Negotiating the Network: The Contracting Experiences of Community Mental Health Agencies in New Zealand

NEGOTIATING THE NETWORK: THE CONTRACTINGEXPERIENCES OF COMMUNITYMENTALHEALTH

AGENCIES IN NEWZEALAND

Susan Newberry and Pauline Barnett*

INTRODUCTION

Accounting has an important role to play in developing systems to supportreformed public sector organisations. It is important, therefore, foraccountants to be aware of the various theoretical frameworks underlyingthese reforms and understand the ways in which alternative arrangementscan have implications for their work, including themonitoring and assessmentof performance, particularly those aspects related to efficiency and costcontainment. This paper aims to contribute to this understanding byconsidering the implications of policy decisions to adopt quasi-marketarrangements for community mental health services in New Zealand. Hoodnoted that new institutional economics (NIE) andmanagerialism are the twin`streams' of ideas underpinning much of the public sector reforminternationally (Hood, 1991) and that New Zealand implemented both`streams' with ùnusual coherence' (Hood, 1991, p. 6), although with varyingdegrees of approval (Osborne and Gaebler, 1992; Broadbent and Guthrie,1992; Kelsey, 1993; and Easton, 1997).

NIE theories, which include public choice theory, transaction costeconomics and agency theory, and managerialism all rely on similarunderlying assumptions: that people are boundedly rational andopportunistic. `Boundedness' reflects imperfect information and levels ofuncertainty, while `rationality' is narrowly defined as individuals' pursuit oftheir own interests. A `strong' form of the opportunism assumptionincorporates levels of `lying and cheating' necessary to achieve desired ends(Williamson, 1996; and Boston et al., 1996, p. 22). A public choice theory(PCT) interpretation of these assumptions is that in general people will try toincrease their power. In the public sector this may involve, for example, publicservants, whether politicians or bureaucrats, seeking to increase the size oftheir departments and budgets (Niskanen, 1971). This interpretationcontrasts with earlier conceptualisations of public servants as putting the

Financial Accountability&Management, 17(2), May 2001, 0267-4424

ßBlackwell Publishers Ltd. 2001, 108 Cowley Road, Oxford OX4 1JF, UKand 350Main Street, Malden, MA 02148, USA. 133

* The authors are respectively from the Department of Accountancy, Finance and InformationSystems, University of Canterbury, New Zealand; and the Department of Public Health andGeneralPractice, Christchurch School of Medicine, University of Otago, New Zealand.

Address for correspondence: Susan Newberry, Department of Accountancy, Finance andInformation Systems, University of Canterbury, Private Bag 4800, Christchurch, New Zealand.e-mail: [email protected]

public interest above their own. Public choice theorists suggest that publicservants' self-seeking behaviour may be curtailed by limiting opportunities,for example, by reducing the size of government and privatising governmentfunctions (McLean, 1986).

Transaction cost economics (TCE) helps identify the ideal institutionalstructure for coordinating particular transactions, the best structure beingone that minimises transaction costs. Possible structures include: markets inwhich coordination occurs through the price mechanism; hierarchies in whichall activities are brought within the organisation and coordinated throughlines of authority; and hybrid forms, including quasi-markets, and networks.Once an appropriate institutional structure is identified, agency theoryaddresses relationships within this. Conceptualising each relationship as acontract between two parties, agency theory regards one party as theprincipal who engages the other party, the agent, to perform according to thecontractual terms which govern the relationship. Given the PCT preferencefor privatisation, theoretically driven public sector reforms imply changedinstitutional arrangements, with the selection of these arrangements and thecontractual mechanisms used to govern bilateral relations critical to thesuccess of the reformed structure.

This paper aims to assess the implications of a particular choice ofinstitutional and agency arrangements (the quasi-market and competitivecontracting) on a sector (community mental health) in which services areacknowledged to be complex and difficult to specify. It reviews varioustheoretical choices of institutional structures, and then elaborates briefly onpublic sector, health and community mental health restructuring in NewZealand. It then reports on research to determine the impact of contractingon community mental health agencies in New Zealand. Finally, theoreticaland practical implications of these findings are discussed.

INSTITUTIONAL STRUCTURES AND CONTRACTS

TCE recognises three broad institutional structures for coordinatingactivities: hierarchies and markets, representing polar extremes, with hybridstructures in between (Williamson, 1975 and 1996). The actual choice ofinstitutional arrangements will reflect the interplay between the humanfactors implicit in the assumptions underlying bounded rationality andopportunism, and environmental factors such as the number of potentialmarket participants and levels of uncertainty, as well as transaction-specificfactors such as service complexity, transaction-specific assets, and thefrequency with which the transaction is expected to occur.

