Bust the myths before killing off the welfare profiteers

This article was first published in Dagens Næringsliv

The incoming Arbeiderpartiet and Senterpartiet government is strongly critical of commercial welfare providers. Before the authorities clamp down, Jonas Gahr Støre should recognise that the criticism is based on three myths.

The so-called welfare profiteers have faced strong accusations of "transferring money from the community into private pockets". PA Consulting has looked more closely at the figures from Statistics Norway, The Storting's own reports and its own experiences from the industry. Our findings challenge three of the key myths about private welfare providers.

Myth 1: They make too much money

After examining the profitability of the welfare sector, PA Consulting has come to the same conclusion as those of the government's report NOU 2020: 13 Private providers in the welfare state. By looking at the annual results of the largest players in the industry, we can see that these companies achieve a margin of 2 to 3 percent, based on reported accounts. Compared with other industries and sectors with similar amounts of capital tied up, this is not far from the norm.

In addition, it is difficult to distinguish exactly what proportion of the cash flows for the various providers come specifically from public funds or private individuals. This makes it hard  to argue that this is an industry making a high level of profit at the expense of the public sector.

"The average operating margin for the various sectors is comparable to or somewhat lower than in the business sector in general." This was the conclusion of a thorough report from a government-appointed committee on the development of welfare providers in the period between 2018 and 2020. The finding is as expected. There should be a somewhat lower margin in this sector, as there is lower risk and less capital tied up than in other industries.

Some players still deliver higher margins than the industry norm. Important reasons for this may be that private providers are more selective in the choice of services, real estate and purchasing, which contributes to more efficient operations, making it easier to secure higher margins.

Myth 2: Employees have lower wages and worse working conditions

Private health care providers are often faced with claims they are making a profit at the expense of employees' conditions and poorer quality for users. In an industry where  personnel costs make up 70-80% of the total, it is natural to assume that there will be a sharp reduction in employee terms and conditions. But it turns out from NHO's member companies that private nursing homes actually pay higher wages than the state until staff have been in post for 10 years.

In addition, there is no clear evidence that pension conditions are worse in the private sector. Making profits at the expense of employees could also potentially affect the quality provided by private providers, but the same survey published by NHO Service shows that "privately run nursing homes score 12% better on nursing quality than municipal nursing homes".

Myth 3: The private sector does the same as the public sector

Private health providers are accused of not adding anything new or not driving innovation. Our analysis shows that this is exactly what they do. As wages and working conditions are relatively equal among private and public players, private operators are forced to think in new ways. The private players are incentivised to drive innovation to a greater extent, develop new skills and look at alternative forms of operation.

The private players identify areas with potential for improvement in the industry that they can then develop. The public sector can see and learn from this, and so use the private sector for its own benefit, without having to bear either the risk or the cost of developing these new methods or expertise.

In summary, the available knowledge shows that private welfare providers are not as profitable as the picture painted by many activists on the left. Their margins are no better than in other industries, the quality of the services and employees’ conditions are at least as good. Not least, private actors also make a contribution through developing new solutions and innovation.