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Research Question:

How as the importing and entrenching of neoliberalism into New Zealands political
economy affected New Zealands hospital system?

For much of the fifty years from 1935 to 1985, New Zealands political ideology was characterised as
being indubitably socialist, which saw the rise of a welfare state distinguished by an emphasis on
equitable development of social and economic conditions (Armstrong, 1995). As a result, New
Zealands population during this era enjoyed advantages such as the worlds first public hospital
service (Blank, 1994) and a universal health care system (Dew & Kirkman, 2002). However, since
1985, in response to a national debt crisis and changing global trading conditions, New Zealands
political economy has been revolutionised to conform with neoclassical economic theory stressing
individualism and a free market approach to economic and social policy (Armstrong). Following from
this, New Zealand health reforms since the mid-1980s have been market orientated, following a
competitive model that has been applied right across New Zealands public sector (Bamford &
Porter-OGrady, 2000). This essay will attempt to examine whether the objectives of reforms to New
Zealands hospital system since 1984 correspond with New Zealands adoption of neoliberal
economic principles.

In order for an comprehensive understanding of New Zealands neoliberal hospital system reforms
since the 1980s, it is first beneficial to be provided with a comprehensive contextual backdrop to
New Zealands health system following the founding of New Zealands Keynesian welfare state in
1935 (Barnett P & Barnett R, 1999), up until the decade of public sector restructuring of the 1980s
(Barnett & Malcolm, 1998). Academic Robin Gauld (2001) asserts that it was from the 1920s
onwards that an increasing pressure on the government to renovate New Zealands health system,

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due to the economic and social hardships being experienced by New Zealand society brought about
by the depression years, contributed to the election of the first Labour government in 1935. Labour
had advocated for social security in its pre-election campaigning and its leader, Michael Joseph
Savage, had a compelling interest in health care (Dow, 2005). The Labour Partys manifesto during
the 1935 election advocated for a national health system characterised by free health and hospital
services (New Zealand Government, 1975). To translate these promises into reality, in 1936 the new
Labour Government passed the Reserve Bank Amendment Act, transferring the Bank from private
to public ownership and giving it powers to make advances to the Government on a substantial scale
(Chapman, 1961).

Labours Keynesian styled welfare states objective was maintain New Zealands economy through
demand-side management , thus stimulating growth and maintaining levels of economic activity
through government spending (Barnett P & Barnett R, 1999). Under Labour, the first serious
attempt at a complete reformation of the health system took place with the passage of its Social
Security Act 1938 (Gauld, 2001, p. 15).

The Social Security Act 1938s original intention would have established the foundation for the
promised fully state-funded, integrated national health service. However, the concept was quickly
met by resistance from the medical profession, resulting in what emerged to be a rather different
policy (French, 1976). The medical profession was primarily concerned that an open access and fully
subsidised national health system would promote over-prescribing and over-servicing (Gauld, 2001).
What emerged from the compromise between the medical profession and the government was
what was to be called the Duel System (New Zealand Government, 1975). This set up a two-tier
system, with the rich who could afford medical insurance having access to private hospitals partially

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subsidised by the state, where as the poor were restricted to the public system(Dew & Kirkman,
2002, p. 215).

With New Zealands general practitioners successfully resisting the Keynesian ideal of working for
and being paid by the state, negotiated Social Security Act of 1938 left them in a fee-for-service
system, also known as the General Medical Services (GMS) benefit system (Dew & Kirkman, 2002).
The government [thus] subsidised visits to the GP [general practitioner] . . . but they had no control
over how much a GP would charge or how many patients they could see (Dew & Kirkman, 2002, p.
215). However, over time, with the combined impacts of inflation, and the failure of successive
governments to adjust the GMS benefit, patient charges steadily increased amounting to two-thirds
of the cost of a consultation by the 1970s (McGuigan, 1975). Such a system meant the state could
not control its expenditure (Dew & Kirkman, 2002, p. 215). When contrasting the outcome of this
policy, with the governments initial aim based on Keynesian economics, that is, having the ability to
reduce aggregate demand by being able to control government expenditure (Marshall 1994), was
not achieved, as the government, and successive governments of this era in fact had no control over
their primary health care expenditure.

