Going Outside

The push to privatize is expanding beyond service delivery into the areas of policy making and program design.
by | May 2004

While governors and legislators scramble to deal with American jobs moving offshore, many of these same policy makers are creating anxiety about outsourcing within their own state's borders--among their own public employees.

Texas, for example, is poised to make a radical change in the way it administers welfare benefits. Anyone seeking public assistance will no longer visit a local government office but instead dial up a call center staffed by private-sector operators. Those corporate employees will be linked to a computer system that allows them fingertip access to a vast array of financial data. Using such information, the new- style eligibility workers will then tell callers whether or not they qualify to receive a variety of benefits--from food stamps and Temporary Assistance to Needy Families to child health insurance and Medicaid.

The "call center" approach to qualifying citizens for public benefits is the front edge of a wedge aimed at opening up a huge new area of traditional government work to the private sector. If it receives federal approval, the Texas privatization strategy could trigger a wave of state and local outsourcing nationwide worth billions of dollars, affecting millions of citizens and tens of thousands of state and local employees, while at the same time opening up whole new business lines for eager vendors. Frank Ambramcheck, who heads up public sector consulting for Unisys Corp., calls it the "the bow wave" of a private-sector push into government work, an expansion that is beginning to go beyond what has typically been privatized--service delivery to citizens--and into program design and decision making.

"If Texas gets its toe in the water," says Celia Hagert, an analyst with Progressive Policy Institute who has been tracking the issue, "then a whole lot of states will be diving in right behind it." Hagert, along with many health and social services advocates nationwide, is concerned about private companies deciding who ought to get government benefits, arguing that it has always been too sensitive a job to sell off.

The drive to privatize in Texas is part of a massive consolidation that will distill 12 health and human services agencies into four. The job of administering the four new departments falls to the Health and Human Services Commission, which formerly had more casual oversight over the sprawling bureaucracies. The law that engineered the consolidation also directs HHSC to turn as much other work as is practicable over to the private sector.

The commission already has sent out a request for proposals to run the human resource management function--not just payroll administration but a broad range of HR work, from recruitment of new employees to initial screening of job candidates. Other administrative basics such as procurement and information technology will also be on the table.

But that's not all. In keeping with the outsourcing theme of the overhaul, the reorganization itself is being quarterbacked by the private sector. Deloitte Consulting, Maximus and Accenture are doing everything from reengineering how work gets done, to ensuring that whatever system Texas ends up with squares with federal cost- accounting requirements.

As of this spring, the commission's "contracting opportunities" Web site had more than a dozen RFPs listed, ranging from such specific work as studying the closure or consolidation of certain facilities, to doing feasibility studies on community-based treatment for emotionally disturbed kids. What's more, vendors also are helping HSSC to do the analyses that will become part of the "business case" that the agency uses to evaluate the efficacy of contracting out.

The math and the mindset driving the privatization effort are straightforward: Texas is facing a $10 billion budget deficit and in the view of many influential Republicans there is only one way to deal with that number: Let the private sector in on state work to lower state costs. "I am a very strong proponent of free enterprise and private-sector solutions to meet the needs of government," says state Representative Arlene Wohlgemuth, who sponsored the consolidation bill. Through reorganization and consolidation, she says, the state is slated to save billions of dollars, in part through programmatic changes to such big-ticket items as Medicaid but also by turning work over to contractors. Under the Wohlgemuth plan, more than 2,500 state health and social services jobs are scheduled to be handed off to vendors in the next two years. Ultimately, the plan could directly impact the lives of thousands more state workers across Texas.

But if Texas is shaping up as a privatizer's dream come true, some who have been watching the process closely view it as an exercise in outsourcing gone amok. Patrick Bresette, executive director of the Austin-based Center for Public Policy Priorities, calls it the "the big-bang theory" applied to scaling back government service. There is scant evidence, according to the center's analysis of the consolidation plan and early outsourcing efforts, that it will actually result in improved services at lower costs.

Texas employees, meanwhile, express their own brand of skepticism. The state is "stepping over dollars to save dimes," says Gary Anderson, executive director of the Texas Public Employees Association. While he understands the cost-saving imperative, he believes the state isn't thinking much beyond a single budget cycle in assessing the actual value of outsourcing so much work. "In the short term, you may see some savings," he acknowledges. But in the long run, Anderson contends, the state loses valuable institutional knowledge along with the capacity to easily take work back if vendors don't pan out. That could saddle the state with huge down-the-road costs, for both rebuilding internal capacity and compensating for non-performance of basic work.

