A hidden cost to watch out for in the proposed health system reform

The New Zealand government has proposed a massive reform of the health system. Part of the goal is to simplify the health system and make it easier to manage (see the government's white paper on health reform). One consequence will be job losses in back office functions. The New Zealand Herald reported earlier in the week:

Health Minister Andrew Little today confirmed jobs would go in the proposed district health board shake-up...

He highlighted two non-medical roles as an example of jobs likely to disappear when the health boards are abolished by June 30 next year.

"When you're chunking down 20 DHBs into one single national organisation you don't need 20 chief IT managers, you don't need 20 chief HR managers, so there will be some roles and positions that will go," Little told The AM Show...

The biggest change as a result of the reforms is the scrapping of the 20 District Health Boards (DHBs), to be replaced by a single organisation, Health NZ. So, along with job losses there is likely to be some cost savings in terms of IT provision, human resources management, governance, and so on. And that should mean more of the health budget could be spent on core health services and increasing equity (which is another goal of the reforms).

But not so fast. We currently have 20 DHBs, with 20 IT systems, 20 HR systems, 20 patient management and hospital services scheduling systems. Merging those different systems together is not trivial, as we learned when the eight councils (seven district or city councils, and the Auckland Regional Council) merged to form a single Auckland Council. The cost of replacing the IT systems alone more than doubled to $140 million compared with the original estimates. And that was only merging eight entities together, not 20.

This is a case of 'watch this space'. We haven't heard anything as yet about the expected costs of the health reforms, and in particular the costs of merging systems. There may be some cost savings to be had in back office functions, but it is likely they will be overwhelmed by the substantial transitional costs. And the government has a long history of underestimating how substantial transitional costs can be.

To be clear, the existence of transitional costs, even substantial costs, is not a case against reform. If it were, then we would constantly be stuck with expensive mistakes of past governments. However, ignoring or underestimating those costs does us no good, in terms of understanding the overall costs and benefits of the reforms.