oversight

Social Service Privatization: Ethics and Accountability Challenges in State Contracting

Published by the Government Accountability Office on 1999-04-05.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Requesters




April 1999
                 SOCIAL SERVICE
                 PRIVATIZATION
                 Ethics and
                 Accountability
                 Challenges in State
                 Contracting




GAO/HEHS-99-41
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Health, Education, and
      Human Services Division

      B-279094

      April 5, 1999

      The Honorable Henry A. Waxman
      Ranking Minority Member
      Committee on Government Reform
      House of Representatives

      The Honorable Dennis J. Kucinich
      House of Representatives

      The magnitude of federal funding in several major social service
      programs—child support enforcement, Temporary Assistance for Needy
      Families (TANF), child welfare, and child care—which reached about
      $20 billion in 1996, has contributed to renewed interest in the states’
      contracting out of social services and other program activities. Program
      officials, contracting experts, and others—prompted in part by a rise in the
      volume of contracting in services not previously privatized—have raised
      concerns about states’ efforts to privatize social services. In addition,
      some Members of Congress have expressed concern that the movement of
      state program managers and other employees to take similar jobs with
      contractors, a process often called the “revolving door,” may affect the
      capacity of state governments to manage public services and may give an
      unfair advantage to contractors employing former public officials.
      Members of Congress also have questioned the extent to which states have
      adopted strategies to hold contractors accountable for program results.
      Recent changes in social service privatization have prompted a growing
      need to assess the strength of ethics policies intended to protect open and
      fair contracting and examine states’ capacity to ensure program
      accountability.

      To follow up on our previous report and testimony,1 you raised several
      issues about the revolving door and its relationship to competitive social
      service contracting as well as the capacity of the states to hold contractors
      accountable for program results. Therefore, you asked us to (1) identify
      the extent to which government employees have moved to positions at
      social service contractors and the impact such movement has had on the
      management of publicly provided social services; (2) determine the
      relative success in winning contracts by contractors who hired state
      employees and contractors who did not; (3) examine state ethics laws,
      policies, and enforcement approaches that address the employment of

      1
      See Social Service Privatization: Expansion Poses Challenges in Ensuring Accountability for Program
      Results (GAO/HEHS-98-6, Oct. 20, 1997) and Child Support Enforcement: Challenges in Ensuring
      Accountability for Program Results (GAO/T-HEHS-98-22, Nov. 4, 1997).



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                   former state employees and other related issues; and (4) examine state
                   practices for holding contractors accountable for achieving program
                   results through contracted services.

                   As agreed with your offices, we focused on state-administered child
                   support enforcement and TANF given the significant level of federal funds
                   that support these services, the states’ use of new and different types of
                   contracting, and the states’ reliance on a mix of for-profit and
                   not-for-profit contractors. To address these issues, among other steps, we
                   performed detailed work in four states with diverse policies and program
                   practices—Arkansas, Maryland, Massachusetts, and Texas. In these states,
                   we examined employee movement into positions with social service
                   contractors, contract awards, ethics laws and enforcement, and practices
                   intended to hold contractors accountable for program results. We did our
                   work between January and December 1998 in accordance with generally
                   accepted government auditing standards. A more detailed discussion of
                   our methodology is in appendix I.


                   Since 1993, 11 of 42 state child support enforcement directors who left
Results in Brief   their government positions accepted a managerial position with a
                   contractor providing child support enforcement services, according to
                   federal and state program officials. Similarly, since 1993, federal and state
                   officials indicated that 10 of the 41 high-level TANF managers who left state
                   service accepted a position with a social service contractor. As may be
                   expected, when the four states we examined lost child support
                   enforcement and TANF managers and other staff, officials indicated that
                   they experienced short-term difficulties because they were required to
                   train staff selected to fill the managerial vacancies. Ultimately, however,
                   these states were able to fill their vacancies with program staff they
                   believed were capable of performing the roles and handling the
                   responsibilities.

                   Although these 21 directors and managers left the government to accept a
                   position with a social service contractor, our review of 59 contract
                   proposals in four states found that proposals listing former state
                   employees as key personnel did not result in contract awards any more
                   frequently than did proposals not listing such employees. This was the
                   case for both the child support enforcement and TANF-related programs.
                   Our analysis also showed that proposals listing former employees from the
                   same state in which the bidding took place resulted in contracts about as
                   frequently as did proposals not listing such employees.



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             Most states have established some ethics policies designed to help ensure
             open and fair contracting by adopting provisions determined by the
             American Bar Association (ABA) and other organizations to be critical in
             prohibiting certain postemployment practices and conflicts of interest.
             However, more than one-third of the states have ethics policies that lack
             one or more of these provisions. For example, in some states, ethics
             provisions only apply to a limited range of state employees and officials
             likely to be involved in the contracting process. Among the four states we
             examined, enforcement approaches to help ensure compliance with
             applicable ethics provisions differed widely. For example, the Arkansas
             Ethics Commission, citing other priorities, has undertaken limited
             enforcement of the state’s competitive bidding process, whereas Maryland
             has placed representatives from the Attorney General’s office in major
             state agencies to help ensure that the agencies comply with applicable
             contracting policies. To address these inconsistencies, model laws
             prepared by ABA and others offer possible frameworks for strengthening
             state ethics policies. The Medicaid statute also offers a model in that it
             directs participating states to have requirements applicable to state
             Medicaid officials that are at least as stringent as those applicable to
             federal employees.

