The folks at the Center for Public Policy Priorities (CPPP) have just released a paper on Updating and Outsourcing Enrollment Public Benefits: The Texas Experience. It's a 60-page PDF file, just the thing for a little light reading before bedtime. Here's the capsule review:
Outsourcing was supposed to save the state hundreds of millions of dollars and improve services to clients, but so far, the state has not saved a penny in administrative costs. The children, elderly, and persons with disabilities who rely on these services have suffered through a frustrating enrollment process, been caught in long backlogs, and often been wrongly denied benefits. In May 2006, the state delayed further rollout of the system indefinitely and asked state staff to take over. This report shares the Texas experience.
The most commonly cited reason for outsourcing is that it will increase competition, thereby improving quality and lowering cost. However, competition for the right to administer a program differs from competition to provide the service itself in several ways. These differences may undermine government’s ability to reap the benefits of competition.First, there is no competitive market for eligibility determination for public benefits. States that decide to outsource this function are essentially buying a service that no company currently sells. States would have to recruit companies into the business. These companies would have to make a huge investment to enter the market, including hiring, training, and supervising staff and numerous other steps necessary to establish an eligibility determination system. The start-up costs would be significant. The few companies able to respond to a contract offer would in essence assume monopoly power.
The lack of a competitive market also increases the risk that the contractor will be unable to perform as promised. Because bidders lack the present capacity to offer those services, selecting a contractor will involve a great deal of speculation by the state. If the contract is awarded based on the lowest bid, then bidders may grossly underestimate the cost of providing the services in order to win the contract. At this point, the state faces a difficult decision: pay the contractor more or let services to clients suffer. The disruption, cost, and risk of finding a new contractor or rebuilding its public system may leave the state with little practical choice but to stay with the contractor even if the company has performed poorly or is demanding a higher price.
Moreover, any competition would effectively end upon the signing of a contract. Because of the cost and disruption of awarding a contract and the significant start-up costs involved in transferring responsibilities to the contractor, contracts are likely to run for many years, eliminating any competition for long periods of time.
In effect, the state assumes most of the risk in the inherent uncertainty over the costs of outsourcing eligibility
determination: if the contract price proves to be more than is needed to run the eligibility system, the contractor keeps the profits, but if it proves inadequate, the contractor has leverage to ask for more money.Another significant risk in outsourcing eligibility determination is that it is hard to measure performance, which makes crafting an effective contract a challenge. Research suggests that the key factor in predicting success in outsourcing is whether there is “clear accountability for results, clear criteria for performance, and clear public objectives.” In this regard, 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. By contrast, government functions that require the “exercise of judgment to weigh competing priorities” have proven difficult to outsource successfully.
The 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 a person to fill out an application, are easy to measure and therefore more conducive to outsourcing. More subjective determinations, such as identifying a disability that may prevent an applicant from meeting program requirements, are much harder to measure and therefore less conducive to outsourcing.
Eligibility determination also requires accommodating or balancing many different policies that at least partially conflict - for example, controlling for fraud while encouraging maximum participation by eligible families. Designing a contract that strikes an appropriate balance between the competing priorities of program integrity and program access is extremely difficult.
When deciding whether to outsource, states should consider which steps in the eligibility determination process lend themselves to outsourcing, and how hard it will be to measure performance.