Contractual Pitfalls in Capitated Primary Health Care: Sharing Random Demand Risk in New Zealand's Strategy

This paper uses the literature on the likely outcomes of the use of capitation contracts in primary health care to critique the arrangements in the New Zealand Primary Health Care Strategy (NZPHCS) introduced in 2002. The New Zealand arrangements provide significant challenges to achieving the desired goals of increased equity in the allocation of available resources according to health need behavioural changes towards more collaborative models of care delivery and an increased focus upon prevention and patient wellness instead of instances of illness. The single capitation instrument chosen to deliver the objectives is unusual in that the capitation funder does not meet the full costs of the commissioned care the independent private sector practitioners receiving capitation payments are able to charge the patient for any costs not met by the funder and the capitation incentive becomes increasingly sharp over time as the funder selectively prioritises different population groups to receive greater proportions of its subsidies. The discussion concludes that the NZPHCS use of capitation is unlikely to be helpful in achieving the desired objectives but is far more likely to lead to substantial increases in the cost of care relative to the previous system and distortions in sector interactions that will result in distributional outcomes diametrically opposed to the articulated objectives. If the desired behavioural changes amongst practitioners do occur this is far more likely to be as a consequence of non-price mechanisms in the NZPHCS than financial incentives.