Privatization of welfare services has a long history in the United States. Recently, however, the privatization of welfare services has increased significantly and expanded into new services a trend that is likely to continue. The 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) provided much of the impetus for this increase. It did so by shifting the emphasis of the welfare system from providing cash assistance to placing welfare recipients in jobs and by giving states more autonomy to formulate their own programs and policies under the new Temporary Assistance for Needy Families (TANF) program. Many states and localities responded to welfare reform by changing not only the services they offer, but also the types of organizations that deliver them. Services once primarily provided by government agencies, including case management, are now increasingly contracted out. The U.S. General Accounting Office (GAO) estimates that in 2001 state and local governments spent more than $1.5 billion or about 13 percent of all federal and state maintenance-of-effort expenditures for TANF administration and services on contracts with nongovernmental agencies (GAO 2002).
State and local government agencies that choose to privatize welfare services face significant challenges, however. The agency must ensure that contractors are selected in a fair, effective, and competitive way; design contracts that motivate providers to perform and ensure appropriate services are provided; coordinate the public and private provision of services; and monitor the work of the contractors. Many states and localities that are privatizing welfare services have little experience with large-scale contracting, and information on the associated challenges and effective ways to meet them is scant.
Recognizing the need for more information about privatization of TANF services, the Office of the Assistant Secretary for Planning and Evaluation (ASPE) of the U.S. Department of Health and Human Services (DHHS) funded Mathematica Policy Research to conduct a study of privatization with a special emphasis on TANF case management. This study is designed to inform policymakers, researchers, and states and localities that are either currently contracting out or considering doing so. Built around in-depth case studies of six states or localities that have privatized TANF case management, the study has two main goals:
- To describe the privatization of TANF case management in the study sites. The study focuses on the key decisions and activities undertaken in privatizing TANF case management. It describes the rationale for privatization and the selection of services to privatize, the contractors involved, the procurement process, and the types of contracts issued. The challenges of service provision under privatization and the methods used to monitor contractors are also examined.
- To document the lessons learned in the study sites from their experiences privatizing TANF case management. States and localities have gained expertise on privatization both by meeting its challenges and by learning from the mistakes inevitable in all new ventures. This study aims to highlight innovative practices and identify common pitfalls in privatization.
The study focuses on TANF case management and related case processing for three reasons. First, these services which include eligibility determination, assessments, development of self-sufficiency or employment plans, referrals, and sanctioning had traditionally been provided mainly by government agencies but are now increasingly being provided by private agencies. Indeed, prior to PRWORA, only government employees were allowed to determine eligibility for cash assistance. Now, however, privatizing some aspects of TANF case management is quite common 40 states have done so and some states and localities have privatized all TANF case management functions (GAO 2002). Second, case management is at the heart of the TANF program; the programs success in placing welfare recipients in jobs is largely dependent on case managers ability to identify barriers to employment and ensure that clients receive appropriate services. Third, by the nature of their jobs, case managers have considerable discretion in the provision of services. Some observers have raised concerns about assigning this power to private agencies, particularly for-profit organizations.
The findings from the case studies will be valuable to any state or locality that has already decided to privatize welfare services. However, the study does not address the broader question of whether the state or locality should privatize. While information on stakeholders perceptions about the effects of privatization was collected as part of the case studies, it was beyond the scope of the study to conduct a rigorous evaluation of the impact of privatization.
This report presents findings from the case studies. The remainder of Chapter I defines privatization, provides study background, and describes the study design. Chapter II describes the TANF case management services privatized in each site, how they were privatized, to whom the contracts were awarded, and the rationale for those decisions. The methods used to select contractors and ensure that the process was fair, effective, and competitive are outlined in Chapter III. The issues involved in designing the contracts between public and private agencies are presented in Chapter IV. The role of the public agency in monitoring the work of the private agencies is discussed in Chapter V. Chapter VI examines some challenges to service delivery under privatization, including coordinating public and private service provision, facilitating the transition to privatization, and managing contract turnover. Chapter VII offers a summary of the major lessons learned from the study.
The term "privatization" can mean several different things, from contracting out services to the sale of government assets. In this study, "privatization" refers to contracting out services to private organizations, including both for-profit and nonprofit organizations. Although some states and localities, including several in this study, contract with government agencies (such as local government agencies) and quasi-governmental agencies (such as community colleges), the study focuses mainly on contracting out to private agencies.
