Today's Indianapolis Star has in-depth coverage of a decision by Indiana's Republican governor, Mitch Daniels, to cancel a contract to privatize the state's welfare services. Apparently several other states had been monitoring Indiana closely as they considered outsourcing and privatizing their own welfare programs. But Indiana was not the first state to try and fail to privatize much-needed government services. Texas cancelled a similar program with Accenture in 2007.
Follow me below the fold for more details on Indiana's failed attempt to prove the private sector can do well what the government does poorly.
Mitch Daniels has been governor of Indiana since 2005, re-elected in 2008. Prior to that he was Office of Management and Budget Director for George W. Bush. I no longer live in Indiana so I haven't followed his every move as governor. However, I know there are several Kossacks from Indiana and hope they will help fill out Daniels' profile in the comments.
Cost and Projected Savings
Daniels has made the privatization of the welfare system a hallmark of his administration. In December 2006 he signed a 10-year, $1.16 billion contract with I.B.M. to overhaul the state system for managing welfare, food stamps and Medicaid. (At some point the contract grew to $1.34 billion). The projected savings were $341.6 million over the 10-year contract. In an op-ed piece shortly after the contract signing, Daniels wrote:
Although this proposal has been under constant attack for weeks, it is one of the most straightforward and obvious decisions our administration has faced. Here's why. Today's welfare system, as run by the monstrous bureaucracy known as the Family and Social Service Administration (FSSA), is totally indefensible.
There is no doubt that Indiana's welfare system needed fixing. It was ranked at or near the bottom by many performance metrics. Daniels often said he had inherited the worst welfare system in the nation. That may very well have been true. The problem was that he only saw one possible solution: privatizaton. From his op-ed piece:
There is absolutely nothing new about government delivering a service by contracting rather than hiring more people on government payrolls. That's how we build highways, train employees, service computers, and purchase plane tickets, for example.
Almost all of Medicaid is already "privatized": the doctors, substance abuse counselors, and hospitals are not government-owned, they are private businesses. The billing and back office functions are all under private contract, exactly as welfare's now will be. Overall, more than nine out of ten FSSA dollars are already spent through contracts with the private sector.
We contract for service for only one reason, to get a better deal for the taxpayer. We saved $12 million a year when we "privatized" the cooking of prison food, millions more by hiring private janitorial services and collection agencies to pursue tax evaders. We "privatize" functions to save tax dollars, but each time we do there is a secondary benefit: the Indiana private economy gets a little stronger.
The private sector that some interest groups and politicians love to bash is where most Hoosiers work, and thank goodness. That's where the money to fund government comes from; without a strong private sector, there are no taxes for government to spend in the first place.
It should also be noted that the contract bidding process itself was not without controversy. By the time a final decision was made, the I.B.M. Group was the only bidder standing. Some questioned this because one of the companies in the I.B.M. consortium was Affiliated Computer Services of Texas and Mitch Roob, who at the time was the secretary of Indiana's Family and Social Services Administration, had previously been a senior vice president at ACS. Roob is currently director of the Indiana Economic Development Corporation.
Effect on State Employees
Under the plan, 700 out of 2200 state Family and Social Services Administration (FSSA) employees would remain employees of the state (my aunt being one of the lucky ones); the other 1500 were offered private-sector jobs with the I.B.M. consortium. Since I.B.M.'s proposed cost-cutting services involved reducing the amount of face-to-face interaction with the people served by FSSA, to keep their jobs many of the workers had to either move or commute long distances to one of the new regional processing centers where they would deal primarily with computers instead of people. I.B.M. also promised to open a new 1,000-employee call center (not sure if the call center ever opened but one article I read indicated there were a total of 2,600 employees at the time the program was halted).
Daniels saw nothing but good things ahead for the former state, now private-sector, employees. Again from his op-ed piece:
For employees of the system, their new private sector employment with IBM or one of its partners means equal or better pay, benefits, pensions, and career prospects superior to any state government can offer them. It also means they will be freed of pushing paper and able to spend more of their time helping citizens achieve self-sufficiency.
A Rocky Start
The new system went online in October 2007. By May 2008 the American Civil Liberties Union was already filing lawsuits on the basis that some disabled Hoosiers were unfairly losing their benefits. In June 2008 the system was in place for 59 of Indiana's 92 counties but the state suspended expansion of the program because FSSA staff were busy dealing with flooding in central and southern Indiana. Because of complaints that hungry Hoosiers were hurting because of slow processing of food stamp applications, the program never expanded beyond those 59 counties.
Performance of the Privatized Program
Because the program never expanded to Indiana's most populous counties, the system never took on more than a third of the state's caseload. Indiana should consider itself lucky for small miracles. In late September, the IndyStar released a scathing editorial of the program, writing:
The Daniels administration rightly points out that the welfare program it inherited, built on paper records, was inefficient and open to fraud. Clearly, though, the replacement system, based on computer and automated phone contact rather than personal relationships with caseworkers, has made its predecessor seem like a hit with the public.
Complaints of inaccuracies, unwarranted denials of eligibility, confusion over use of the technology, and long delays, even past the deaths of claimants, have been rife in the 59 counties in which the new plan has been rolled out. "Chaos," says state Sen. Vaneta Becker, who is among various elected officials who have found themselves acting as de facto caseworkers for countless frustrated and bewildered constituents.
According to an earlier IndyStar article, In January 2007, before IBM took over the program, the percentage of food stamp cases that was mishandled was 4.38%. By January 2009, the percentage had grown to 18.2%. Way to go, IBM! A 450% change in performance!! Unfortunately, it was in the wrong direction. :-(
However, for me, the strongest incrimination of the program comes in the form of this tragic story related to the IndyStar by State Senator Vaneta Becker, a Republican from Evansville.
The saddest, she said, was a woman whose application for reauthorization of her Medicaid was denied because she missed an appointment while she was in the hospital.
"She lost her Medicaid, lost her food stamps, lost her transportation," Becker recalled.
For months, the woman tried to negotiate the maze to restore her help.
"On March 1st, she died. On March 2nd, we got her redetermination approved," Becker said. "She might have died anyway, but she never would have suffered the stress that she suffered the last six months of her life."
The Beginning of the End
By March 2009, state legislators were under pressure from advocates for Indiana's poor and hungry families to cancel the contract with IBM. In July 2009, after a 12-week review that identified 430 problems and made 200 recommendations for improvement, FSSA Secretary Anne Murphy officially gave notice to I.B.M. that the system required drastic improvements by the end of September or the contract would be cancelled. Today we saw the end result.
This could not have been an easy decision for Daniels. He was convinced the private-sector could do a better job than the government at meeting Hoosiers' needs. Today he had to admit he was wrong.
"They did try hard," he said. "It wasn't resources. It wasn't effort. It was a flawed concept that simply did not work out in practice."
I give credit to the governor for admitting defeat and not clinging out of ideological necessity to a sinking ship that was taking down hundreds of thousands of Hoosiers with it. Of course, as a good conservative, he's not quite ready to admit that the problem was privatization.
"It has nothing to do with private or public. It had to do with a concept," he said. "If you would use the same concept IBM brought, and every worker was a state worker, you would have had the same results, or worse."
I have followed this issue because I have an aunt who works as a welfare counselor for the state of Indiana. However, I think its impact goes far beyond Indiana and is a direct hit on conservative philosophy. How many times have we heard throughout the health care debate that the private sector always outperforms the public sector? That government can't do anything right? Well, as we have seen many times before and as Mitch Daniels and the state of Indiana found out the hard way, private sector companies aren't always up to snuff either.