Privatization and Welfare Administration

CRS Report for Congress
Privatization and Welfare Administration
Joe Richardson
Domestic Social Policy Division
Summary
All states use private companies to administer significant parts of the three major
federal/state public assistance programs they are charged with operating: Temporary
Assistance for Needy Families (TANF), the Medicaid program, and the Food Stamp
program. These components include benefit delivery, work/training efforts for
recipients, social services and caseload management, and computer/automation services.
However, federal laws covering these programs allow “privatization” of one important
activity — actual eligibility determinations — in only one of the three, TANF. In the
other two, states must use government workers to perform eligibility determination
tasks, unless a waiver is granted. And, even with TANF, only one state (Wisconsin)
now uses private groups to administer all aspects of its program, including eligibility
judgments.
At issue is whether (and how) to extend authority to “privatize” eligibility
determinations to food stamps and Medicaid and the degree to which this might make
privatized eligibility determinations more prevalent. In addition to Wisconsin, four
states (Arizona, California, Florida, and Texas) have shown interest in expanded
privatization. Florida and Texas are considering public assistance reforms that may
require waivers of federal food stamp and Medicaid rules; an Arizona pilot was ended
in 2003; and a California government commission has recommended pursuing across-
the-board privatization. However, there has been no definitive congressional action, and
no waivers have yet been approved.
Proponents of extended privatization authority contend there are efficiencies and
cost-savings that could accrue, and that it is difficult to privatize administration for only
one of the three major programs because the applicant/recipient population overlaps
significantly. Opponents state concerns about the potential for denial of help to those
in need due to cost concerns, the administrative problems and financial risks associated
with privatizing eligibility determinations, and the potential for a net loss of jobs.
This report gives a brief background on the debate and will be updated as events,
legislation, and new proposals warrant.

Congressional Research Service ˜ The Library of Congress

States have long used private entities to run discrete components of their major
welfare programs, TANF, food stamps, and Medicaid.¹ Examples include work/training
programs and social services (like child care) provided through TANF, benefit delivery
through electronic benefit transfer (EBT) systems, and “managed care” systems used in
the Medicaid program. But the 1996 welfare reform law (P.L. 104-193) gave efforts to
privatize the administration of benefits a boost. It explicitly allows states to “administer
and provide services” under TANF through contracts with private organizations. This
effectively permits states to privatize all features of their TANF program, including
activities related to the determination of eligibility. On the other hand, states still must
use public officials to undertake activities related to eligibility judgments in the Food²
Stamp and Medicaid programs because of limiting provisions in their governing laws.
General waiver authority in both these programs might permit “demonstration” projects
under which private entities carry out eligibility determinations; however, no waivers have
yet been approved.
Major State Initiatives
Privatization of eligibility activities has been, or is being, pursued in five states:
Arizona, California, Florida, Texas, and Wisconsin.
Wisconsin goes beyond the typical privatization of public assistance services. It uses
private groups to administer all aspects of its TANF program in many (but not all) of its
state welfare program “regions.” However, since public employees still must determine
eligibility for food stamps and Medicaid, there are on-site county eligibility workers to do
so.
Pursuant to a welfare privatization program established by state law, Arizona
launched a pilot program in 2000 in part of one county under which the welfare
department transferred its TANF responsibilities and certain other duties (like eligibility
for child care assistance) to a private vendor; food stamps and Medicaid activities were
not included. But, in July 2003, the vendor discontinued its role in determining TANF
eligibility — primarily because of “duplication” resulting from the requirement that
government personnel decide food stamp eligibility.
Texas is in the process of establishing a system under which most activities relating
to public assistance eligibility/benefit determinations would be integrated and privatized
(using contracts with private sector companies). Depending on the type of system Texas
adopts, federal food stamp and Medicaid waivers (or congressional action) may be called
for.
Florida is developing a system under which local community and faith-based
organizations would take over many (perhaps most) activities relating to public assistance
determinations (e.g., screening applicants, collecting information for use in judging

¹ They also have operated other significant programs for low-income families and individuals not
covered in this report — e.g., social services and child care not funded under TANF — using a
wide range of private groups.
² Section 11(e)(6) of the Food Stamp Act and Section 1902(a)(5) of the Social Security Act.

