Sobering predictions for aged care

By Simon Hartley

Westpac industry economist David Norman tackles the vexed issues of New Zealand’s ageing population and the future of its 20 district health boards. His findings do not bode well for the public, ODT senior business reporter Simon Hartley reports.

New Zealand's ageing population should lower their expectations of healthcare during retirement, as the cost and increasing type of treatments outweigh the country’s ability to pay for health services for the aged.

World Bank estimates are that New Zealand’s health spending per capita has quadrupled in less than 20 years, the majority of it (about 82%) provided by the public healthcare sector.

Despite the proliferation of independent-living retirement villages during the past five to eight years, including the successes of listed companies Ryman Healthcare, Summerset and Metlifecare, there is a "huge gulf" developing for those who cannot afford that level of care, Westpac industry economist David Norman says.

"Those type of companies [Ryman, Summerset and Metlifecare] provide about 40% of the bed numbers, while 60% are your small, independent, local rest-homes with 25 or 30 beds. But they are closing," he said of tightening financial support from the Government.

The Government’s Vote Health budget for 2016-17 is $16.1billion.

Mr Norman has in recent months spoken with numerous district health boards (DHBs), primary healthcare organisations (PHOs), GPs, specialists, private hospitals, mental healthcare providers, aged-care providers and government agencies.

"The dominant message was that New Zealanders will need to moderate their expectations of what the healthcare system can and cannot provide, given the limited funding sources and near limitless range of medical intervention options," Mr Norman said.

He said in 1950 it was expected global medical knowledge would double every 50 years, but by 2010 that expectation was knowledge doubling every 3.5 years.

"Advances in knowledge, surgical techniques and medicines are lengthening lives, and exponentially increasing the costs of providing healthcare.

"The expectation of the public is that if a treatment option exists it should be available to them. But funding is not unlimited," Mr Norman said.

There was a significant problem in how the New Zealand health sector was structured, which included the funding challenges, he said.

From his survey of organisations, sources told Mr Norman one impact of the "highly fractured health system", with its 20 DHBs and 32 PHOs, was a lot of duplicated administrative functions.

He estimated that across $13billion of annual Vote Health allocations every year there was 10%, or $1.3billion, spent on administration and support, rather than frontline care.

"Fewer DHBs would likely yield more funding for the frontline services," he said.

There was a second suggestion from sources DHB governance capability was "mixed", leading to varying levels of efficiency in funding use across the DHBs.

A third issue was the "capitation model", or population-based funding, which awarded DHBs funding on the number of people within a jurisdiction, which could stifle innovation.

Mr Norman said sources were "almost unanimous" in suggesting the country had too many DHBs, arguing there was a strong case for a single health authority in New Zealand.

The 20 DHBs had between 33,000 and 580,000 residents within their jurisdiction.

Mr Norman said detractors noted the UK had one health system, the National Health Service, and that major Australian cities the size of New Zealand had one government health system.

"They argue that there is a strong case for a single health authority in New Zealand," Mr Norman said.

A smaller number of DHBs, between four and nine and covering a minimum of more than 300,000 people each, could encourage a higher average quality of governance across the DHBs as the number of people with specialist governance skills required would be smaller, he said.

Mr Norman’s "Industry Insights" into the healthcare and social support services report also scrutinised GPs, specialists and hospitals, primary and secondary healthcare.

But the headline feature of the report was "aged care deficiency", where people were living for longer but health costs per person had subsequently "spiralled as a result".

He estimated in the next 25 years, by 2041, the number of over-65s would have doubled to 1.29million people.

"An older population and an increasing number of people with dementia means a massive rise in rest-home and dementia care beds is needed," he said.

While the listed companies such as Ryman, Summerset and Metlifecare offered levels of independent living, then assisted, hospital and dementia care, it was the smaller rest-homes where the majority of senior citizens received basic, ongoing healthcare support.

"Industry sources estimated that between one-third and half of all New Zealanders pass away in a rest-home," Mr Norman said, noting they spent on average three months to two years in a rest-home.

For New Zealanders who could afford it, the privately operated retirement villages, with villas, apartments or serviced apartments, were increasingly popular.

Those villages were being developed almost entirely by corporate or independent private sector players, with less than 8% of all units built during the past eight years by not-for-profit organisations, Mr Norman said.

"New Zealand is not building nearly enough rest-home-type facilities to meet demand," he said.

One of the major reasons was that stand-alone rest-home care was not profitable.

The number of senior care facilities fell between 2000 and 2014 as many of the smaller rest-homes closed, because of profitability challenges.

He said returns and profitability steadily increased with the scale of a facility, with those with more than 125 beds being far more profitable than smaller facilities.

"Data by service type indicates that rest-home care is far less profitable than hospital or dementia care," Mr Norman said.

It was estimated about two-thirds of rest-home residents received a means-tested government subsidy, from partial to total subsidy.

However, the Government had capped the weekly rate to between $884 and $972, depending on which part of New Zealand the person was in, equating to $139 per day to cover basis care costs, including accommodation, food and nursing support, he said.

Compounding this, extra medical costs were often borne by the rest-home, while administrative costs, such as health and safety, reduced funding for frontline services.

Lastly, land and construction costs in many places were rising faster than the consumer price index.

"Again, this means the cost per bed delivered is much higher and alternative uses may be more attractive," Mr Norman said.

Those areas which were more expensive might become under-served by rest-home facilities, but places with cheaper land could be more viable.

"For instance, Dunedin, which is New Zealand’s largest city by geographic area.

"It has vastly more distant areas [within its territorial boundary] that may have much more affordable land available, and where the maximum contribution rate is the same as in the city."

Mr Norman noted those interviewed for his report had agreed the Government focus was on keeping people in their own home for as long as possible, given the costs of residential care were much higher.

He said aged-care industry leaders were arguing the Government should be increasing its contribution by 25%-35%, which would make rest-homes more profitable, which would also free up the more expensive hospital beds for those needing that level of care.

"The challenge of a shortfall in rest-home and dementia care is only being partially overcome, and a crisis is looming," he said.

The Government contributions were too low and falling home ownership rates meant fewer seniors would be able to fund their own rest-home stay.

He said the Government preferance for in-home assistance created other challenges of isolation and loneliness, and often only delayed the period until rest-home or hospital care was required.

To counter some of the issues, providers were offering a range of user-pay services at rest-homes, which could boost profitability by $14,600 over two years, and be more flexible in bed allocation uses, not for rest-home services but use as hospital or dementia care.

"However, it’s clear that all of these actions are only part solutions, and that a significant shortfall of rest-home and dementia care is inevitable unless further drastic action is taken," Mr Norman said.