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Center for Public Policy Priorities www.cppp.org

United Way of Tarrant County

Pre-Legislative Forum

Outsourcing Issues and ConcernsOutsourcing Issues and Concernsin Public Benefits Administrationin Public Benefits Administration

November 13, 2006

Celia Hagert, Senior Policy [email protected]


The Big Picture


Pros and Cons of Privatization


Argument for Outsourcing the IE&E Project

• Private sector has expertise, capital to modernize

• Help state meet central challenge: serving growing number of clients with fewer resources

• $210 m in additional savings estimated over 5 years (9% > than savings in state-run IE&E)


Stepping Back: What are the Challenges Facing Our

Eligibility System?

• Labor-intensive process costly for states, burdensome for clients, especially working families

• Eligibility determination is complicated, driven by complex federal and state laws designed to – target benefits to those who need them most, – keep program error or fraud at a minimum,

and – Ensure prudent stewardship of taxpayer

money.



Eligibility System?

• Clients are not easy to serve: – majority have incomes below the

poverty level; – many are elderly, have disabilities, or

grapple with language barriers.• Each program serves a distinct

clientele and rules vary considerably, which makes determining eligibility even more difficult.



Eligibility System?• Constant policy changes pose challenges

both workers and clients• Legislature has not provided necessary

resources to ensure effective administration

• Out-of-date technology can lead to duplication of effort -- unnecessary “red tape”

• Chronic underfunding exacerbates existing challenges


Before IE@E


Does Outsourcing Hinder or Help?

• Experience suggests some functions are most efficiently performed by the government directly; others are best contracted out.

• States must identify which kinds of activities fall into each category

• Avoid decisions based on generic assumptions about competition or ideological preferences.

• Overarching question is: do the benefits of outsourcing outweigh the risks?


Overview of Challenges, Risk

• Competition is limited – increases risk

• Hard to measure performance• Hard to design contracts to adapt

to caseload/policy changes• Changes role of government,

demands new expertise, greater resources


Limits on Competition• Most commonly cited reason for

outsourcing is increased competition, which will improve quality and

• lower cost• However, competition for the right to

administer a program differs from competition to provide the service itself

• These differences may undermine government’s ability to reap the benefits of competition


Limits on Competition• No competitive market for eligibility determination• Winning bidder must make huge investment to

enter the market -- start-up costs are significant• Companies able to respond in essence assume

monopoly power• Any competition effectively ends upon the signing

of contract• Cost, disruption of awarding contract, transferring

responsibilities to contractor means contracts likely to run for many years

• Competition eliminated for long periods of time


Limits on Competition• Lack of a competitive market increases risk that

contractor will be unable to perform as promised – Bidders lack present capacity to offer services– Selecting a contractor involves great deal of speculation by

state• If contract awarded based on lowest bid, bidders may

grossly underestimate cost in order to win contract• The disruption, cost, & risk of finding new contractor

or rebuilding public system may force state to stay with contractor even if company has performed poorly or is demanding higher price

• At this point, state must pay contractor more or let services to clients suffer


Limits on Competition• In effect, state assumes most of risk

in inherent uncertainty over costs of outsourcing eligibility determination

• If contract price proves to be more than is needed, contractor keeps the profits

• If price proves inadequate, contractor has leverage to ask for more money


Hard to Measure Performance• Key factor in predicting success in outsourcing is

whether there is clear accountability for results, clear criteria for performance, and clear public objectives.

• By contrast, government functions that require the exercise of judgment to weigh competing priorities have proven difficult to outsource successfully.

• Private companies may be well suited for certain functions related to public benefits administration, including straightforward services such as processing payments, data processing, or computer systems design.


Hard to Measure Performance• Steps required to determine eligibility for public

benefits range from simple, objective functions to complex, subjective determinations.

• More objective acts, such as scanning documents or helping to fill out application, are easy to measure and therefore more conducive to outsourcing.

• More subjective determinations, such as identifying disability that may prevent applicant from meeting program requirements, are much harder to measure and therefore less conducive to outsourcing.


Hard to Measure Performance• Eligibility determination requires

accommodating (or balancing) many different policies that at least partially conflict— i.e., controlling for fraud while encouraging maximum participation.

• Designing a contract that strikes appropriate balance between competing priorities of program integrity and program access is extremely difficult.


Contract Must Be Flexible• Public benefits system lacks stability: caseloads

prone to rise and fall unexpectedly due to economic circumstances or policy changes.

• Designing a contract that can adapt to changes in participation is difficult.

• If the contract does not increase reimbursement when caseloads go up, then contractor has incentive to create barriers to families seeking services in order to maintain profit margin.

• If payments are conditioned on outcome of eligibility determination, then contractor has less incentive to focus on program integrity or emphasize services with potential to reduce reliance on public assistance, i.e., job training.


Risks Reduce Potential for Savings• Any savings are likely to come from reductions in

services, such as closing offices, or reducing staff. • Those reductions can be achieved by the state,

without outsourcing, if cutting costs is primary goal. • Outsourcing alone offers no immediate ways of

producing significant efficiencies. • Many federal rules governing public benefits

cannot be changed simply because states find that they are not efficient.

• On the other hand, where there is flexibility to simplify the process, state can adopt these changes without outsourcing.


Looking Back a Decade

Caseload and Staffing Changes, 1995-2006

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Clients

Total Staff


Outsourcing Changes Role of Government

• Outsourcing changes role of government and creates new responsibilities

• State assumes responsibility for developing requests for bids, negotiating contracts, monitoring performance, and enforcing compliance.

• States need to determine whether they have capacity to play this role and include costs of contract monitoring and enforcement in their analysis when determining whether outsourcing a particular function is cost-effective.


Audit of IE&E Contract

• Comptroller’s audit alleged serious flaws in design of the contract

• Criticized HHSC for its failure to monitor and enforce the contract

• Faulted the state for moving too quickly to implement new system without adequate testing or contingency planning,

• This resulted in the loss of critical numbers of state staff and jeopardized services to low-income Texans.


Mitigating the Risks• Clearly specify the role and responsibility of the contractor

(and subcontractors).• Determine appropriate costs.• Be able to develop clear and measurable performance

criteria. • Because contracting problems are inevitable, states

should begin on a limited scale • Conduct intense evaluation of pilot before relinquishing

significant control of system to private company • Prepare for the dramatic change outsourcing will have on

state roles and responsibilities• Be able and willing to commit the additional resources

needed to ensure effective contract monitoring and enforcement.


Challenges for Advocacy• Outsourcing brings new challenges and changes

the role of advocacy groups.• May have to divert significant resources, develop

new areas of expertise to respond effectively in a privatized system.

• The National Center for Law and Economic Justice has developed guidance to help advocates analyze and address issues related to privatization of public assistance programs:

• Identifies areas for advocacy and strategies to make the contracting process more responsive and accountable to clients and public concerns. (See http://www.nclej.org/files/privatization.pdf).


Challenges for Nonprofits• Nonprofit community has a lot at stake, if

outsourcing shifts more responsibility to the client.

• Need to consider how this shift affects your mission and resources.

• Need to explore whether contracting with the state to take over portions of the application process poses any liability for you.

• Contracting may alter your relationship with the state and potentially impede your ability to advocate on behalf of your clients.


A Final Word…• Nonprofits are uniquely poised to exert a

positive influence on changes taking place in Texas.

• Nonprofit community can shape these efforts in a way that will improve outcomes for low-income families.

• Nonprofit organizations need to take an active part in planning and development process, both because they have so much to offer and so much at stake.


Privatization is Here to Stay


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