Follow the Swedish Model and Keep the VON

Commentary, Frontier Centre, Healthcare

The more things change, the more they stay the same. So continues the saga of healthcare reform in Manitoba, particularly the Winnipeg Regional Health Authority’s decision to eliminate the Victorian Order of Nurses as an outside nursing contractor. The spectacle of large public organizations trying to become more efficient by centralizing and consolidating services and activities continues here, despite their longer term downsides of lower quality services and higher costs.

There is strong evidence that larger organizations spend more money on administration and experience rising costs as the need to be efficient in the face of competitive alternatives is eliminated. Famous local examples include Winnipeg Unicity, our largest public school division, and, of course, the Tories ill-fated centralized kitchen project. The Victorian Order of Nurses is an agency that has specialized in home care services for almost a century. Despite its impeccable reputation for high quality and efficiency, the Winnipeg Regional Health Authority has cancelled the non-profit agency’s contract and will absorb its workforce into its sprawling empire next spring. The WRHA claims it can save $750,000 by providing the service directly.

It’s not clear to the folks at the VON exactly how this economy will be achieved, for the WRHA has given them “limited information” on the details. The Authority can’t provide the nuts and bolts because it doesn’t have them. The Medicare system stopped gathering this sort of data years ago and has no system in place to measure costs versus benefits. When the Health Authority’s administrators look at the VON’s costs, it may seem economic to morph them into its existing infrastructure, but they don’t really know — which is normal, bad public policy.

A common feature of low performance delivery systems in government is their lack of transparency. Public agencies seldom define the unit of service being delivered. Even in the few instances where they do so adequately, they always underestimate their internal delivery costs by failing to allocate overheads, capital charges and other items that are automatically included in any outside supplier’s price. We can safely bet that the VON’s delivery costs are lower than the WRHA’s. Without transparent information and by using an “apples to apples” comparison, however, the agency probably does believe it is more “efficient.” The losers who pay for this fallacious “economies of scale,” we can do it cheaper in-house” restructuring are consumers and taxpayers.

There may be other reasons. Cynics, for example, will agree that expanding monopoly services in a framework where costs are opaque creates larger collective bargaining units that bring in higher revenues from union dues.

Home-care workers tend to more than 30,000 clients in Manitoba. For every dollar spent on home care, the government saves nine, because it costs much more to look after the sick in hospitals or nursing homes. About five percent of our province’s health spending is dedicated to home care. But the service has been deteriorating. Many clients have untrained workers arrive at their doors, or get a phone call telling them that no one is available and that they must fend for themselves. As a monopoly, the WRHA does not need to track levels of customer satisfaction, a feature oddly and frequently hailed as an administrative efficiency.

At some point, the ponderous one-provider juggernaut tends to roll back over the monopoly’s employees: skilled labour gets trapped in a system where it has no bargaining power and wages stagnate. Sweden is a case in point. The nurses’ union wanted out of their Soviet-style one-employer system, which, it was finally realized, had become a low-wage ghetto. In 1992, the City of Stockholm started to experiment with market-based alternatives. About 250 medical service professionals, mostly nurses, have left the public system and now work as private contractors. The nurses’ union is enthusiastically on board, even going so far as to help the new entrepreneurs set up shop.

Eva Fernvall, the chairwoman of Sweden’s 120,000-member National Union of Nurses states flatly: “Let the market take over health care!” An advocate of “health-care pluralism”, Fernvall tirelessly stumps for “a completely different, more independent organization than the present one . . . a better function of health care for the same or lower costs.” In light of the results, the nurses’ support for marketization is not surprising. Between 1995 and 1999, competition for their services has boosted pay packets by 26%, three times the level of raises they received in the previous five-year period.

Fernvall eloquently explains why the nurses failed to obtain adequate remuneration under the old monopoly: “Today, in many fields there are uncertain mechanisms for decision-making within sometimes conflicting hierarchies. … The system suffers from petty political interference. Operations need to be led by professional, non-political management.”

Although she’s not an economist, Fernvall understands the problem that has arisen as a result of the system’s combining and confusing the roles of purchaser and provider. “In societies of today the old [health-care] model no longer works,” she says. “Now there is a need for flexibility, entrepreneurship and new channels to let loose the complexity of demand and supply, held back since decades….”

Does higher pay for health workers threaten to bankrupt the system? Not at all. The Swedes have allowed competition in a range of services, with impressive results:

Service Delivered Competitively Performance Improvements
Nursing homes 20-30%
Ambulances 15%
Private doctors 10-15%
Hospitals 15-20%

Source: Frontier Centre for Public Policy

The last figure refers to the most sweeping move made so far by the Greater Council of Stockholm. In 1999, the Council sold one of the city’s largest hospitals, St. Göran’s, to a private company. In its first year of private management, it beat the cost performance of the most efficient public hospital in Stockholm by 15%, and the rest by 20%. Nor have the cost reductions been achieved at the price of quality, which is also improving throughout the system as private competitors force the public system to sharpen its performance.

Johan Hjertqvist, a Swedish healthcare consultant, estimates that, when the current round of marketization is complete, fully 40% of the country’s medical services will be offered in the marketplace, mostly in the more sophisticated larger cities. Hjertqvist believes that the Swedes’ long experience with the welfare state has soured them on the monopoly model. “People no longer accept being pushed back and forth or enduring delays in treatment for administrative reasons,” he says. “Service entrepreneurs have the tools to solve these severe problems. Consumers want a customer focus, no waiting lists and highly motivated care providers. This type of service is best delivered by small, independently operated enterprises, particularly employee-owned firms.”

In other words, organizations like the VON. The agency fears that, once it disappears and its staff is dispersed, it will be impossible to reconstruct at as high a level of service.

“In order to make an omelette,” a famous social reformer once observed, “you have to break a few eggs.” The WRHA, or rather our well-meaning “inside the box” politicians, should visit Sweden, which is going in the opposite direction, before it breaks up the VON.