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The private provision of government-funded services has a long history in the United States. In recent years, however, the use of private organizations — both for-profit and not-for-profit — to perform social service functions has increased substantially, and this increase is expected to continue. The privatization of welfare services, in particular, grew substantially after passage of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). PRWORA signaled a major shift in the federal government's philosophy regarding welfare by ending the cash assistance entitlement. Just as importantly, it gave states much more autonomy to formulate their own policies under the new Temporary Assistance for Needy Families (TANF) program. Many states have used this newfound flexibility not only to change the types of services they provide, but also to rethink the mechanisms by which these services are delivered. This legislation, together with an increasing skepticism about government and an interest in performance-based management techniques, provided an impetus for the growing use of private providers.
Not much is known about the privatization of welfare services, however, especially of those services traditionally performed by public agencies, such as eligibility determination, intake and assessment, and other case-management functions. For this reason, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) of the Department of Health and Human Services (DHHS) asked Mathematica Policy Research, Inc., (MPR) to conduct a study of privatization with a special emphasis on case management of TANF. The study will describe the experiences of, and lessons learned by, six TANF agencies that have privatized case management.
To set the stage for the case studies, this report provides a review of the literature on the privatization of welfare and related services. The empirical literature is fairly limited. The U.S. General Accounting Office has conducted studies on the privatization of government services in general (GAO 1997b, 1998). Others have conducted studies of the privatization of particular services, such as child support enforcement (GAO 1996) or JTPA employment services (Heinrich 2000), although few focus on welfare services Still others have conducted case studies of government privatization in specific states (Kornfeld 2001; Sanger 2001; Roper 1998; Yates 1997a). Given the significant changes in welfare policy that have occurred over the past five years, a clear need exists for more current and more detailed information on privatization of TANF programs.
The MPR case studies of the privatization of TANF case management as well as a forthcoming GAO study will partly meet this need for further research. The GAO will report on a survey of TANF administrators in the 50 states and the District of Columbia, as well as some counties. The survey collects information on the extent and nature of contracting out for TANF services. That study also includes six case studies of the procurement and monitoring of TANF contracts.
In the rest of this introductory chapter, we define what we mean by privatization and describe the reasons for the recent increase in privatization. Chapter II describes the current extent of privatized social services and describes the organizations that are providing services. Chapter III discusses the arguments for contracting out, while Chapter IV discusses the challenges that contracting out presents. Finally, Chapter V outlines research needs that will be met by the MPR/ASPE case studies.
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The term "privatization" can mean several things. For the purposes of this study, we focus on the most common form of privatization — contracting out services to private organizations. However, privatization can also refer to the complete government withdrawal from the function, including the sale of government assets such as rail systems or banks to private companies. In addition, it can include the use of vouchers to allow customers to "shop around" for services, as used, for example, in providing training services under the Workforce Investment Act (WIA) (GAO 1997b; Nightingale and Pindus 1997).(1)
In this study, we focus on the contracting out of services that are funded by public agencies, irrespective of whether the services are provided by nonprofit or for-profit private organizations. Some observers make a distinction between government contracts with not-for-profit organizations and those with for-profit companies, arguing that the differences in their missions and incentives will lead to different strengths and weaknesses in service provision (Cohen 1998; Nightingale and Pindus 1997; Sanger 2001; Osborne and Gaebler 1992). However, others argue that making a sharp distinction between for-profit and nonprofit privatization is not particularly useful because, in many jurisdictions, for-profit and nonprofit organizations subcontract with each other, making it difficult, if not impossible, to draw clean operational or contractual lines between them.
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Private provision of publicly funded services, including social services, is not new. Before the New Deal era, most social services were delivered by private religious or secular organizations that sometimes received public subsidies to pay for the care of needy people, though the level of public funding varied widely (Smith and Lipsky 1993). After the Great Depression, the government's role in funding private social services began to increase, though it remained fairly limited. During the 1960s and 1970s, however, federal expenditures for social welfare services escalated, and a large proportion of this growth was due to spending on services provided by private agencies. State spending increased as well — one study found that in 1971, 25 percent of state spending on social services was for "purchased services." By 1976, the percentage had risen to 49 percent (Smith and Lipsky 1993). A national 1993 study by the Council of State Governments found that almost 80 percent of the states surveyed reported that in the previous five years they had increased their use of privatized social services (GAO 1997b).
