| Vol. 1, No. 2 February 1997 |
Privatization and Welfare Reform
by Jessica Yates
Background
As states try to reduce costs, enhance efficiencies or improve services, many are considering privatizing aspects of their programs. While privatization in human services has a long history, the Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-193) gives states more flexibility to administer Temporary Assistance for Needy Families (TANF) and several other assistance programs through vouchers and contracts with private non-profit and for-profit organizations.
For example, prior to the enactment of P.L. 104-193, only state employees could make eligibility and benefit determinations under the Aid to Families With Dependent Children and Food Stamp programs. The new law contains no such restrictions for TANF and permits them to be waived for the Food Stamp program. Many of the ideas and plans for privatization in welfare reform focus on services that, until now or recently, were performed solely by state or local governments. Non-governmental entities may increasingly be asked to handle functions such as case management that are critical to clients’ lives, and to determine what services a client receives. This growing private sector role presents significant logistical, legal and philosophical issues.
Policy Issues
The opportunities incorporated in P.L. 104-193 will require new policies and new administrative responses. Jurisdictions considering broadening the scale or scope of privatization will want to be aware of the following issues.
What should be privatized? If privatization is to be a major strategy for service improvement, it is important to develop criteria for determining what services or activities should be privatized. In most jurisdictions, the potential for increased efficiency and/or cost savings will lead the list of criteria, which should be weighed against issues such as client access and equity. Additional factors might relate to the function (information systems, administrative services, eligibility determination, service delivery, etc.), the program area (public safety, income support, education and training, etc.), population to be served (adults, adjudicated criminals, at-risk children, etc.) or cross-cutting objectives (service integration, community-based services, etc.).
How much flexibility should be provided to contractors? In general, most jurisdictions will want to retain responsibilities for policy development and contract management within the government sphere. Beyond those core activities, governments could allow providers to decide how to produce contractually-mandated results, or contract for products and services that meet detailed government specifications. While some degree of specification is necessary to ensure that legal requirements are met, overly detailed prescriptions may preclude private initiatives that could improve services or maximize potential government savings.
What providers should be allowed to compete? Most observers believe that competition is critical to the success of privatization. Jurisdictions may decide to allow non-profit and for-profit organizations to compete for government contracts, or competition can be limited to non-profit organizations. This decision may be driven by state law, philosophy or provider availability. P.L. 104-193 expands governments’ capacity to contract with religious organizations. Under the law, these organizations are not required to remove religious symbols or in other ways undermine their faith when providing services, but states must provide alternatives to clients who do not want to use religious providers.
In structuring competition, jurisdictions may also want to consider the role of local governments or community-based organizations. Allowing such entities to compete may help accomplish program-related goals of coordination that might not be possible by using large, private sector contractors. Related issues are whether public agencies are permitted to bid on contracts, either on their own or in combination with non-profit or for-profit providers, and whether public agencies need special waivers of governmental requirements in order to compete on a level playing field.
How can cost comparisons be done? Cost comparison raises two primary issues. First is the ability to calculate accurately the public sector’s cost and the resulting savings if the function is privatized. It is important to recognize that privatization costs include the public agency’s overhead costs (which generally will not disappear but instead be reallocated to other programs) and costs associated with bidding out and monitoring contracts. The General Accounting Office (GAO) has noted that cost comparisons between public and private provision also must control for variables, such as the proportion of clients who are considered "more difficult" to serve.
The second issue is the value of improved results. If the private sector is able to reduce the number of erroneous eligibility determinations, increase child support collections, or improve job placements and retention, program savings will result. But a jurisdiction also will want to determine whether similar savings could be accomplished simply by changing public sector performance.
How will providers be compensated? Traditionally, government has paid contractors for specific products or units of service. Such arrangements may still be appropriate for many of the functions to be privatized, but government increasingly is looking to reimbursement methods that focus on pay-for-performance and/or shared risk-taking, and these may be linked to program revenues or cost savings. While such payment tools can be a powerful incentive to improve efficiency, care must be taken to ensure that such incentives are consistent with program objectives.
How will providers be held accountable? Contract management is a key element of privatization. Jurisdictions will want to make sure that they have the staff and other resources necessary to oversee the contractors adequately. Such costs should be considered in determining the cost-effectiveness of privatization decisions. In addition, jurisdictions will want to establish clear criteria for contractor evaluation. Increasingly, this evaluation will be outcome-oriented, but certain checks on administrative procedures may continue to be needed.
What remedies will be made available to clients dissatisfied with private providers? As contracting increasingly impacts the well-being of families and individuals, jurisdictions will need to consider what kinds of due process procedures should be in place so that the rights of clients are adequately safeguarded, and how best to ensure customer satisfaction and protect the quality of services. Contracts may include penalties for inappropriate contractor activities or decisions.