             Once contracts have been awarded, several states have instituted
             mechanisms aimed at holding contractors accountable for program
             results. These mechanisms include measures states apply when they
             assess contractor performance. While these states have established
             practices to assess contractor progress toward achieving program results,
             many others generally rely on basic accountability measures that focus on
             compliance with program rules more than on results.


             States have contracted out social services for decades.2 Federally funded
Background   social service programs generally support the financial, employment, and
             other public assistance needs of children and families. In recent years, the
             amount of contracting for state-administered social services has increased
             and the nature of privatization has changed significantly. State


             2
              Social service privatization is defined as contracting out program functions or services. To contract
             out social services, states generally follow five major phases: (1) issuing requests for proposal (RFP),
             (2) reviewing contractor proposals, (3) awarding contracts, (4) administering contracts, and
             (5) overseeing contractor performance. Our review focused primarily on state policies and practices
             for reviewing proposals, awarding contracts, and overseeing contractor performance. When states
             review proposals, they consider the proposals’ relative technical merit, the proposers’ organizational
             and staff experience, and projected contract costs. States implement varying approaches to oversee
             contractor performance. These approaches include financial and compliance audits and other program
             assessments.



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governments have increased their spending on privatized services, and
strong support from state political leaders and high-level program
managers has helped prompt new privatization initiatives. Recent changes
in social service privatization have also been spurred by changes in federal
legislation. As a result of the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (P.L. 104-193), for example, states
are now permitted under TANF to privatize eligibility determinations, a
function traditionally performed by state governments. To help ensure
program accountability in federally funded social service programs, the
Department of Health and Human Services (HHS) has responsibility for
overseeing state performance. With the fundamental changes in the
magnitude and nature of social service privatization, states continue to
face new challenges—utilizing competitive markets, developing
performance-based contracts, and enhancing program
accountability—that program officials, contracting experts, and others
believe warrant continued focus.

When contracting for social services, states often seek to achieve fair and
open competition among those who submit contract proposals. To protect
opportunities for all qualified contractors to compete openly and fairly for
government business, states may, among other things, limit certain
activities of former government employees seeking employment with
private organizations and prohibit financial, programmatic, and other
conflicts of interest. Studies have specified that state ethics policies
should apply to a broad range of public employees, including legislators,
political appointees, program managers, and others involved in the
contracting process, while minimizing to the extent possible the limits
placed on the discretion of state employees to choose public or private
employment.3

State governments and social service contractors often work in tandem to
provide diverse program services. In response to state RFPs, contractors
submit proposals they believe address state needs. Contractors recruit and
hire qualified specialists to maximize their competitive positions, while at
the same time government employees exercise their prerogatives in an
open labor market to pursue private sector careers where they can apply
their talents in return for pay and benefits commensurate with their
experience and expertise. In this way, social service contractors make use
of a flexible labor pool in their attempts to meet state service needs. While
these practices may benefit states and social service contractors, from

3
 Public Integrity Annual, ed. James S. Bowman (Lexington, Ky.: Council of State Governments,
1996) and Michael W. J. Cody and Richardson R. Lynn, Honest Government: An Ethics Guide for Public
Service (Westport, Conn.: Praeger, 1991).



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                            another perspective, the movement of government employees to work for
                            contractors may also reduce the capacity of states to manage public
                            services and may confer unfair advantages to certain offerors.


                            Although many child support enforcement and TANF senior program
States Able to Replace      managers left their positions from 1993 to 1998, about a quarter of them
Departing Program           left to take positions with social service contractors. State employees
Managers, but Loss of       generally joined contractors to increase their income. The states we
                            examined were able to fill vacancies created by the loss of child support
Information                 enforcement and TANF program managers and other staff with minimal
Technology Staff Was        disruption. However, Texas child support enforcement officials expressed
                            concern over their losses in mid-level information technology (IT)
More Troublesome            personnel and related impacts on program services.


Senior Program Directors    Nationally, many senior program directors in both the child support
and Other State Employees   enforcement and TANF programs left their positions in the last 5 years.
Moved to For-Profit         About a quarter of these officials took positions with social service
                            contractors. According to federal and state program officials, of the 41
Contractors, Attracted by   states in which the child support enforcement director left that position,
Higher Salaries and         11 directors went to work for social service contractors. Similarly, of the
Benefits                    senior TANF program managers who left their positions in 40 states, 10
                            joined the staffs of social service contractors.