A hierarchy is a single entity which comprises subordinate units under thecentral direction of a decision-making elite, using authority to coordinateactivities. Within the hierarchy, contract arrangements may be rudimentary,

134 NEWBERRYAND BARNETT

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but expectations of long-term relationships are thought conducive tocooperation. The decision-making elite's ability to determine direction andcoordinate activities is crucial to a hierarchy's success. Direction-settingability is dependent on sufficient information but, as environmentalconditions change, such information may be unavailable (Sabel, 1993).

A competitive market comprises numerous principals and agents whochoose, based largely on price, whether to enter contractual relationships.These relationships are guaranteed only until contracts expire and so arecharacterised by `short-termism'. Agents typically seek competitiveadvantage through secrecy about key information or techniques, and resistinvestment in non-redeployable assets. Competition, together with theprincipal's ability to specify contractual requirements clearly and ensurereceipt of the specified goods or services, ensures the effectiveness of acompetitive market.

Hybrid structures include quasi-markets and networks. A quasi-market in areformed public sector would consist of one principal but many agentscompeting with each other. As with a market, a quasi-market implies shortterm contractual relationships and clearly specified contractual requirements.Price remains the coordinating mechanism, but power would also featurebecause of quasi-market characteristics. A network comprises numerousapparently independent parties, sometimes characterised by mutuality andnegotiation between equal partners and sometimes brought together underthe coordinating authority of a lead agency (superintendent) viewed as adecision-making elite. Closer to a hierarchy, the network implies continuingrelationships between network members but these relationships are notguaranteed (Sobrero and Schrader, 1998). Authority is the coordinatingmechanism, but price also features to encourage market-style flexibility andcontestability (Sabel, 1993; and Williamson, 1985 and 1996). As with ahierarchy, the decision-making elite requires information for it to functioneffectively, with some of that information coming from other networkmembers. Service/product complexity, particularly, requires knowledgesharing (Hanf and O`Toole, 1992). There are differing views on whether therelationship that develops between networkmembers themselves and with thedecision-making elite needs to be based on trust. One view, which argues thatit would be na|« ve to trust, comes from within TCE. The other view, that trustis essential, comes from outside the TCE framework.

Clearly, within TCE the underlying assumptions of bounded rationalityand opportunism mean that contracting parties should not trust each other.Williamson (1996, p. 56) argues that with `contracting man' the strong formof opportunism, lying and cheating, should be assumed. According to thisTCE view, a combination of contractual requirements and `functionalsubstitutes' for trust are sufficient for effective operation of the network.Examples of functional substitutes might be arrangements that would imposesevere costs on a party that fails to meet requirements, reciprocal

COMMUNITYMENTALHEALTH AGENCIES IN NEWZEALAND 135


arrangements and `taking hostages' by requiring major committed up-frontinvestments (Williamson, 1996). Given the heavy reliance on authority,combined with the nature of the functional substitutes, this type of network isregarded in this paper as a coercive network.

In contrast to this TCE view, organisation theory views authority and priceas essential coordination mechanisms of a network, but recognises a thirdcoordination mechanism, trust, as essential if network participants arewillingly to share their knowledge (Powell and Smith-Doerr, 1994; and Flynnet al., 1996). Trust consists of three identified components: integrity;competence; and beneficence, or the extent to which one party is likely to dogood to, or for, the other (Mayer et al., 1995; and Sako, 1998). Thesecomponents are based on one party's perceptions of the other. Given thetrusting nature of the relationships according to this view, this type of networkis regarded in this paper as a beneficent network.

Historically public sector services have been provided via hierarchicalstructures, although in the last two decades there has been widespread interestin the use of markets or, especially in the case of health and social services,quasi-markets. There have been few studies specifically of community mentalhealth services and alternative institutional structures (Hadley and Clough,1996; and Flynn et al., 1996), but experience is mixed, as are findings relatedto other health and social services (Robinson and Le Grand, 1994; Cutler andWayne, 1994; Smith, 1996; Lunt et al., 1996; andMannion and Smith, 1997).Indications from the US suggest that managed care organisations canapproximate network arrangements, with health maintenance organisationsacting as network superintendents, either coercive or beneficent. Flynn et al.(1996) conclude that community health services exhibit many of thecharacteristics essential for the development of effective networks (e.g.complexity, interdependence, cooperation), but that attempts to develop aquasi-market are ineffective because the essential features of a quasi-market,such as clear specifications, short-termism and secrecy, are inappropriate forthe services concerned (p. 147).

PUBLIC SECTORANDHEALTHREFORM INNEWZEALAND

New Zealand's public sector reforms began with the election of a Labourgovernment in 1984. These reforms have been extensively documented (see, forexample Scott et al., 1990; Duncan and Bollard, 1992; and Boston et al., 1996)with New Zealand an èxtreme and rapid mover' (Ferlie et al., 1996, p. 16) inimplementing both NIE and managerialist ideas. Health sector restructuringoccurred in two main phases. The first, under the Labour government (1984^90) applied agency theory via financial reform, managerialist practices andperformance-based contracts. Later, the National government (1990^96), usingrhetoric which encompassed privatisation, competition and commercial



discipline announced a `quasi-market` for health (Upton, 1991; and NationalInterim Provider Board, 1992).

