1. Center for Public Policy Prioritieswww.cppp.org Outsourcing Issues and Concerns in Public Benefits Administration United Way of Tarrant County Pre-Legislative Forum Outsourcing Issues and Concerns in Public Benefits Administration November 13, 2006 Celia Hagert, Senior Policy Analyst hagert@cppp.org hagert@cppp.org

2. Center for Public Policy Prioritieswww.cppp.org The Big Picture

3. Center for Public Policy Prioritieswww.cppp.org Pros and Cons of Privatization

4. Center for Public Policy Prioritieswww.cppp.org 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)

5. Center for Public Policy Prioritieswww.cppp.org 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.

6. Center for Public Policy Prioritieswww.cppp.org Stepping Back: What are the Challenges Facing Our 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.

7. Center for Public Policy Prioritieswww.cppp.org Stepping Back: What are the Challenges Facing Our 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challenges both workers and clients Legislature has not provided necessary resources to ensure effective administration Out-of-date technology can lead to duplication of effort -- unnecessary “red tape” Chronic underfunding exacerbates existing challenges

8. Center for Public Policy Prioritieswww.cppp.org Before IE@E

9. Center for Public Policy Prioritieswww.cppp.org 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?

10. Center for Public Policy Prioritieswww.cppp.org 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

11. Center for Public Policy Prioritieswww.cppp.org 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

12. Center for Public Policy Prioritieswww.cppp.org 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

13. Center for Public Policy Prioritieswww.cppp.org 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

14. Center for Public Policy Prioritieswww.cppp.org 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

15. Center for Public Policy Prioritieswww.cppp.org 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.

16. Center for Public Policy Prioritieswww.cppp.org 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.

17. Center for Public Policy Prioritieswww.cppp.org 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.

18. Center for Public Policy Prioritieswww.cppp.org 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.

19. Center for Public Policy Prioritieswww.cppp.org 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.

20. Center for Public Policy Prioritieswww.cppp.org Looking Back a Decade

21. Center for Public Policy Prioritieswww.cppp.org 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.

22. Center for Public Policy Prioritieswww.cppp.org 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.

23. Center for Public Policy Prioritieswww.cppp.org 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.

24. Center for Public Policy Prioritieswww.cppp.org 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).

25. Center for Public Policy Prioritieswww.cppp.org 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.

26. Center for Public Policy Prioritieswww.cppp.org 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.

27. Center for Public Policy Prioritieswww.cppp.org Privatization is Here to Stay

28. Center for Public Policy Prioritieswww.cppp.org For more information or to sign up for our free E-Mail Updates, visit www.cppp.org

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