From 1948 to 1968 patient numbers almost doubled from 1.071 to 3.011 million patients per annum
(Department of Health, 1969). Patient profiles also continued to evolve as the concentration of
treatment shifted from the young to the elderly (Gauld, 2001, p. 24). As well as this, the rate of
service expansion was exceeded by raising public expectations (Gauld, 2001). This, as well as a
number of other factors fuelled a public perception, that the national health system was
deteriorating (Gauld). First, while government retained the role of funding the public hospital
service, local hospital boards retained the authority over hospital administration, thus creating a

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decentralised system, based on specific community demands, and the interests of elected bored
representatives (Gauld). Secondly, the post-War baby boom generated an increased pressure on the
system, emphasised by the promise of free public hospital maternity services introduced in the 1938
legislation (Gauld). Thirdly, due to the 1950s centralisation of hospital funding under the Hospital
Amendment Act 1951, increased pressure on government to increase funding propagated, which
the government was unable and unprepared to rectify (Gauld). Finally, contributing to the overall
perception that all was not well in the public hospital system, waiting lists for non-urgent medical
and surgical services continued to increase (Davis, 1981).

With pressure for reform beginning to build up during the 1970s, the 1975 Labour government
initiated a comprehensive in-house review of the nation health system, with a review of the findings
and reform proposals made available in the form of a White Paper, entitled A Health Service for
New Zealand (McGuigan, 1975). The critical reform proposition that came out of the review, was a
proposed organisational change, with the establishment of fourteen partly elected regional health
authorities replacing the existing local hospital boards, with the responsibility of coordinating
primary through to tertiary care (Starke, 2010). However, due to opposition from local authorities
with regards to fears of hospital closures and the medical profession who felt profitable
opportunities for additional private practice would become impossible after the reform, Labour did
not implement any of the proposed reforms from the White Paper (Starke).

As Gauld (2001) asserts, with the lessons of its predecessor, the succeeding National government
(1975-1984) took a more pragmatic route in health policy-making and presided over the
introduction of changes which would prevail until the health reforms of the 1990s (p. 34). In
corporatist fashion (Jordan, 1981), this meant that all proceeding reforms were developed with the

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input of interest groups such as the New Zealand Medical Association (Gauld, 2001). What finally
came from these reform proposals, first instigated by the 1975 Labour Government, was the
implementation of a system of Area Health Boards (AHBs) (Starke, 2010). In creating AHBs, the
intention was to amalgamate existing hospital boards and integrate their (curative) functions with
the Department of Healths (preventive) district health offices (Gauld, 2001, p. 35), with the
smallest AHB covered 35,000 people, the largest 900,000 (Starke, 2010, p. 493). The administration
of secondary and tertiary health care became the responsibility of the AHBs, while primary care
remained effectively unchanged, as a concession to general practitioners (Barnett & Barnett, 2003).
However, AHBs were without doubt still subject to central decision making and steering by the
Department of Health, with all decisions regarding the extent of quality of services offered, hospital
closures, and medical training regulations, still subject to central regulation (Starke, 2010).

The first section of this essay has described the contextual background to the New Zealands
adoption of neoliberal economic reforms, following the key developments in the era succeeding the
implementation of the Social Security Act 1938. Key hallmarks of this period included, the
implementation of a national health system, and the solidification of the dual system; the
combination of factors leading to the perception of decline of the system, up until the 1970s
pressure for reform (Gauld, 2001). It was the election of the fourth Labour government in 1984
[that] marked the beginnings of a transformation in New Zealand politics and public policy (Gauld,
2001, p. 39).