The new arrangements comprised four state-owned regional healthauthorities (RHAs), each with a government-appointed board (Boston et al.,1996, p. 174), to purchase all publicly-funded health services for their regions.Funding agreements (contracts) between the Minister of Health and theRHAs broadly specified the range of health services to be purchased, and thecriteria for access to those services. Services were purchased from a mix ofproviders, both public and private.

The implementation of health sector reform stimulated extensive political,academic and popular comment which focused on the appropriateness orotherwise of both the quasi-market structure and the contracting processes(Easton, 1997; and Ashton, 1998). Critics noted the potential difficulties of amarket structured unrealistically, a single purchaser and fixed total funding(Howden-Chapman and Ashton, 1994). Limited empirical evidence suggeststhat the services least amenable to quasi-market arrangements are those inwhich specification is difficult and linkages important (Malcolm, Barnettand Nuthall, 1996; and Ashton, 1998), a categorisation which includescommunity mental health services (Wolfe, 1986).

CommunityMental Health Services

Over the last three decades the provision of mental health services in NewZealand, as in most western countries, has changed. Care, even for those withserious mental illness, is now commonly provided in the community, andincludes intensive treatment, rehabilitation, and support services (Kemp,1994; Joseph and Kearns, 1996; and Wilson, 1997). Appropriately managedand funded, community services are widely viewed as effective and preferableto hospital-based services. Although clinical and technological advances inpsychiatric care enabled these changes, they occurred at a time whengovernments sought to reduce expenditure on social services, includinghealth.

In New Zealand in 1991, when the health sector reforms were announced, anumber of charitable and private organisations already provided community-based psychiatric care (Ernst and Young, 1996), and were available to enterthe quasi-market contracting environment. With the reforms heavily focusedon cost containment, and the long-standing view of mental health as a `servicewhich can cope on minimal funding' (Mason, 1996, p. 170) indications werethat these reformsmight not be easy. Typically the community-based agencieshad prior relationships with, and obtained funds from, a variety of sourcesincluding government departments, public hospitals, local authorities andcharitable trusts. The reforms, however, redirected to the RHAs the fundingpreviously available from other government sources, and thus strengthenedthe RHAs' monopsony power.



The government's funding agreements with the four RHAs (designatedhere RHA1-RHA4) broadly specified services, monitoring and reportingrequirements (see, for example Ministry of Health, 1995). Each RHA,however, negotiated its own specific interests with the Minister of Health.Consequently, each funding agreement had a different emphasis, such as afocus on contestability and risk management (RHA4) or on the technicalaspects of contracting (RHA2). In the case of mental health services,designated a national priority, only RHA3 presented a strategic view of itsintentions for mental health services, while RHA1 was concerned about the`political risks' of deinstitutionalisation (Ministry of Health, 1995).

RESEARCH SCOPE ANDAGENCY PROFILE

This research reports on a survey in MarchÂpril 1997 of 23 respondentsrepresenting 28 out of a possible 34 service sites or agencies identified asproviding rehabilitation or combined residential and rehabilitationprogrammes. These agencies, spread throughout the country, were approachedand telephone interviews took place with agency heads or a senior staff personinvolved in contracting. Telephone interviews have been demonstrated to bean effective, inexpensive and convenient means of interviewing a geographicallydispersed sample of elite respondents, such as senior managers, who might needto reschedule interviews, on topics which, while possibly contentious, are notsensitive in personal terms (Barnett and Malcolm, 1997). Interviews were semi-structured and covered: agency background and scope; the contracting processand relationships with purchasers; contract provisions including price, serviceobligations, and reporting; and implications for the agency. The questions weredesigned to assess the impact of the reforms on the agencies and their perceptionsof the developing relationship with their RHA. Interviews lasted between 30minutes and one hour, and were taped and transcribed. NU*DIST softwarewas used for analysis because of its capacity to manage data and cross-referencelinked themes and text. Results are reported in aggregate terms so thatindividuals and agencies could not be identified. Not all agencies responded toall questions.

The 28 agencies were spread across all four purchasing authorities:RHA1(8 services), RHA2 (7), RHA3 (8), RHA4 (5). Agencies varied in size,ranging from very small sites caring for a few people tomultiple sites caring forseveral hundred. Services ranged from independent living arrangements tohighly supported environments, usually targeted to, and providingcomprehensive services for, particular disability levels. Typically agenciesreported growing numbers of clients and increased diversity of services. Thisdiversity was reflected in new service approaches, such as mobile clinics, andtargeting groups with previously unmet needs, such as Maori and ruralcommunities.