                            According to state program officials we interviewed, senior program
                            directors most often leave their jobs to retire, fill other government
                            positions, or respond to changes in a state’s administration. Contractors
                            told us that they recruit more from state child support enforcement
                            programs than from TANF-supported programs. According to contractor
                            officials, child support enforcement demands a high degree of technical
                            expertise, particularly with respect to state information systems. Through
                            such hiring practices, contractors believe they are in a better position to
                            meet state program needs.

                            State officials noted that personnel who leave the government for social
                            service contractors generally do so to improve their salaries and benefits.
                            Benefits such as stock option and profit-sharing plans offered by some
                            companies are appealing and often critical to employees in weighing a
                            decision to leave public service for private sector careers. Although pay
                            and benefit considerations were often cited as the leading reasons state
                            personnel left their positions for the private sector, we also found one



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                            instance in which state law resulted in state employees leaving their
                            government jobs to become private sector employees. In 1995, Maryland’s
                            legislature required two locations—Baltimore City and Queen Anne’s
                            County—to privatize all child support enforcement services. The
                            legislation also required that the selected contractor offer employment to
                            state employees affected by the privatization. Of the over 300 employees
                            who were affected, 213 accepted employment with the selected
                            contractor, while many of the remaining employees retired or accepted
                            jobs elsewhere.


Loss of Child Support       Some state officials we interviewed reported that they experienced limited
Enforcement and TANF        impacts on program management after losing program management staff.
Program Managers Posed      We were told that the loss of senior officials in their states caused minimal
                            disruption to the administration of the child support enforcement and TANF
Few Problems                programs. These officials also reported that when they lost middle
                            management and staff-level state employees to contractors, such losses
                            did not cause disruption to program administration, as agencies were able
                            to train new employees.


Information Technology      Child support enforcement officials in Texas said that about 80 percent of
Personnel Losses Were       their IT personnel, such as systems analysts and programmers, left state
More Difficult to Address   government jobs to join various firms that contract with the child support
                            enforcement program and other program areas. The director of Texas’
                            child support enforcement program indicated that the movement of IT
                            personnel to the private sector has often been driven by private sector
                            salaries that are up to about 40 percent higher than salaries for
                            comparable government positions. The loss of these employees resulted in
                            longer-term program impacts than did the loss of senior program
                            managers in other states. In those instances when Texas could not replace
                            the IT personnel it had lost, state officials said they had to contract for IT
                            services at a cost higher than would have been incurred if such services
                            had been performed by government employees. According to state child
                            support enforcement program officials, the net loss of IT personnel
                            resulted in poor or reduced service to the public, because without timely
                            upgrades to automated systems, program personnel could not easily
                            access case information, update files, or respond to customer inquiries.




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                       Among the proposals we reviewed, we found that child support
No Relationship        enforcement and TANF-related proposals listing former state employees
Between Contractors’   from any state as key personnel resulted in contract awards about as
Hiring of State        frequently as did proposals that did not list such employees.4 Of the 59
                       child support enforcement and TANF contract proposals submitted in the
Employees and          four states we reviewed, 34 listed at least one former state employee as
Contracts Awarded      key contract personnel. Twenty-five of these proposals did not list any
                       former state employees as key contract personnel. Those proposals that
                       did not list former state employees as key personnel were awarded
                       contracts about as often as those proposals that did. Slightly under
                       two-thirds of the proposals from each group, that is, those listing state
                       employees and those not, resulted in contracts being awarded. Thirty-eight
                       percent of the proposals that listed former state employees, and 36 percent
                       of those that did not, did not result in contract awards. When we examined
                       the child support enforcement and TANF programs separately, we still
                       found that, in each program, proposals not listing former state employees
                       resulted in contract awards about as often as proposals listing such
                       employees. These comparisons are summarized in figure 1.




                       4
                        We focused our review of a proposal on the personnel who were listed as key staff designated to
                       perform specific functions in direct support of the contract if it was awarded to the offeror.



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Figure 1: Contract Awards for Proposals Listing and Those Not Listing Former State Employees as Key Personnel




                                         Note: None of the differences between the proportion of proposals resulting in contract awards
                                         among those listing former state employees and the proportion resulting in contract awards
                                         among those not listing state employees was statistically significant at the .05 level.

                                         Source: GAO analysis and interviews with state officials.




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                          Even when contractors listed former state employees as key personnel
                          from the state offering the contract, the difference in the proportion of
                          contracts awarded among these proposals and the proportion awarded
                          among proposals not listing such employees was not statistically
                          significant. Of the 18 proposals that listed employees from the same state
                          that offered the contract, 14 resulted in contract awards. By comparison,
                          of the 41 proposals that did not list such employees, 25 resulted in contract
                          awards.5


                          Many states, in an effort to help ensure open and fair competition among
Some States Lack          contractors, have established ethics policies. However, more than
Recommended Ethics        one-third of the states lack one or more of the key ethics provisions, such
Provisions;               as those prohibiting certain postemployment activities and conflicts of
                          interest, which ABA and other organizations recommend as critical to state
Enforcement               efforts aimed at protecting competitive contracting.6 In addition, the states
Approaches Differ         we examined also differ widely in their approaches to enforce ethics
                          policies. To address the disparities in state ethics policies, model laws
Widely                    prepared by organizations such as ABA offer frameworks that states can
                          use to strengthen their ethics policies. Also, the Medicaid statute may offer
                          a model in that it requires participating states to have in place
                          conflict-of-interest provisions applicable to those involved in the program
                          equivalent to federal conflict-of-interest requirements.


