- Study Design
- Rationale for Privatization
- Deciding the Scope and Size of Contracts
- The Contractors
- Promoting Competition
- Ensuring Effective and Fair Procurements
- Designing Contracts That Work
- Upholding Accountability Through Monitoring
- Managing Service Provision under Privatization
- Lessons Learned
Recently, 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 have responded to welfare reform by changing not only the services they offer, but also the type of organization that delivers these services from government agencies to private contractors. 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 entities (GAO 2002).
Despite its popularity, privatizing welfare services poses significant challenges to the state and local government agencies that are responsible for contracting out. Most have little experience with large-scale contracting, and information on the associated challenges and effective ways to meet them is scant. Recognizing this knowledge gap, 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 report presents the findings from the study.
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The study has two main goals:
- To describe the key decisions and activities undertaken in privatizing TANF case management
- To document the lessons learned in the study sites from their experiences privatizing TANF case management
The study focuses on the contracting out of TANF case management to private agencies, including both for-profit and nonprofit organizations. It addresses TANF case management and related case processing because these services have traditionally been provided mainly by government agencies and, prior to PRWORA, only government employees were allowed to determine eligibility for cash assistance. In addition, case management is an essential function a key to placing welfare recipients in jobs and providing them with support services. Some observers have raised concerns about assigning the discretion and power inherent in case management and processing to private agencies, particularly for-profit companies.
The study is built around in-depth case studies of six states or localities that have privatized TANF case management:
- State of Delaware
- Hennepin County, Minnesota
- Lower Rio Grande Valley Workforce Development Board, Texas
- Palm Beach County Workforce Development Board, Florida
- San Diego County, California
- State of Wisconsin
The sites were selected purposively in order to maximize the collection of useful information. All the sites have considerable experience with contracting out TANF services. They have a relatively long history of contracting out case management and have experienced several procurement cycles. They also have privatized all, or a substantial proportion of, TANF case management and processing services, including assessments, development of an employment plan, referrals, monitoring, and, in some cases, eligibility determination. The sites also differ in how they have approached privatization. For example, in San Diego County and Wisconsin, TANF case management was privatized in only certain geographic areas; in the other areas a public agency conducts all TANF case management and processing functions. In Hennepin County, TANF clients can choose between private, state, or county agencies for employment-related case management.
The sites were also chosen to ensure diversity in the types of public agencies responsible for TANF (state, county, or workforce development board), the types of contractors, the types of contracts, and the region of the country and urban/rural composition. Table 1 summarizes the key characteristics of each site.
Information for this study was gathered mainly through site visits and telephone interviews conducted between March and July 2002. Researchers interviewed individuals with a variety of perspectives on privatization, including management and line staff at public and private agencies, advocates for TANF recipients, and representatives of public employees' unions.
|Site||Entity Responsible for TANF Administration||Type of Contractors||Type of Contracts|
|Delaware||State||For-profit (MAXIMUS) |
Local affiliate of national nonprofit (Salvation Army) Local nonprofits
|Hennepin County||County and City of Minneapolis||Local affiliate of national nonprofit (Lutheran Social Services) |
|Lower Rio Grande Valley||State, Local Workforce Development Boards||Joint venture between a for-profit (ACS) and a regional nonprofit||Hybrid of cost-reimbursement and pay-for-performance|
|Palm Beach County||State, Local Workforce Development Boards||For-profit (ACS)||Two contracts, one pure pay-for-performance, the other fixed price|
|San Diego County||County||For-profits (ACS, MAXIMUS) Local affiliate of national nonprofit (Catholic Charities)||Hybrid of fixed price and pay-for-performance|
|Wisconsin||State||For-profits (MAXIMUS, ACS) Local and regional nonprofits County agencies |
|Hybrid of cost-reimbursement and pay-for-performance|
|ACS: Affiliated Computer Services|
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Although some TANF services are privatized in all but one of the 50 states, there is considerable variation in the scale and scope of services privatized. To help explain these differences, the rationale for privatization was explored in each site.
The most frequently given rationale for privatization is the belief that it will lead to better services and/or services being delivered more efficiently. This can occur because of:
- Competition. Competition for contracts or clients may motivate organizations to innovate and to find new ways to improve the quality and efficiency of service provision.
- Specific Characteristics of Private Agencies. Private agencies may be more flexible. This may be because they tend to have smaller bureaucracies, are not covered by civil-service regulations, and often their employees are not unionized. They also may be more motivated by performance standards than public agencies.