Deinstitutionalisation and the desire to service the mental health needs ofpeople in the community were given as reasons for formation by 26 of the 28agencies. Eighteen agencies had been established prior to the announcementof the health reforms in 1991, mostly within the previous decade. The servicesestablished since 1991 focused mainly on Maori mental health, a previouslyneglected area. All agencies acknowledged that their continued existencenow depended on RHA purchase of their services. The results of the researchare presented under three broad themes: contact terms; contracting process;and contract relationships.

CONTRACT TERMS

Price

More than half of the agencies (15/28) knowingly provided services that costthem more to provide than the price they received (Table 1). There were cleardifferences between regions. All RHA2 agencies had signed contracts for a pricebelow their costs. In contrast, most RHA3 and RHA4 agencies maintained thattheir costs would be covered and those in RHA1 were evenly divided, althoughnone had actually signed a contract. Overall, nineteen agencies expected futureimprovement in prices, partly because of announced government policy toincrease mental health funding, and partly because they were now better ableto justify their costs and therefore prices. Some larger agencies, especially thoseoperating inmore than oneRHA region, acknowledged their ability to resist lowoffers which smaller agencies, operating in a single region, could not.

Specifications

Agencies reported clear regional differences in contract specifications. RHA1and RHA4 had developed detailed contract specifications, while RHA2 andRHA3 seemed less concerned about such detail. Within this broadcategorisation there were further differences (Table 2).

Table 1

Regional Comparison of Price and Costs

Price Paid Covers Costs? Yes No Total

RHA1 4 4 8RHA2 0 7 7RHA3 5 3 8RHA4 4 1 5



Agencies generally considered that RHA1 and RHA2 used vague servicerequirements to their own advantage. RHA1 was àlways wanting to lift therequirements to what they argue is implicit in the contract' (Agency N,RHA1), while RHA2's specifications were ambiguous until, as reported byone agency, the RHA decided on a particular interpretation. Concern aboutopportunistic behaviour by these RHAsmeant that agencies preferred clearerservice descriptions as a form of protection. This was especially a concernwhere low prices meant that:

in terms of the funding we receive to . . . maintain those specifications . . . You arebreaching the contract because you are trying to cut corners (Agency H, RHA2).

RHA1 and RHA2 attempted to break services into smaller components bycontracting separately for accommodation and rehabilitation services.Agencies resisted this, anticipating that the separation could be used to limitboth accommodation prices and levels of rehabilitation services, and thatdifficulties would arise with access and coordination.

RHA3 circulated service descriptions around agencies and from responseshad clarified the terminology used. Contracts did not include detailedspecifications, but agencies thought the service descriptions were reasonablyclear. Ì think they ended up with something that most people felt quitecomfortable with' (Agency F, RHA3).

RHA4 developed detailed specifications of service processes thatincorporated agency views. Two of the five agencies in this region consideredthat service obligations were appropriate and the specifications clear. Theother three thought the specifications too detailed, either because they wereinflexible, likely to commodify services across agencies and destroy positivedifferences and innovation, or because they thought the RHA emphasisedservice processes, without adequate knowledge of the issues.

Table 2

Regional Comparison of Contract Specifications

Specifications Detailed? Explanation

RHA1 Yes/No Detailed legal aspects, especially RHA protectionfrom liabilityService requirements vague

RHA2 No Broad, non-specific, ambiguous service requirementsRHA3 No Description of overall service, terminology agreed

with providersRHA4 Yes Detailed specification of service processes



CONTRACTING PROCESS

Each RHA was required to develop and execute a purchasing strategy forcommunity-based mental health services. Interviews sought to makeapparent each RHA's strategy through questions related to: consultationand communication with agencies; the time involved in achieving completedcontracts; agencies' views about the coherence of the purchasing approach asa whole; RHAs' use of power; and whether RHAs fostered mutuality or anindividualistic culture (Table 3).

Consultation/Communication

All four RHAs met with groups of agencies to discuss contract issues, toachieve some understanding of contract terms, and, sometimes, to discussprice (Table 3). Other types of communication were also reported,including correspondence, telephone calls, group meetings and individualmeetings. RHA3 was considered most successful in its consultation becauseagencies could see that the consultation process led to service develop-ment:

They had a major consultation process . . . a detailed analysis of needs . . . Thatinvolved a lot of service providers and groups of mental health consumers. The endresult was a strong commitment and buy-in on the part of just abouteveryone . . . Most people accepted that thiswas the right way to go andthey felt goodbecause they had been consulted . . . Now, nearly three years later, we've got about90%or probablymore of the services actually in place and Ithink there is still a degreeof commitment on the part of just about everybody (Agency F, RHA3).