In recent years, both the scale and the nature of the relationship between the government and the private sector have changed. The government is contracting for a wider variety of services, and government contracts are purchasing whole programs, rather than simply limited services (Smith and Lipsky 1993). Interest has grown in bringing for-profit companies into new areas, such as welfare services. In addition, as we discuss in the next chapter, the number of social service agencies who contract out services has increased.
Increased interest in contracting out welfare services in recent years has occurred for several reasons: frustration with the welfare system under Aid to Families with Dependent Children (AFDC), the passage of PRWORA, skepticism about the ability of government to provide services effectively, and a growth in the desire for performance-based management.
Before PRWORA, a widespread belief existed that the old AFDC system and the agencies that administered it were fundamentally flawed, and geared more toward ensuring eligibility and compliance with rules than toward helping recipients work and become self-sufficient (Bane and Ellwood 1994; Walters 1997). The sense of frustration with the old welfare system seemed to increase interest in using private organizations to provide welfare services. Many states articulated the goal of "changing the culture of the welfare office," and contractors were seen as less entrenched in the old ways than public welfare agencies were (Diller 2000). One journalist commented that the effective replacement of AFDC with TANF would require "nothing less than the reinvention of human services delivery at the state level" (Walters 1997). Privatization was one way to accomplish this reinvention.
Welfare reform provided an impetus to privatization in several ways. Its work requirements spurred states and localities to find new ways to deliver employment services. By dropping the requirement that eligibility for cash assistance be determined by public employees, it encouraged contracting out of a broader set of services. And the change to funding through block grants gave new incentives for privatization.(2)
In response to growing frustration over the lack of focus on work in the AFDC program, the new welfare system shifted to an emphasis on "work first" rather than the verification of eligibility. Initiatives were developed to divert applicants into jobs before they reached the rolls, to move welfare recipients into employment as quickly as possible, and to support their efforts while in work. Although many states had begun such efforts under waivers before the passage of PRWORA, their efforts accelerated after the law's passage. While all states had provided some employment programs for welfare recipients through the Job Opportunities for Basic Skills (JOBS) program under AFDC, the new requirements for work programs far exceeded the old. PRWORA mandated sharp increases in recipient work participation, requiring that states rapidly gear up their employment programs. The new law mandated that states place at least 25 percent of household heads in all families in work activities by 1997, increasing to 50 percent by 2002. For two-parent families, the required rate reached 90 percent in 1999.(3) In addition, as welfare caseloads declined, many believed that a larger proportion of those still on the rolls were "hard-to-employ" clients who would require more intensive assistance to leave welfare for work.
Public officials in many states believed that they lacked the capacity to meet these demands and to meet them quickly enough, without contracting with private organizations. Contracting out allowed them to "buy" new capacity and come up to speed quickly, while giving them the flexibility to get rid of this additional capacity if needs changed (Sanger 2001).
Unlike AFDC, TANF no longer prohibited states from using personnel from private organizations to perform eligibility determination for cash assistance (Title I, Section 104). This opened the possibility of contracting out welfare services broadly and created a potential new market for private providers (Nightingale and Pindus 1997; Sanger 2001). Possibilities for wide-scale privatization of welfare services were limited, however, by the continued requirement that only public workers determine eligibility for Medicaid and Food Stamps. States that wanted to privatize TANF eligibility determination but also wanted to preserve or increase integration of services either would have to receive waivers from the Medicaid and Food Stamp Program requirements (which to date have not been granted) or would have to choose between privatization and service integration for eligibility determination.
