Unleashing value: rethinking regulation in the human services sector

Rethinking regulation in the human services sector

With the introduction of consumer directed care, contestability and other market type reforms in human services, governments across the country are having to fundamentally rethink the way they regulate the human services sector. This is happening across most of the human services economy including in the areas of health, disability, housing, community, aged care and child and family services. Responding to these trends does not necessarily mean less regulation but it does mean smarter and more sophisticated regulation.

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Governments are increasingly having to do more with less, while continuing to deliver outcomes and protect society’s most vulnerable and disadvantaged.

Tightening budgets and an increasing demand for services provide a strong incentive for all governments to reconsider traditional models of service delivery. This has led to the adoption of market-based reforms in the provision of human services – for example in health, disability, aged care, housing, and child and family services. These approaches are redefining government’s relationship with service providers, individuals and the general community, including the way it regulates services.

In the case of human services, where services are provided to some of the most vulnerable and disadvantaged members of the community, there need to be clear frameworks for responding to market failures, ensuring quality services to individuals and providing stability and certainty for providers. However, the tools on which government has traditionally relied for regulating human services are no longer fit for purpose, and new ways of working are now required.

Sector and market reforms

The human services market continues to grow in size and importance. The demand for health, aged care and child care services in particular is expected to continue to fuel growth in the sector. At the same time, there will be increasing challenges on the supply side with providers competing for a skilled workforce to meet growth in demand.

The human services market has been undergoing major change as governments move out of direct service delivery and seek to manage and deliver services through greater use of managed markets and consumer directed approaches. The Competition Policy Review (the Harper report) has called for reforms in this area to go much further in order to drive much-needed productivity improvements across the sector. As a result, governments across the country are having to fundamentally rethink the way they regulate the human services sector.

Contestability

Like other government services, human services are now exposed to competition as Government seeks to drive greater efficiencies in the face of escalating demand for services. Contestability does not necessarily mean outsourcing of services but it does mean benchmarking publicly provided services against alternative modes of provision.

A number of jurisdictions are recommissioning human services including health, housing, and disability services and seeking interest from a range of providers in taking on services. The role of Government as a direct provider of services is progressively diminishing as it moves to more of a stewardship and purchasing role.

The potential for productivity gains from introducing greater competition and contestability is considerable with estimated gains of between 20 and 25 percent for Government services not previously exposed to competition.

Person-centred approaches and consumer choice

The introduction of person-centred care through the National Disability Insurance Scheme (NDIS) and consumer-directed care in aged care is driving a more market-based approach to human services. Unlike the market for many other goods and services, the market for human services is predominantly supported by government funding. Services where individuals receive the services free of charge, or where standard prices are set by government, do not provide price signals to individuals to distinguish between services based on an assessment of relative costs and value. Instead, services are usually funded via block or output funding models using contracts between government and service providers or in some cases, funded and provided directly by government itself. Where individuals are allocated directly to providers, this dulls the incentives for providers to respond to individuals’ needs and preferences. Person-centred care in the NDIS is about introducing an empowered consumer into the market; a consumer with direct purchasing power and the ability to exercise choice and control over the services they need.

While services are still reliant on government funding, the funds are being put in the hands of the consumer. This new funding approach being applied to people with complex needs and (in some limited cases) to homelessness services. This new approach will have profound implications for providers, who will no longer be able to rely on funding from the government and will instead have to compete for the purchasing dollar of increasingly informed consumers.

The markets for human services vary across different service types and, in some cases, are immature and evolving. For instance, the aged care and child care markets are fairly mature and well established and tend to be dominated by private and for-profit providers, with government playing a limited role. The disability services and social housing and homelessness services markets, on the other hand, are far less mature and have traditionally been associated with government and not-for-profit providers. Considering varying levels of market maturity will be critical in developing a new market-based approach to regulation in the sector.

Regulation in human services

In regulating human services, governments have focused on traditional approaches which involve licensing/registration of providers, strict monitoring and compliance regimes and extensive reporting requirements.

While these tools may have been effective in managing risks in the past, they have also encouraged a passivity among both providers and individuals which has stifled innovation and productivity.

Enabling innovation – key risk considerations

Government

  • What are the risks to government? Are the risks financial or nonfinancial? What data are there to support the assessment of risk?
  • What would happen if government didn’t intervene to address a particular problem or risk?
  • Is this an emerging risk, a one-off isolated event or an ongoing risk which will require a more systemic response?

