We Should Privatise the NDIS (for its own sake)

There is a classic scene in the movie The Incredibles that perfectly illustrates the conundrum we are facing with the NDIS. Mr Incredible, while trying to assimilate into society by working for an insurance company is grilled by his boss for trying to help a customer make a claim. The boss shouts: “We're supposed to help *our* people! Starting with our stockholders… Tell me how you're keeping Insuricare in the black! Tell me how that's *possible* with you writing cheques to every Harry Hardluck and Sally Sobstory that gives you a phone call!”

The scene is a parody, but it illustrates an important point about human nature and the insurance business. It’s human nature to want to help people in a bad situation, to give them everything you can, especially when it’s someone else’s money. But any insurer that operated with unfettered generosity would need to charge exorbitant premiums that no customer would pay. Unless, of course, that customer had no choice because that customer was the Australian taxpayer.

The NDIS started with a good idea: what if disability support was delivered by the government, not as a typical service like public schooling or housing, but as an insurance scheme? The theory went that it would be more cost effective because an insurer is incentivised to offer holistic care and early interventions that reduce their long-term costs. Everyone would be covered, leading to a fairer and more equitable system for all.

At the time, the insurance ‘premium’ was estimated at $600 per Australian each year. The cost is now $1,150 per Australian and it is the single fastest growing expense in the federal budget.

Regular readers of my blog will probably surmise that I am no opponent of better care for disabled Australians, and that’s true. I believe a society should be judged by how it treats its most vulnerable. But the reality is, there is clear evidence of inefficiency and waste on a massive scale in the NDIS and it needs to be dealt with, for the sake of the system itself.

The problem can’t be put down to teething pains or a few unscrupulous operators either, the problem is baked into the very design of the NDIS itself. Namely, that the NDIS is an insurer by name but not by nature.

Consider a commercial car insurer. Their goal is to maximise profits by increasing their revenue and reducing their expenses. They increase their revenue primarily by offering the best service at a low price, thereby increasing their market share. They reduce their expenses by (1) reducing the number of claims paid out, (2) reducing the payout per claim and (3) reducing overheads. They might reduce the number of claims by trying to deny every claim (as depicted in The Incredibles) but this would come at the cost of reputation and ultimately market share. They might also do everything possible to help their customers avoid accidents (e.g. alerting them of severe weather). To reduce their payout per claim, they would leverage their purchasing power to secure very low prices with repairers, or perhaps choose to insource repair work. They might reduce their overheads through process improvement and automation.

Nobody can deny that these measures serve to provide a better service to the end user at a better price, but there are two linchpins without which none of this happens: competition and the profit incentive. Without competition, there is little incentive to cut prices or improve customer service beyond the bare minimum. Without profit, there is little incentive to cut costs or invest. The NDIS lacks these two linchpins of profit and competition, and the result is ever growing premiums.

Where is the incentive for the NDIS to negotiate low prices with service providers when they can just increase premiums knowing the government will foot the bill? Where is the incentive to limit support to only what is reasonable and necessary rather than providing the most funding possible to recipients? Where is the incentive to ensure the best possible customer experience, when they know their customers can’t go elsewhere?

All of these incentives can be artificially imposed through all manner of bureaucratic processes and procedures, but at the end of the day, as long as the scheme is uncapped, human generosity will trump any bureaucratically imposed attempts to curb spending.

What is the solution?

In short, the NDIS should be privatised. This could take many forms, but I can think of a few ways it might work. One is a contract, where tenderers are asked to bid on the total cost of delivering prescribed disability support to a large block of Australians.

Another is a voucher system, where instead of the government directly funding the insurance, they provide a voucher that can be spent on the insurer of choice. Customers could then choose what is important to them, and potentially pay more if they desire better coverage. A key challenge would be the fact you can’t buy an insurance policy after you already need it (as is the case for thousands of people currently on the NDIS). Any such system would need to focus on new parents choosing an insurer for their baby.

No doubt there are many other ways it might be achieved, but my concern is with the principle rather than the detail. The only way to keep the NDIS sustainable and continuously improving in its efficiency and customer service is to bake in competition and the profit incentive.

A word on profit. Australians seem to have a somewhat capricious attitude towards profit, take for example Coles and Bunnings. By and large, Australians love Bunnings. When you spend $100 at Bunnings, they take $12 as profit. Fair enough we say. Coles on the other hand are currently portrayed as the quintessential greedy “Big Business” and accused of price gauging. But they take less than $5 profit for every $100 spent. It seems Australians are willing to accept profits, except when the profit-maker is perceived (rightly or wrongly) as ripping off customers.

Those on the Left continuously peddle a narrative that profit is inherently bad, and corporate greed is the root of all societal ills. They claim that delivering services via the private sector is more expensive because of profit margins. The opposite is nearly always true. Assuming a reasonable profit margin of 10%, the private company needs to be only 10% more efficient than the public service to break even. Anything beyond that results in better value for money for the taxpayer. Believe me, it is not hard to be 10% more efficient than the public service, and the profit motive is the strongest possible driver towards efficiency.

To be sure, there are some government functions that should not be privatised. Enterprises that are by their nature monopolies and immune to competition are a good example (e.g. public utilities). Policy work is another. Billions of dollars’ worth of public sector work is outsourced to the big consulting firms, who usually have profit margins around 30%. It is hard to believe they are 30% more efficient than simply employing the consultants directly, and this practice has stripped crucial expertise from the public service. But that’s a topic for another blog post.

What should be abundantly clear is that insurance can and should be delivered by the private sector. When we get the incentives right, everybody wins. A NDIS driven towards efficiency, lower costs and higher quality of service is in the best interests of all Australians with disabilities.