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Guest Editorial

Financial restraint, budget cuts and outsourcing: Impact of the new public management of health care in Victoria

Pauline Stanton
Senior Lecturer, School of Management, La Trobe University, VIC

Suzanne Young
Lecturer, Bowater School of Management and Marketing, Deakin University, VIC

Eileen Willis
Department of Palliative and Supportive Services, School of Medicine, Flinders University, Adelaide, SA

Article Text

The new public management: The case of Victoria
In hindsight it could now be argued that the in the late 1980s and early 1990s the nursing profession in Australia looked towards a challenging, but optimistic future. Mindful of the need to keep pace with new medical technologies as well as shifts in social attitudes and values, nurse leaders had successfully lobbied for career structures that reflected expertise and rewarded excellence, while the early and continuing education of nurses was gaining increased status through the transfer to the tertiary sector. Nursing offered a rich and exciting career for those committed to the service of others. This was especially so in the public hospital sector where directors of nursing were able to explore a range of models of care and nurse leaders were working collaboratively with the Commonwealth on realistic costing of nursing services into casemix (Challinger 1995).
What was not predicted at this time was the impact of the new political economy on these invigorating developments in nursing, particularly the view that the public sector was underperforming and that the solution lay in incorporating many of the competitive strategies of the 'market' into this sector. This belief led to a series of strategies broadly defined as the New Public Management (NPM) (Ferlie 1998). Ferlie (1998:17) lists six features of the New Public Management. These are (1) privatisation of public utilities; (2) the introduction of market like mechanisms into the public sector; (3) separating core (policy) from periphery (service delivery) tasks; (4) out-sourcing the service delivery, while maintaining government control over policy; (5) more active management such as performance management systems; and (6) labour market flexibility.
In this editorial we reflect on the success of these strategies taking as a case study the state of Victoria during the Kennett years (1992–1999) and clinical and support services other than nursing and medicine such as pathology, pharmacy, engineering, maintenance and gardening. We do this by firstly providing a brief overview of the reform process and then make comment on the ambivalent outcomes of the industrial relations strategy of enterprise bargaining (EB) and outsourcing. Here we argue that EB has had little impact on changes to workplace practices or on increases in productivity and efficiency. Instead we argue that it the policies of financial restraint and outsourcing as well as the introduction of casemix funding that had the most effect on work practice reform. Secondly, we provide two case studies; one from a rural hospital, the other from a large tertiary hospital network. We argue that in a number of cases services were outsourced and budget savings were realised. However we also illustrate that the decision to outsource services was sometimes contingent on factors other than market forces. This was especially so for clinical services such as pathology, pharmacy and radiology. In the final section we ask in what way have the changes to the organisation of work of allied health professionals and the various health service occupations impacted on the work of nurses in public hospitals? This is a timely question as we move into the 21st century and the signing of a new Australian Health Care Agreement in the coming months.

Health sector reform in the Kennett years (1992–1999)
The Kennett government came to power in 1992 with a set of neoliberal policies including a commitment to small government through outsourcing and privatisation, the introduction of private sector managerial practices through the development of performance reviews, audits, and contractual relationships and a 'steering not rowing' approach to service delivery (Alford and O' Neil 1994). Fears of rising costs in the public hospital sector made it a target for reform. By 1992 a number of reports had suggested that Victorian hospitals were inefficient compared to their interstate counterparts (Lin and Duckett 1997). Victorian public hospitals had always been largely independent bodies run by semi autonomous boards of management. These boards of management had substantial autonomy from government, and board members although appointed by government, often saw themselves as accountable to the community.
The government moved quickly to implement its health reform agenda, including stringent budget cuts and the availability of voluntary departure packages, and the encouragement of outsourcing. At the same time Victoria became the first Australian state to introduce Casemix funding in 1993. According to unpublished data from the Australian Bureau of Statistics 12,000 jobs disappeared from the health and community services sector between February 1992 and February 1994 although some of these jobs might have been contracted out rather than 'lost' (Stanton 2002).
In 1995 the state government introduced another arms length management initiative with the establishment of Metropolitan Networks, which contained a number of previously independent hospitals within their jurisdiction. Individual boards of management were abolished and the networks were governed by Boards that were small, accountable, informed on health issues and commercially oriented (MHPB 1995:iv). The directors of the Boards were professional, paid and appointed by the Minister with a greater commercial focus and business orientation (MHPB 1995:57).