More Than One-Third of    Many state ethics policies aimed at helping ensure open and fair
States Lack Recommended   contracting have shortcomings relative to the provisions widely
Ethics Provisions         recommended for protecting the integrity of the competitive contracting
                          process.7 In some states, ethics provisions apply only to a limited number
                          of state employees, leaving others who may be involved in the contracting
                          process uncovered by them. In other states, ethics provisions differ as to
                          the type of activity prohibited and the period of time covered by the
                          prohibition. Moreover, more than one-third of the states lack one or more

                          5
                           Although the proportion of proposals resulting in contract awards among those listing former state
                          employees as key personnel from the same state offering the contract is somewhat larger than the
                          proportion resulting in awards that did not list such employees, this difference is not statistically
                          significant at the .05 level.
                          6
                            See ABA, The Model Procurement Code for State and Local Governments (Washington, D.C.: 1979);
                          Common Cause, A Model Ethics Law for State Government (Washington, D.C.: 1989); and Society of
                          Professional Journalists, Open Records Model Law: Revised Guidelines and Recommended Minimum
                          Standards for Statutes Governing Public Access to Government Records and Information (Washington,
                          D.C.: 1993).
                          7
                          For detailed information regarding ethics policies in specific states, see Marilyn Hughes, Ethics
                          Update (Oklahoma City, Okla.: Council of Government Ethics Laws, 1997).



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    ethics provisions, such as restrictions against certain employment
    activities by former state employees and prohibitions intended to deter the
    misuse of public office for private gain. The weaknesses in state ethics
    policies are demonstrated in the examples summarized here:

•   State ethics provisions applicable to a limited number of employees.
    Oregon has provisions restricting the employment activities of former
    state employees. However, these restrictions apply only to a limited group
    of former state employees who held positions specifically listed in the law
    and not to the full range of positions that may involve contracting. (Or.
    Rev. Stat. 244.045 (1997))
•   State postemployment restrictions have gaps. South Carolina’s ethics
    provisions apply only to former state employees that accept employment
    from an organization regulated by the state agency where they formerly
    worked or if this employment involves a matter in which they participated
    directly and substantially. (S.C. Code Ann. 8-13-755 (1997)) Hawaii’s ethics
    provisions place some employment limitations on former employees and
    legislators but also expressly provide that those limitations do not prohibit
    a state agency from contracting with them to act on behalf of the state.
    (Haw. Rev. Stat. Ann. 84-18 (1998))
•   Length of states’ postemployment prohibitions varies. Kansas’ ethics
    provisions prohibit former state officers or employees from accepting
    employment with a person or business if they participated in the making
    of any contract with that person or business. The prohibition lasts for 2
    years from the time the contract is completed or from the time the state
    employment ended, whichever is sooner. (Kan. Stat. Ann. 46-233 (1997)) In
    contrast, Kentucky’s provisions prohibit for 6 months after termination of
    state service certain former officials from participating in or benefiting
    from any contract involving the agency where they were employed. The
    provisions also prohibit such individuals from accepting employment,
    compensation, or other economic benefits from any person or business
    that contracts with the state on a matter in which the former official was
    directly involved during the past 3 years of state service. (Ky. Rev. Stat.
    Ann. 11A.040 (1998))

    According to a 1996 study completed by the Council of State Governments
    and the American Society for Public Administration, 17 states lacked one
    or more of the ethics provisions ABA and other organizations believe are
    necessary to promote open and fair competitive contracting, as
    summarized in table 1.8 Of these 17 states, 9 did not restrict
    postemployment activities of former state employees with organizations

    8
     Public Integrity Annual, ed. James S. Bowman.



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                                          that compete for government contracts. For example, Arkansas does not
                                          prohibit postemployment activities of former state employees that could
                                          have a bearing on social service contracting.9 Eight states lacked
                                          provisions limiting the direct involvement of former public employees in
                                          competitive contracting.


Table 1: States Lacking One or More Recommended Ethics Provisions
                                          State ethics provisions not included in contracting policies
                                              Representation                                           Provision of
                       Acceptance of          of clients                                               benefits to         Use of
                       postgovernment         before         Participation in Use of public            influence           confidential
                       employment with        government     competitive      position for             government          government
State                  contractors            agencies       contracting      private gain             actions             information
Arkansas               X
California                                                     X
Georgia                X
Indiana                                       X                                    X
Iowa                                                                                                                       X
Louisiana                                                                                              X
Maine                  X                      X                X                   X                   X                   X
Minnesota              X                      X                X                   X                                       X
Mississippi            X                      X
Nebraska               X
New Hampshire          X                      X                X
New Mexico                                    X                X
North Carolina         X                      X                                                                            X
North Dakota           X                                                                                                   X
Oregon                                                         X
West Virginia                                                  X
Wisconsin                                                      X
Total                  9                      7                8                   3                   2                   5
                                          Source: Council of State Governments and the American Society for Public Administration.