RHA2was considered least successful because, although it received positivecomment for undertaking consultation, this process had produced nodiscernible effect on its purchasing decisions or strategies. Agencies referredto RHA2's consultation as playing games, `raising people's hopes' (Agency

Table 3

Provider Perceptions of RHA

RHA1 RHA2 RHA3 RHA4

Consultation/communication Y Y Y YTimeliness/finalised contract N N Y YCoherent approach N N Y NAppropriate use of power N N Y NFostering mutualist culture N N Y Y

Notes:Y = largely present in purchaser's strategy.N = largely absent from purchaser's strategy.



K, RHA2), and `the University of Mental Health, always doing surveys'(AgencyW, RHA2).

Timeliness/Finalised Contracts

Agencies criticised RHA1 and RHA2 for the long time taken to finalisecontracts. All RHA1 agencies were providing services without signedcontracts, with contracts `rolled over' while the disagreement continued.RHA2's agencies reported finalised contracts but several reported delayswhich pressured them to accept contracts at unsatisfactory prices, simplyto obtain funds to continue in operation. In contrast, most agencies inRHA3's and RHA4's regions viewed the time involved in negotiations asacceptable.

Coherent Approach

Views about the coherence of the RHAs' approaches largely related to theway they defined the services and their consistency of attitude towardsagencies and competition (Table 3). Agencies saw RHA1, RHA2 andRHA4 as attempting to disaggregate and standardise services or servicecomponents in order to promote competition. For example, RHA1 andRHA2 tried to split services into accommodation and rehabilitationcomponents, with agencies anticipating that additional cooperation wouldbe required to integrate these newly fragmented services. Paradoxically,RHA1 and RHA4 brought together for one purpose the agencies theysought to divide for other purposes. RHA1 supported an association ofcommunity mental health agencies to develop a generic contract andpricing proposal. This association `came back and bit [RHA1] on thebum' (Agency M, RHA1), because the agencies also worked together onlegal issues and price. Later RHA1 attempted to divide the agencies byoffering preferred provider status to those that accepted its contract terms.RHA4 brought agencies together for discussion and information purposesthen required individual contract negotiations. At this point, RHA4 `triedto set up one against the other and if we discussed with each other they threwthe Commerce Act at us' (Agency U, RHA4). Agencies viewed thisbehaviour, which sent mixed messages, as inconsistent, although it wasentirely consistent with RHAs' efforts both to contain contracting costsand minimise prices.

Overall, agencies viewed RHA3's approach as most coherent, followed byRHA4's. RHA1 and RHA2 were viewed as following the least coherentapproach, with agencies frequently referring to staff turnover, workloads andinexperience in these RHAs.



Use of Power

The RHAs' use of power was most obvious in relation to contract prices.RHA1 used its statutory power to `roll' contracts, requiring agencies tocontinue services at previous unsatisfactory prices until new contracts werenegotiated. Despite offering preferred provider status to those that wouldaccept RHA1's terms, at the time of the survey there were no signed contractsin this region. RHA2 achieved signed contracts, but agencies consideredprices inadequate and methods (including delays, threats and withholdinginformation) questionable. Agencies viewed RHA3's willingness to discussthe amount of money available and the services the agency could offer for thatamount as `real negotiation' (Agency W, RHA3). Although somenegotiations forced additional costs (e.g. dental treatment) onto agencies,they considered RHA3's use of its power appropriate. One agency describeda serious battle over price withRHA4, while another reported no choice but toaccept the price offered. Others commented on RHA4's attempts to promotecompetition between agencies, including threats to take legal action ifagencies discussed negotiations amongst themselves.

Mutual vs Individual Culture

Purchasers and provider agencies were interdependent, with RHAs unable toachieve their purchasing function without the agencies, and many agenciesunable to survive without an RHA contract. Despite this interdependence,agencies found working with both RHA1 and RHA2 difficult because of acombative atmosphere:

It isn't just a financial legal transaction here, there's a trust transactionaswell . . . if thataspect isn't provided for in the interchange . . . we'remaking the process a lot harder foreverybody (Agency N, RHA1).

You're seen as a provider with vested interests and you want to say,`look, I've been aprovider for years and this is a philosophical commitment, not towidgets but to peoplewho are extremely disabled' (AgencyW, RHA2).

Some agencies questionedwhether the focus on cost reduction inRHA1 andRHA2 overrode their ambitions towards service improvements. As someagencies observed, RHA1's requirements for rehabilitation services breachedboth employment and health and safety legislation and RHA2's low pricesforced de-skilling. The result in RHA2's region was:

an extreme loss of services, a loss of creativity, a loss of energy, a loss of sense ofcommunity and . . . severe backwards steps in provision of community mental health(AgencyW, RHA2).

