Tom Keating: getting balance right in human services outsourcing

By Tom Keating

December 11, 2015

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Public goods are distinguishable from private goods in a number of ways. They are concerned with basic human needs and services which are essential for participation in society; typically health, welfare, education, housing and transport. They exist in contexts where there are not natural markets or where markets cannot be reasonably expect to provide them in a way which is acceptable in equitable society, though they are frequently provided contiguously and sometimes in conjunction with private sector markets.

The history of public administration in the later part of the 20th and early 21st centuries was one of attempts to use market signals to manage the provision of public goods, harnessing the capacity of competition to drive efficiency.

Strategies have included the creation of internal markets (eg: casemix funding in acute hospitals), contracting with or otherwise utilising private sector markets (eg: COAG public housing reforms) and outsourcing or privatising functions (eg: disability employment services).

The difficulties in achieving desired outcomes are in part attributable to the failure to recognise some essential differences between public and private goods. Public goods are evaluated on three inter-related but competing dimensions:

  • Efficiency: the costs and benefits of the goods;
  • Quality: the relative value of the goods against qualitative criteria; and
  • Access: the availability on an equitable basis to those who have a claim on the goods.

While these dimensions receive differential attention at different times, they are of equal significance. In the private sector, however, efficiency is a primary dimension. The principal requirement of private sector managers is that they create value for their shareholders. Quality is derivative in that failures of quality may impact upon profitability through loss of market share or the creation of liability. Access is simply an outcome of the market; goods are provided when and where and to whom they can be profitably provided.

The history of utilising market-based systems to provide public goods is one of mixed success and frequent systemic failure. Casemix funding (or “activity-based funding” as it is now called in the national context) was very successful initially in driving efficiency in hospitals in Victoria, but did so at the cost of quality as catering and cleaning services were slashed, nursing care was reduced and emergency beds were forgone in order to optimise occupancy.

Access was determined by efficiency as there was no clinical planning which determined service availability based on population health analysis. The COAG housing reforms in the late 1990s transferred resources from the construction of social housing to the payment of rental subsidies to private landlords. The effect was to push up the cost of private rental by an equivalent amount, reducing the availability of affordable housing. The privatisation of disability employment services has resulted in an efficient system that meets targets for job placement but fails to meet the long term support needs of disabled people in employment.

Victorian example: complex and changing

The situation in Victoria with respect to privatised provision of services is complex and changing.

The provision of community services and traditional welfare services in Victoria has a long history of non-government participation. This dates back to the days following the 1850s gold rush during which there was established many church-based and benevolent organisations with substantial resources committed to charitable works. During the 1970s and ’80s as these resources became depleted and wages became a greater component of overall costs, many of the established child and family welfare organisations negotiated subsidies up to 100% of their costs.

In subsequent times, these agreements have been rolled into a unit price which is the subject of a “service contract”. This has the appearance of a commercial contract but is in effect merely an agreement about price and volume. Quality provisions are not enforced. They do, however, address equity in that they reflect agreements that types and numbers of services are provided to eligible consumers in designated areas. This will come under pressure with the expansion of individual service contracts for consumer-directed care.

“The area where privatisation continues to be an issue in Victoria is residential aged care.”

The larger part of the state’s disability services are provided directly by the Department of Human Services though the advent of the National Disability Insurance Scheme will change that. Because of a strong public sector union over a long period, the wages and conditions in this sector have been relatively generous. An attempt in the early ’90s to privatise the services failed when it was found that transmission of business requirements in industrial agreements would transfer these benefits to the non-government sector, increasing overall costs rather than reducing them.

The area where privatisation continues to be an issue in Victoria is residential aged care. Victoria is unusual in Australia in that the state owns and operates a significant number of the residential aged care beds, many of which are attached to rural hospitals. State-owned residential aged care services are subject to nurse/patient ratios and so are very much more expensive to operate than private sector beds, where personal care attendants are employed rather than nurses.

The Kennett government attempted to privatise the metropolitan residential aged care beds but was prevented from doing so when it lost the ’99 election. The Napthine government announced a similar plan in 2013 but this was prevented by the change of government.

The privatisation of nursing home beds should be seen as a preferencing of efficiency over quality and equity of access. It would seek to reduce costs by reducing the skill level of the workforce. As the beds would be presumably owned by the purchaser, they could be relocated with their Commonwealth subsidies to the most profitable location irrespective of need.

Aged care: profitable and regulated

The aged care sector is marginally profitable and highly regulated. Recent policy changes have removed the distinction between low- and high-care beds and made the charging of accommodation bonds possible for all beds. Demand is reducing as consumers prefer to receive care in their own homes and residential care is becoming focused on dementia care and end-of-life care.

In order to survive, residential aged care providers need to run at close to total occupancy and have a high level of acuity or care requirement (which determines the Commonwealth subsidy or ACFI, or Aged Care Funding Instrument, subsidy). The Abbott government was sympathetic to the arguments from some of the large publicly listed companies that provide residential aged care for an uncapping of bed numbers and the provision of vouchers to consumers. This would remove the regulation of the industry in such a way as to reduce the viability of small local services and would further reduce equity of access.

The most significant move towards privatising of human services is likely to be an unintended consequence of the adoption of patient-centred purchasing of services. This was pioneered in Victoria in the disability sector and is now an underpinning principle of the NDIS and the community aged care sector. It is widely believed that this will become the dominant means of purchasing and providing services across the human services sector in coming years.

On the surface it looks like this is a significant movement to enhance quality through increased accountability to consumers. Consumers are allocated a package of resources based upon their assessed need, which they can use to flexibly “purchase” the services they require. In practice the purchasing is mediated through an authorised agency and packages are competed for in a market.

In the community aged care sector, in the 2013 ACAR (Aged Care Approval Founds) allocation of packages, contracts were entered into principally with large corporate providers and large nationally based not-for-profits, to the exclusion of local providers. In practice these organisations have “creamed off” the lucrative case management components of packages and sub-contracted to local providers to provide services. The effect has been a de-facto privatisation of these services.

In summary, there are range of market-based mechanisms which can and have been used to enhance the management of health and human services systems. If these are to deliver improved outcomes, however, they need to attend to and balance the requirements of efficiency, quality and access which are fundamental requirement for the distribution of public goods.

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