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National backs third medical school in Waikato
(i.stuff.co.nz)
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My understanding is that yes, there is the demand. The issue is money, Auckland and Otago want the money that would go to a new med school to instead increase their own capacity. Opening a new med school is certainly expensive but is a better solution in the long run, in my opinion.
Keeping the doctors is the other side of the coin, to which I don't have a great answer other than, unfortunately, more money.