- Client Choice. In a privatized system with multiple providers, welfare recipients may be allowed to choose their service provider, as they are in Hennepin County, increasing the likelihood of a good match between the services and the client.
Pragmatic and political factors also played a role in the decision to privatize in some sites. Privatization was seen as a way to add the capacity to provide new services quickly in response to welfare reform, without increasing the size of the government workforce. Some proponents of privatization argued that private agencies were needed because existing public agency staff lacked the necessary skills and mindset to conduct intensive work-focused case management. Finally, privatization of new employment services seemed natural to some sites that had a history of contracting out for other related services.
The sites in our study followed one of two models of privatization. Two sites Palm Beach County and certain counties in Wisconsin privatized all TANF case management and processing functions, including eligibility determination. The other four sites Delaware, Hennepin County, Lower Rio Grande Valley, and San Diego County privatized only employment-related case management functions. In these sites, clients have two case workers, one with the public agency and one with the contractor. The public agency case worker determines TANF eligibility and imposes sanctions, while the private agency case worker provides intensive employment case management.
Two factors came into play when the study sites decided which case management and processing functions to privatize:
- The Relative Strengths of the Public and Private Agencies. Some sites that chose to privatize only employment case management viewed the public agencies as having the skills and expertise necessary to determine eligibility, but lacking the skills to conduct effectively the intensive employment case management required by welfare reform.
- The Importance Placed on Service Integration. Federal law requires that a public employee determine eligibility for food stamps and Medicaid, preventing the privatization of a fully integrated system. Some sites refrained from privatizing TANF eligibility in order to keep the eligibility functions integrated across programs; others chose to privatize all TANF services, separating eligibility determination for TANF and the other assistance programs.
Sites vary not only in the scope of their contracts, but also in whether they award one large contract or more numerous small contracts, covering individual regions or service components. Issuing a few large contracts limits the cost of contract administration and monitoring, allows contractors to reap economies of scale in providing services, and permits greater coordination and service integration. Issuing more numerous, smaller contracts, however, allows contractors to specialize by service or by population. It also reduces the risk of contractor nonperformance if a contractor goes out of business or performs below standard, the administering agency can more quickly replace the nonperforming contractor with another. Finally, numerous smaller contracts enhance competition by increasing the number of incumbent contractors that can compete, and by bringing in smaller organizations that may lack the financial or operational capacity to compete for large contracts.
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Three broad types of private agency provide TANF case management and processing services:
- National For-Profits. Both MAXIMUS and Affiliated Computer Services (ACS), large national organizations whose business activities extend beyond the welfare arena, operated in the study sites. These companies have considerable resources to devote to securing new contracts and operating programs.
- Affiliates of National Nonprofits. Examples of affiliates in the study sites include Catholic Charities Diocese of San Diego and the Salvation Army Delaware Region. These organizations typically offer an array of social services and view TANF case management as an extension of their employment and training programs. They include faith-based and secular organizations. Their national headquarters generally provide less assistance in securing contracts and operating programs than those of for-profits.
- Local and Regional Nonprofits. These organizations tend to operate with fewer funds and administrative resources than for-profits or nonprofits working within a national network. They include faith-based and secular organizations. Examples of local nonprofits in the study sites include Children and Families First in Delaware and the Church of St. Stephen in Hennepin County. Some of these organizations focus their activities on a particular neighborhood, ethnic group, or population in need of assistance.
Contractors of different types frequently collaborate through subcontracting arrangements or partnerships, such as the joint venture between ACS and the Texas Migrant Council in Lower Rio Grande Valley. The for-profit agencies bring to these collaborations wide-ranging expertise and financial resources, while the nonprofits often bring experience serving specific populations and knowledge of the local community.
The experiences of the study sites offer no conclusive evidence that one type of contractor consistently provides better services than another. Some stakeholders perceive, however, that for-profits hew more closely to the provisions of a contract and that nonprofits may be more likely to meet the needs of clients regardless of their contractual obligations.
Many of privatization's perceived benefits derive from competition among contractors. The number of bids per contract, the frequency of contractor turnover, and the perceptions of both the public agencies and contractors suggest that there is a wide variation in the degree of competition for TANF case management contracts. Competition seems strong in Delaware, San Diego County, and Lower Rio Grande Valley. In San Diego County, for example, there were two to five bids per contract. It is more limited in Hennepin County (at least for some contracts), Palm Beach County, and Wisconsin. For example, no provider bid against the incumbent contractor in the last procurement in Palm Beach County.