Enterprise bargaining and the Kennett government 1995–1999
The Kennett government was also committed to industrial reform, including the decentralisation of industrial relations through enterprise bargaining (EB), and controlling the power of trade unions. Up until 1992, industrially, public health employment was centralised. Although hospital staff were not government employees they were largely employed on state awards under the jurisdiction of the Victorian Industrial Relations Commission (VIRC). The VIRC was modelled on its federal counterpart and incorporated conciliation and arbitration principles. Industrial processes were largely conducted centrally with direct state government involvement. The health trade unions because of their links with the Australian Labor Party were seen as powerful and able to negotiate generous wages and conditions.
The government's support for EB as opposed to centralised wage fixation led to a growth in the number of EB agreements. However, in practice evidence shows that wage bargaining remained centralised and provided few productivity trade offs (Stanton 2002). This was due to a number of factors; firstly, the role of government as funder and therefore effective employer in the public health sector meant that hospitals had no separate revenue stream to fund wage increases. The larger public hospital employers did attempt to bargain individually in the 1997 bargaining round. However, the government clearly held the purse strings and despite expressed commitments to autonomy in industrial relations, in practice such autonomy was strictly controlled. If a potential local agreement had cost implications for the government the hospital was told that such an agreement would not be funded. Secondly, the role and strength of the unions, particularly the professional unions meant that a reluctant government was forced to the bargaining table and thirdly, the political nature of the health care industry meant that long term disputes in this sector were always a danger for the government; the nursing profession being a case in point.

Privatisation of public utilities: Outsourcing during the Kennett years
The adoption of outsourcing, or contracting-out, as a method of organising labour has been used extensively across various industries in Australia and overseas. Despite this, it has been relatively recent phenomena in the public sector in Australia, emerging in the 1980s and increasingly employed in the 1990s. Notwithstanding this development, research into the public sector has been sparse, and that which has occurred has been broadly focused on the emerging New-Right political agenda with its platform of public sector privatisation. The primary stated aim of the Government in this privatisation process has been to increase efficiency and decrease costs by integrating private sector practices into the public sphere, and one method of implementing this has been through the use of outsourcing (Ferlie 1998).
In 1996 the State Victorian Government Policy (1996: 21), detailing the implementation of National Competition Policy, stated that the Federal Government's competitive neutrality policy was to be implemented in the Victorian Department of Human Services. It specifically stated that significant business activities undertaken within public hospitals, such as the non-clinical services of car parking, computing, laundry, engineering, cleaning and catering; and clinical services, such as medical imaging, pathology, pharmacy, allied health services and general practitioner services, were to be subject to Model 2 competitive neutrality policies. The process included benchmarking against private sector practices, and as a consequence outsourcing the services. The outcome of this policy for two hospitals; one rural and one part of a large urban network is outlined. In each case the decision to outsource was not axiomatic.

Case study one: Rural public hospital
The town in which this hospital is located covers 120 square kilometers and is the largest in the region. In 1996 the town's population was 26,776 with a median age of 32 years. The region that this healthcare campus now serves comprises the city and two shires and has a population of 59,606, with an area of 10,334 square kilometers (ABS 1996). Within this area there are three additional smaller regional hospitals which act as feeders to this hospital.
The hospital is regarded as the key provider of healthcare in the region, providing nursing, medical, psychiatric, allied health and health promotion services to inpatients, outpatients, domiciliary care clients and the general community. In addition, support services are provided for other hospitals and health-related organisations in its sub-region. These include centralised purchasing, linen provision and information technology. The hospital is one of the major employers of labour in the region, with 543 effective full-time staff. In 1999 it treated approximately 13,000 acute inpatients, 73,000 outpatients and served 250,000 meals. Turnover amounted to $45 million with total assets of $55m.
Within this hospital a variety of decisions were made to either outsource functions or retain services in-house. Services considered for outsourcing included radiology, pathology, dental technician, lawn mowing, security, engineering and maintenance, and food services. All decisions to outsource were implemented within an environment of decreased funding, hospital amalgamations and the introduction of the National Competition Policy. As such, then, political factors were important in setting the context in which each decision was made. The fiscal environment produced pressure on the hospital's ability to provide funding for capital replacement, whilst the characteristics of the rural labour market produced added pressure on the hospital's ability to obtain professional staff.
The impetus for the pathology decision was the change to government funding rendering it profitable for the private sector to move into the public provision of pathology. This occurred alongside a difficult industrial relations environment where a strong medical scientist union was attempting to push up wage rates whilst resisting demands for increases in work flexibility. The result of outsourcing this service was a saving in recurrent costs of $200,000 to $300,000 per annum. The outsourcing of radiology was due to the problematical relationship between management and staff, causing reduced patient numbers and conflicts of interest between public and private patient needs. The outsourcing led to improved relationships and increased staff morale, and produced economic benefits through increased patient numbers and the private injection of over $3 million to upgrade capital equipment.
The reasons for investigating the outsourcing of non-clinical services related to the desire to adhere to the ideology of the Government. The outsourcing of dental technician services was due to the desire to increase workforce flexibility and focus on core competencies, while the outsourcing of lawn mowing was based on the desire to reduce costs. Similar cost and efficiency reasons were paramount in outsourcing security services, where specialist services were engaged in an area where the hospital had no previous experience. However the hospital management retained operational control through a management appointment in order to ensure that nursing staff's concerns in regard to safety were met.
Hospital management rejected the complete outsourcing of food services as well as engineering and maintenance, whilst reducing costs through downsizing and changes to workforce flexibility and accountability, rosters, structures and technology. Engineering and maintenance services also used a mix of internal and external tradespersons depending on the nature of the task. This was judged as a successful arrangement due to the need for specialised staff, the difficulty in attracting them to rural areas and the special requirements of a hospital in relation to quality and response times. Food services were kept in-house due to management's desire to repay the loyalty of staff who had been subjected to downsizing and had made substantial changes to work practices. In addition, the rural nature of the hospital was an impetus in retaining in-house staff as management did not wish the public who cared deeply for their local hospital, to see local staff replaced by those from outside the rural area. However in food services the downsizing resulted in staff numbers falling from a high of 72 in 1989 to 35 in 2000. Between 1992 and 1997 engineering and maintenance staff numbers also fell from 25 to 11, although by 2000 they had increased to 15 due to the realisation that some tasks were better handled by internal staff.
No further outsourcing was considered as there was a belief that there would be no savings to be made alongside concerns about quality. The Chief Executive Officer stated that, 'in a number of areas staff provide a value added service by working late and attending meetings, all adding more than the savings would amount to'.