Background to the Study
Private provision of publicly funded social services is not new in the United States. Private religious and secular organizations have delivered welfare services for over a century (Smith and Lipsky 1993). During the 1960s and 1970s, however, spending on social services provided by private agencies increased (Brodkin et al. 2002). This increase was fueled in the 1960s by new federal spending (Young et al. 1981) and in the 1970s by the search for ways to reduce costs in light of fiscal strains (Kramer 1994).
Since the passage of PRWORA, both the scale and scope of privatization of welfare services has changed. The GAO found that contracting for TANF-funded services occurs in the District of Columbia and every state except South Dakota (GAO 2002). Prior to welfare reform, welfare agencies mainly contracted out direct services, such as job training, job search instruction, and child care provision. Some Aid to Families with Dependent Children (AFDC) agencies, for example, contracted with employment and training providers for the operation of all or part of their Jobs Opportunities for Basic Skills (JOBS) programs. While these types of services are still often contracted out, private agencies are now more likely to provide case management and job placement or retention services. Another recent change is the increasing role of large, national for-profit organizations in the provision of welfare services.
Welfare reform provided an impetus to privatization in several ways. First, it signaled a growing frustration with the old AFDC system, seen as geared more toward ensuring eligibility and compliance with rules than helping clients become self-sufficient (Bane and Ellwood 1994). As private agencies were seen as less entrenched in the old ways than the public welfare agencies, privatization appeared to be a way of making fundamental changes to the welfare program (Diller 2000).
Second, the change to a work-oriented assistance program meant that TANF programs needed to provide new services to move welfare recipients into jobs as quickly as possible and provide the supports necessary to maintain employment. Some states and localities believed they lacked the capacity to provide the services, and contracting out allowed them to "buy" this capacity quickly (Sanger 2001).
Third, unlike AFDC, TANF no longer prohibited private organizations from performing eligibility determination for cash assistance. This opened up the possibility of privatizing the entire TANF program. Public employees are still required, however, to determine food stamp and Medicaid eligibility in 1997, DHHS denied Texas a waiver to privatize these functions. As TANF recipients are frequently also eligible for food stamps and Medicaid, being unable to privatize eligibility determination for these benefits may reduce the advantages of privatizing TANF eligibility determination. A recent waiver granted to Florida may spur new interest in privatizing TANF eligibility determination. In July 2002, six counties in Florida received permission for private contractors to determine food stamp eligibility. The Senate Appropriations Committee, however, directed that no additional waivers be granted until the effects of privatizing food stamp eligibility determination in Florida are evaluated.
Fourth, changes in the federal financing of cash assistance gave states broad new discretion and new incentives to pursue potentially cost-saving methods of service delivery (Winston et al. 2002). By switching from unlimited matching funds under AFDC to a fixed block grant under TANF, the federal government encouraged states to investigate new options for increasing efficiency, including privatization.
PRWORA also expanded states ability to contract with faith-based organizations through its "charitable choice" provisions. These organizations are now allowed to provide TANF-funded services without removing religious symbols from their facilities or religious content from their services. These provisions, however, have not been viewed as a significant factor in the increase in privatization of welfare services.
Privatization of welfare services is controversial. Proponents view privatization as a means to improve services, reduce costs, increase the flexibility of the public sector, and provide opportunities to meet more needs of welfare recipients. Opponents are skeptical that privatization results in an improvement in services, citing lack of competition (Sclar 2000) and the pursuit of profits leading for-profit organizations to reduce service quality (Service Employees International Union 1997; Rodrigue 1997; Hartung and Washburn 1998). Some remain unconvinced that privatization reduces the costs of service provision once the costs of administering and monitoring the contracts are taken into account. Others are concerned that community-based organizations may be unable to compete for contracts with large, for-profit organizations, and may no longer be viable (Sanger 2001). Further concerns include the loss of public employee jobs (SEIU 1997), the loss of talented staff from the public sector (Sanger 2001), and the potential for conflict of interest in the procurement process (Berkowitz 2001; Hartung and Washburn 1998).
In-depth case studies were conducted in six sites. Each site was defined by the jurisdiction of the public agency that contracted out TANF case management. The sites, shown in Figure I.1, are:
Figure I.1. Case Study Sites
- State of Delaware (Delaware)
- Hennepin County, Minnesota (Hennepin County)
- Lower Rio Grande Valley Workforce Development Board, Texas (Lower Rio Grande Valley)
- Palm Beach County Workforce Development Board, Florida (Palm Beach County)
- San Diego County, California (San Diego County)
- State of Wisconsin (Wisconsin)
Appendix A provides a detailed description of each study site.