State Enforcement                         State enforcement approaches to help ensure compliance with ethics
Approaches Differ Widely                  provisions differed widely among the four states we reviewed. In these
                                          states, enforcement involved a variety of officials and organizations, such
                                          as the department or agency that contracted for services, ethics

                                          9
                                           Through an executive order issued by Arkansas’ Governor in February 1998, the state now requires
                                          contractors to disclose whether they have hired former state employees.



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                              commissions, legislative and state auditors, inspectors general, and
                              attorneys general. In Maryland, for example, the state placed
                              representatives from the Attorney General’s office in major state agencies
                              to provide technical assistance and help ensure that state agencies comply
                              with applicable contracting policies.

                              Two of the four states lacked enforcement elements that officials in those
                              states believe are necessary to help ensure compliance with applicable
                              ethics policies. In Massachusetts, the state Inspector General believes that
                              social services contracting has a high level of risk, often associated with
                              unfair contractor advantages, conflicts of interest, and personal gain
                              through public office. According to officials from the Attorney General’s
                              office, program staff have sometimes been ineffective in enforcing
                              compliance with applicable ethics provisions. As a result, the Attorney
                              General has had to prosecute contractors for violations of state ethics
                              laws that Attorney General representatives believe could have otherwise
                              been prevented.

                              Arkansas lacks a statewide mechanism to enforce and resolve allegations
                              of unethical activity. Unlike Massachusetts, the Attorney General in
                              Arkansas does not have statewide responsibility to investigate illegal
                              activities associated with state contracting. Instead, prosecuting attorneys
                              in each county may investigate and resolve allegations associated with
                              state contracting. Moreover, the Director of Arkansas’ Ethics Commission
                              said the Commission has very narrow enforcement responsibilities as well.
                              The Commission focuses predominantly on campaign finance issues and is
                              not involved with monitoring the contracting process.


Alleged Violations of State   The lack of some states’ ethics provisions may result in conflicts of
Ethics Policies Influenced    interest that adversely influence state contract award processes.
Contract Award Processes      According to Arkansas and Massachusetts officials we interviewed, these
                              situations have arisen in their states. Arkansas has contracted out the full
                              range of child support enforcement services, including locating absent
                              parents and collecting support payments, in selected counties. Arkansas
                              has contracted with an established network of providers, some employees
                              of whom had formerly worked for the state’s child support enforcement
                              program. According to the state’s child support enforcement General
                              Counsel, the lack of a comprehensive ethics policy undermined potential
                              contractors’ confidence in the fairness of the contracting process. As a
                              result, organizations that had not competed before were discouraged from
                              submitting proposals. This situation, in turn, left the state with no choice



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                              but to contract with organizations with which it had long-standing
                              relationships. At the same time, allegations have surfaced regarding the
                              influence exerted by a state legislator to have a child support enforcement
                              full-service contract awarded to an organization in which the legislator has
                              a financial interest.

                              In Massachusetts, state employee conflicts of interest had some adverse
                              impact in contracting supported by TANF block grant funds. Officials in the
                              Department of Transitional Assistance who administer TANF-funded
                              programs had to recompete a contract because state employees were
                              found to have a conflict of interest with respect to one of the competing
                              contractors. Under similar circumstances, the state also had to terminate a
                              contract that had previously been awarded. Final resolution of both these
                              ethics issues required the state to award the contract at a time later than
                              originally anticipated.


Model Laws and Federal        ABA and Common Cause, a nonpartisan organization that studies
Provisions Suggest            government policies, have developed comprehensive model laws that
Framework for Reducing        address state ethics policies related to open and fair contracting and
                              include restrictions regarding postemployment activities, conflicts of
Disparities in State Ethics   interest, and other safeguards. States seeking to strengthen their ethics
Policies                      policies may adopt the provisions included in these model laws.

                              Although states are contracting extensively for child support enforcement
                              and TANF-related services, federal laws for these two programs, as recently
                              amended by the Personal Responsibility and Work Opportunity
                              Reconciliation Act of 1996, do not require that states establish or comply
                              with ethics policies like those in ABA’s model law. This is not true,
                              however, with respect to Medicaid. The Congress incorporated
                              conflict-of-interest provisions into state Medicaid plan requirements in
                              1979, when legislation was enacted authorizing greater use of health
                              maintenance organizations. As a condition of state participation in
                              Medicaid, states must have or enact provisions that require anyone
                              involved in Medicaid-related contracting to be subject to
                              conflict-of-interest requirements similar to, or at least as stringent as,
                              those applicable to federal employees.10 The federal ethics provisions
                              applicable to Medicaid also include employment restrictions and
                              prohibitions on employees knowingly participating personally and



                              10
                                42 U.S.C. 1396a(a)(4)(C).