Anderson sees one other potential and ironic cost to the plan: If vendors are really going to save the state money, then they will probably have to do that by using low-wage, low-benefit workers, which means the very people taking over pieces of food stamps, TANF and Medicaid administration could end up qualifying for all those benefits themselves.


The issues of cost, performance and capacity have long been at the heart of what drives outsourcing--and the heated debates about it. "More (and better) for less" has been the longstanding rationale for using private contractors to do everything from mowing grass to placing kids in foster care. But recently privatization has been taking on a more ideological edge. A new generation of elected officials--top-level executives, in particular--is making no secret of its conviction that government should not only "be run like a business" but also, in many cases, be run BY business. And that has led to a new aggressiveness in what states such as Texas are looking to contract out.

Adding heat to the simmering outsourcing debate is the current controversy over where, exactly, the privatized work is going. Offshore outsourcing began to capture the attention of lawmakers at the beginning of this year, fueled by a string of stories about private contractors sending state work--especially call-center work-- to foreign countries. The image of employees in India handling Virginians' and Vermonters' queries about food-stamp benefits had governors and legislatures nationwide arguing all spring about whether they ought to limit state contracts to vendors who agree not to send jobs abroad (see related article on page 54).

But the issue of offshore outsourcing is clearly a sideshow to the main event: the increased interest in domestic outsourcing fueled by new, more market-friendly political leadership in combination with tough budget times. Faced with a $350 million budget deficit, South Carolina Governor Mark Sanford is among those identifying areas where the private sector might do the job better for less.

One of the items on Sanford's list--outsourcing inmate health care-- has fallen to John Davis, the acting health services director for the Corrections Department. A veteran of past privatization efforts, Davis well understands that coming up with a list of areas to consider for outsourcing is one thing, and actually doing the contracting in a way that delivers quality service at reasonable cost is quite another. In fact, the state had been contracting out part of its inmate health care prior to Sanford's election, and that experience wasn't altogether satisfactory. The state dropped its contract with a private health services provider working at 10 state facilities for a very simple reason: The company wanted more money, and the state didn't want to pay more.

Now health care for the ENTIRE corrections system is on the table, and Davis is wrestling with the RFP process. It is a daunting task. First, the state doesn't have a good handle on costs, so it's hard to judge if outsourcing will really be a better deal. "We break things down in large categories. What it costs for hospitalization, pharmaceuticals and personnel. But we don't know how much it costs to treat diabetics or cardiac patients," he says. Although the state is currently working on a cost-coding system that will help it to capture such data, for now it is negotiating RFPs absent such detailed breakouts. Cost, of course, is what makes the outsourcing world go around, and as part of the back-and-forth with potential vendors over the RFP, private-sector companies also are asking that liability for cost overruns be shared by the state. That has made for dicier negotiations.

Also complicating the contracting effort is the fact that the state operates on an annual budget, so it's hard to lock any company into a long-term contract. That raises the specter of a low-ball bid just to get the work, with ever-escalating contract requests to follow. The state may be particularly susceptible to such a syndrome in this case, Davis notes, because this contract involves outsourcing health care services at all 29 of its facilities, which would mean the state would lose the capacity to do the work itself. "Once you've dismantled the system, it's tough to put it back together," he says, "and vendors know that."

Still, the RFP process proceeds apace. Davis thinks that given the state's past experience, things are going a little smoother this time, and that the state is doing a better job of bargaining.

In all cases, though, whether it's outsourcing human resource management or inmate health care, the basic question is the same: Does it really add up to cheaper and better government? Organized labor challenges that notion, arguing that it frequently adds up to more expensive government and worse performance. Free marketeers, meanwhile, argue that privatization is the only way to break expensive government--and government employee--monopolies. Such a break wrings greater performance and productivity from government bureaucracies, argue proponents, while applying fresh ideas and strategies to government administration and programs.

With states and localities spending upwards of $400 billion a year on contracts, and with the recent incursions into new outsourcing territory, it's not an argument that's likely to ease up anytime soon. But even Adrian Moore, executive director of the pro-privatization Reason Foundation, admits contracting out is not a panacea. "Like all policy tools, it is neither good nor bad," he says, "It depends on whether or not you do it right."


Stories and data abound illustrating how and where government does it wrong, say outsourcing critics. Joe Fox, vice president of the New York State Public Employees Federation, says he understands there are times when outsourcing makes sense--when a temporary spike in demand calls for some outside help or for certain kinds of seasonal work. But Fox argues that because of outsourcing, New York state government is currently paying more for a wide range of traditional government work and is getting lower quality service for the money.