Four factors may increase competition:
- Using a Competitive Rather than Sole-Source Procurement. The largest obstacle to competition is, of course, sole-source procurement. Among the study sites, only Wisconsin had any sole-source procurements for contracts that covered TANF case management.
- Reducing the Advantage of the Incumbent Contractor. An incumbent contractor that performs at least satisfactorily has several advantages at the next procurement, which can make it difficult for other providers to compete effectively. Having multiple incumbent contractors reduces the advantage of each. The incumbent's advantage also decreases if the cost of contractor turnover is not perceived as large or if the public agency is willing to bear the cost.
- Increasing the Pool of Qualified Potential Bidders. Contracts that are large, risky, or require considerable financial reserves limit the number of qualified providers, since many smaller organizations will be unable to compete for them.
- Giving Clients a Choice of Provider. Public agencies may foster competition by allowing clients to choose from different providers and paying providers for only the clients they serve.
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A well-designed procurement process offers sufficient information to encourage qualified providers to bid, gives the public agency a clear picture of potential contractors' capabilities, and includes safeguards to ensure that the agency is and is seen as unbiased in its selection. Most procurements include three basic steps:
- Developing Requests for Proposals. Agencies in the study sites strike different balances between flexibility and prescription in Requests for Proposals (RFPs). Increasing flexibility gives contractors more opportunity to innovate. Limited experience with contracting, or a desire to have contractors plan comprehensively in advance, may lead public agencies to stipulate program approaches in more detail.
- Providing Information and Assistance to Potential Bidders. Some public agencies make special efforts to help potential bidders become familiar with program requirements. At least two study sites provide tailored feedback to improve the quality of proposals that organizations submit. These steps may be especially useful to smaller providers with less experience in and resources for developing proposals.
- Evaluating Proposals and Selecting Contractors. In every study site, a committee composed of public agency staff, independent citizens, and/or consultants has responsibility for assessing proposals and making awards. Some sites deliberately use a mix of different types of evaluators to increase fairness in procurement. Factors such as program design, organization capacity, and past performance generally receive more weight than a proposal's budget in selecting contractors.
Designing effective contracts is one of the most challenging and consequential aspects of privatizing TANF case management. Public agencies must make a host of choices as they develop contracts, including what performance measures to include, how to structure payments to contractors, and how long the contract should stay in effect.
Reflecting the trend toward holding government agencies accountable for their performance, contracts in all study sites contain performance measures. The measures can be either outcome-based or "process" oriented. Typical outcome measures include employment, job retention, wages or earnings, and participation in work activities. Process measures, on the other hand, assess whether and how services are delivered. They include measures such as the number of program enrollments, completion of assessments, accuracy of referrals, and even the amount of staff training. The number of performance measures included in the contracts varies from 5 to 23 in the study sites.
Selecting performance standards is not straightforward. In choosing measures, there is a tension between creating strong incentives and avoiding unintended consequences. Incentives are greatest when the measures are focused on outcomes and targeted to the most important goals of the program. However, by focusing attention on a limited set of measurable objectives, a contract may inadvertently encourage providers to act in ways that conflict with other program goals. For example, if performance measures focus on placements only, contractors may work to find a job for the client quickly, with less concern over the quality or suitability of the job. Increasing the number of performance measures and including process as well as outcome measures can alleviate this problem but also tends to dilute the strength of incentives.
Agencies in the study sites use four different contract types:
- Pure Pay-for-Performance Contracts. Under these contracts, providers are compensated only as they achieve certain performance goals. Payments can be based on the number of clients who achieve certain outcomes, the percentage of clients who meet performance goals, or both.
- Cost-Reimbursement Contracts. Under these contracts, providers receive payments for the expenses they incur. Generally, costs must fall within a budget approved during the procurement process.
- Fixed-Price Contracts. These contracts establish a set fee for contractors, regardless of performance or the actual cost of providing services.
- Hybrid Contracts. These contracts combine elements of pay-for-performance contracts with either cost-reimbursement or fixed-price contracts. The three hybrid contracts in the study sites vary in the share of contractor earnings that is based on performance. San Diego County ties most of each contractor's income to performance, but contractors receive a fixed monthly payment of 15 to 25 percent of their budgets, irrespective of their performance. In Lower Rio Grande Valley and Wisconsin, the contracts are cost-reimbursement with performance-based incentive payments.
