HELPING THE LADY MADONNA
Copayments can improve Productivity Commission's recommendations on the early childhood education sector
A long time ago, I learnt as a graduate policy analyst in Treasury that if you couldn’t explain a policy using demand and supply curves, then either you didn’t understand the issue, or it was a bad policy. Applying that metric on the Productivity Commission’s draft report on childcare —which I am going to use synonymously with the formal acronym of ECEC, for Early Childhood Education and Care —leaves me somewhat nonplussed.
Let’s think the matter through from first principles.
Why is there a role for public policy in childcare? Well, we are dealing with children, who are vulnerable and therefore needs protection. Therefore, the childcare suppliers need to maintain a minimum quality. This would be one rationale for policy. Further, a sufficiently high-quality childcare service might have spillover benefits in the form of raising better citizens —that’s another possible reason for policy intervention. Availability of childcare can also boost labour supply (primarily of the mother, but not exclusively so) and thus economic growth—yet another policy rationale.
Okay, so governments have a role to play in ensuring the supply of sufficiently high-quality childcare services that are accessible to parents across the income, geographic, and sociocultural distribution.
Against that background, the Government asked the Commission to come up with policy options that will ‘support affordable, accessible, equitable and high-quality’ childcare.
The Commission in its draft report claims that: its inquiry put children at the centre of the policy —that is, it’s not about labour supply as such; and its recommendations intend to achieve universality —by which it means that any parent wishing to send their kid(s) to childcare should be able to access one.
Okay, so let’s think of these in terms of supply and demand. There is a demand curve for childcare, and a supply curve, and at the equilibrium price P0, some parents are priced out. If the supply curve could shift outwards so that price fell to P1, more parents could access childcare. So, the Commission makes a bunch of recommendations (see below) addressing the supply curve of quality childcare that are available across geographic and sociocultural dimensions —note that in this simple schema, the supply curve also captures the needs of children with special abilities.
Of course, even at P1, some parents will be priced out. However, the interpretation of this ‘pricing out’ matters for policy. It could be that the parents can afford childcare at that price, but they just don’t value it as much relative to other stuff they could spend their money on. Or, it could be that they are poor, and would like to send their kid(s) to childcare, but simply can’t afford to. Co-payment (that is, less than 100 percent subsidy) is one way to sort the parents in terms of their preference for childcare. Without co-payment (that is, if the subsidy is 100 percent), policymakers wouldn’t know whether the parents genuinely valued the childcare.
The importance of co-payment in designing mechanisms where a service is provided by the market with heavy interventions can be illustrated through two Australian examples, one that works well, the other less so.
The Pharmaceutical Benefits Scheme works really well, in part because it generally requires copayments. It turns out that, even in the area of medical care — literally a matter of life or death for many people at times — modest copayments reduce costs without affecting the health of the average person.* The PBS is designed to impose only modest copayments, with appropriately lower copayments for concession card holders, but large enough that one may think twice about asking their doctor whether they still need a medication from time to time. It puts the patient at the centre of health care and discourages waste in the system, which means the taxpayer's dollar can go a little bit further in adding new and expensive pharmaceuticals to the scheme a bit earlier than they could if more of the money were wasted.
Contrast this with the National Disability Insurance Scheme. The idea of providing appropriate care to people with a disability is hugely important, yet the execution has been poor. One of the reasons is that there are no copayments. If one is awarded a $50,000 NDIS package then one will likely spend it, albeit an absence of suppliers in some remote markets can make that difficult. But would the person with a disability and a $50,000 NDIS package prefer to pay a 5% copayment on their NDIS plan AND receive $2500 more in their Disability Support Pension? The answer is generally 'yes'. The scheme was poorly designed and without copayments the cost has grown beyond any reasonable expectation of the benefits to society that it would provide. The absence of copayments not only leads to higher prices, it also facilitates fraudulent charging for services not delivered by the minority of unscrupulous service providers. And because all those nickels are being spent on inefficent NDIS packages, the prospect of a future meaningful lift in the Disability Support Pension is fairly low.