In a widely publicized effort at broad privatization of welfare services, Texas attempted to privatize its entire welfare system statewide, including the determination of eligibility for TANF, Medicaid, and Food Stamps. In 1997, however, the federal DHHS denied the state the necessary waivers. Instead, Texas opted to pursue integration of eligibility determination across programs, while keeping that function in the state Department of Human Services (Center for Public Policy Priorities 1997). At the same time, it moved to privatize other functions, such as job search and placement, through a system of decentralized workforce development boards that contracted with a range of private providers (Policy Research Project on Workforce Reform in Texas 1997; Pavetti et al. 2000). In contrast, Arizona elected to privatize eligibility determination of TANF on a pilot basis in one county, but left eligibility determination for the other programs under the auspices of the state welfare agency (Kornfeld 2001). Wisconsin began pursuing wide-scale privatization efforts under federal waivers that allowed the privatization of eligibility determination for cash assistance before passage of PRWORA. The state did not, however, also privatize eligibility determination for Medicaid and Food Stamps.
Under AFDC, the federal government provided unlimited matching funds to states, while under TANF, each state is given a fixed block grant. This has given states broad new discretion and new incentives and opportunities to change their service approaches. Under the TANF block grant, states have a new incentive to pursue cost-saving methods of service delivery. The block grant allows them to transfer limited amounts of their TANF surpluses to other social services, and state funds that have been spent on those services can be freed up for other priorities, including service enhancements or tax cuts. Because a common goal of privatization is cost savings, the chance to reap some of their TANF savings and use the funds for other purposes might have contributed to states' interest in contracting out. States' discretion has also freed them from the federal oversight entailed in the AFDC quality control (QC) system, and allowed them greater flexibility to set their own rules and measures of program success.(4)
During the last several decades, general public skepticism has grown about the capabilities of government, especially the federal government, and there has been a commensurate interest in harnessing market forces to perform a wide range of functions in a more "business-like" and efficient manner (Sclar 2000). One 1997 nationwide survey found that 41 percent of respondents said they had a "mostly unfavorable" view of the federal government, while 34 percent had a "mostly favorable" view (Pew Research Center for the People and the Press [undated]). In contrast, only 23 percent said they had a "mostly unfavorable" opinion of business corporations, while 55 percent expressed a "mostly favorable" opinion. This kind of ideological preference for private organizations has been reflected in an increasing reluctance to fund expansion of government services.
Related to the increased skepticism about the performance of government, policymakers, practitioners, and scholars increasingly have advocated applying performance-based management and accountability techniques, used successfully in the private sector, to the public sector. On the federal level, legislation such as the Government Performance and Results Act of 1993 and the Government Management and Results Act of 1994, as well as the National Performance Review's "reinventing government" initiative of the mid-1990s, reflected the growing interest in using performance-based measurement and bringing entrepreneurial approaches into public-sector service delivery (Osborne and Gaebler 1992; National Performance Review 1994). The goal of federal deficit reduction and general cost cutting gave particular impetus to these efforts to find new ways to make government more efficient. These "re-engineering" efforts took hold in many states and localities as well. Privatization was seen as one way to bring performance-based management to the public sector.
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1. Some policymakers and scholars emphasize the extent of competition rather than whether the public or private sector provides the service. In an effort to increase competition and still include the public sector, a number of states and localities are requiring public-sector organizations to compete with each other and/or with private organizations.
2. Through its "charitable choice" provision, PRWORA expanded states' ability to contract with faith-based organizations, allowing these organizations to provide TANF-funded services without requiring that they remove religious symbols from their facilities or religious content from their services (Title I, Section 104). The privatization literature thus far has not focused on this as a significant reason for increased contracting out.
3. A federal "caseload reduction credit" in PRWORA mandated that a state's participation requirements be dropped by a percentage point for every percentage point drop in caseloads after 1995, as long as the decline was not due to state policy changes (U.S. House of Representatives 2000). Due to the sharp, and unexpected, caseload decline experienced by many states, this credit eased the work mandates during the first five years following passage of PRWORA.
4. However, the federal government uses measures of state success in meeting the TANF goals to allocate its high-performance bonuses and bonuses for reductions in out-of-wedlock births.
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