City public health network
Initially the network consisted of four metropolitan hospitals but in November 1997, a larger conglomeration was formed of ten hospitals and health services. In 2000 the hospital network was reduced to one hospital plus five programs and services. Between 1996 and 2000 the Network had four Chief Executive Officers reflecting the difficulties of constant mergers. This health network serves a population of nearly one million people predominantly living in two areas of the metropolitan city, as well as offering a range of specialist services for the whole state. The network operates 1200 beds, is the second largest in the state, and manages six health care programs and services. Within the network, the major hospital is the State's leading tertiary teaching hospital, with activities extending to training and research. In the year 2000/01 the network serviced approximately 67,000 acute inpatients and 232,000 acute outpatients. It's mental health area serviced approximately 4500 inpatients and 380 outpatients.
Since the early 1990s, this hospital network, under the umbrella of National Competition Policy, embarked on a review of services in the infrastructure division, pathology and pharmacy. This review was conducted in an environment in which turbulent network amalgamations and restructures had been experienced, operating losses were common and benchmarking exercises numerous. Continual leadership instability led staff to comment that there was a lack of accountability, a lack of consultation, a lack of vision and too great a focus on fiscal matters.
The result of the review process was that car parking, gardens and grounds and supply management were outsourced to external contractors. Internal teams won the contracts for food services and engineering, whilst pharmacy and pathology continued operating within the internal hierarchical structure. In outsourcing car parking to a private contractor the network aimed to reduce costs and increase efficiency, through introducing expertise in systems, technology and management. The outsourcing of gardens and grounds was due to its peripheral nature. However, it was unsuccessful due to problems with quality and excessive monitoring. As a consequence the contract was subsequently awarded to a person who had previously been an employee in the hospital but had transferred to the private contractor.
Supply management was outsourced to a multi-national contract organisation that specialised in logistics in order to increase efficiency through changes to management and work processes. The contractor was responsible for downsizing the department from 65 to 35 operational staff plus 4 managers and the process resulted in savings of $3m. However when the contract comes up for renewal the network plans to bring the service back in-house as the desired changes to work practices and updating of management skills has been met. The contract for the provision of food services was awarded to the internal team based on increasing efficiency through downsizing, changes to work practices and new technology. The bid was successful due to the previous changes the in-house team made in reducing staff numbers from 320 to 160 upon aggregation into the network structure. Savings have amounted to $5.5m per annum. Similarly, the contract for engineering services was awarded to the internal team with the aim of increasing efficiency, decreasing costs and promoting workforce flexibility. Management believed the internal team had the capabilities to downsize, using contractors for specialist tasks, whilst the use of internal staff provided for the retention of corporate knowledge. The result was that staff numbers were reduced from 160 in 1995 to 35 in 2000, with over thirty specialist services contracted out and savings of over $3m. With regard to cleaning services, changes were made to work practices, and downsizing and numerical flexibility was achieved without market testing.
In contrast, pharmacy services were retained internally after market testing due to lack of provable benefits in efficiency and the heightened risk factors associated with private sector involvement. The patient contact, teaching and research components utilised specialist knowledge, and reflected the core nature of these services, which management felt was not available to the same extent in the private market. Pathology was not outsourced due to the high costs of each of the bids and the realisation that costs could not be reduced with outsourcing.
Even though increased efficiency and reduced costs were the stated rationale for testing all services, management believed this was only achievable in the non-clinical services. The effect on staff morale throughout these processes was mentioned frequently and staff took the approach of 'bunkering down' knowing that change was continually being thrust upon them.