With RHA3, in particular, and RHA4 agencies felt more mutuality ofgoals. RHA3's consultation process resulted in a plan for services that mostagencies described positively:



You think about being at the mercy of a single purchaser, but where there's goodwillandwhere it's quite evident that the service is being delivered and the price is tolerablethen I think things go on quite nicely (Agency B, RHA3).

At the same time, there was some concern growing that RHA3 was beginningtomove away from èxcellent consultation' towards dictating to agencies whatwould be done. Ìt's going to be a bit difficult if they don't keep us all on board'(Agency F, RHA3).

RHA4's agencies described establishing helpful relationships and credibilitywith particular RHA staff, reporting such items as assistance from a policyanalyst in the first contracting round, being listened to, and being allowed tore-write proposed service specifications. One expressed confidence that RHA4would increase the price for a new service if it was inadequate. Another describedhow, after resolution of a long-running battle over both services and price, goodrelations had resumed. Agencies noted the `professional' attitude of RHA4 staff,while expressing regret at RHA4's attempts to promote competition betweenagencies because it reduced information sharing.

In the contracting process overall, RHA1 and RHA2 were considereddifficult to deal with, RHA3 good to deal with, and RHA4 falling in between.Personalities were clearly important, with favourable comments made aboutthe attitude and competence of the staff of RHA3 and RHA4. Of the fourRHAs onlyRHA3 successfully spent its entire special mental health allocationin 1996/97 compared with 80% for RHA1 (and this in a rush at the end of theyear), 70% forRHA4, and a lowly 30% forRHA2 (Ministry ofHealth, 1998).

CONTRACTING RELATIONSHIPS

Activity surrounding the contracting process provides the framework for anoverall relationship between purchaser and provider. Agencies were askedwhether they perceived the relationship as equal or whether one partydominated. They were also asked to make an overall assessment of the tone ofthis relationship as it appeared both during negotiations and on an ongoingbasis (Table 4).

Agencies considered RHA3 the most successful in developing relationships,the important determinants being continuity and competence of personnel,regular communication and a clear process as well as payment of a fair pricefor services. RHA3 staff were described as:

prepared to listen and take note and fairly reasonable. They can say, `This is theconstraint of our budget, what do you suggest', and get to a common place. Realnegotiation (AgencyW, RHA3).

RHA4 was also seen quite positively, whereas RHA1 and, particularly,RHA2 were considered much less successful. Agencies noted that in RHA1and RHA2 high staff turnover and workloads impeded the development of



relationships, as did the perceived inappropriateness of some RHA staff fortheir tasks.

Summary: Divergent Strategies

The characteristics of the different purchasing RHAs, as seen by theirprovider agencies, is summarised in Table 5, based on Tables 1^4 and the

Table 4

Agency Rating of Relationship with Purchaser

RHA1 RHA2 RHA3 RHA4

#Equality of negotiating relationship 1.9 1.3 2.6 2.5*Tone of negotiations 3.0 1.6 4.4 3.4*Ongoing relationship 3.5 3.0 4.0 4.0

Notes:# 1 = purchaser very dominant, 2 = purchaser more dominant, 3 = equal relationship, 4 = provi-der more dominant, 5 = provider very dominant.* 1= very poor, 2 = poor, 3 = satisfactory, 4 = good, 5 = very good.

Table 5

Summary of Provider Perceptions of RHA Behaviour

RHA1 RHA2 RHA3 RHA4

Contract TermsPrice 2 3 1 1Specifications 2 2 1 2

Contracting ProcessConsultation/communication 1 2 1 1Timeliness 3 3 1 1Coherent strategy 3 3 1 2Use of power 3 3 1 3Fostering mutualist culture 3 3 1 2

Contracting RelationshipsEquality of relationship 2 3 1 1Tone of relationship 2 3 1 2Ongoing relationship 2 2 1 1Total 23 27 10 16

Notes:Each item of RHA behaviour rated as perceived by agencies as:1 = very good, 2 = adequate, 3 = not adequate.



prior discussion. Each RHA is assigned a score between 1 and 3 on each of theten dimensions, and the scores totalled. A maximum possible score is 10 and aminimum is 30. While this is a crude method and does not weight the data inany way, the pattern of scores and overall totals provide a picture of divergentstrategies.

Overall RHA3 is perceived as the most successful of the RHAs, inacceptability of contract terms, processes and relationships. RHA4 is lesssuccessful and criticised for a flawed approach to contract specifications, lesscoherent purchasing strategy and a more heavy-handed approach tonegotiation. RHA1 and RHA2 were seen as notably unsuccessful from aprovider perspective, on most dimensions, with RHA2 viewed the mostnegatively, largely because it was also considered duplicitous.

