It’s the economy, stupid! When economics and politics override health policy goals – the case of tax reliefs to build private hospitals in Ireland in the early 2000s

Irish economic, political and health policy context

Economic context. Throughout the 1990s and the first years of the early twenty first century, Ireland experienced exceptional economic growth with annual growth rates of 7.5%, which in some years exceeded 10% (Kirby, 2010). For fifteen years up to 2008, Ireland’s growth rates were over three times the European average (Kirby, 2010).

This expansion, which was subsequently found to be unsustainable, was driven by a pro-cyclical economic policy, largely dependent on Foreign Direct Investment; and a property boom fuelled by government tax-reliefs and over-generous, unsound lending practices by banks (Kirby, 2010). These factors, combined with low interest rates, which were predetermined by Ireland’s Eurozone membership, fed ‘an orgy of borrowing and consumption’ (Kirby, 2010 : 4).

Irish economic growth came to a sudden end in 2007/8, at the onset of the global financial crisis. By 2010, borrowing rates were unsustainable and Ireland entered an EU/IMF/ECB (European Central Bank) bailout (Department of Finance, 2010).

Political context. Two national political parties, Fianna Fáil and the Progressive Democrats (PDs), were in power continually from 1997 to 2007 (Leahy, 2009). Fianna Fáil, which was self-styled as the ‘republican party’, was the largest, oldest, dominant party in Ireland, characterised by a working-class base and conservative policies (Ferriter, 2004).

Popularly known as the PDs, the Progressive Democrats party, which was formed in the late 1980s by a group that split from Fianna Fáil, pursued economically conservative policies with a strong low-tax, pro-business and pro-market focus (Collins, 2005). Although the minority party in government for ten years from 1997, they had considerable influence over government policy, especially economic policy (Leahy, 2009). Their leader, Mary Harney, was Tánaiste (deputy prime minister) and from 2004 until 2010 she was the Minister for Health. In government, the PDs held considerable influence over health policy even before occupying the health ministry (Wren, 2003).

The Minister for Finance from 1997 to 2004, Charlie McCreevy, was a senior Fianna Fáil member closely allied with the PDs and their leader. Together, they had significant influence over Government policy (Collins, 2005; Leahy, 2009).

Health policy context

As public finances expanded significantly, the Irish public health budget quadrupled between 1997 and 2007, rising from €4 billion to €16 billion (Department of Health, 2010). This rise reflected the economic growth and increased expenditure across spending departments, especially on wages. Much of this investment was making up for decades of under-spending, when Ireland spent well below the OECD average on health (Wren, 2003). Ireland’s average health spending per capita between 1995 and 2008 came seventeenth of 25 OECD countries (McDonnell & McCarthy, 2010).

While public spending on health increased in the 1990s, there were few attempts to reform the financing or inequitable structure of the Irish health system. Ireland’s inequitable and inefficient public private mix of healthcare is well documented, characterised particularly by the absence of a universal primary care system and inequality in access to the public hospital system, in that those with private insurance get preferential (quicker) access to public, as well as private, hospital beds (Burke, 2009).

In 2001, a new health strategy ‘Quality and Fairness’ was published, which outlined 121 actions in a seven year reform programme (Department of Health, 2001). The Strategy proposed many measures, of which few were achieved, as most reform efforts went into restructuring the health system from eleven old health boards into one Health Service Executive in 2005 (Burke, 2009).

Throughout the last decade, public hospitals have been under increasing pressure to treat more public patients, to reduce waiting times as well as meet the demand for those with private health insurance (Burke et al., 2014). In 2000, there were limited numbers of private hospital beds with some parts of the country without any private hospitals (Wren, 2003).

Conceptual framework

All interviews were transcribed and coded using NVivo 9 under themes identified in a conceptual framework specifically devised for this research. The conceptual framework was derived from relevant literature in the public policy, health policy and political economy fields. The framework drew on Kingdon’s multiple streams research, policy analysis work of Walt and Gilson, Grindle and Thomas’s empirical work on the political economy of health reform, Reich’s work on political priorities for health policy, as well as Touhy’s and Wilson’s comparative health systems analyses (Grindle & Thomas, 1991; Kingdon, 1995; Reich, 1995; Touhy, 1999; Walt & Gilson, 1994; Wilsford, 1994).

