Privatization in Practice: Case Studies of Contracting for TANF Case Management. Avoiding Unintended Incentives

03/01/2003

By focusing attention on a limited set of measurable objectives, a contract may inadvertently encourage providers to act in ways that contradict other program goals. Examples of potential unintended incentives in TANF case management contracts include:

  • Contractors may work to find a job for the client quickly but not help clients find jobs that offer high wages, benefits, and the possibility of upward mobility. This may occur if performance standards focus on placement only.
  • Contractors may choose to place fewer resources into contacting clients and enrolling them into the program if they believe that those who are harder to enroll are less likely to have positive outcomes. No contractor in the study could deny services to a referred client, but they could control the intensity of their outreach.
  • Contractors may put less effort into conducting thorough assessments and making appropriate referrals for clients if performance measures focus only on employment outcomes.
  • Contractors may attempt to fine tune service data in order to influence performance measures  for example, by estimating hours for work participation generously.

While public agency administrators and contractors in the study sites admitted that some of these perverse incentives do exist in the contracts and potentially could create difficulties, there was no evidence that they were a serious problem at the time of the site visits. Contractors argued that it was difficult to favor clients who were more likely to become employed, because they could not identify those people easily, and most of their clients faced barriers to employment. Moreover, the contracts in the study were designed to avoid these problems  they all included a range of performance measures, including process measures.

Some public agencies and contractors in the study sites acknowledged that providers placed special emphasis on reporting favorable client outcomes. Several contractors noted that they spent time manipulating the data to present their performance in the most positive light.

Adding certain performance measures can reduce the likelihood of unintended incentives. Including measures related to job retention, wages and benefits, and earnings gains diminishes the incentive for contractors to place clients quickly in poor quality jobs. Measures of program enrollment increase the contractors incentive to engage all referred clients. Incorporating measures indicating completion of program activities such as assessments limits the ability of contractors to serve clients differentially.

Increasing the number of performance measures, however, has its drawbacks. A larger number of measures may reduce the focus of the contractor on the key program goals. If the measures focus on the delivery of particular services, they also may limit the flexibility of the contractor to innovate.

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