Upon taking office in mid July 1984, the fourth Labour Government immediately began the
systematic implementation of wide-ranging economic reforms (Boston & Holland, 1987). As
academic Brian Roper (2005) asserts, this government systematically rejected the Keynesian policy

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regime which had provided the underlying framework for politics and policy-making since the mid1930s, and rapidly implemented a comprehensive program of neoliberal structural adjustment (p.
175). These changed included, the liberalization of the financial sector; the liberalization of product
markets both internally and externally; major reform of taxation; and some important changes to
the labour market and in the social policy field (Boston & Holland). While Labour recast the core
public sector they refrained from major restructuring of the health sector (Gauld, 2001, p. 53). It
would be the series of independent reviews of the health system commissioned by Labour, which
would prove to be influential in health policy development in the 1990s (Gauld, 2001, p. 53).

The 1990 general election saw the National Party return to power (Gauld, 2001). In pre-election
campaigning, National provided what seemed to be a reasonably clear picture of its intentions for
health policy (Gauld). These included:
continuing with the AHB system; allowing the private sector to tender for public work and
for both public and private providers to subcontract to one another where appropriate;
allowing private insurers to fund care for their patients in public facilities, and for ACC
patients to be treated outside of the public sector; giving greater autonomy to hospital
managers; making AHBs the principal funders in their regions; and separating funding from
provision of health care . . . (Gauld, 2001, p. 80).

When analysing Nationals intensions for health policy, and in particular the hospital system, there is
an undeniable correlation with neoliberal economic principles. From these intensions, there seems
to be a predominant focus of implementing the private sector in to the national health system. As
Roper (2005) asserts, neoliberal public sector reform assumes that the private capitalist firm is the
most efficient form of productive organisation known to humankind; therefore state sector
organisation should be comprehensively along similar lines to those of the private sector (p. 189).

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As academic Peter Starke (2010) asserts, the National governments reforms to the New Zealand
hospital system were centred on the purchaser provider split. With the introduction of the Health
and Disability Service Act 1993 (Parliamentary Library, 2009), the government abolished area health
boards and proposed that four regional health authorities (RHAs) be set up to purchase all publically
funded personal or clinical health services within their regions (Barnett & Malcolm, 1998, p. 81),
with twenty-three Crown Health Enterprises as providers (explained below) (Parliamentary Library,
2009). Funding for each of the RHAs was determined on a population basis (Ashton, Mays, & Devlin,
2005), and their budgets were capped to promote macroeconomic efficiency (Parliamentary Library).
RHAs were directly accountable to the Minister of Health and to Parliament. This purchaser/provider
split consequently meant that public hospitals no longer had access to public funding over similar
private providers (Easton, 2002). Advisement to the RHAs on which public health services needed to
be purchased, and which services were no longer offered, came from the established National
Advisory Committee on Core Health Services (Gauld, 2001).
Once the RHAs were fully established, the intention was to introduce competition between
public and private purchasers by giving people the choice of obtaining their health care
through RHAs or through other (non-government) health care plans using a public voucher.
However, this plan was never implemented (Finlayson, 2001, p. 254).

In the analysis of the economic principles that provide the basis for the hospital system reform, it is
quite clear that these principles are from the neoliberal economic school of thought. The idea of the
RHAs being forced to purchase services from a range of providers in a competitive health market
(Parliamentary Library, 2009), corresponds to the neoliberal economic principal that due to capitalist
markets forcing private capitalist firms to manage their operations in the most efficient and
profitable manner possible, thus state organisations should imitate private sector management
practices, in order to be as efficient as possible (Roper, 2005).