DISCUSSION

According to new institutional economics the size of government should bereduced, with transaction cost economics (TCE) helping determineappropriate institutional arrangements to replace large public sectorbureaucracies. Despite the strong theoretical background to New Zealand'spublic sector reforms, Boston et al. (1996) noted little evidence of the use ofTCE. Further, it has been argued that TCE is seldom used in the waytheorised (Demsetz, 1993). Instead, what occurred in New Zealand's healthreforms seemed similar to Williamson's (1996, p. 212) approach to theredistribution methods. First, a market should be tried; if that doesn`t worktry hybrid structures, and only if these prove inadequate, and as a last resort,should there be reversion to a hierarchy.

In these reforms, the presence of monopsonist purchasers meant that amarket was never an option, with the architects of the reforms opting for theclosest hybrid, the quasi-market. For success, this structure requires well-specified, standardised services and a sufficient number of competingproviders for the price mechanism to operate (Macneil, 1978; and Boston etal., 1996), although it was clear at the implementation of the reforms thatthese quasi-market features were largely absent in the health sector(Howden-Chapman and Ashton, 1994). Some RHAs attempted to develop aquasi-market for community mental health services, and RHA4 seemed tocome closest. As in other settings, there were difficulties (Wolfe, 1986;Malcolm, Barnett and Nuthall, 1996; and Ashton, 1998), with agenciesviewing detailed process specifications as removing discretion, stultifyingservices, and generally challenging the mixture of openness and cooperationrequired for coordination of community mental health services.

A quasi-market uses price as a key coordination mechanism. Arguably,sufficient providers in the market means that they will compete for contractsbased on price. But with their capped budgets the RHAs could not afford to



allow the price mechanism to operate, attempting instead to impose prices(Howden-Chapman and Ashton, 1995). With few new competing agencies,there is little evidence of efficient pricing. Even as the RHAs tried to developspecifications suitable for a quasi-market, their price restrictions meant thatthey prevented a quasi-market from developing. In community mental healthservices only RHA4 appeared to persist with a quasi-market approach, withan emphasis on detailed specifications, price as a coordinatingmechanism andcompetitive arrangements.So if only RHA4 approached quasi-market arrangements, how then did

the other regions develop? The complexity of services and the pricerestrictions implied the need for a collaborative approach, with thestructures emerging in the three remaining regions suggestive of networks,with each RHA acting as a superintendent. For these networks to operateeffectively, cooperation and information-sharing between provider andRHA, and among providers is essential (Mannion and Smith, 1997; andSobrero and Schrader, 1998). As previously discussed, there are differingviews about the nature of the relationship required for information sharingto occur. The TCE view is that `contractingman' should not be trusted, andthat contract specifications and functional substitutes for trust will suffice.This is the coercive network and arguably, the powerful monopsoniststructure provided each RHAwith a built-in functional substitute for trust.Agencies recognised that their continued existence depended on the RHApurchasing their services. The organisation theory view, however, is thatirrespective of such power, trust is essential for information sharing. This isthe beneficent network.

The results of our survey can be used to illustrate the way that networkarrangements emerged in RHA1, RHA2 and RHA3. The characteristics ofthe RHAs, as seen by their provider agencies have been discussed and weresummarised in Table 5. Overall RHA3 can be characterised as a beneficentnetwork. RHA3 relied on a combination of trust and power. It established itscredibility early and, although it imposed various additional costs on agencies,those costs were not thought unduly harmful to the agencies or to the service.Agencies praised RHA3 for service improvements, for its relationships andwillingness to listen, and for payment of fair prices. RHA3's agencies metregularly to exchange information, and passed information back to RHA3which apparently accepted and encouraged this arrangement:

Oftenwhenwe go to our working groups and people have talked about issues, then onbehalf of that groupwe'll raise some thingswewant to talk about, about how things areworking or not working or problems in this area (Agency F, RHA3).

Of the four RHAs, only RHA3 had such an information sharing process.RHA1 and, particularly, RHA2 appear to have developed coercive

networks. They both relied heavily on power to impose on agencies de-skillingas well as service and price reductions. They largely disregarded trust, instead,



at times, apparently acting opportunistically to the agencies' detriment. Theneed for information-sharing seemed to be unrecognised, and some agenciesadmitted, that having previously voluntarily shared sensitive informationwith these RHAs they would not do so again. Impeded information flowsmight not present an immediate problem to these RHAs but would threatentheir effectiveness over a longer term (Sabel, 1993; and Demsetz, 1993).Simply imposing information-sharing requirements would not necessarilyachieve success (Hanf and O`Toole, 1992). While coercive networks broughtsome agency demoralisation, the RHAs did appear successful in containingtheir own costs. RHA2 was known to pay the lowest prices for community-based mental health services, while RHA1 successfully delayed price rises forsome time.There are important implications for accounting in the emergence of

