Profiting from the Poor: Outsourcing Social Services Puts Most Vulnerable at Risk

-- by Nick Surgey and Katie Lorenze

In a story most in the media missed, protestors gathered under the dome at the Mississippi state capitol earlier this year to oppose a bill that would allow the state Department of Human Services (DHS) to privatize everything from child protective services to nutrition programs for the elderly.

The bill, HB 1009, which later passed, started out as a way to allow the Mississippi DHS to hire private contractors to collect child support payments -- something which Mississippi had flirted with in the past, with less than impressive results.

From 1995-2000, a wealthy but little known firm called Maximus, Inc. had been hired to collect overdue child support payments in Mississippi and, according to a joint legislative committee report, on average, had higher costs but collected less in payments than the state did during the same five-year period. During the February 2013 debate on the new bill in the state Senate, the Associated Press quoted Senator Hob Bryan as saying "I remember the disaster that Maximus was."

But memories of that failed experiment did not stop Republican lawmakers from expanding HB 1009 to include a broad provision to allow the Mississippi DHS to privatize any of its functions by contracting out to private companies.

"Outsourcing aid for people can't work. It's designed to make a profit," Mississippi state representative Jim Evans told CMD. Evans had joined other legislators to stop what they saw as the potential corporate takeover of a public agency providing essential services to vulnerable citizens.

Despite the now lengthy list of failed -- and often disastrous -- attempts at privatizing social services in states across the country, Mississippi Governor Phil Bryant signed the bill into law this spring.

Indiana Outsourcing Demonstrates the "Perfect Storm" of Overzealous Corporate Ambition and Corporate Politicians

Mississippi protestors had good reason to be concerned. The privatization of social services has in the past resulted in some spectacular failures.

The Denver Post found a shocking pattern of abuse when it conducted an in-depth investigation of the privatization of Colorado's foster care system a decade ago. The Post reported that numerous children were molested, abused, and even died in foster home after the state started contracting with businesses that failed to ensure they were placed in safe homes. The state also paid three times as much to place a child in private foster care as it did in homes that were supervised by the counties.

More recently, Indiana Governor Mitch Daniels' attempt to transform the state into a privatized utopia failed spectacularly in the health and human services area. Indiana's 2006 experiment involving a $1.16 billion contract awarded to a consortium of firms including Affiliated Computer Services, Inc. (ACS), went so badly, that the Governor cancelled the contract at an unknown cost to the state, and the state legislature even considered banning privatization altogether.

Before Indiana privatized these services, it had one of the lowest rates in the country for incorrectly denying or ending access to food stamps, but in 2008, under for-profit outsourcing, that error rate jumped 13 percent according to the LA Times, resulting in kids going hungry and grandmas losing their Medicaid coverage. The human cost of these failures is all too real. WTHR News in Indiana, reported on the story of Ronald Alexander who died in 2009, more than a year after being wrongly denied Medicaid benefits and despite his frequent and frustrated attempts to get the help he needed.

Many blamed ACS, the main subcontractor on the project, for the repeated problems. By 2009, the state cancelled its contract and attempted to institute a hybrid method, transferring some functions back to the state government.

In a lawsuit after the outsourcing effort collapsed, Judge David Dreyer wrote, "ACS failed to make any serious effort with respect to its portion of the responsibilities, and was instead lobbying the state, directly and through its lobbyist, to replace IBM as the general contractor on the project." Dreyer continued: "This story represents a 'perfect storm' of misguided government policy and overzealous corporate ambition."

Maximus: A Lesson in How Profiteers Have Billed Taxpayers for Parties and Settled Charges of Medicaid Fraud, but Still Win Outsourcing Bids

Many question whether these services -- aimed at helping the elderly, single parents, and foster children -- should ever be delivered with a profit motive. As Bob Jacobson of the Wisconsin Council on Children and Families put it, "If you're a corporation whose very mission is to increase shareholder value that is automatically in conflict with a social service agency whose sole purpose is to meet the needs of people in the program."

Hired to manage Wisconsin's privatized welfare to work program known as "Wisconsin Works," the Maximus firm had billed the state nearly half a million dollars in improper or questionable expenses, including $195,745 that it spent on promotional materials, $15,741 spent on items such as "hotel rooms in Lake Geneva" and parties and $1,498 that it had spent on flowers, according to a Wisconsin Legislative Audit Bureau report.

Lawmakers subsequently called for the termination of the corporation's $46 million contract with the state.

It's not just in Wisconsin that Maximus has been documented ripping off taxpayers.

In 2007, a whistleblower came forward accusing the corporation of defrauding Medicaid in the District of Columbia. In response, Maximus agreed to pay $30.5 million in a settlement with the Department of Justice.

Remarkably, despite this history, in 2011 Maximus was given a $21 million rebid to manage Wisconsin's foster care administration through 2016.

Jacobson noted that in the early days of privatizing social services in Wisconsin, contracts with Maximus and others were set up in such a way that "the profit motive was built in to deny benefits." That is, whatever money Maximus saved the government by not enrolling eligible individuals, it got to keep. "There was all sorts of money being siphoned off to build big houses for CEOs and it was perfectly legal," Jacobson told CMD.

In Tennessee, Maximus controlled the Davidson County Child Support Enforcement Office for more than 20 years until last July when the county terminated its contract. One juvenile court magistrate observed, "We have three full-time magistrates ready to hear cases, and our dockets have never been completely full [under Maximus]...we were being underutilized."