Discussion
In this editorial we have argued that the greatest impact on employment relations and productivity in the health sector was not industrial reform but the policies of financial restraint, including budget cuts, the introduction of casemix funding and outsourcing. Under the Kennett government productivity in the public health sector did increase however, the government's focus on cost reduction strategies was accompanied by a lack of recognition of the effect of such policies on employees and increasing problems of work intensification, labour shortages, and the consequent impact on staff commitment and moral (Considine and Buchanan 1999; Stanton, 2002;Weekes, et al. 2001).
There is evidence that hospital managers did recognise these issues in relation to outsourcing. While it is generally agreed that outsourcing has advantages in allowing organisations to reduce costs (Hodge 1996; Cubbin, Domberger & Meadowcroft 1987; Domberger & Rimmer 1994; Young 2000), introduce labour market flexibility (see, for example; Rimmer 1993; Industry Commission 1995), and focus on core competencies (Rimmer 1993), in the case studies above hospital management engaged in pragmatic decision making in deciding what services were outsourced and those that were kept in house. These decisions were not based solely on economic consideration; but included issues of rural loyalty, viability, and broader goals of education, research and quality assurance. Consistent with international evidence, managers were aware that merely transferring ownership from the public to the private sector achieves limited results, and may even be counterproductive (Ernst 1997: 14 as cited in CDIH & HIC 2001).
What has not been explored here is the impact of these decisions to outsource clinical and non-clinical services on the work of nurses. Anecdotal evidence suggests that nurses have had much to say about the outsourcing of cleaning and laundry services. Changes in work practices in these areas are experienced directly by nurses especially if linen services run out or maintenance staff cannot be called up to attend to problems. We know however, that government policies in general impacted on nurses. In Victoria a report commissioned by the Australian Nursing Federation (Considine and Buchanan 1999) found increases in nursing workloads due to staffing shortages and an increase in nurses leaving the industry, no longer prepared to put up with the worsening working conditions leading to further staffing shortages.
Considine and Buchanan (1999) argue that nurses were available but increasingly did not wish to work in the public health sector because of the intensification of the workload and the increased responsibilities with fewer resources. The impact of outsourcing clinical services such as radiology and pharmacy must also have impacted on nursing work but there has been little research in this area. The reality would have been another story. These processes did not occur in isolation to the industrial and work-place struggles experienced by nurses in Victoria.
Other professional groups also experienced the impact of workplace change in these years. In Victoria, Weekes, Peterson et al. (2000) researching medical scientists found that working conditions had undergone dramatic changes over the past decade due to a range of factors of which enterprise bargaining is just one. The others being technological changes, rationalisation, budget cuts, privatisation and the introduction of casemix funding in public hospitals. The authors found increasing work intensification in the industry leading to workers complaining of greater stress levels and ill health. The working lives of hospital staff were also changed in other ways.
In some hospitals changing management structures and practices limited career paths and career opportunities for professionals (Ferguson 1998). Although in others opportunities were created as experienced staff left and new younger and more junior staff took their place. Hospitals faced with increasing budgetary problems often cut back first on training and development with little thought to the long term implications of that course of action as long term workforce planning is not often a role of an individual organization (Stanton 2002).
The public health sector turned out to be the Achilles heel of the Kennett government and played a major role in its electoral defeat in 1999. The Bracks Labour government returned to a more centralized model of health service management putting more money and resources into the sector in particular into its nurse recruitment strategy including a nurse patient ratio policy. However as we have attempted to illustrate in this editorial nursing is not the only professional group to have experienced the full impact of the new public management; other health professional and occupational groups have also experienced workplace change and reduced numbers. What we do suggest is that the impact of these changes on the work of these professionals would also have reverberated on nursing.

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