One of the Commission’s recommendations is to have a 100 percent childcare subsidy (up from the current 90 percent) for families earning less than $80,000. I found this recommendation, and the underlying analysis, baffling because it didn’t explore the benefits of co-payment in the form of the current 90 percent subsidy. Nor did it consider an option of 90 percent subsidy plus additional rebate (or some other form of cash support) to families under $80,000 accessing childcare.
Perhaps a few stylised examples would illustrate why co-payments is important, even for the low income households.
Imagine a dual income couple working two or three days a week. Maybe they could co-ordinate with at least one of their bosses to schedule their work on different days so that they need less childcare. Maybe granny would really enjoy looking after the kids one day a fortnight. Maybe they have a second child and intend to stay home and care for both of them for the next six months but haven't yet gotten around to cancelling the first child's care arrangement. Maybe they have one of a minority of unscrupulous care provider that will continue to bill them at the taxpayer's expense because the only person that knows whether the children are turning up is the couple, and the providers aren't required to bill the couple!
Like the patient asking their doctor whether they still need a drug, and like the NDIS recipient who really would prefer more in their pension and less in their service package but can't do so, some low income households may prefer to reduce their use of child care a little, spend a little more time raising their own kids and maybe pocket a slightly lower tax burden when the Parliament next gets around to adjusting the tax free threshold.
It may not be intended this way, but it is possible to read an implicit assumption in the Commission’s report that low income couples are not capable of assessing these trade offs for themselves!
Going back to our simple supply-demand framework, would the recommendation of 100 percent subsidy for the families earning less than $80,000 affect the demand curve at the margin? If the demand curve were to shift out, would the equilibrium price of P2 not be higher than P1 (or indeed P0, depending on the demand and supplies elasticities)?
So, if the policy aim is to increase the childcare availability of all parents who wish to make use of the service, how do policies that shift the demand curve out help?
Now, the recommendation might make more sense if the primary aim of the were to help boost labour supply —particularly (but not exclusively so) the female labour supply. And that may well be a worthwhile policy objective. In addition to boosting economic growth (and thus tax revenue), raising female labour force participation can have important social policy implications. But this is not what Commission said was its focus.
It is a good idea to help out the Lady Madonna with children at her feet. However, stewardship of markets is both important and easy to get wrong. And in this case, the Commission could do better.
The Commission’s key recommendations
(I)n persistent ‘thin’ markets or communities with complex needs, the Australian Government should provide additional funding to support the establishment of appropriate services and, where necessary, ensure their ongoing viability through block funding. ECEC educators who are studying to become teachers should be offered accelerated pathways and greater flexibility to complete their qualifications while working.
Early childhood teachers who hold degree-level qualifications approved by the Australian Children’s Education & Care Quality Authority should be eligible for teacher registration in all states and territories.
The Australian Government should raise the maximum rate of the Child Care Subsidy (CCS) to 100% of the hourly rate cap for families on incomes up to $80,000 – about 30% of all families with young children.
The CCS activity test should be relaxed so that it is not a barrier for any family wishing to access up to 30 hours or three days a week of ECEC services.
Governments should remove impediments to the provision of flexible services, such as wrap-around care in dedicated preschools, and improve incentives for services to operate during non-standard hours. The Australian Government should fund supports for families experiencing significant barriers to access, such as lack of transport.
The operation of state and territory regulatory authorities should be independently reviewed, and where necessary, the Australian Government should fund an increase in resourcing to enable regulatory authorities to deliver timely quality assessments and support continuous quality improvement.
*One of the reasons we know this is that the RAND Corporation in the United States (fun fact: they are named that way because they do research and development) did an experiment in the 1970s and 1980s in which they gave out free health insurance but with randomly assigned copayment schedules. People facing modest copayments used a lot less health care, but their health was by and large about the same as those with no copayments.
Cutler D and Zeckhauser R, The Anatomy of Health Insurance, NBER WP 7176, 1999.
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Another problem with the proposed $80,000 threshold is that it adds to the problem of very high effective marginal tax rates for families around that level of income.