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                          substantially in matters in which they, family members, or certain business
                          associates have a financial interest.11

                          More recently, section 4724(c) of the Balanced Budget Act of 1997 (P.L.
                          105-33) broadened the Medicaid state plan requirement to include
                          additional conflict-of-interest safeguards.12 Specifically, it required states
                          to have in place restrictions at least as stringent as those applicable to the
                          federal contracting process related to the disclosure of contractor bid,
                          proposal, and source selection information that might undermine open
                          and fair competition.13 The Medicaid provisions allow states to tailor their
                          ethics policies to their specific circumstances, relying on model laws and
                          other enforcement approaches as they so choose, and offer some
                          assurance that basic safeguards will be in place when a state is contracting
                          for Medicaid services.


                          Several states have established practices to help ensure that contract
State Strategies to       awardees are held accountable for program results, which provides added
Hold Contractors          assurance that these states will receive the services for which they paid.
Accountable Are           These practices include performance measures states use when they
                          assess contractor progress toward achieving program results. However,
Focused More on           program officials in most states indicated that they rely on traditional
Compliance With           accountability strategies, such as audits, that focus more on compliance
                          with program rules than on results. The Government Performance and
Program Rules Than        Results Act of 1993 and results-oriented state initiatives have helped
on Results                establish frameworks to better focus program management on
                          accountability for results.


State Practices to Hold   In addition to an integrated network of comprehensive ethics policies and
Contractors Accountable   enforcement approaches, contracting experts and program managers
Focused on Compliance     believe states need effective approaches for holding contractors
                          accountable for program results. Effective accountability mechanisms,
With Program Rules        while difficult to develop, can help states ensure that they base contract
                          payments on performance. Our earlier reviews of privatization have




                          11
                            18 U.S.C. 207 and 208.
                          12
                            42 U.S.C. 1396a(a)(4)(D).
                          13
                            41 U.S.C. 423.



                          Page 14                                GAO/HEHS-99-41 Social Service Privatization
                              B-279094




                              concluded that managers need to supplement current practices that assess
                              compliance with program rules with a greater focus on results.14

                              Our earlier work on social service privatization also found that monitoring
                              contractors’ performance toward achieving program results was among
                              the most challenging aspects of the privatization process. This
                              examination of program accountability found that assessing compliance
                              with program requirements, while a significant component of
                              accountability, can constrain the available resources state auditors are
                              able to apply toward assessing longer-term program results. Faced with
                              these priorities and related resource constraints, officials in Texas’ child
                              support enforcement program, for example, have relied on compliance
                              reviews of administrative processes and other approaches in an effort to
                              monitor performance relative to results specified in applicable contracts.
                              In recent audit cycles, the state’s auditors have reviewed compliance with
                              allowable expenditures and reporting requirements.

                              Assessing program results can play a critical role in reviewing contractor
                              performance. Such assessments could incorporate various techniques,
                              such as monitoring outcomes and reviewing qualitative information. In
                              Maryland’s oversight of its TANF-supported welfare-to-work programs, for
                              example, the state has developed a planning process that sets forth
                              long-term goals and objectives for its Department of Human
                              Resources—which administers TANF—and each program it manages and
                              oversees. In addition, program officials, through Strategic Management
                              Assessment Review Teams, periodically assess progress providers have
                              made toward achieving program results, such as program enrollment and
                              completion, employment, and job retention. Generally, contractors are
                              paid on the basis of their performance in each of these program
                              dimensions.


The Results Act and           Assessing program results enables states to determine whether
Related Initiatives Provide   contractors have in fact achieved intended outcomes. Under the Results
Frameworks for Assessing      Act, HHS developed a framework for establishing performance measures
                              and assessing program results in the child support enforcement program.
State Program Results         HHS’ Office of Child Support Enforcement (OCSE), in conjunction with the
                              states, established a 5-year strategic plan that included program goals and
                              performance measures for evaluating the magnitude of increases in
                              paternities established, support orders obtained, and collections received.


                              14
                               See GAO/HEHS-98-6, Oct. 20, 1997, and Privatization: Lessons Learned by State and Local
                              Governments (GAO/GGD-97-48, Mar. 14, 1997).



                              Page 15                                            GAO/HEHS-99-41 Social Service Privatization
              B-279094




              OCSE and the states developed these measures after considering key
              dimensions indicative of state performance in providing child support
              enforcement services. Subsequently, these and other measures were
              included in modifications to the program’s incentive funding structure.
              Such frameworks can enhance state strategies to improve accountability
              for program results in privatized social service programs supported with
              federal funds.

              Beyond the Results Act requirements applicable to federally administered
              programs, some states, such as Oregon and Minnesota, established their
              own strategies for assessing program results. Toward this end, state
              legislatures or executive branch agencies have developed program goals
              and measures for assessing performance. Moreover, one recent study
              concluded that 47 states have established performance-based budgeting
              systems intended to improve the effectiveness of state programs. These
              state initiatives, combined with a greater orientation toward program
              results in HHS, provide additional management tools that can be used to
              optimize the anticipated benefits from privatizing child support
              enforcement, welfare-to-work, and other social service programs.