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During the 1993 reforms, the National Government regrouped public hospitals and community
services into twenty-three profit-orientated Crown Health Enterprises (CHEs) and made them
compete with private hospitals (Starke, 2010, p. 497). CHEs were established along the lines of the
state-owned enterprise (SOE) model, consequently granting them the power to contract staff, raise
capital and operate independently under the Companies Act 1993 as limited liability companies and
thus consequently being subject to commercial legislation (Gauld, 2001). CHEs were funded of a
contractual price volume basis (Parliamentary Library, 2009). The Crown Company Monitoring
Agency Unit (CCMAU) was established to ensure the CHE directors and boards met their financial
targets (Parliamentary Library). The CHE boards were in most cases appointed with members
coming from the business community rather than health professionals, to emphasize the
commercial orientation of the new bodies (Starke, 2010, p. 498). More than half of the twentythree chief executives did not have prior experience in health management (Gauld). This reform
subsequently caused protest from the public as some CHEs, handicapped by inherited operating
debt, were unable to compete with private tenderers, resulting the closure of 17 rural hospitals
during the 1990s (Coney, 1994). In 1994 there were a total of 330 hospitals in New Zealand with
24,120 beds (Statistics New Zealand, 1996). One hundred and twenty six of these were public
hospitals with 16,468 hospital beds available (Statistics New Zealand). The remaining 204 hospital
beds were privately owned and had 7,652 hospital beds available (Statistics New Zealand).
The economic reasoning underlying these changes was that competition between providers
would provide the desired incentives for improved technical and productive efficiency, while
competition between purchasers (had it been introduced) would have improved allocative
efficiency by making purchasers more responsive to the preferences of consumers (Ashton
et al, 2005, p. 254).

The economic reasoning for the formation CHEs directly parallels the neoliberal economic principles
of corporatisation and the effective running and management of public sector organisations and
corporations in order to for the organisation to run at its most efficient.

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With regards to the overall governance of the newly reformed health system, the governing bodies,
that is, the Ministry of Health (MOH) and the Public Health Commission (PHC) were established. The
MOH was set up to be a streamlined version of the Department of Health (Gauld, 2001). The
streamlining of the Department of Health corresponds with the neoliberal economic policy of
reducing the size of state infrastructure, along the lines of private sector companies, in order to
make them cost-effective (Roper, 2005). The purpose of the MOH was to monitor the newly
established PHC and the performance of the RHAs against their funding agreements with the Crown
(Parliamentary Library, 2009).The PHC on the other hand was a registered Crown agency,
independent of the MOH, with the task of advising the Minister of Health on public health policy,
health monitoring, and the consultation and purchase of public health services (Blank, 1994). The
PHC was decommissioned in 1995 due to the developing of an unnecessarily complex public health
structure, and due to its regular production of advice for the MOH, that often clashed with
government policy (Gauld).

In correlation with the neoliberal economic principal of effective government expenditure (Roper,
2005), Pharmac [the Pharmaceutical Management Agency of New Zealand] was initially set up
under the Health and Disability Services Act 1993 with the specific purpose of improving the
management of government expenditure on pharmaceuticals (Parliamentary Library, 2009, p.11).

The 1996 general election was the first under the new MMP system. A National New Zealand First
Government formed around the Coalition Agreement (Parliamentary Library, 2009, p. 14). After
length negotiations, a coalition agreement with the directive of moving away from the strict marketliberal path from 1990-1995, was formed (Starke, 2010). As a result of the coalition agreement, the

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1997 health reforms embodied the notion that principles of public service were to replace the
previous notion of commercial profit objectives (Starke). The four RHAs were merged into a single
purchasing organization, the Health Funding Authority (HFA) (Starke, p. 500). Following the Health
and Disability Services Amendment Act 1998, the Health funding authority replaced the THA and
assumed legal responsibility for the purchase and monitoring of health and disability services for the
public (Gould, 2001). In correlation with neoliberal economic principles, the rationale for a single
entity was to reduce cost shifting among different agencies and service levels (Bloom, 2000).

