For a number of years I worked on a project developing ways of analysing the market structure of the National Disability Insurance Scheme. The successful funding bid by the late UNSW professor Gemma Carey had been based on a proposal I’d made as a PhD student participating in a planning retreat at Kioloa, the ANU campus on the south coast of New South Wales.
Inspired by a US military study, the project’s central idea was that a market can be understood and visualised like an ecology inhabited by predators and prey — service providers of different sizes and appetites on the one hand, customers with different service needs on the other.
After the application was successful I began working my way through the Productivity Commission’s two-volume blueprint for the National Disability Insurance Scheme. I very quickly realised the scheme was deficient in one vital respect: nobody had made any attempt — anywhere in the design or implementation of the scheme — to specify what an individual episode of each service type needed to include, and nor had they attempted to benchmark the price providers could charge.
This could have been done if the scheme designers — the Productivity Commission and then the National Disability Insurance Agency, or NDIA — had possessed the required time, personnel and expertise. Initial pricing could have been based on the prices the states and territories were already paying. But it would have been a big job, and the scheme’s planners seem to have decided to let the market sort it out instead.
I call this the original sin of the NDIS scheme design.
The Productivity Commission’s report refers at different points to the emergence of dynamic forces that would self-organise the different markets for services and generate pressures that would, in its vision, control prices. But when I went looking for the market theory that underpinned the design of the scheme, I found only a single reference. In a subsequent journal article I drew on my analysis to criticise what I called the “magical thinking about markets” that underpins the design of the scheme.
According to conventional market theory, efficiencies usually emerge because price rises are constrained — preferably by limits on what consumers are willing to pay — in a dynamic interplay of supply and demand. But in a scheme like the NDIS, the consumer and the payer are separate entities, so the consumer has no incentive to economise. This poses a theoretical challenge that different thinkers have resolved in different ways.
The neoclassical theory of markets proposes that we impose budgets on consumers of public goods to school them in economic rationality. This thinking underpins an obsession among politically conservative economists — Milton Friedman being the best known — with voucher schemes and lower welfare payments. It assumes that economies arise directly out of market participants’ urge to economise.
By contrast, the neoliberal theory of markets proposes that efficiencies emerge from superior use of local knowledge by market participants best left to their own devices. Unconstrained by regulation, they will use price signals to efficiently transmit knowledge about changing conditions of supply and demand.
Schemes like the NDIS are called “quasi-markets” because they require ongoing government regulation to generate the constraints and information flows that these two quite different theories predict are necessary in order for dynamic pricing and allocation to emerge.
Although the Productivity Commission reports are effectively silent on which theory of markets underpins the design of the NDIS, the design itself gives it away. Scheme participants are allocated personal budgets they use themselves to purchase different supports. This is Friedman’s approach on steroids. No attempt is made to constrain prices; instead, consumers are left to pressure service providers to deliver more for less.
This is where the market structure of the NDIS turns out to be crucial. The only way for participants to exert pressure on providers is the threat of changing providers. But many local markets only have two or three providers (if that!) to choose from, and if those providers offer similar services and pricing, consumers are powerless to exert any pressure on the service mix, the approach to service provision or the pricing of services. The situation that market forces are supposed to remedy is the situation that immobilises them.
When markets “fail” — when dynamic market forces don’t emerge to self-organise the pricing and allocation of services — there is said to be a case for market intervention by government. Three main options exist for intervening in failed markets.
First, governments can step in and deliver programs themselves to ensure scheme participants are not left without services. The NDIA has shown little appetite for this approach, and it would constitute a public acknowledgement that the market-based design of the scheme is flawed. (At a bare minimum, many of the supports received by people with autism and low needs could be delivered more cost effectively by direct service provision through funded community services.)
Second, if we adopt the neoliberal theory of markets as self-organising networks whose dynamic function is enabled via flows of knowledge and consumer empowerment, then we might advocate evaluation and information sharing to enable participants to make better-informed choices based on differences in approaches to service delivery. But the NDIA took forever to scale up its capacity for service evaluation and complaints handling, and it primarily uses this information to evaluate the performance of the scheme rather than packaging it up to help inform participants’ choices.
Finally, there is the blunt instrument of market theory: constrain budgets to force the consumer of public goods to make “hard choices” and economise on their service use. This, predictably, is the strategy the Labor government has chosen to pursue.
We can speculate on its reasons for doing so. First, it is consistent with the neoclassical market theory that implicitly but obviously underpins the Productivity Commission’s design of the scheme. Far from being the only option in an emergency, my sense is that something like this moment was always anticipated as part of the implementation of the scheme.
Second, this approach is politically convenient. It doesn’t require any admission that an earlier Labor government made a grave error when it commissioned the economists of the Productivity Commission to design a market-based scheme for human service provision. It is also consistent with Labor’s desire to present itself as a responsible economic player willing to take the hard decisions.
What this approach fails to consider is the brutal reality of living with disability: no matter how much it costs, you still need help to shower. Without effective constraints on pricing, there is no guarantee participants can afford to pay for the supports they need. •