The payment structures embedded in contracts affect the incentives for contractors to perform, the distribution of risk between public agencies and contractors, the timing of payments to contractors, and the operational challenges public agencies face.
Incentives. Pure pay-for-performance contracts offer the greatest financial incentives, and evidence from the study sites suggests that these incentives do motivate contractors staff at all levels were aware of the performance goals, and in some for-profit agencies bonuses were paid to employees for meeting those goals. Contractors still care about their performance even in cost-reimbursement and fixed-price contracts because it affects the likelihood that they will be able to keep their contract and their reputation among other potential clients. However, the incentives to perform under these contracts are less intense than under pay-for-performance contracts.
Distribution of Financial Risk. Payment structure affects how the risks associated with uncertainty about client flow and the economy are shared between the public and private agencies.
- Pure pay-for-performance contracts are the least risky contracts for public agencies and the most risky for service providers because payments are only made if contractors are successful at meeting the goals. They are especially risky if payments are based on the number of clients who meet performance goals, since this is affected by referral flows, over which contractors have little control.
- Under cost-reimbursement contracts, most of the risk is borne by the public agency. Payments must be made to the contractor regardless of the quality and effectiveness of the services. Payments may also vary unpredictably, depending on fluctuations in referral flows.
- Under fixed-price contracts, the public agency and contractor share the risk. The agency must make payments irrespective of the quality and effectiveness of the services but the contractor bears the risk that costs may be higher than anticipated.
It is not necessarily in the best interests of the public agency to design contracts that are risky for contractors. If contractors suffer financially, they may cut services or terminate their contracts. And risky contracts may deter small organizations from competing. Hybrid contracts allow public agencies to retain the power of incentives but also to share the financial risk with their contractors . Some contracts also allow for reconsideration of the payment structure if there are changes in the economy or referral flow.
Cash Flow. A contract's payment structure affects when payments are made to contractors. Contractors sometimes experience cash flow problems, especially under large, pure pay-for-performance contracts. Small organizations, in particular, may not have the financial resources to bid on contracts that require them to cover significant expenses upfront or to weather a period in which expenses exceed income. Advance payments can help contractors address cash flow issues by covering their upfront costs.
Operational Challenges. Pay-for-performance and hybrid contracts require a sophisticated data management system to track whether goals are met. It is also challenging to set the performance targets at an appropriate level that is high enough to motivate the contractors and allow them to cover their costs, but not so high that the public agency pays significantly more than the actual cost of service provision.
Most contracts in the study sites cover one or two years but typically include options for renewal. Longer contracts reduce the potential for contractor turnover, conserve the resources used in procurements, and give contractors an opportunity to establish a program model and improve service provision. Shorter contracts, on the other hand, increase competition, allow public agencies to change the scope of work and their welfare programs more frequently, and offer more chances to remove unsatisfactory providers easily.
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Because privatizing TANF services does not relieve welfare agencies of their public accountability, they must make certain that contractors meet standards in three basic areas:
- Service Quality and Effectiveness. This monitoring usually involves determining contractors' performance on measures included in their contracts. To assess aspects of service quality that performance measures may not reflect, sites also use client satisfaction surveys and review case notes and other documents.
- Policy Compliance. Public agencies monitor policy compliance to evaluate whether contractors abide by established TANF rules. This may include collecting documentation from clients, meeting standards for timeliness in service delivery, and adequately justifying sanction decisions.
- Financial Integrity. This area of monitoring focuses on whether contractors bill for appropriate services and properly administer funding for subcontractors or client supportive service payments.
The tasks involved in monitoring are shared among welfare agencies, contractors, outside auditors, and advocates.
A public agency may give particular emphasis to one type of monitoring over another, depending on the type of contracts it has with service providers. Pure pay-for performance contracts require more attention to documentation of performance outcomes, while cost-reimbursement contracts necessitate greater scrutiny of contractors' financial controls.
Monitoring is most valuable when public agencies and other organizations use information gathered on contractors' services to facilitate improvements. They can do so by sharing findings on a regular basis and working with contractors to address deficiencies. However, public agencies need to balance the benefits of monitoring with its cost to the agency and contractors in terms of the staff time and systems necessary to collect required data.
