1996 policy changes represent an actual re-versal of policy or are indicative of a new way of runningthe health system. That new strategy could be characterisedas neither ‘New Right’ nor ‘Old Left’, but a ‘third way’, thatis, a more pragmatic political positioning between these twoideological extremes (Powell, 1999, 2000). Using the fourcriteria set out by Powell: spending; competition; account-ability; and a focus on health goals, this question and thelikely impacts of such changes are now addressed.

With respect to spending and resource allocation, the firstyear of the Coalition (1997/98) saw the greatest percentageincrease in real health spending during the 1990s and inthis sense represented a continuation of the trend towardsincreased spending first begun in 1993 (Ministry of Health,2000b). However, from 1997 resource allocation becamemore pragmatic, reflecting the changed political climate ofthe time. This pragmatic approach was evident in the retreatfrom targeting and the introduction of universal free accessto GPs for under six year olds and new funding for polit-

ically contentious areas of surgical waiting lists and mentalhealth. Along with the replacement of CHE financing withnew HFA contracts, and despite continued downsizing, hos-pitals were protected by a moratorium on further closures in1998 (Minister of Health, 1998). This pragmatic approach tohealth policy may not continue under the Labour-led Coali-tion Government (1999). In some respects Coalition policyechoed New Right ideals of tightly constraining expenditure,with no indication that the trend to a declining public com-ponent of health funding (77% by 1998 (Ministry of Health,2000b)) will be reversed.

With respect to competition, while retaining elementsof the purchaser/provider split the Labour-led Coalition hasimplemented a less competitive structure that is increasinglyreplacing the market and competition with planning and co-operation. The organisational climate changed in 2000 whenthe HFA and the 23 HHSs were abolished and replaced by21 District Health Boards (DHBs) (Figure 2) which rangein size from populations of 33,000 to over 400,000. Theseare funded by a new population-based formula and, likeAHBs before them, are responsible for both the fundingand provision of some services. However, the scope of theirfunding activity is much wider than those of AHBs and in-cludes primary health care, but as yet excludes public healthand some disability support services. While the stated aimis for collaboration, the experience of different styles ofpurchasing experienced under RHAs (from ‘coercive’ to ‘be-neficent’ (Newberry and Barnett, 2001)), suggests that somefledgling DHBs may be challenged to maintain partnershipapproaches.

Thirdly, accountability arrangements of the latest re-forms (2000-) appear to be increasingly complex. Theseinvolve a return to democratically elected representatives onDHBs. Representing more of a return to the past than a ‘thirdway’, this change is likely to lead to greater accountability ofproviders to local communities and a more co-operative andresponsive approach compared to the confrontational styleof RHAs and CHEs. However, the dual accountability ofDHBs to both the Ministry of Health and local communitiesis likely to replicate some of the tensions of the earlier era.

Finally, the refocus on health goals represents an exten-sion of ideals that were evident in the New Zealand HealthCharter and Health Goals and Targets of the later 1980s(Beaglehole and Davis, 1992), rather than being a new ‘thirdway’. The development of a ‘New Zealand Health Strategy’(Ministry of Health, 2000c) by the new Labour-led Co-alition reflects this broader vision, stressing health goals,especially the reduction in ethnic inequalities in health, andimproved access to health services, as well as intersectoralco-operation to help attain such goals.

The achievement of greater equality of health outcomes,however, or even equity of access to health care, is likelyto be difficult. In the case of access to surgical services,for example, while extra funding in 1997 produced a smalldecline in the number of people waiting for care, the mainstate response since then has been increased rationing ofservices via a new points system which redefined eligibil-ity for hospital treatment. Implemented in 1998 the points