Research Findings
There is relatively little formal research evaluating the comparative effectiveness of public versus private social services delivery. Available material addresses several aspects of privatization. First, studies have looked at the relative costs of public and private social services provision. GAO has compared privatized child support services with public agencies in four states and found that the cost-effectiveness of private agencies varied tremendously – savings were achieved in some cases, but costs increased in others.
The Council of State Governments (CSG) and the Reason Foundation independently surveyed state social services agencies. In both surveys, the agencies reported some cost reductions after privatizing social services, but less savings than state agencies reaped in privatizing other types of services. The Reason Foundation attributed these results to insufficient competition in contracting out social services. These studies underscore the importance of a careful cost/benefit analysis as a part of the decision making process.
Second, there is a growing body of research that attempts to document the processes used for contracting and contract management and the impact of these factors on program and financial outcomes. These studies reinforce the importance of consensus building in the decision making process, the availability of competition, clearly defining the discretion given a provider, and well-defined performance measures. Discussions with public officials also suggest that a government should invest time in careful planning and consider implementing privatization on a phased basis. In addition, advocacy and public employee groups are focusing attention on such issues as service quality and accessibility, customer satisfaction, and recipients’ rights.
Innovative Practices
State and local governments are becoming increasingly experienced in privatization and should begin by looking at their own contracting experiences with similar programs or services. The following examples are also informative. Additional examples of state and local privatization are available in the WIN clearinghouse database and from some of the contacts listed on page
Wisconsin: Under Wisconsin Works (W-2), a new statewide initiative, the state is contracting for eligibility determinations, case management, employment and other welfare-related services in each locality. Public, for-profit and non-profit agencies were able to bid for the contracts, but county job centers that had met certain performance benchmarks had the option of providing W-2 services under contract without having to compete. Where local agencies did not meet the benchmarks, an open competition was held. Contractors will be able to make a profit if they spend less than their awarded allotments. However, a contractor will be fined $5,000 each time it fails to serve an eligible and cooperative individual. Contact: Ginevra Ewers, Section Chief of the Budget Aides Contract Team, Wisconsin Department of Workforce Development, (608) 266-8145. Internet: www.dwd.state.wi.us.
As a separate, local initiative, Kenosha County has used a multiple-provider approach in its job center since 1990. The 18 providers work together so that clients’ access to and use of job services are coordinated, but the providers can compete against each other when contracts come up for renewal. Contact: Larry Jankowski, Director, Kenosha County Job Center Director, (414) 697-4500.
New York City: America Works, a for-profit company, contracts with New York State to place New York City welfare recipients in jobs, getting $5,490 per fully assisted recipient. The company receives: 18% of its payment at the initial, temporary job placement; 70% if the employer hires the recipient as a permanent employee after four months; and the final 12% if the individual remains in the job for an additional 90 days. Two researchers from Columbia University studied America Works and reported favorably on the program’s costs/benefits based on an analysis of the number and duration of placements. America Works also operates in Albany, N.Y., and Indianapolis, IN. Contact: Richard Greenwald, Development Manager at America Works, (212) 244-JOBS (5627); and John Haley, Income Maintenance Specialist at the N.Y. State Department of Social Services, (518) 473-6555.
Texas: Texas is aiming simultaneously to restructure and privatize its process for enrolling people in a broad range of state and federally-funded assistance programs. Texas wants to integrate eligibility determinations, enrollments, service referrals and client data for TANF cash assistance, Medicaid, Food Stamps and other programs, and hopes that the private sector will reengineer these processes and develop complementary automated systems. Many potential providers are bidding as coalitions, two of which include state agencies. Federal approval is needed to secure federal financial participation in the plan. Texas will continue to set eligibility criteria and all other assistance policy, and administer certain aspects of the programs – such as investigating fraud and holding due process hearings. Contact: Andy Slack, Program Manager, Texas Health and Human Services Commission, (512) 424-6533; Internet: www.hhsc.state.tx.us/ties.htm.
Kansas: Kansas recently privatized its family preservation, adoption and foster care programs through regional contracts. The foster care providers will receive one-year contracts, renewable for up to four years, receiving a flat payment for each case. The first year will permit "risk sharing," where the provider can seek extra funding if its costs exceed 110% of the state payments. Similarly, the state will recover funds if a provider’s actual expenditures are significantly less (more than 10% less) than its total state payments. Using flat payments is intended to ensure that the quality of placements will not suffer, since a provider will receive no additional funds if it must place a child in more than one foster home in the same year. Contact: Marilyn Jacobson, Kansas Department of Social and Rehabilitative Services, (913) 296-2011.
Other Initiatives:
Cost Models: Many states have developed models to help make privatization decisions. A typical cost model, such as that used by Georgia, addresses start-up costs, contract development and monitoring costs, and other expenses incurred in the privatization process. Governments also should consider privatization’s financial impact on taxes, federal grants and other revenue sources. Sample cost analysis models also can be found in CSG’s report on privatization and the Reason Foundation’s privatization guides.