Public agency staff always need to coordinate with private agency staff in the provision of TANF services, at least to some extent. Even when the entire TANF program is privatized, TANF workers in private agencies need to coordinate with the public agency staff conducting food stamp and Medicaid eligibility determination. And in those sites where only employment case management functions are privatized, public agency workers who conduct TANF eligibility determination and other case processing functions need to coordinate with employment case workers at private agencies.
The study sites vary in how successfully the public and private agencies manage this division of responsibilities. Issues that require attention include:
- Coordinating eligibility determination for TANF and other assistance programs when it is conducted by two different agencies.
- Aligning the often-differing goals of the public and private agencies. Given the difference in their functions, public agency staff are often more focused on accuracy and adherence to program rules, while private agency staff may focus more on assessing client goals and needs.
- Ensuring a seamless transfer of clients between the public and private agencies, so that they do not "fall through the cracks."
- Promoting good working relationships between staff at different agencies when tensions may arise over differences in work rules (such as work hours and dress code), the general culture, and the mission of the agency.
Some confusion among staff and clients occurred with the transition to privatization in many sites, along with the typical hiccups that accompany any major change in program or service delivery. Since this transition often came with changes in the overall philosophy of the welfare programs, it is difficult to ascertain the effects of privatization per se. The privatization of new services typically went more smoothly than the privatization of functions that were previously performed by public agency staff. Despite public employees' fears, however, large layoffs of public agency staff did not occur in any site. This was because private agencies hired some public agency staff, and the public agencies provided positions for staff in other parts of their agencies and reduced staff size through attrition.
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Privatization of TANF case management has presented new responsibilities and challenges to all the public welfare agencies in this study. It expands the main duties of public welfare agencies to include procuring contractors, designing contracts, monitoring contractor performance, and coordinating the work of multiple agencies. As is common in new ventures, the agencies made mistakes as they took on these responsibilities. They also learned important lessons in the process. Seven key lessons emerged from the case studies:
- Agencies Must Prepare to Address the Challenges of Privatization. All the study sites found privatization challenging, some more so than they anticipated. States and localities considering privatization must allocate sufficient resources particularly staff time and outside expertise to ensure it is done well.
- The Procurement Process Must be Fair and Transparent. Public agencies can employ several strategies to enhance the fairness and transparency of procurements. These may include engaging evaluators who do not have close links with potential bidders, making certain that evaluators share a similar understanding of the selection criteria and undertake a complete review of proposals, and documenting the selection process thoroughly.
- Contract Design Affects the Level of Competition. Competition can be significantly decreased if the contract value is large, covers all TANF case management in the area, and specifies that a large proportion of contractor's income is based on performance. On the other hand, competition may be increased if the contracts are smaller and provide some funds to contractors independent of performance outcomes, thus allowing a wider range of organizations to bid, including smaller community-based organizations
- Performance Measures Should be Targeted, Yet Comprehensive Enough to Avoid Unintended Consequences. To focus providers' efforts and limit data collection burdens, the performance measures should be targeted to only a small number of key program goals. Including some performance measures that address the quality of service provision, however, helps guard against unintended incentives.
- It is Possible to Design Contracts that Include Performance Incentives But Limit Risk to Contractors. Hybrid contracts, which combine fixed-price or cost-reimbursement contracts with pay based on performance, provide incentives but limit the financial risks on providers. Some contracts also allow adjustments in performance targets if there are significant changes in the economy or caseloads.
- Public Agencies Must Dedicate Resources to Monitor the Work of Contractors Effectively. Monitoring involves ensuring that contractors deliver services that meet standards for quality and effectiveness, abide by program rules, bill only for appropriate services, and properly administer subcontractor payments. This monitoring requires significant resources.
- Public and Private Agencies Must Find Effective Ways to Coordinate Services. Coordination between agencies can be improved by cross-training staff, holding regular staff meetings, and ensuring shared access to data systems. Co-location of staff alleviates some problems that arise from a lack of coordination, but may exacerbate tensions that arise because of differences in pay, rules, or professional cultures.
These lessons offer important guidance to public agencies facing the challenges of privatization. However, many significant questions remain for future research to address, including whether TANF recipients receive more effective services from private organizations than from public agencies, whether some types of private organizations provide better services than others, and, given the new responsibilities it places on public agencies, whether privatization saves taxpayers money. Answers to these questions will allow public agencies to make informed decisions about the future direction of welfare privatization.