Kingdon’s classic work on why policy issues rise onto and fall off governments’ agendas, identified the problem, policy and political streams that come together at a certain moment in time to form a policy window, which is often opened by a policy entrepreneur (Kingdon, 1995). While this research does not utilise Kingdon’s multiple streams, it draws on Kingdon’s focus on how alternatives to government proposals are generated, as the Finance Act changes emerged as alternatives to original health policy intent. Kingdon’s concepts of policy windows and policy entrepreneurs are explicitly utilised in the framework.

Kingdon defines ‘policy entrepreneurs’ as ‘advocates who are willing to invest their resources – time, energy, reputation, money – to promote a position, in return for future gain’ (Kingdon, 1995: 179). Kingdon identifies how policy entrepreneurs are ‘not only responsible for prompting important people to pay attention, but also for coupling both problems and solutions to politics’. (Kingdon, 1995: 18). Kingdon also points out how there is no single formal or informal position for policy entrepreneurs, they can be a cabinet secretary, lobbyist, civil servant or academic.

Touhy’s comparative work on how windows of opportunity were more likely to be created by events in the political realm, rather than in healthcare, and Wilsford’s work on path dependency, also influenced the conceptual framework (Touhy, 1999; Wilsford, 1994).

The conceptual framework developed for this research was devised by merging and combining aspects of the work referenced. All material was then analysed using this conceptual framework with the themes and variables outlined in Table 1.

Policy characteristic

Severity of problem. By 2000, there was widespread agreement inside and outside the health system that the shortage of public hospital beds and the associated long waits for public patients in emergency departments and for hospital admission for elective treatment was one of the major challenges facing the Irish health system (Department of Health, 2001). Simultaneously, there were increasing numbers with private health insurance without much choice in private hospital options. By 2001, over 47% of the population had private health insurance, which facilitated faster access to care in public as well as private hospitals (HIA, 2013). Yet, private health insurance contributed towards less than 7% of overall health expenditure in the early 2000s (OECD, 2004).

While there was agreement about the shortage of public beds and long waiting times experienced by public patients, there was significant disagreement as to the causes. Government decisions had closed large numbers of public hospital beds in Ireland during the 1980s economic crisis. By 2000, in line with international trends, there was an expectation of a falling need for hospital beds facilitated by advances in medical technology, shorter lengths of hospital stays and increased numbers of day cases.

Since the 1990s, government policy stipulated that a maximum of 20% of patients treated in public hospitals can be private patients (Wren, 2003). In 2002, after this policy was restated in Quality and Fairness, 25% of public hospital discharges were found to be private and in some hospitals up to 40–50% of patients were private (Comptroller and Auditor General, 2003). This high demand for private treatment in public hospitals, combined with incentives, encouraged doctors and hospitals to prioritise private patients over public patients and exacerbated two-tier access to hospital care (Burke, 2009).

The main explanation given by interviewees for the shortage of public hospital beds was the failure to invest in the capital public health budget.

Ideas for intervention. The long waits for public patients needing admission to public hospitals emerged as a central issue in the 2001 national health strategy (Department of Health, 2001). As a response, a key proposal was to increase the numbers of hospital beds by 3,000, 650 of which were due to come on stream in year one, 450 of which would be public (Department of Health, 2001).

There are arguments for and against whether private hospital capacity assisted in alleviating public hospital capacity. Given that the majority of citizens do not have access to private hospitals and that more complex care takes place in the public system, meeting the needs of the whole population could be best addressed through investment in the public system (Department of Health, 2010).

In parallel, in 2000, the Department of Finance was developing the annual Finance Act, which is the primary legislation that brings the provision for the national budget into effect. In the national budgets in the years up to 2001, there had been a proliferation of tax-reliefs, which gave tax breaks to developers to build hotels, houses, apartments, car parks, and shopping centres (Commission on Taxation, 2009).

Tax-reliefs were a central instrument of government policy, which fuelled the economy and a construction industry boom, which in turn generated huge tax revenues for successive governments. Tax-reliefs allow individuals or companies to pay less tax due to ‘reliefs’ (Department of Finance, 2011). Ireland had 245 tax-reliefs in the 2000s, a far higher number than any other OECD country (Commission on Taxation, 2009). There was unanimity among interviewees in this study that the changes to the Finance Act in 2001 and 2002 that gave tax-reliefs to build private hospitals were an extension to healthcare of the model used in other sectors. They were a politically acceptable alternative to public sector investment.

