A Rich New Business Called Poverty

As welfare programs get privatized, corporations rush in

Gerald H. Miller's life is the epitome of public service. For 20 years, he held jobs in Michigan government--the latest was running the state's $1 billion welfare program. But last year, Miller took a job at Lockheed Martin Corp., heading its new welfare services business. So do his old government friends accuse him of being a turncoat? A corporate profiteer? No. "They ask me: `Can I send you my resume?"' Miller says.

Miller had better get a bigger in-box. To the deep concern of public service employee unions and antipoverty groups, Corporate America is rushing into the poverty business. As state and local governments face tighter welfare budgets, they're turning to the for-profit sector to help them save money and improve efficiency. Companies big and small are placing welfare recipients in private-sector jobs, pursuing deadbeat parents for child-support payments, finding foster homes for abused children, and acting as brokers in the Medicaid managed-care field. The potential U.S. market: more than $30 billion a year.

The stakes have soared in Texas, where Governor George W. Bush Jr. wants companies to run the welfare, Medicaid, and food stamp operations. Lockheed Martin, Electronic Data Systems, and Andersen Consulting, a unit of Arthur Andersen & Co., were poised to bid on a $500 million-a-year contract.

FINAL SAY. But Texas public employees, who fear their ranks could shrink by 17,000 jobs, have been lobbying the White House for months to block the deal. And on May 2, they won a partial victory: The Clinton Administration told Texas that only public employees could make final decisions on eligibility for Medicaid and food stamps. Nevertheless, Texas could still privatize parts of its social services operations, letting companies determine welfare eligibility and place welfare recipients into jobs.

No matter what the outcome in the Lone Star State, other states are moving forward. Come Sept. 1, Wisconsin will divvy up its Milwaukee County human services programs--including welfare, food stamps, Medicaid, and job training--to be run by Maximus Inc., a McLean (Va.) company that offers administrative services, and by several nonprofit groups. In addition, Arizona recently gave two counties the go-ahead to privatize welfare, food stamps, Medicaid, and child-care operations. The Texas ruling, however, could force Arizona to redesign its proposal.

The market got a boost last year when Clinton signed a welfare reform bill that gives private contractors the right to decide who is eligible for benefits. The law also cut food stamps, capped welfare payments to the states, and enacted penalties for states that failed to move most of their recipients into jobs within two years.

The leap toward privatization has left labor and advocates for the poor fuming. They worry that in their zeal to make a profit, private companies could harm people by cutting corners--by withholding benefits from the deserving or by providing inferior service to foster-care children. And, of course, unions fear the potential loss of 250,000 public-employee jobs nationwide. So they've been eager to highlight the mixed record of some early privatization efforts.

EXORBITANT PAY. For example, government investigators have often accused private job-training operators, who get paid for each job placement, of ignoring difficult cases. And two years ago, Florida Governor Lawton Chiles halted enrollments in private health-maintenance organizations serving Medicaid patients, following allegations that operators were drawing exorbitant salaries while providing inferior medical care to the poor.

"Profit-making companies whose main concern is the bottom line shouldn't decide who gets welfare benefits and who gets into a job-search program," argues Morton Bahr, president of the Communications Workers of America. The cwa has been running radio ads opposing privatization in Texas, and on Apr. 16 it staged a protest rally for 2,000 members in Austin.

But such complaints won't dampen corporate enthusiasm for turning do-good social workers into hard-nosed bottom-liners. Freed from rigid civil service and procurement rules, companies say they can provide bonuses to employees who meet productivity goals, fire poor performers, move workers into new tasks quickly, and buy new technology without red tape. Texas expected savings of about $100 million a year. Among the innovations: replacing some field offices with automated kiosks that could issue applications and offer information. "We can make services more accessible and convenient," says eds spokesman Stephen Person.

Employee bonuses and new technology are big reasons Audrey Rowe, a senior vice-president at Lockheed Martin, thinks more deadbeat parents in Maryland are paying up. Last Nov. 1, more than 270 public workers in Baltimore County's child-support enforcement office became Lockheed Martin employees. The company runs everything from tracking down delinquent parents to giving blood tests to establish paternity.

Special technology allows her employees to come up with a "profile" of a specific delinquent parent and tailor a strategy to track the parent down. Employees get bonuses if they exceed weekly collection goals. Lockheed gets to keep 22.9% of what it takes in--but from a government administrative fund, not from child-support payments. Rowe says she has already exceeded what state employees collected at this time a year ago. Her goal: to collect $80 million in 1997, compared with $55 million in '96.

Activists say it's one thing to wring money from deadbeat dads, but quite another for profit-hungry companies to decide who gets benefits. Case in point: In Milwaukee County, Maximus and the nonprofits will decide who is eligible for benefits and then find jobs for recipients. The operators are paid 10% of the difference between what the state expects to spend on benefits and what gets doled out.

George W. Leutermann, vice-president for welfare programs at Maximus, insists such incentives won't encourage administrators to withhold benefits from the deserving, since the company will be penalized if a state grievance officer finds any administrative error. Also, he says, it is in Maximus' interest to get welfare recipients into well-paying, permanent jobs. If it doesn't, the company will have to continue paying benefits, depleting the pot of money the state gives it. Leutermann argues: "Why is the private sector better? If your lifeblood depends on your ability to move people off of welfare into work, you will do it."

That's exactly what worries labor and advocates for the poor. And no one knows exactly how well this experiment will work. In such a new market, companies and public-policy makers are taking a big gamble. And if it's a failure, the biggest loser could be business' newest client--the poor.