As Starke (2010) asserts, on the provider side, profitability as the key goal was removed from CHE
statutues (p. 500). Through the Health and Disability Services Amendment Act 1998, the twentythree CHEs were renamed Hospital and health Services (HHS) (Parliamentary Library, 2009).
However, this name change was largely symbolic, and their underlying purpose stayed the same
(Gauld, 2001).
In sum, the National-NZF [New Zealand First] coalition government tried to (symbolically)
water down the market element in the health system while concentrating resources at the
centre and developing more explicit rationing methods such as the booking system for
waiting lists. It should be stressed, however, that many crucial design elements of the 1993
reforms, especially the purchaser-provider split, were not reversed (Starke, 2010, p. 500).

A genuine policy reversal took place only after a centre-left Labour Party led coalition came to power
in 1999 (Starke, 2010). One of the fundamental policy supports of the Labour Partys 1999 preelection campaign was a pledge to restructure New Zealands health system, in which public and
professional confidence was low (Dolan, Blendon, & Schoen, 1999). This was supported by the
opinion polls indicating that the public considered health to be the most important election issue
(Gauld, 2001). Before the election, the Labour Party issued a comprehensive policy statement
regarding their policies for the coalitions new district health board system New Zealand health
system (Labour, 1999). Labour pledged:

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... to focus on patients not profit and to cut waiting times for surgery. To achieve this
commitment, and restore the public confidence in the health system, we must return to a
health system that allows the people to have a say. Democratically electing representatives
on boards will restore the systems [sic] moral authority. Certainty in funding, and long-term
planning will allow a systematic rebuilding of the public health system. Cooperation, rather
than competition, will mean that the public health system works for patients not for profits
(Labour, 1999, p. 1).

As well as this, Labour publically criticised the HFA/HHS system and considered the sytem:
lacked leadership; lacked clear vision; was based on a model which, through the contract
tendering process, promoted competition; lacked democratic community input into
decision-making; was accountable to neither government nor communities because of the
funder-purchaser-provider split and the gap this created between the MOH and the service
provision level; focused primarily on financial accountability, with little attention to service
quality indicators; failed to induce public confidence in health services; was too focused on
treatment as opposed to the improvement of community health; and had no clear channel
for advice to government on health issues advice originated from a number of central
agencies (Labour, 1999, p. 1).

After winning the 1999 election, the Labour coalition set out to attend to these issues, with a core
focus on the detriments of health and illness, with the assumption that good health was dependent
on adequate housing, education, and the alleviation of poverty and unemployment (Gauld, 2001. In
relation to the restructuring of New Zealands health sector, Labour asserted that the roles of the
Minister and the Ministry of Health were to be reiterated in their restructuring (Gauld). The Minister
of Healths role would be to take full accountability for decisions about the direction of health
policy, funding levels and the funding mechanisms which will be used for various services (Labour,
1999, p. 2). In order to eliminate the competition among the central agencies which had prospered
during the reforms of the 1990s, the MOH was to be the principal agency responsible for policy
advice (Gauld). The MOH would have new responsibilities of reporting on progress toward health
goals; funding and monitoring the health and disability sectors; and managing relationships between
the MOH, Minister and service providers. This would require an internal reconfiguration and
expanded number of directorates to ferform the new functions (Gauld, p. 181). When contrasting
this expansion of the number of directorates and the expanded responsibilities with the neoliberal

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economic principles of reducing the size of government, one can see that this new era of New
Zealand hospital system reforms, contrasts with these neoliberal economic principles.

More importantly, other purchasing functions were to be handed over to Labours newly devised
district health boards (DHBs), which would be constructed out of the existing HHSs, and be funded
using a weighted population-based formula although some services would remain centrally funded
(Gauld 2001), thus adding to the control of government, again contradictory to neoliberal economic
principles (Roper, 2005).The DHBs would have the primary obejectives originally established for
area health boards (Labour, 1999, p.7), namely to
promote, protect and conserve the public health, and to provide health services; to provide
for the effective coordination of the planning, provision and evaluation of health services
between the public, private and nongovernment sectors; and to establish and maintain an
appropriate balance in the provision and use of resources for population based public health
services and health treatment services (Labour, 1999, p.7).