Providers

  • How many providers will be affected by the government’s intervention and how will they be impacted? Are there particular providers that will be more affected than others?
  • Can industry bodies play a role in responding to the particular risks or problems?
  • Does the problem only relate to a relatively small number of providers? Is it an isolated or a more systemic problem?

Market

  • What is the current state of the market for the services being regulated? Is the market relatively mature or still evolving?
  • What impacts will government regulation/intervention have on the market? Will addressing risks create barriers to entry or reduce competition in the market?
  • Are the risks related to particular types of market failure, e.g.information asymmetry? What evidence is there to support the identification of risk and the impacts of market failure?

Individuals

  • How many individuals are likely to be impacted by the problem or risk? Are there data on the level of complaints or adverse incidents?
  • What can individuals do to help manage their own risks?
  • What information is available to individuals and the general community about the level of risk and how they can protect against that risk?

Using all the tools in the toolbox

Designing regulatory options – questions to consider

Government

  • Have all possible alternatives to regulation been considered to address the identified policy problem and the government’s policy objectives?
  • What are the roles of other existing regulators at the Commonwealth, State and Local Government levels in addressing the problem?
  • Have the costs and benefits of each of the regulatory options been considered to ensure the most cost-effective and efficient response is introduced?

Providers

  • Does the option impose the minimum necessary costs and administrative burden on regulated entities?
  • How can you incentivise good performance among providers? Can you differentiate between providers and recognise and reward providers with proven track records? What reward mechanisms could be considered?
  • Could self-regulation and co-regulation options be considered – are there established industry bodies that could play a role? Are there service and quality standards already in place?

Market

  • What is the size, scope and structure of the market being regulated? Does the market operate as a national market with wide coverage or is it state based?
  • How mature is the market and how sophisticated are the providers? Is the market concentrated around a small number of players or is there a diverse range of participants?
  • How competitive is the current market? Are there existing barriers to entry? How will the different alternatives impact on competition in the market?
  • Are the services provided similar across the market or do they vary considerably, making comparisons difficult for consumers?

Individuals

  • What research is available about what consumers are seeking in terms of protections from government?
  • Could the problem be addressed by requiring information disclosure to consumers?
  • Would public information or education campaigns assist with improving the quality and distribution of information among consumers and the general community?

The path to reform

The path to regulatory reform is not easy and requires achieving and sustaining a significant cultural change across the public sector. There must be strength and consistency of support at the highest political level and a will to challenge and overcome vested interests in maintaining the status quo. The speed of and pathway to reform will also differ across organisations depending on their specific cultural practices and their history of regulation making. For example, reforming human services regulation is a complex and challenging exercise given the accretion of regulation over decades and the traditionally risk-averse approach that has been adopted.

Five steps to take

Leadership/Governance

Strong leadership is vital in driving the cultural change needed to support regulatory reform.

  • A clear vision for reform and articulation of the expected benefits is required.
  • Senior decision makers must understand market dynamics and the impacts of regulation on competition in markets.
  • Political will is needed to avoid systemic regulatory responses to isolated adverse incidents.

Risk management

Risk management is at the core of regulatory reform and this needs to be supported by robust data systems.

  • Risks need to be well understood and clearly defined, including risks to health and safety and financial risks.
  • The government’s risk appetite should be tested and agreed.
  • There should be strong databased systems for managing and monitoring risks over time.

Planning and co-design

Regulatory reform plans should be developed collaboratively with industry, providers and individuals.

  • Regulatory reforms need to be planned and targeted to where they can deliver the most benefits.
  • Regulated entities should be involved approaches to encourage new ideas and more innovative thinking.
  • Empowering individuals to manage their own risks through information should be considered.

Capacity/Capabilities

New staff skills and capabilities are needed to help shift away from traditional ways of regulating.

  • Staff will need training and improved capabilities in designing more performance-based regulatory responses.
  • Improved capabilities in understanding markets and risk assessments are needed.
  • Highly skilled market regulators should be available for deployment across organisations.

Communication and engagement

Governments need to build the case for reform and get buy-in from stakeholders and the general public.

  • Communication and engagement strategy should be developed.
  • Clearly articulate the benefits of reform and the costs of doing nothing.
  • Inform and educate the public about the need for shared responsibilities in managing risks.
  • Share early successes with stakeholders.

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