              Social service contracting presents many significant challenges to state
Conclusions   governments, including the need to achieve competitive contracting and
              accountability for program results. These challenges, coupled with the
              magnitude of federal funds that support privatized social service
              programs, amplify the call for adequate protections against ethics
              violations that can potentially undermine competition. While our work in
              selected states suggests that contract awards were not related to the
              “revolving door,” there is room to strengthen state ethics policies and
              enforcement approaches to help strengthen open and fair competition.
              Without comprehensive ethics policies and effective enforcement
              approaches intended to safeguard competitive contracting, states may not
              benefit as fully from competition when they privatize social services.
              Similarly, an insufficient capacity to assess progress toward achieving
              program results weakens state assurances that contractors will provide
              federally funded services efficiently and effectively.

              Faced with these challenges, states can take steps to mitigate threats to
              competition. By relying on comprehensive models for guidance, states can
              develop or refine their ethics policies and adopt effective enforcement
              approaches to strengthen competition in privatized social services. States
              have been required by statute, in fact, to adopt and apply certain



              Page 16                               GAO/HEHS-99-41 Social Service Privatization
                     B-279094




                     conflict-of-interest requirements to state officials with regard to Medicaid.
                     While the Results Act provides a framework for reorienting program
                     management toward accountability for results, states could take additional
                     measures to help ensure that they obtain desired results from their
                     contracting efforts. Together, fortified ethics policies, effective
                     enforcement approaches, and accountability strategies focused on
                     program results can optimize the states’ capacity to achieve the benefits of
                     social service privatization.


                     We received comments on a draft of this report from HHS, the four states in
Agency Comments      which we conducted detailed work, and a recognized expert in social
and Our Evaluation   service privatization. The comments generally concurred with our findings
                     and conclusions. We also received a number of technical comments that
                     we incorporated where appropriate.


                     We are providing copies of this report to the Honorable Donna E. Shalala,
                     the Secretary of HHS; and the Honorable Olivia A. Golden, HHS’ Assistant
                     Secretary for Children and Families. We will also send copies to state child
                     support enforcement and TANF directors and to other interested parties on
                     request.

                     If you or your staffs have any questions about this report, please contact
                     David D. Bellis, Assistant Director, or Mark E. Ward, Senior Evaluator, at
                     (202) 512-7215. Other major contributors are Gregory Curtis, Joel I.
                     Grossman, Craig H. Winslow, and James P. Wright.




                     Cynthia M. Fagnoni
                     Director, Income Security Issues




                     Page 17                                GAO/HEHS-99-41 Social Service Privatization
Contents



Letter                                                                                                1


Appendix I                                                                                           20
Scope and
Methodology
Related GAO Products                                                                                 24


Tables                 Table 1: States Lacking One or More Recommended Ethics                        11
                         Provisions
                       Table I.1: Selected States, Programs, Proposals, and Contract                 21
                         Awards


Figure                 Figure 1: Contract Awards for Proposals Listing and Those Not                  8
                         Listing Former State Employees as Key Personnel




                       Abbreviations

                       ABA        American Bar Association
                       HHS        Department of Health and Human Services
                       IT         information technology
                       OCSE       Office of Child Support Enforcement
                       RFP        request for proposal
                       TANF       Temporary Assistance for Needy Families


                       Page 18                               GAO/HEHS-99-41 Social Service Privatization
Page 19   GAO/HEHS-99-41 Social Service Privatization
Appendix I

Scope and Methodology


             This appendix provides additional details on the methods we used to meet
             the objectives of our study. To help us understand state ethics laws and
             their enforcement, we reviewed GAO reports, journal articles, and studies
             on contracting, as well as state ethics laws and policies. To estimate the
             extent of national movement by former state employees to positions at
             social service contractors, we obtained information from federal and state
             program managers in the child support enforcement and Temporary
             Assistance for Needy Families (TANF) programs. We supplemented these
             data by interviewing officials of public employee unions and other
             organizations. In addition, we interviewed state government officials in
             four states to determine how their states responded to the loss of
             personnel and the impact this loss had on state programs.

             To aid us in determining the extent to which state employees left
             government positions for employment with contractors and the effect this
             movement had on contract awards, we examined the proposals submitted
             in response to eight recently issued requests for proposal (RFP) in the four
             selected states. We selected two full-service child support enforcement
             RFPs—one in Arkansas and one in Maryland—and two child support
             enforcement RFPs for automated systems—one in Massachusetts and one
             in Texas. We also chose one TANF welfare-to-work RFP in each of the four
             states. We reviewed all proposals submitted in response to RFPs for these
             contracts to identify former government employees who had worked in
             either state child support enforcement or welfare-to-work programs and
             were subsequently listed as key personnel designated to perform specific
             functions in direct support of the contract, pending selection of contract
             awardees. Sometimes states awarded more than one contract for each RFP.
             In addition, the projected contract costs among the contracts we reviewed
             varied widely. To supplement the information we obtained from our
             review of proposals, we interviewed state officials to obtain their
             perspectives on how the movement of former state employees to
             organizations competing for contracts affected contract awards. We did
             not evaluate the merits of state contract award decisions, nor did we
             independently assess whether states or contractors complied with
             applicable ethics policies.