For More Information . . .
RESOURCE CONTACTS
Alliance for Redesigning Government. Its Internet site offers resources and case studies on privatization: www.clearlake.ibm.com/Alliance; (202) 466-6887.
Council of State Governments (CSG). Keon Chi, Director of the Center for State Trends and Innovations; (606) 244-8251.
Georgia Office of Planning and Budget. Bill Roper, created state model for privatization decisions and cost analyses; (404) 656-2191.
Public Employee Department of the AFL-CIO. Laura Ginsburg and Paul Hughes; (202) 393-2820.
Reason Foundation. William D. Eggers, Director of Privatization and Government Reform; (310) 391-2245.
States Information Center (SIC), operated by CSG. Inquiry and reference service; on-line database: www.csg.org/sic/index.html; (606) 244-8253.
PUBLICATIONS
"An Action Agenda to Redesign State Government." National Governors’ Association. 1993. (301) 498-3738.
Calicchia, Marcia, and Laura Ginsburg. "Caring for Our Children: Labor’s Role in Human Services Reform." Public Employee Department of the AFL-CIO. 1996. (202) 393-2820. Newsletter on privatization also is available.
Chi, Keon. "Privatization in State Government: Options for the Future." State Trends and Forecasts. CSG. November 1993. (800) 800-1910.
Cohen, Steven, and William Eimicke. "Assessing the Cost Effectiveness of Welfare to Work Programs: A Comparison of America Works and Other Job Training and Partnership Act Programs." Columbia University’s School of International and Public Affairs, Graduate Program in Public Policy and Administration. April 19, 1996.
General Accounting Office, (202) 512-6000, www.gao.gov:
Miranda, Rowan, and Karlyn Andersen. "Alternative Service Delivery in Local Government, 1982-1992." 1994 Municipal Year Book. International City/County Management Association. (202) 289-4262.
Rosenbaum, Sara, Dana Hughes, Elizabeth Butler and Deborah Howard. "Incantations in the Dark: Medicaid, Managed Care and Maternity Care." Milbank Quarterly. Vol. 66, No. 4, 1988.
February 6, 1997
Dear Colleague:
This edition of Issue Notes addresses privatization in the context of welfare reform. It provides a brief overview of the impact of the new welfare legislation on privatization opportunities and highlights some of the policy and management issues that governments will want to address in considering these opportunities. It also provides a short discussion of available research, describes several state and local initiatives, and lists a number of contacts and publications that can provide additional information.
Our purpose is not to endorse or oppose the use of privatization, but instead to assist states in crafting a framework for decision making and accessing resources that will better inform those decisions. While privatization can be an important component of a welfare reform strategy, its utility and appropriateness may vary by program and function. As a result, each jurisdiction must determine how privatization could apply to specific services and specific recipient groups. It must develop approaches that address the unique aspects of individual programs or client groups.
Privatization takes many forms, including contracts, vouchers and public/private partnerships, but jurisdictions have been using mostly contracts for privatizing welfare reform activities, and this Issue Note reflects that trend. However, public/private partnerships also have blossomed in many localities, and governments are experimenting with financial incentives and other competitive mechanisms to improve services and/or reduce costs.
Significant new privatization initiatives, particularly those that involve determining eligibility for income assistance, are likely to raise substantial concerns on the part of public employees, labor organizations and advocacy groups. It is important that these concerns be addressed forthrightly. Policy makers may identify alternative approaches that can achieve similar objectives within the public sector, or clarify the contract provisions and performance requirements needed to protect both the public interest and the clients who will be served by private providers.
The examples in this edition of Issue Notes are not exhaustive. Other examples of using competitive government to improve human services delivery abound. For instance, a public/private partnership in Tulsa, OK, consolidates publicly provided case management and commercially funded on-the-job training into one facility and then "graduates" individuals into permanent jobs with the businesses that funded the training. Florida has a state-wide initiative in which job training providers (community colleges and school districts’ vocational centers) compete for incentive dollars. State experiences in contracting for workforce services and training are a rich source of information as is extensive experience with child support enforcement and a variety of children’s services.
Moreover, research on privatization and human services is ongoing. For example, the Center for Health Policy Research at George Washington University will soon release a study detailing states’ contracting practices with HMOs under the Medicaid program, which could offer lessons for welfare privatization. The Manpower Demonstration Research Corporation is compiling case studies of jurisdictions’ use of privatization and other competitive practices in their work programs.
WIN will continue to monitor such research and state and local practices, and disseminate this information through Issue Notes, the WIN Internet site (www.welfareinfo.org) and its clearinghouse database. WIN would welcome any comments or suggestions about Issue Notes or privatization research, initiatives or technical assistance resources that should be included in the clearinghouse. Comments may be mailed or faxed as shown above, or sent to us by e-mail at welfinfo@welfareinfo.org.
Sincerely,