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system effectively removed a large number of people fromthe waiting list who did not meet the new eligibility criteriafor public hospital treatment. However, the system has beenplagued by problems, including important equity issues as-sociated with regional differentiation in priority criteria andthe availability of funding, and the potential for abuse of thesupposedly more transparent rationing procedures (Gauld,2000). Achieving equity of access to primary care will alsobe difficult. The new Primary Health Care Strategy (Ministerof Health, 2001) proposes both population funding and neworganisational structures. As with hospital services, popula-tion funding becomes an equity ‘input’ but does not addressthe way in which funds are distributed locally or provideinsights into continuing problems associated with patient co-payments and the targeted CSC regime. Given the evidencethat increased and more equitable primary care funding canhelp reduce health inequalities and unnecessary hospital ad-missions (Starfield, 1996; Shi et al., 1999), then there is aneed for more progressive initiatives which can be charac-terised as a ‘third way’. One such initiative is evident in therecent formation of primary health organisations (PHOs),the first six of which were formed in 2002 (Barnett andBarnett 2003).

PHOs are ‘third sector’ organisations (Crampton et al.,2001) which rely on a community and multi-disciplinarygovernance model and have goals related to improving ac-cess and serving disadvantaged groups. In promulgatingPHOs for the development of primary health care, the Gov-ernment’s policy discourse appears to exclude GPs and ig-nore IPAs, instead endorsing a community orientated modelas the preferred vehicle to achieve its policy ends (Ministerof Health, 2001). Given the emphasis on equity of access itis not surprising that the PHOs are to be broad-based organ-isations composed of various primary care providers, such asiwi groups, midwives, non-government organisations, in ad-dition to GPs. The new organisations are envisaged as beingregionally based, with population funding and having a par-ticularly important role in the development of public healthinitiatives. Partnership is expected with local Maori and,where relevant, Pacific Island communities and communityrepresentation on the governance board is required.

The development of PHOs in New Zealand has the poten-tial to improve equity of access to care, reduce unnecessaryhospitalisation and to improve overall population health. Itrepresents a fundamental shift in national primary healthcare (PHC) policy away from an individual to a populationfocus (although this has been emerging among primary careorganisations for some time), and from fee-for-service toa funding approach stressing capitation, with inter-regionaldistribution of PHC funds based on population need. Thepotential is for a fairer system of PHC where services will bemore freely available to those in need. However, improvedequity of access may be difficult to achieve, given the prob-lems and risks in developing PHOs. In New Zealand theseinclude fragmentation of providers, inadequate attention tothe regional sensitivity of allocation formulae, concern overthe extent to which funding should be based on individualsor areas, and the extent to which full participation of both

providers and public is secured. Given the significant ad-ditional investment by the Government, PHOs will need todemonstrate not only fairer access to primary care reductionsin health inequalities and improvements in population healthoverall.

Conclusions

Since the 1980s the New Zealand health system has beensubjected to repeated restructuring designed to improve sys-tem performance and achieve efficiency and equity object-ives. Most momentous were the introduction of neoliberalreforms in 1993 that changed the overall culture of healthcare delivery and the expectations of New Zealanders re-garding the role of the state in the provision of welfare. Inretrospect the ideologically driven imposition of the market-oriented reforms was not an exercise of bold leadershipbut one of political arrogance and rejection of establishedcommunity values. Within the community, the neoliberal ex-periment heightened income and health inequalities, createda loss of social cohesion and generally provoked feelingsof powerlessness. Within the health sector, the reformspolarised clinical and commercial cultures (Hornblow andBarnett, 2000) and changed the geography of health caredelivery. This occurred not only because place was de-emphasised, but also because decentralisation of purchasingcreated four health systems with widely divergent systemsof contracting and standards of care.

As Hornblow and Barnett (2000) indicate, the lessonsof the health reforms have been painful, and must not belost. A fundamental lesson is that market approaches to thedelivery of health care have major limitations and that theultimate goal of a health system should be the equitable, ef-fective and efficient provision of care, not the profitable saleof commodities. Since 1997 there has been a retreat fromthe market, although it is not clear whether recent policydevelopments represent a new or distinctive ‘third way’ or apragmatic ‘pick and mix’, combining the best from the mar-ket and the managerialism first introduced by Labour in the1980s. Quite clearly, the experiment with the market was notsustainable. Whether this will also be true of the post-1990shealth reforms in New Zealand only time will tell.

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