Human Services at Risk

Social Service Review

Volumn 72, Issue 2, 1998, Pages 192-208

  Felty, Dennis W ^a   Jones, Marshall B ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0002384416     PISSN: 00377961     EISSN: None     Source Type: Journal    
DOI: 10.1086/515750     Document Type: Article

References (17)

1. Peter Dobkin Hall, "Historical Perspectives on Nonprofit Organizations," in The Jossey-Bass Handbook of Nonprofit Leadership and Management, ed. Robert D. Herman and associates (San Francisco: Jossey-Bass, 1994).
2. Lester M. Salamon, America's Nonprofit Sector: A Primer (New York: Foundation Center, 1992), p. 47.
3. Lester M. Salamon, "Partners in Public Service: The Scope and Theory of Government-Nonprofit Relations," in The Nonprofit Sector: A Research Handbook, ed. Walter W. Powell (New Haven, Conn.: Yale University Press, 1987), p. 103.
4. Steven Rathgeb Smith and Michael Lipsky, Nonprofits for Hire: The Welfare State in the Age of Contracting (Cambridge, Mass.: Harvard University Press, 1993), pp. 5, 9.
5. For further discussion of this division of labor, see Neil Gilbert, Capitalism and the Welfare State (New Haven, Conn.: Yale University Press, 1983); Jennifer R. Wolch, The Shadow State: Government and Voluntary Sector in Transition (New York: Foundation Center, 1990), p. 223; Smith and Lipsky (n. 4 above).
6. For further discussion of this division of labor, see Neil Gilbert, Capitalism and the Welfare State (New Haven, Conn.: Yale University Press, 1983); Jennifer R. Wolch, The Shadow State: Government and Voluntary Sector in Transition (New York: Foundation Center, 1990), p. 223; Smith and Lipsky (n. 4 above).
7. Monica E. Oss, "System Evolution: Trends in Behavioral Health and Human Services Financing" (paper presented at the annual meeting of the Child Welfare League of America, Washington, D.C., March 1996); Health Care Financing Association, "Medicaid Managed Care State Enrollment" (Washington, D.C.: Health Care Financing Association, June 30, 1996), available from 〈www.hcfa.gov/medicaid/pntrtn3.htm〉.
8. Monica E. Oss, "System Evolution: Trends in Behavioral Health and Human Services Financing" (paper presented at the annual meeting of the Child Welfare League of America, Washington, D.C., March 1996); Health Care Financing Association, "Medicaid Managed Care State Enrollment" (Washington, D.C.: Health Care Financing Association, June 30, 1996), available from 〈www.hcfa.gov/medicaid/pntrtn3.htm〉.
9. "Great Extremes Exist in Executive Compensation," Open Minds: The Behavioral Health Industry Analyst (October 1995), p. 8.
10. For more on the failure of social services to meet the usual definition of a market commodity, see Henry Hansmann, "Economic Theories of Nonprofit Organization," in Powell, ed. (n. 3 above); Lester M. Salamon, "Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonprofit Relations in the Modern Welfare State," Journal of Voluntary Action Research 16 (1987): 29-49.
11. For more on the failure of social services to meet the usual definition of a market commodity, see Henry Hansmann, "Economic Theories of Nonprofit Organization," in Powell, ed. (n. 3 above); Lester M. Salamon, "Of Market Failure, Voluntary Failure, and Third-Party Government: Toward a Theory of Government-Nonprofit Relations in the Modern Welfare State," Journal of Voluntary Action Research 16 (1987): 29-49.
12. Gordon Bultena and Edward Powers, "Effects of Age-Grade Comparisons on Adjustment in Later Life," in Time, Roles, and Self in Old Age, ed. Jaber F. Gubrium (New York: Human Sciences Press, 1976).
13. The Pennsylvania formula is cited here as illustrative only. There is nothing magical about the figure of 11 percent. Nor is it to be expected that the same figure would apply to all services or in all places. In fact, Pennsylvania itself is already negotiating different figures with different counties. There is, moreover, a giant "hole" in the Pennsylvania formula, namely, that it applies to MCOs only and not to subcontracting provider organizations. An MCO, however, may own a subcontracting provider organization, thus opening the way to what are called "second tier" profits. If centralized costs were 10 percent and 20 percent of contract value for the MCO and its subcontracting provider, respectively, only 70¢ on an appropriated dollar would directly benefit the recipients. The Pennsylvania formula says nothing about second-tier profits. A better formula would control them.
14. Two further issues should be mentioned. The first is an issue in ownership. A non-profit may own or control a for-profit company. In such an arrangement, an executive or board member of the parent company who holds equity in the subsidiary has a clear conflict of interest because he or she is positioned to direct the parent company's policy, e.g., by shifting costs so as to favor the subsidiary and, hence, his or her own interest. The second issue concerns the distinction between "profits" and "return on capital investment An MCO must have access to significant amounts of capital. It must either have or be able to arrange for many millions of dollars to be held in reserve against the possibility of a cost overrun. This money is not spent, however. If all goes well, the MCO will have all of its risk reserve when the contract ends. In fact, it may have more because the money held in reserve may also earn interest. In addition, the MCO, or whoever puts up the risk reserve, is entitled to a risk reserve fee, usually around 15 percent and paid for under the cap as a centralized cost. In contrast, the capital requirements of an MCO in terms of money it must spend in order to do business are light, often no more than a management information system and some computers. Consider a company that invests $1 million in such software and equipment. The company then obtains a $100 million contract and meets its contractual obligations for $97 million, thereby making a $3 million profit. The profit is modest, 3 percent but the return on investment is very large, 300 percent. It is not clear to us that return on investment either can or should be controlled, but its separateness from profitas a percentage of contract value should be recognized.
15. Richard Bush, "Survival of the Nonprofit Spirit in a For-Profit World," Nonprofit and Voluntary Sector Quarterly 21 (1992): 391-410.
16. This advantage could be mitigated by the use of volunteer inspectors. Social service motivation takes many forms, and one of them is a concern that people in care not be abused. A voluntary inspection system would have to include training (because there is something to know about both the process of inspection and what is being inspected) and oversight. The cost of such training and oversight would fall to government, but this cost would be incomparably less than the cost of hiring inspectors.
17. "$54 Billion Spent on Behavioral Health Treatment," Open Minds: The Behavioral Health Industry Analyst (November 1994), p. 12. The total government-funded health market is, of course, much larger, approximately $300 billion in 1994.