According to PEF calculations, the state could save at least $160 million a year if it brought nursing, pharmaceutical, psychiatric, computer and engineering work back in-house. The federation's stand is bolstered by a March 2001 letter to the New York State Department of Transportation, in which the state comptroller declared, "It is generally less expensive for the department to design and inspect projects in-house rather than use consultants." For Fox, the game being played by New York and other states is obvious. "Politically, it looks good to say, 'I don't have this huge workforce.' But it's smoke and mirrors."

Outsourcing critics also say some politicians pursue privatization in order to offload difficult policy areas. In looking at the highly volatile area of child protective services and foster care, Richard Wexler, executive director of the National Coalition for Child Protection Reform, says Florida is a national model of how outsourcing the administration of child protection is an effort to dump responsibility and accountability. "The only motivation for privatization of child welfare in Florida is that it is a political liability, and Governor Jeb Bush doesn't want that liability," says Wexler.

The governor's administration rejects that criticism out of hand. "If you look at that area, it's one where states have been outsourcing for 100 years," says Bill Simon, secretary of the Florida Department of Management Services. The whole concept of sending kids to foster homes instead of orphanages, Simon notes, is one where outsourcing has proved "wildly successful." And he adds, "It's not much of a step to then look at outsourcing its administration."

But Florida is a state that has come in for heavy criticism for its aggressive, big-ticket and low-accountability outsourcing efforts. In particular, the governor has been pounded over the state's high- profile and so far unhappy effort to outsource a significant portion of its human resources management function. A $280 million contract with Cincinnati-based Convergys Corp. to take over the job has bogged down badly, which means the state is spending millions of dollars keeping its old system up and running while Convergys tries to work out kinks in the new system.

Still, DMS secretary Simon believes that much of the criticism aimed at Bush is simply on account of the "blistering pace" with which the governor has pursued privatization. So far, state action on the outsourcing front has included everything from collecting tolls to investigating allegations of child abuse.

Not all of Florida's privatizing has gone badly. In several multi- million-dollar deals, the contractors have performed as advertised. But both the governor's own Inspector General and the legislature's Office of Program Policy Analysis and Government Accountability have released papers taking the state to task for its less-than- businesslike approach to contracting out. The legislative oversight office, for instance, said agencies need to make a better business case for privatization and look more at performance-based contracting. It also suggested the need for central oversight of contracting.

Florida has received enough official criticism about its privatization efforts that Governor Bush in March created a Center for Efficient Government in the state's Department of Management Services to oversee the state's outsourcing efforts. One of the center's main jobs will be to provide technical assistance to agencies not used to negotiating large contracts with experienced, savvy vendors. "We have state agencies that might do a $100 million contract every one or two years, whereas IBM does one a week," Simon says. The center will also be the central repository for information on cost and performance.


While Florida has received much attention for its outsourcing efforts, most eyes right now are on Texas and its decision to privatize eligibility determination--and whatever else it can--as part of its health and human services overhaul.

Texas is still negotiating with the feds for permission to outsource all the eligibility determination work that it would like to-- particularly in the areas of food stamps and Medicaid. Gregg Phillips, a former consultant with Deloitte who is now HHSC's point man on reorganization and contracting out, is confident the state will be allowed to hand the work off to contractors. Other states are watching the action carefully.

Phillips is well aware of concerns about contracting out. But he says that Texas won't repeat the mistakes of other aggressive privatizers that have gone before it. Furthermore, he argues that the state already has been using the call-center approach in such areas as the child health insurance program and workers' compensation with no problems. "Right now with our CHIP program," he says, "every eligibility determination is being made by a private-sector company. Texans seeking service don't care who they're talking to as long as who they are talking to is courteous, accurate and performs well."

Furthermore, says Phillips, every outsourcing effort that HHSC undertakes has to be justified by a business case, and where contracting out is deemed cost effective--and he's confident there will be lots more cases--contractors will always be held to high standards of performance with clear penalties for failure to meet those standards. He also believes there are enough vendors around that are interested in picking up state work that HHSC will never be held hostage by any private-sector monopolizer.

Still, even the staunchest advocates of outsourcing, including Representative Wohlgemuth, understand that building that kind of contract-writing, administration and oversight capacity in state government is in and of itself a daunting task. But she has a ready answer for how to deal with any shortfall in state contracting capacity: "You can contract that out, too."