DHB members would be elected, with the Minister of Health appointing additional members to
ensure a balanced expertise and representation was present on a board (Gauld, 2001). Each DHB
would be required to establish at least two standing sub-committees (Gauld). One sub-committee
would take on the responsibility for primary health and the engagement with the between primary
and secondary care, and the other sub-committees role would be to be accountable to the DHB for
the efficient management of hospital services (Gauld). Finally, DHBs would be required to produce
a five year strategic plans for service development. Required, in addition, would ba an annual plan,
developed in :full consultation with the community that outlined the services to be funded
(Gauld, pp. 181-182).

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The Second field of significant reform since the change in office of 1999 was primary care (Starke,
2010, p. 502). As Starke (2010) asserts, when first assessing these reforms, it appears as if these
reforms were consciously legislated by the 1999 government on the basis of a grand strategy the
Primary Health Care Strategy, launch in 2001. However, on closer inspection, it becomes obvious
that these reforms have been built on the unintended consequences that occurred with the reforms
of the 1990s (Starke). During the 1992 health system reforms, there was a sparked growth of what
were called Independent Practitioner Associations (IPAs), in which groups of general practitioners
teamed up in various seizes, in order to be a better position to negotiate contracts with the
purchasing bodies in the quasi-market system characterised by neoliberal economic based reforms
of the time (Ashton, 1999). The new organisational form spread quite fast with eighty percent of
general practitioners being part of IPAs by 1999 (Barnett, & Barnett, 2004). The Labour government
during this period tried to capitalise on the growth of primary care organisations, in order to achieve
some of the aims set out in the Primary Health Care Strategy, that is, to better coordinating of care
providers and the reducing of inequalities in access to service (Starke). Thus, the new organisational
model promoted by the government from 2002 onward was the Primary Health Organisation (PHO)
(Starke). PHOs are in short, networks of different primary health care providers and not just, as
IPAs usually were, that is, a network of general PR actioners, PHOs are in fact, community owned
and operated and can be seen as an attempt to introduce a degree of managed care in New
Zealand (Starke). The main difference setting PHOs apart, from the likes of IPAs, is the added focus
on service coordination to the public and on improving equality of access (Starke).

As Starke (2010) asserts, since 1999 there has been a shift toward a more universal model of health
care, especially in primary care (Starke, p. 504). In this respect the prime objectives have been the
widening of access to health services and the lowering of co-payments, at the expense of the
incorporation of market mechanisms characterised in the period of neoliberal economic reform of

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the 1990s (Starke). While some of these reforms had already occurred with the so called watering
down of the neoliberal economic agenda of the 1990s that influenced New Zealands health
reforms, and in particular hospital system reforms during the National-New Zeeland First coalition, it
was only under the Labour government that came to power in 1999, that the new themes became
appropriately institutionalised in policy. What happened after 1999 did not merely further the
health policy agenda of the previous government but amounted to something new, a real counter
revolution (Starke, p. 504).

When analysing the reforms to New Zealands health system, and in particular its hospital system
since the mid-1980s, that were characterised by a market orientated, competitive model influence
(Bamford & Porter-OGrady, 2000), it becomes undisputedly apparent, that during the period from
the mid-1980s up until 1999, New Zealands importation and entrenching of neoliberalism into its
political economy, undoubtedly affected New Zealands hospital system, transforming it into a
market based, competitive system. However, these reforms based no neoliberal economic principles,
were reversed during the Labour Partys reforms to the health sector in 1999, transforming New
Zealands hospital system into a a more universal model of health care (Starke, 2010, p. 504),
comparable to New Zealands hospital system before the neoliberal economic reforms of the 1980s.

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