eligibility) in order to facilitate service integration. To the extent these organizations are
involved in actual eligibility determinations, federal food stamp and Medicaid waivers (or
congressional action) may be requested. At an earlier stage, Florida made preliminary
requests for broad waivers of federal rules that would have permitted it to largely (if not
completely) privatize food stamp and Medicaid eligibility activities.
California’s Performance Review Commission has recommended that the
responsibility for deciding who is eligible for TANF, food stamps, and Medicaid become
a state-level (not county) responsibility that would use an Internet-based application
system for all three programs and would be run by a private contractor.
Views on Privatization
Support for privatization of welfare eligibility determination activities — as well as
other public assistance administrative functions — derives from a strong belief that it will
“shrink” government, reduce costs by introducing private-sector efficiencies into the
administration of public aid, and bring about better service to public assistance applicants
and recipients. Proponents maintain that private agencies are likely to be more innovative
than public ones and that competition for contracts should raise performance levels.
Moreover, they note that the current situation — in which TANF eligibility activities can
be privatized, but not those in other programs — is untenable, as shown by experience so
far (e.g., the limited degree to which privatization has been taken up). The
applicant/recipient population for the three major public aid programs overlaps to a great
extent. Continuing to require government-employee involvement for food stamp and
Medicaid eligibility determinations makes it extremely difficult to effectuate a
coordinated public assistance system/strategy using private contractors.
Those who question the need for increased privatization authority have both general
and specific objections. They worry that benefits may be denied to eligible applicants
because private companies administering a given program could be tempted to hold down
costs under the terms of their state contract at the expense of needy applicants/recipients,
that there might be a net loss of jobs in a switchover to private administrators, and that the
financial benefits to the government have not been shown. More specifically, there is
concern that (1) selecting winning bidders would depend on a great deal of speculation,
which could risk higher costs (because private entities’ capacity to take on public
assistance eligibility determinations is relatively unknown); (2) contractors would have
great leverage over the state and potential competitors because of the likely high cost of
changing administrators; (3) measuring contractors’ performance with regard to eligibility
determinations would be very hard; (4) contracting eligibility determinations might
subject state and federal governments to large financial losses if the private entities
withdraw (e.g., go bankrupt) and the government must step in; and (5) some privatization
projects have been called to account for lax practices (e.g., Wisconsin’s approach).³ In
addition, opponents note that prior experience with privatization (e.g., conversion to
electronic delivery of benefits) typically took a long time — including pilot projects and
extensive evaluations — before it became accepted practice. They contend that a “go-

³ Wisconsin has had to warn one of its contractors that it might lose its contract unless it
corrected major problems, including failure to “balance caseload and financial resources.”

slow” approach should be adopted, as opposed to wholesale conversion to private
contracting with regard to eligibility determinations.
Legislation
No new substantive legislation directly related to expanding privatization of
eligibility determinations has been proposed in the 109^th Congress. However, some
measures in earlier Congresses addressed the issue. H.R. 2015 of the 105^th Congress (as
approved by the House) proposed the use of nongovernmental personnel in making food
stamp eligibility determinations. And S. 5 of the 108^th Congress (a Senate Republican
leadership bill) and H.R. 4 (as passed by the House in the 108^th Congress) would have
required increased scrutiny (through oversight of state audits) of TANF privatization
initiatives. This latter provision for increased oversight is included in H.R. 240/S. 105
of the 109^th Congress. Moreover, S. 5 included a provision specifically allowing states
to privatize food stamp eligibility determinations.
On the other hand, proposals for new “superwaiver” authority — see CRS Report
RS21219, “Superwaiver” Proposals in the Current Welfare Reform Debate — could
allow states to get waivers, under somewhat looser rules than are now the case, for
privatizing administration of food stamp eligibility determinations.
Other Resources
At least three other additional resources can be consulted when considering the
question of privatizing eligibility determination activities in major public assistance
programs: (1) work done by the Reason Foundation;⁴ (2) a 2004 report done by the
Center on Budget and Policy Priorities dealing with privatization policies as they relate
to the Food Stamp program;⁵ and (3) a 2002 privatization study, funded by the
Department of Health and Human Services, looking at six TANF sites (Privatization in
Practice: Case Studies of Contracting TANF Case Management, Final Report, March⁶

2003).

⁴ The Reason Foundation’s most pertinent annual privatization report is available, at
[ h t t p : / / www.r ppi .or g/ apr 2004/ wel f ar e.sht ml ] .
⁵ This report is available at the Center for Budget and Policy Priorities’ site,
[http://www.cbpp.org] and is listed under food assistance publications.
⁶ This study is available at [http://aspe.hhs.gov/hsp/privatization-rpt03/].