             We examined state ethics laws, policies, and enforcement approaches and
             their federal counterparts to determine the extent to which state ethics
             laws and policies parallel generally accepted ethics standards, as defined
             by the American Bar Association, contracting experts, and others. We also
             interviewed state officials to identify any allegations of state ethics
             violations and their resolution.



             Page 20                                GAO/HEHS-99-41 Social Service Privatization
                                        Appendix I
                                        Scope and Methodology




                                        In addition, we examined state and federal policies and practices for
                                        holding contractors accountable for program results. We also interviewed
                                        state program officials in the four selected states to identify the practices
                                        they used to hold contractors accountable for program results. Finally, we
                                        interviewed Department of Health and Human Services officials regarding
                                        their oversight of state and local social service contracting in the context
                                        of applicable federal policies.

                                        We focused on the child support enforcement and TANF programs in four
                                        states—Arkansas, Maryland, Massachusetts, and Texas. We selected these
                                        two programs because each receives a significant level of federal funds
                                        and each makes widespread or long-term use of contracting. We chose
                                        these four states because they offered variation in the strength of their
                                        respective ethics provisions. In addition, these four states were using
                                        contractors to provide child support enforcement services or to design
                                        related automated systems. All four states contracted out TANF-funded
                                        welfare-to-work services. Table I.1 summarizes the selected states,
                                        number of proposals submitted in response to each RFP, and number of
                                        contracts awarded.

Table I.1: Selected States, Programs,
Proposals, and Contract Awards                                          Child support enforcement program
                                                                                                Number of
                                                                          Number of full-       automated        Number of TANF
                                                                       service proposals system proposals          proposals and
                                                                           and contracts     and contracts             contracts
                                        Arkansas
                                        Proposals per RFP                               8                                        1
                                        Contracts awarded per
                                        RFP                                             6                                        1
                                        Maryland
                                        Proposals per RFP                               3                                       11
                                        Contracts awarded per
                                        RFP                                             1                                        7
                                        Massachusetts
                                        Proposals per RFP                                                    4                  24
                                        Contracts awarded per
                                        RFP                                                                  1                  15
                                        Texas
                                        Proposals per RFP                                                    1                   7
                                        Contracts awarded per
                                        RFP                                                                  1                   5
                                        Source: GAO analysis of contract information.




                                        Page 21                                         GAO/HEHS-99-41 Social Service Privatization
Page 22   GAO/HEHS-99-41 Social Service Privatization
Page 23   GAO/HEHS-99-41 Social Service Privatization
Related GAO Products


              Welfare Reform: States Are Restructuring Programs to Reduce Welfare
              Dependence (GAO/HEHS-98-109, June 18, 1998).

              Child Support Enforcement Privatization: Challenges in Ensuring
              Accountability for Program Results (GAO/T-HEHS-98-22, Nov. 4, 1997).

              Social Service Privatization: Expansion Poses Challenges in Ensuring
              Accountability for Program Results (GAO/HEHS-98-6, Oct. 20, 1997).

              Managing for Results: Analytic Challenges in Measuring Performance
              (GAO/HEHS/GGD-97-138, May 30, 1997).

              Welfare Reform: Three States’ Approaches Show Promise of Increasing
              Work Participation (GAO/HEHS-97-80, May 30, 1997).

              Privatization: Lessons Learned by State and Local Governments
              (GAO/GGD-97-48, Mar. 14, 1997).

              Child Support Enforcement: Early Results on Comparability of Privatized
              and Public Offices (GAO/HEHS-97-4, Dec. 16, 1996).

              Child Support Enforcement: Reorienting Management Toward Achieving
              Better Program Results (GAO/HEHS/GGD-97-14, Oct. 25, 1996).

              Employment Training: Successful Projects Share Common Strategy
              (GAO/HEHS-96-108, May 7, 1996).

              District of Columbia: City and State Privatization Initiatives and
              Impediments (GAO/GGD-95-194, June 28, 1995).

              Welfare to Work: Measuring Outcomes for JOBS Participants
              (GAO/HEHS-95-86, Apr. 17, 1995).

              Office of Government Ethics: Need for Additional Funding for Regulation
              Development and Oversight (GAO/T-GGD-92-17, Mar. 4, 1992).

              Ethics Enforcement: Process by Which Conflict of Interest Allegations Are
              Investigated and Resolved (GAO/GGD-87-83BR, May 21, 1987).




(116011)      Page 24                                GAO/HEHS-99-41 Social Service Privatization
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