Restructuring Primary Health Care Markets in New Zealand: Financial Risk, Competition, Innovation and Governance Implications

New Zealand's primary health care sector has undergone fundamental changes under the Primary Health Care Strategy announced in 2001 and implemented from 2002. The strategy replaces historic fee-for-service general practitioner subsidies with population-based capitation subsidies and restructures the key contracting relationships within the sector. Primary Health Organisations take on the responsibilities for contracting with services providers to deliver services and for contracting with District Health Boards in order to secure funding and ascertain service type and quality requirements for the services delivered to patients. This paper uses the framework of economic contracts to analyse the effects of the changes brought about by the changes to primary health care arrangements in New Zealand. The paper finds that the change in arrangements is likely to lead to higher costs of financial risk and reduction in the level of competition between providers of health care services. When combined with the governance arrangements specified in the strategy these effects are likely to result in reductions in efficiency in the primary health care sector relative to the arrangements prevailing prior to the change and are unlikely to lead to the levels of innovation in service delivery anticipated by the strategy. These findings draw into question the extent of value for money that will be delivered from the substantial increases in government funding applied to the new strategy.