Maximus had little incentive to round up parents who consistently fail to make their mandated child support payments since the government offers money to address the problem of low collection rates. In other words, for Maximus and other companies, doing the job well could mean losing money that it could otherwise keep for itself.

Despite this record, Maximus continues to be awarded numerous significant government contracts. Most recently, on October 3, 2013 a U.S. Department of Education contract was announced, to provide services including a call center and to process payments from federal student loan borrowers. That contract begins at $143.3 million, but could run as high as $848.4 million.

The corporation also boasts of being the "nation's largest administrative support vendor for Medicaid and the Children's Health Insurance Program," and has won numerous contracts to run eight call centers in multiple states to support the new health care exchanges set up under the implementation of the Affordable Care Act.

ACS Siphoned Money from Poor Families, Failed to Deliver on Medicaid Contracts

In 2008, Affiliated Computer Services signed a $69 million seven-year contract with California to manage the state's electronic benefits transfer system. This allows families receiving cash welfare assistance, utility grants, and other emergency support to access their benefits electronically.

In 2011, the Huffington Post reported that ACS collected $806,238 in fees from California's public benefit recipients over the first eight months of that year, according to state data, and banks collected about $12.9 million in ATM surcharges from many of California's poor families during the same period. Under the terms of the contract, ACS charged families an 80-cent fee to access their cash at an ATM and 25 cents each time they checked their balance at an ATM.

Although the contract has been a financial boom for ACS, it has been less reliable for those that depend on vital benefits that are now paid through the system. In January 2013, 37,000 people in 17 California counties suddenly found their food stamp benefits had disappeared and were left hungry and unable to feed themselves and their families. Some had to wait long periods for new cards to arrive in the mail.

In North Carolina in 2004, ACS won a five-year $171 million contract to deliver a new Medicaid Management Information System (MMIS) for the state, designed to streamline the processing of claims and payments. After two years of failing to meet the terms of its agreement, the state finally cancelled the ACS contract at a cost of $16.5 million to the state.

In 2008, North Carolina tried again, awarding a larger $265 million contract to ACS rival Computer Sciences Corp of Virginia. That system, called "NCTracks," was due to go live in August 2011, but didn't do so until July 2013 while the cost ballooned by 82 percent to $484 million. All too predictably, NCTracks is already beset by problems, including the fairly fundamental problem of inaccurately processing claims.

Similar MMIS contracts were awarded to ACS in North Dakota and New Hampshire.

In the Granite State, after nine missed deadlines, the $90 million project finally went live in March this year, fully six years later than originally planned. Now that it's launched, the project is facing yet more complications, with a reported $10 million payment backlog in processing payments.

The North Dakota program, which was scheduled to launch in 2011, is finally due to go live this month (October 2013).

ACS didn't do much better in Minnesota, where it had a contract to create a computerized system to match the nearly 700,000 people on state health care programs to the correct program. After five years, the state Department of Human Services decided it would be better off developing the system without ACS.

Welfare to Poor Families Dwindles as Corporate Welfare Thrives

As some cash strapped governments choose to balance the budget on the backs of children and families, corporate contractors' profits are soaring.

According to SEC filings, Maximus raked in total revenue of $1.05 billion during its 2012 fiscal year, with CEO, Richard Montoni receiving more than four million dollars. Over the past five years his total compensation has been $16,194,847. From 2008-2012, Maximus' top executives have pulled in $41,808,585, with substantial revenue from state taxpayers.

During the 2012 fiscal year, ACS's parent company, Xerox, took in $22.3 billion. Lynn Blodgett, the former CEO of ACS (prior to its acquisition by Xerox) who is currently a Xerox Executive Vice President, made $7,561,949 in total compensation last year.

In the three years since Xerox bought ACS, Blodgett's compensation has totaled $17,475,776. Xerox -- which directly benefits from the government contracting work done by ACS and its other division -- compensated its top executives a total of $124,842,705 from 2008-2012.

The Story of Outsourcing Social Services to For-Profit Firms Is Repeated Failure

Despite repeated examples of failure, laws like Mississippi's HB 1009, which bring about the selling off of social service agencies to for-profit contractors, will continue to crop up around the country if legislators fail to learn from the past mistakes of outsourcing, and instead persist in the drive to privatize the provision of essential services and benefits for our most vulnerable citizens.

The provision of benefits and social services to the poor or otherwise needy has traditionally been carried out almost exclusively by government or by charity, often in partnership. Increasingly this is changing.

As private corporations like ACS and Maximus rake in hundreds of millions of dollars in massive contracts, and their executives rake in colossal compensation packages, shareholder profits and warped incentives detract from the standards of care provided by these corporations.

According to In the Public Interest, a comprehensive resource center on privatization and responsible contracting: "Numerous state and local governmental entities are finding that turning over these programs to private contractors not only fails to achieve projected cost savings but also decreases access to these important services, hurting many vulnerable families. In many cases, the service quality declines dramatically and many sick or at-risk people are left with substandard care."

In September, CMD launched a new project on the privatizers and profiteers selling out our democracy. You can find detailed corporate profiles of Maximus and Affiliated Computer Services (ACS) on our new website OutsourcingAmericaExposed.org.