alternative arrangements, particularly network situations. The stated goalsof public sector reform were performance improvements (efficiency andeffectiveness), and accountability. One important role of accounting inthese reforms is to develop reporting arrangements which allow suchassessments to be made. Little progress has been made on effectivenessassessments via non-financial performance measures, with such measurestypically involving little more than numerical counts and statistical surveyinformation. In line with the cost pressures imposed in the reforms, mostassessment largely revolves around financial measures in the reports ofindividual network members. Given the inter-dependency of networkmembers, however, is it reasonable to assess performance andaccountability by assessing individual members of a network and relyingon contractual terms? Agencies' experiences in the three `network' regionssuggest that performance and accountability assessments on an individualbasis might be misleading. In RHA1's and RHA2's regions, where agenciesreported the greatest financial stress, the greatest concern about price/specifications mismatches, about contractual requirements that breachedhealth and safety regulations and about methods of achieving low prices,some also reported their inability to perform in accordance with thecontractual terms. Individual service performance assessments mightindicate that agencies' service provision is substandard and that theseRHA regions are cursed with poor quality agencies. Individual financialperformance assessments might indicate that RHA1 and RHA2 were themost efficient RHAs because they contained their own costs. In contrast,with RHA3's agencies noting how they worked together and with RHA3,they appeared to recognise that success was achieved jointly. An individualfinancial performance assessment of RHA3, however, might suggest thatRHA3was inefficient in comparison with RHA1 andRHA2 because it paidreasonable prices to the agencies.



CONCLUSION

This research suggests both theoretical and practical implications for NewZealand's continuing reform process. The theoretical implications includethe possibility that the underlying assumptions of NIE ^ bounded rationalityand opportunism ^ produce an inadequate conceptualisation of potentialinstitutional structures because those assumptions specifically reject thepossibility of trusting arrangements. Of the three distinct institutionalstructures that emerged for coordinating community mental health services,quasi-market, coercive network and beneficent network, this last one isbeyond the scope of NIE. That different structures emerged should be nosurprise given the managerialist ideas about autonomy underlying thereforms. That the unexpected structure ^ the beneficent network ^ was theonly one that developed information sharing mechanisms and agencies foundit the best to work with should require at least revisiting the theoreticalunderpinnings of the reforms and considering the acknowledged complexityand difficulties of operating trust-based network relationships (Williamson,1996; Mayer et al., 1995; and Lane and Bachmann, 1998). That anotherstructure ^ the coercive network ^ is consistent with the theoreticalunderpinnings but led to agencies not sharing information with the RHAand was seen by agencies as incoherent, should also raise questions about thevalidity of the TCE conception of networks.

Practical implications of this research include considering how performancemight be assessed.With their capped budgets, RHAswere required to allocateamounts to particular areas and purchase the best possible services. EachRHA faced different geographical and demographic challenges, for example,ethnic diversity in RHA1, and dispersed populations in RHA2 and RHA4,which presumably, influenced resource allocation priorities within RHAs.Within these constraints, maximising service quantities with availableresources gives the appearance of efficiency. It is arguable whether RHA1and RHA2 actually achieved efficient performance or merely used theirpower to shift costs to the agencies. Even Williamson (1996) acknowledgedthat when interdependent structures exist, then performance measures shouldrelate to the whole structure and not be confined to individual components.Although such measures clearly require development there are no signs thataccounting will address network performance. New Zealand's recently issuedexposure drafts revising business combination accounting requirementsactually narrow earlier ideas of control to specifically exclude power of apurchase form, such as that exerted by theRHAs over these agencies (ICANZ,1998, ED-84). This accounting development ignores the network structureand focuses only on individual network members. As suggested above, thenature of a network arrangement implies that individual member assessmentswill not provide information with which the performance and accountabilityof the whole network may be assessed.



In late 1997 the four RHAs were restructured as one Health FundingAgency (HFA), charged with developing a collaborative approach through aunified system. In 2000 further changes are planned which will decentralisesome funding decisions to districts, requiring further coordination at locallevels. Talk of a collaborative approach immediately suggests rejection offurther attempts to develop a quasi-market, with network structures mostlikely. Funders could choose a coercive network style like that demonstratedby RHA1 and RHA2, or a beneficent network style in the manner of RHA3.The choice of a coercive network would be consistent with the theoreticalunderpinnings of the original reforms, but the choice of a beneficent networkwould be consistent withmore pragmatic views emerging in the late 1990s anda changed political climate. The experience of providers in RHA3's regionsuggests that such a network may be effectively and coherently operated.Irrespective of the choice of network style, assessment of a funder'sperformance cannot reasonably be achieved in isolation from performance ofthe whole network and new performance measures need to be developed. Thisis an issue that accounting has yet to address.

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Documents

Negotiating the Network: The Contracting Experiences of Community Mental Health Agencies in New Zealand