Actor power

Guiding institutions. The guiding institutions in these policy developments were the departments of finance and health. Documents obtained show that officials from both departments opposed the changes to the Finance Acts in 2001 and 2002, which gave tax breaks to build private hospitals. Differences between the ministers of Finance and Health are also detailed.

In one communication between the Department of Finance and the Department of Health, a Finance official said:

In response, a Department of Health official said:

These findings were reinforced by the interview data (selected quotes are in Table 2), which show that senior civil servants in both government departments and the Minister for Health’s position was overridden by the Minister for Finance.

The role of policy entrepreneurs. Two policy entrepreneurs emerge clearly from the documents. In the first year that health institutions were included for tax-reliefs, James Sheehan, a surgeon and co-owner of Ireland’s first stand-alone private hospital, lobbied finance minister McCreevy seeking tax breaks for hospitals.

In November 2000, Sheehan wrote:

In 2002, a representative of private hospitals, Michael Heavey, lobbied the government that the tax-reliefs be extended to for-profit hospitals.

The 2001 Finance Act included stipulations that gave tax breaks to developers to build private hospitals with stipulations that hospitals would have more than 100 beds and be of charitable status (Department of Finance, 2001). The Finance Act 2002 was amended to include the provision of tax free finance for the development of for-profit hospitals and the number of beds required was reduced to 70 (Department of Finance, 2002).

Private sector interests. The extent of private sector influence is evident from the fact that the two policy entrepreneurs that directly influenced the changes to the Finance Act two years running were from private hospitals. In one communication between the Departments of Finance and Health during this time, a hand-written note from a senior finance official included the following:

Every interviewee was asked about the extent of lobbying. All of the public sector interviewees acknowledged that lobbying took place at a political level. Politicians and/or political advisors interviewed concurred.

Political contexts

Political ideology/institutions. The senior partner in successive coalition governments, Fianna Fáil, was in power continuously from 1997 to 2011. Fianna Fáil, traditionally had a strong working class base; however, during its time in office, it shifted to the right as government economic policy was driven by the PDs (Leahy, 2009).

Although the Minister for Finance, McCreevy, was a long standing Fianna Fáil member, his political ideology and economic policy was considered closer to the PDs’ policies (Leahy, 2009). McCreevy was a close ally of PD leader Mary Harney, and their influence was referred to, both in the media and in interviews for this study, as the ‘McCreevy/Harney’ axis (Leahy, 2009). This Harney/McCreevy axis, shared an ideology and belief in tax-reliefs; and the promotion of the private sector as an economic driver emerged as a strong theme in the interviews.

One of the clearest findings of this research is the political nature of the policy making process. In the case of the introduction of tax-reliefs to health, it was policy making outside of the health domain, which undermined the explicit national health strategy with a significant effect on the health landscape, disproportionately increasing the numbers of private hospital beds and exacerbating the inequities in access to hospital care.

Numbers compiled specifically for this research show that between 2002 and 2010, the numbers of public hospital beds increased by 321 (3%), whereas the number of beds in private hospitals increased by 899 (34%). Most of the private beds opened after 2007 which reflects the time it took for the capital allowances to take effect and the planning and building time involved in constructing new hospitals.

Policy process/window. Two separate policy processes were in train while tax-reliefs to build private hospitals were introduced. The first was the public process of developing a new national health strategy, which started in autumn 2000 (Department of Health, 2001). The other was the annual budget development process, which ran throughout the autumn in the run up to the December 2000 budget and culminated with the publication of the Finance Act in March 2001.

Interviewees confirm what the documents show: that the tax breaks were driven by the Minister of Finance, McCreevy, and that health officials and the health minister who opposed them had little success in opposing them. Sheehan, when interviewed, confirmed that he drafted the wording that appeared in the legislation (see table for quotes¹). This was corroborated by other interviewees. The 2001 and 2002 tax breaks for private hospitals resulted from lobbying, behind closed doors, with no public or political debate about their possible impact on access to and quality of hospital care.